The Kindle vs iPad battle in the tablet and e-book markets

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A strategic analysis on relative strengths of Amazon, Apple and Google in the e-book market.
Special emphasis on whether Amazon should launch a color Kindle and which e-book segments will grow at the highest pace until 2015

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The Kindle vs iPad battle in the tablet and e-book markets

  1. 1. BCG Strategy Cup 2011 TABLETS AND E-BOOKS f by Leap roggers
  2. 2. 2010 What Apple wins on premium tablets..Key e-book revenues and profits in $M E-book market share in 2010 In 2010, the US e-book market is valued at $966M. 700 It is assumed that Amazon and Apple control 80% of this 525 market. Barnes&Nobles, Sony as well as platforms non- associated with any proprietary readers control the 350 remaining 20%. 20% 175 Previously minor, e-books became a true alternative with 69,4% 0 the introduction of e-readers and tablets. 10,6% Apple Amazon Amazon and Apple play different games in an evenly split market Amazon Apple launched the iPad in April 2010 and created a new category. Apple Profit Several other devices were launched before, however Kindle and iPad were a real boost to Others Revenues the market. ey offer different functions and operate in different price segments. Both will stage a war to define this nascent segment and to impose proprietary standards. Amazon AppleKey tablet revenues and profits in $M Tablet market share in numbers 6 000 8M Sales in 2010 8.5M 4 500 3 000 1.86% Op erating Marg in 54.83% 1 500 48% 0 52% Apple Amazon Amazon’s Kindle provides a channel to buy and read e-books. Apple’s iPad, Operating profits generated by Kindle are on top of that, is a source of tremendous income in itself. negligible at $3.51 per device. *Given the scope of the analysis and poor market penetration by other players only Kindle and iPad were considered.
  3. 3. Amazon recoups on wholesaling e-books Wholesale Model where Amazon Agency Model by Apple buys e-books at 50% discount on where publishers get 70% of the retail price of paper version. the retail price of e-books. Based on NY Times Paperback Bestseller list ( July 2010), average publisher margins are:Wholesale $9.45 a v e r a g e r e t a i l p r i c e $10.90 Agency $2.32 publisher profit per bestseller sold $2.45 Aer factoring in margins on hardcovers at their current 23% market share, publishers’ profits per e-book rise to $4.96 32% more with Wholesale $3.76 Short-term perspective Amazon offers lower prices at its own risk and } thus extends publishers’ market. Customers prefer Wholesale which offers them lower prices. Long-term perspective In the short run, publishers gain more with Wholesale, but If the $9.99 e-book price persists: – current paper book prices are not sustainable, therefore in the long run, Agency Model prevents them from publishers’ revenues from the Wholesale model diminish becoming a mere content provider. – e-book retail platforms become the sole distribution channel thus putting publishers at retailers’ mercy. In the Agency Model: *is estimate abstracts from market dynamics. It is likely that the $9.99 policy will be discontinued as: – publishers keep full control of retail prices a) TOP5 publishers control 84/73% of the hardcover/paperback market and therefore their supplier negotiation power is huge – avoid the threat of customers getting used to low prices. b) Apple is explicitly against $9.99 and binds its contractors not to offer lower prices at any other platform In this case, publishers would renegotiate upwards the 50% discount rate, thus making the two models converge.
  4. 4. Apple can encroach on Amazon’s turf (Amazon cannot) { } Historical leader in online book retail Established & dominated new markets (iPod, iPhone)Amazon Apple Exhaustive choice of competitively priced books Product design and soware-hardware integrationstands for stands for Exemplary customer service and logistics Cross-media 1-click platform with a large client basebooks Kindle, the first e-Ink reader to ship in volume Stores: client interaction and first-hand experience intuitive Kindle iPad Reader-friendly Status symbol E-Ink technology Versatile Allows for reading in sunlight Excellent user interface Limited eye strain Games Long battery life (up to one month) Applications Lower price tag ($139 w/o WiFi) Web browsing E-mail support Kindle is preferred by active readers, Surveys show substantial interest they buy 8 times more books than in new functions like color display iPad users. or video support.
