E-book market will be hot, flat and crowded

June 25, 2010

The electronic book market is looking increasingly hot, flat and crowded. A vicious price war has broken out among producers of digital readers thanks to Apple’s success with the iPad. Companies such as Amazon hope that selling tomes across multiple devices will fill the profit gap. But competition in e-book distribution is heating up and could pressure margins there, too.

Apple has sold more than 3 million iPads in about two-and-a-half months. While Amazon doesn’t give figures, analysts think it has sold a similar number of its Kindle e-readers in two-and-a-half years.

Investors haven’t missed the implications. Amazon’s stock has fallen 10 percent since the iPad was rolled out. That’s about the same as the market as a whole. The stock of Barnes & Noble, another e-reader seller, has fallen more sharply, losing almost a quarter of its value. Yet both are still richly priced compared with the market — Amazon trades at 40 times estimated earnings this financial year and Barnes & Noble at 20 times.

Meanwhile, Apple’s shares have risen 15 percent since the beginning of April, adding more than $30 billion to the company’s market capitalization. Of course, booming iPhone sales account for a large chunk of this rise. There’s a three-week waiting list for the latest version when you buy it online. But the iPad figures as well. Analysts’ expectations seem to be rising weekly. Several now predict Apple could sell more than 10 million this year.

Devices like the Kindle, Barnes & Noble’s Nook and Sony’s Daily Edition e-reader are made specifically for reading, so they have gray screens that are easy on the eyes and batteries that last for days. The iPad, by contrast, has a bright color screen and a battery that drains far more quickly. Its success suggests the perceived advantages of e-readers may turn out not to matter too much to consumers.

After all, iPad users have already downloaded more than 5 million e-books. It may be that many people prefer a more versatile device that allows them to surf the web, watch videos, read email and download games and other applications — and act as an e-reader as well. That’s a potential nightmare for Amazon and other purveyors of e-readers. Think how jack-of-all-trades mobile phones have pushed out initially successful dedicated personal digital organizers.

Pricing trends seems to support the thesis. E-reader sellers slashed their prices this week — some by a quarter. But even corporate clients with giant orders for iPads can’t expect to score any discount from Apple. Basic e-readers now go for well under $200 and will almost certainly be offered for less than $100 by the time the holiday season comes around, according to research outfit Gartner.

There’s a battle brewing over e-books, too. Before Apple’s iPad appeared, Amazon lost about $3 a book, analysts reckon. This boosted Kindle sales and helped establish both the e-book market and Amazon’s place within it. The iPad has given publishers ammunition to demand higher prices for digitized books. The net result could be a wash, at least for Amazon. Citigroup estimates the Kindle and e-books combined will continue to account for about 5 percent of the company’s total sales and profit, in line with current levels.

Apple’s bookselling rivals increasingly hope customers will buy e-books via applications that can be used on multiple devices, including iPads, BlackBerry smartphones and desktop and laptop computers. Moreover, e-readers’ ability to provide instant gratification via wireless downloads may mean the market for digital books will continue to heat up. Since Amazon has a large stock of e-books, the Internet retailer’s reader app should have an advantage over some rivals, including Apple. It was the size of Amazon’s book collection which first established the company as a force to be reckoned with a decade ago.

But Barnes & Noble has an e-book app not so dissimilar to Amazon’s, and plenty of content. Google is preparing to open its digital bookstore this summer. And the talk is that technology companies such as Dell and Nokia may see the opportunity, too.

If most consumers aren’t locked into a specific device, they will presumably shop around for the best bargain. After all, it’s easy to download multiple apps. Electronic books may be gripping for those who buy them. But once competition sets in, the bottom lines of the companies hawking them may not make such a good read.

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