- Amazon's Chief Executive Jeff Bezos says e-books are a
multi-billion dollar business and growing at 70% y-o-y.
- Forrestor Research estimates that the U.S. e-book market
will reach $13.6 billion by 2017.
- Amazon can solidify its presence in the ebook business
through a secondary market for digital items and launching
) shares rose 4% on February 13 after an analyst note fueled
further optimism about the company's Kindle e-book business.
Amazon's Chief Executive Jeff Bezos noted in the fourth
quarter 2012 earnings results that e-books are a multi-billion
category for Amazon and grew at approximately 70% y-o-y in 2012. In
contrast, the physical book sales registered their lowest December
growth in 17 years at about 5%. Morgan Stanley's Scott Devitt
estimates that the e-book market is a lot bigger than previously
thought and that owners of Kindle e-readers and tablets are reading
more e-books. He estimates worldwide e-book unit sales to have
reached 859 million in 2012, up considerably from a previous
estimate of 567 million. Leading research firm Forrester
Research estimates that the U.S. e-book market will reach $13.6
billion by 2017.
We believe that Amazon, with its Kindle e-reader, low prices for
e-books and self published books, will be the biggest gainer from
the expected growth in the e-book market which will further
solidify its position. Here, we take a look at how the company can
further expand its dominant position in this market.
Amazon's Kindle range of e-readers competes with Apple (
) iPad and Barnes & Noble's Nook devices.
See our full analysis for Amazon's stock
A Secondary Market For eBooks
We recently wrote
about how Amazon won
that will allow online customers to sell or trade digital items
with other users. These digital items include e-books as well. The
company's current library of e-books can be accessed
through its Kindle range of e-readers and tablets as well as
other devices based on iOS and Android platforms. We believe
that a secondary market would enable Amazon to generate revenues
multiple times from a product sale instead of one-time.
Amazon currently generates about 30% of its revenues
from media sales with a significant portion coming from online
media. A secondary market can provide a substantial upside to
revenues from media sales as Amazon is likely to earn a commission
on every secondary market transaction. Currently, Amazon's
broader strategy is to sell mobile devices at or near cost and make
money when consumers use the gadgets to buy digital content,
including e-books, music, videos, apps and games. A secondary
market for digital items will function as an extension of the
Building Interactive eBooks
Most e-books developed presently are mostly text with some
illustrations or pictures thrown in. Software developer and e-book
seller Inkling has developed a tool that can make pictures
come to life through fast moving sequence of photos.
(Think GIF image files and The Daily Prophet newspaper from the
Harry Potter movie franchise)
Many online magazines and newspapers have created interactive
interfaces, embedding features such as slideshows and videos
into webpages; however, ebooks have lagged behind in this aspect.
We believe that Amazon can take lead over Apple by developing
software for the Kindle range which can support such features.
Currently, ebooks sold through the iTunes store also lack
Traditionally, pictorial books (hard copy) have been more
expensive on account of greater interactive content. This trend
might continue in the ebook space by charging a premium for the
unique, high-end interactive experience. Amazon's margins on ebooks
are higher than on some of its other services and interactive
e-books can charge even higher margins. An interactive interface in
books is relevant across genres as varied as educational books for
children to cook books/ how-to guides, etc. We expect that a
greater utility of e-books and popularity of the Kindle platform to
support volumes, which will further help Amazon's revenue
We have a $235 Trefis price estimate for Amazon which is
15% below the current market price.
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