  5. 5. Apple reaps the fruits from the education market E-book market evolution by sector – Tablet sales are expected to grow at 11.8%. in $M of sales – E-book sales are driven by the number of tablets operating in the market, not by current sales. 3 000 – Obsolescence period of two years = tablet sales of last two years constitute this client base that is 2 250 directly correlated with e-book sales. – Initial boost in 2011 as the number of tablet roughly doubles and stable growth thereaer. 1 500 – It is assumed that initial e-book market structure is identical as in the paper book market. 750 – However, Higher Education sector will grow at 21.8%, thus outpacing all other segments and increasing total Education share from 42 in 2010 to 48% in 2015. 0 2010 2011 2012 2013 2014 2015 21% 27% 21% 28% Others 3% 2% Religious 2010 2015 Adult&Juvenile 14% 21% 29% Higher Education 34% K12 Education E-book market share Education demands color, video and interactive features. Education sector evolution by provider between Amazon and Apple Amazon will lose market share in this critical segment. in $M of sales100% 87 By 2015, Apple will multiply its market share by four. 1 500 80 80% 68 1 200 60 It is assumed that churn from Kindle to iPad will be 60% 55 48 51 concentrated in both Education sectors as its demand for 900 45 40% 39 features cannot be met by Kindle. 600 31 20% 20 300 13 0% 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Apple Amazon
  6. 6. Amazon doesn’t budge Apple’s numbers skyrocket E-book Revenue Structure at Apple in $M E-book Revenue Evolution at Amazon in $M1 500 1 500 iPad will increase its initial share from 51% in 2010 to  72% in 2015,1 125 1 125 thus reaching the saturation point for devices in its price range. 750 Apple’s business model enables it to generate tremendous profits both 750 375 on device and e-book sales with $7200M profit only from iPad in 375 2015. 0 2010 2011 2012 2013 2014 2015 0 2010 2011 2012 2013 2014 2015 Amazon will see its market share be restricted to readers of traditional black&white books. Customers craving a versatile device are likely to switch to an iPad. Profits on Kindle will remain stable, but relatively low ($49M) as it is sold almost at construction cost. Profits ey show however a slight upward tendency starting 2013. Revenues w/o profit Kindle sales Revenue Evolution in $M iPad sales Revenue Evolution in$M 2 000 15 000 1 500 11 250 Tablet sales by manufacturer Publisher profits by e-book platform in mln units in $M 1 000 1 000 7 500 30 24 750 18 500 3 750 500 12 6 250 0 0 0 2010 2011 2012 2013 2014 2015 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Apple Amazon
  7. 7. Amazon should reinforce unique positioning without blurring its imageiPad will attract Kindle customers who need a color display in the Education market. Tablet client base evolution by manufacturer (in mln of units) 50e challenge Amazon will face is to convince switching customers to continue to iPadbuy books at its platform. To succeed in leveraging its unique market positioning, 40 Kindle to iPad churnAmazon should: Kindle 30 1) develop reading applications going beyond existing ones that would enable: - taking notes and sharing them 20 - multi-device support, you open the book where you closed it the last time - updating textbooks as they published 10 - enhance college features, e.g. teachers indicating chapters to read 2010 2011 0 2) address campuses and teachers directly to sell textbooks in bulk 2012 2013 2014 2015 Since iBookstore is mainly restricted to Apple users, Amazon should recognize the opportunity of capturing all ebook sales that are not tablet-bound, including e.g. netbooks and Android devices. Analysis of two color device options lead Amazon to the same conclusion: Simple color reader iPad-like tablet – Lacks the e-Ink comfort – Impossible to match iPad on usability and design – Reduced battery life – Lacks relevant skills and R&D capacity – Losing brand identity – Inadequate brand image to become a status symbol – Poor versatility compared to an iPad – Risk to lose advantageous books/device ratio as customers will – Little value for money (at least 35% price increase) be seduced by low price and other features e temptation to launch an imperfect substitute of an iPad should be resisted.
