A study of the e-book market in 2010 and possible perspectives


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We present in this document our understanding of the e-book market in 2010 and how it is likely to evolve.

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A study of the e-book market in 2010 and possible perspectives

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  2. 2. The competition will lie on consumer’s capturing1. The current market analysis shows:•  Apple succeeds in its skimming strategy•  Amazon fails in its volume strategy (iPad being 1st on devices market) EXECUTIVE SUMMARY•  Competition on e-books forces Amazon to incur losses2. Perspectives over 5 years show that:•  Amazon won’t be profitable and will lose market shares both in e-book and devices markets (10% on devices and 16% on e-books)•  iPad will maintain its high profitability on both markets (55% on devices and 30% on e-books).3. As an investment fund, do not underestimate Amazon’s perspectives! Amazon should adopt a razor & bladebusiness model in locking in the customer through a monthly subscription and better fitting the digital environment(expected average profitability per year over 5 years: $143 M) Ø  Attracting more readers by selling the kindle cheap (objective: market penetration rate of 25% in 2015) Ø  Improving the profitability per reader ($288/Reader/year) Ø  Convincing publishers to enter in this win-win momentum4. Competitors would bargain less costly e-books with publishers because of high rate of fixed costs in the e-bookmarket.•  Apple will not change its strategy•  Other e-book readers manufacturers can hardly compete this business model because they are not the 1st movers and will try to adopt a competitive business model or add functionalities.5. Even though Google is an advertiser, its strategy is likely to weaken Apple’s and Amazon’s positions.•  Amazon’s countermove would be to infiltrate its new offer in the Android platform•  Apple can count on its brand image and does not primarily aim at reaching high volume•  Google should heavily penetrate the tablet market in investing in adapting advertising services to tablets (Tablet advertising’s CAGR is expected to be over 20%) 2
  3. 3. Apple’s strategy generates more profits than Amazon’s Revenues  2010   Revenues  2010   Losses  2010   Profits  2010  Apple:   Amazon:   Apple:     Amazon:                    $2  954  M   $  -­‐26  M     $5  423  M       $2  098  M   iPad:   Kindle:   iPad:   Kindle:   $5  346  M     $1  512  M   $2  931  M   $28  M   E-­‐books:   E-­‐books:   E-­‐books:   E-­‐books:   $77  Mn   $586  Mn   $23  M   $  -­‐54M  Market iPad 41% Market Amazon 61%share Kindle 39% share Other 31%devices Other 20% Ebooks iPad 8%2010 2010•  Amazon tries to create a demand and stifle competitors by selling at a loss•  Apple has the biggest market share in the device market and undermine Amazon’sefforts to create a consequent market for e-books Ø  Amazon should gain market share in the device market before all(Source: press research) 3
  4. 4. But, Amazon’s business model is more appealing to publishers and readersWe assume that $26 is the average price of a hardcover and that as many hardcovers are sold as backpapers •  iPad’s success is mainly Amazon   Apple   explained by the range of Average  selling  price  of  an  ebook   functionalities it offers and is not $9,45   $10,91   based on the reading Average  purchasing  cost  of  an  ebook   $10,32   $7,64   experience •  Publishers and readers shouldfeatures   Amazon   Apple   B&N Printed   favor Amazon’s pricing model .com   book  retailer  Content   Ø  Amazon should emphasize:accessibility   1. its edge over printed book retailers (lower cost of books,InteracPon   storage of books and instantUbiquitousness   access) 2. that the iPad is not a good-Comfort   enough reading toolStorage   Weak Average(Source: BCG study) Strong 4
