Media reports on Tuesday seized on staggering numbers from Credit Suisse, predicting that Amazon's (AMZN) current 90% share of the e-book market will plummet to 35% over the next five years. At face value, that sounds rather alarming. But look a little closer, and the prediction may really be a cause for celebration -- even for Amazon.Credit Suisse expects Amazon's share in the e-book market to drop to 72% by the end of this year, due largely to Apple (AAPL) and Google (GOOG). "Near term, we suspect that the iPad and the new eBook agency pricing model, which requires that Amazon increase retail prices to be more consistent with Apple's pricing, will provide Kindle with the most market share headwind," analyst Spencer Wang wrote in the report. "Going forward, we can envision a scenario where Apple, Amazon, and Google eventually split the market."
That's obvious enough, but at the moment, the e-book market is still embryonic. Credit Suisse is conservative in its market estimates, estimating it at just 1% of book sales, projected to grow to 3% by the end of 2010. So while Amazon dominates the e-book and e-reader space, due to Kindle's apparent success (which Amazon hasn't quantified in hard numbers), a huge percentage of a small overall figure still doesn't return as much money as a smaller percentage of a much larger figure.
A Narrower Slice of a Wider Market
E-book sales have brought Amazon from $135 million (per Credit Suisse) to $194 million (from a Lazard Frères report last month). That number could grow above $215 million by year-end and triple to $775 million by 2015. Growth in the e-book market is expected from consumers trying out e-reading on Apple's iPad, buying e-books through Google's upcoming Editions program, spending money on Barnes & Noble's (BKS) Nook (which, after a rocky start, appears to have found its footing), and sticking with the e-readers and smartphones they already use.
But let's remember the result of the drawn-out battle between Amazon and Macmillan: The publisher wanted Amazon to switch from a wholesale to an agency model, which Apple agreed to, and Amazon finally relented. E-book prices for upcoming bestsellers and new releases will rise from the current $9.99 standard -- which will actually generate not a loss but a gain for Amazon with the sale each e-book from a Big Six publisher (save Random House, which hasn't switched to the agency model).
Big Fish, Bigger Pond
What's better for Amazon: being the big fish in a small pond, or being one of a few big fish in a bigger (and still growing) pond? The answer depends on two things. One is whatever keeps its eye-popping profits rolling in. The other is the book market as a whole. Current estimates show Amazon controlling 19% of the total book market, which includes new and used print books and e-books. But unlike Barnes & Noble, Borders (BGP), or big-box giants Walmart (WMT) and CostCo (COST), Amazon has never flexed enough muscle to propel a book singlehandedly to bestsellerdom.
However these variables shake out, Amazon clearly can't afford to rest on its Kindle. Based on its recent acquisition of touchscreen startup TouchCo and persistent rumors that the company will incorporate mirasol, Qualcomm's low-power display technology, into its next-generation Kindle, Amazon seems aware it must keep up with the Jobses. But even if it loses ground to Apple and other tech and book companies on the e-book front, the big picture -- for Amazon, and for publishing -- is surprisingly healthy.
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