  5. 5. Yet, forecasts do not show improvements in Amazon’s results Assuming that the only color device will stay the iPad, iPad will reach in 2015, a market penetration of 12% (i.e. 17.3 M people). We assume that Amazon will not gain market share on other e-readers. According to W. Street, financial analyst, the market share of Apple in e-books will be multiplied by 4. Revenues  Apple  2015:  $19  603M     Revenues  Amazon  2015:  $3  509M     We show the iPad:  $19  171M     E-­‐books:  $432  M   Kindle:  $2  903M     E-­‐books:  $606  M   scenario 55% 30% 2% -9% preserving more the Amazon’s Profits  Apple  2015:  $10  586M   Profits  Amazon  2015:  $-­‐2  M   bottom line. If Amazon adds iPad:  $10  457M   E-­‐Books:  $129  M   Kindle:  $54  M   E-­‐books:  $-­‐56  M   functionalities, it Other e- can lose up to $2 Other MARKET readers: bn. devices MARKET 23% SHARE : 15% SHARE DEVICES Apple: E-BOOKS 32% 2015 2015 Kindle: iPad: 29% Amazon: 57% 45%Ø  Amazon has to change its trajectory to capture the publisher’s margin(Source: press research, BCG study and self estimation) 5
  6. 6. Amazon should conquer consumers by being more adapted to the digital environment We assume that publishers have an average profitability of 5% on books: BOOKS E-BOOKS Possibility to fix it to a certain extent Average  cost  of  a  book  for  a  publisher:  $9.80   Average  cost  of  an  e-­‐book  for  a   publisher:  $4.11         Fixed Fixed   Royalties: 15% costs: costs:   30% 67%   Editing: 5% Marketing: Paper and Royalties: Depreciation: printer: 35% Variable 33% 29% 3% costs:G&A expenses: 9% 70% Variable   Marketing: Shipping: 7% 13% G&A costs:   Returned Editing : 11% expenses: books: 13% Depreciation: 20% 33%   7% Cost  of  a  book  for  Amazon:  between  $9.3  and  $12.38       Cost  of  an  e-­‐book  for  Amazon:  $10.32         •  Assuming hidden costs of one euro per e-book, 1 e-book sold brings as much money to the publisher as at least 2 books sold Ø  Amazon must carry on focusing on volume but should fit to the dematerialized economy in changing its business model (Source: Market Background) 6
  7. 7. Amazon’s new strategy: overcoming the barrier to   adoption and locking-in the customerGoals: Customer Negotiation First mover Aggressive High•  ebook market share: 80% Lock-in of global advantage strategy on profitability•  creating a higher ebook through licenses on device and secureddemand monthly with weakened sales revenues subscription publishers competition PROPOSED STRATEGY •  Sales of the •  $19.99 monthly •  Win-win situation •  Advantage: •  Competition will device at $99 subscription, unlimited with the publisher Secured costs be forced to Objective: reaching access thanks to big and high steady follow or engage a market •  Objective: volume increase revenues in a technology penetration of 25% democratize the market à from 8 to 35 Average $24 per competition Current in 2015 to occasional readers million customers customer/month •  Winner takes all situation •  Advantage: large •  Objective: reduce situation volume increase the cost per book SAME Loss of Exhausting Threat Challenge profitability, Higher STRATEGY on e- competition on erosion of exposure to on device Books wholesale market competition sales sales model shares •  Lack of •  e-Books market •  legally •  current market •  Cannot compete profitability on share will decline jeopardized position difficult to on the technological the Kindle with the •  low profitability, maintain field tightening of competition on •  competition will •  Classic/ Positive •  iPad leads in competition volumes reduce unattractive offer Danger terms of Negative technology •  high costs profitability 7
  8. 8. A strategy enabling Amazon to be profitableASSUMPTIONS:1.  the objective of 25% penetration rate of the market within 5 years will be reached. Calculation based on a regular growth of customers portfolio.2.  Learning Curve: As it is a quite new market, device costs decrease with a constant rate of 30% each time cumulated production doubles3.  Amazon negotiates a yearly increase of 10% of contribution with publishers through a global license to overcome the cannibalization risk. •  Advantage: increased of volumes, secured cash flows, possibility to have discounts on advertising on the Amazon Platform Average  yearly   profitability  of  Amazon   over  5  years:   $143  M   (vs  $  -­‐2M  the  previous   model)   Revenues  per  year:   Costs  per  year:   $4  669  M   $4  526  M   (vs  $2  098M)     (vs  $3  511M)     contribuPon  of  one   average  costs  for  e-­‐ Average  costs  of   consumer:     Average  number  of   books  per  year:   devices  per  year:   devices  sold  per  year:   $288/Consumer/year   $835  M   $3  691  M   9  750  000   (vs  $166.5)   (vs  $640  M)   (vs  $1  484M)   At last Amazon will be profitable and revenues will be growing fast (34%/year) 8
  9. 9. Besides Apple, direct competitor’s response would be to follow the new order reinventing their business model All competitors will negotiate low prices with publishers as the market order would have shifted towards a lower price per ebook. APPLE  ‘S  RESPONSE  WILL  BE  “NOT  MOVE”  •  Stay focused on devices as –  Apple’s core business is not the ebook market but the devices –  Their target is different: Apple’s customers like technology whereas Amazon’s like reading.•  Should Amazon thrive in launching this new business model, it would have exclusivity to the iPad platform in ebook selling but would have to pay a large fee to Apple BARNES  &  NOBLE  •  Would change their business model, “pay-per-page” billing so as to sell to the customer only what it is accessing and thus emphasizing the difference with Amazon. SONY  •  Would leverage their assets in technology and high-tech and would preferably compete with the iPad . In any case they would hardly compete with Amazon because its position would be well secured against followers 9
  10. 10. Google  sells  adverPsing  services  but  sPll  will  undermine  devices,  OperaPng  Systems  and  media  content  providers   Service  to  users   Service  to  ad  buyers   Access  to  content     VALUE CHAIN User  aLracMon   (e-­‐books,  &  all   AdverMsement   (Android  and  apps)   TargeMng   selling   other  digital   media)   Maximize number Retain users in Target client on its Monetize client Objective of Google users Google ecosystem access data database - Number of devices - Time spent in the - Accuracy of data - Billing / traffic KPI - Number of users by Google ecosystem - Market mapping device - Traffic ability OPERATINGCOMPETITION ANALYSIS Google  wants  to   SYSTEM PROVIDERS maximize  its  user   CONTENT database   PROVIDERS Google  wants  to   maximise  Pme  spent   in  its  ecosystem   Google  increases  its   Google  undermines   presence  on  all   the  iPad  value   devices   Google  undermines   Google  gives  access   Android  based   content  providers’   to  the  maximum   value   amount  of  content   devices  competes   with  the  iPad   Google’s move will probably compel Amazon to provide its offer on the Android platform to reach its objective. Apple will resist because they have a strong brand equity and first mover advantage. 10
  11. 11. Google  should  invest  in  adapPng  ads  services  in  the  tablets   GROWTH RATE WITHIN 5 YEARS 100% ASSUMPTIONS: 4 •  Within 3 years, as many Android-based smartphones as iPads will be sold 1 (source: press research) •  Within 5 years, 60% of tablets will run Android 3 •  The objective of 75% of Admob Ads in overall Android tablet Ads will be reached. 50% 5 •  Ad mob will generate within 5 years 45% of the tablet advertising revenues (75% x 60%) 2 6 How  can  Google  leverage  this  environment   0% to  increase  sales?   EASE OF IMPLEMENTATION Spread  the  use  of   Adapt  adverPsing   Google  operaPng   to  the  tablets   system     and  apps  use   Adapt  Android   Increase  the  market   Increase   to  other   Launch   Enable  online   share  of  AdMob  in   access  to   manufacturers’   Google’s   adverPsing  for   Tablet  Ads   digital   tablets   tablet   tablet  web   (ObjecPve:  75%  ads  on  Android;   content   Indicator:  Market   device   browser     Cumulated  revenue:  $971  years)   (Google  books..)   share  of  tablets   2 3 4 running  Android   1 Ensure  a  high  level   Specific  ads   Rely  on  the   of  suitability  with   Quality  of   for  light   tradiPonal   the  OperaPng   TargePng     versions  of   search  and   System   websites   display  ad   5 6 Google should invest in technologies that allow Android to adapt to a maximum of device manufacturers and invest in tablet advertising 11