  8. 8. Tomorrow: Color by default and integrated publishingBinding books to proprietary platforms – By 2015 Apple will control 87% of the Education e-book market. – Apple’s increased negotiation power with publishers will enable it to convince them to launch applications replacing both paper and e-books, thus locking out the competition. – anks to unmatched expertise in user interface, Apple will introduce new proprietary options.Color was not an option before – Apple will prompt authors and publishers to include color and animation that would bind them to Apple’s device – Many books bought on iPad today are children’s books. ose young readers are accustomed from their early days to iPad’s dynamic interface. As they grow up, they will crave it even more. – Apple should focus its marketing effort on these users by facilitating their access to iPads.New publishers to appear – anks to e-books, publishers’ margins increase significantly (from $1.04 to $2.32 for an average bestseller) – Retailers will recognize this opportunity to integrate vertically and to act as publishers. – Today integrated publishing is in test phase in offstream segments but can easily be extended to bestsellers. – Individual authors will gradually become independent of the current value chain in the publishing industry.
  9. 9. Android: an ad-selling machineAdvertisement – Put side by side with the Internet ad market, e-book market remains tiny at 4%. Internet ad market share by access platform – erefore, Google should focus its strategic efforts elsewhere. 100 75– e value of the US Internet advertising market in 2010, display and search 50combined, was $22.4B. 25 – We assume that the share of display ad will remain stable at 30.2% with search 0 2010 2015 accounting for the remaining 69.8%. Computer Cell & Tablet – In 2015, ad market on mobile devices accounts for 10.6% of the overall Internet ad market, up from 2.6% in 2010.Operating systems Tablet market share by operating system in 2015 – Mobile devices will increase their ad share as they will capture parts of the display market. Most of search ad revenues will still be generated on computers. – Since display ads within apps are OS-bound, the real challenge for Google is to 31% impose Android in the tablet market. 38% – By 2015, Apple’s share in the high-end tablet market is on a slippery slope down to 50 , the rest being evenly split between Android and others, just as in the low-end segment. 31% iOS Android Others
  10. 10. Browsing is the real cash cow – Application developers earn 60% of ad revenues generated in Apple apps.– It is assumed that Google will converge towards this model for Android apps.– Google’s revenues from display ads vary by access platform: 100% For AdSense ads in browsers, whether on a computer, a tablet or a smartphone 0% For iAds in apps on Apple operating system (iPad, iPhone, iPod touch) 40% For ads in Android apps In display ads, the transfer from computer to mobile devices will clearly diminish Google’s revenues.– To remedy this unfortunate evolution, Google should: • Support pre-tablet markets • Impose web-based Chrome OS to maintain sales of app-free netbooks • Encourage app development on Android mainly as a selling argument • Improve web browsing experience on tablets so that applications lose their appeal • Re-emphasize Google’s founding values and promote open, unconstrained access to the Internet as opposed to restricted environment of applications
  11. 11. Executive summary { – e nascent tablet market is evenly split between Amazon(8M Kindles) and Apple (8.5M iPads), Apple has far better margins on devices. – anks to its historical position, Amazon dominates e-book sales at almost 70% market share. 2010 – ey offer competing pricing models in the e-book market. Amazon buys e-books at discount and sets up an aggressive pricing strategy. Apple leaves pricing decisions to publishers and imposes a 30% fee. – In the long-run publishers will either favor the Agency model or make the two converge. { – Education market will grow from $405M to $1543M. – It will trigger demand for color, interactive devices like the iPad. – Kindle sales remain stable as customers switch for an iPad (significant churn rate concentrated in Education market) 2015 – iPad sales reach 21M p.a. and 8M for Kindle. – ere are 55M tablets in operation. Market for high-end, expensive devices is saturated at 13% penetration rate. – Apple’s market share in e-books reaches that of Amazon’s. { – Amazon has to retain Kindle-to-iPad switchers within its e-book shop. – Multiple device applications will be more important in retaining customers than the device itself.Next steps – Amazon should stick to its core competence rather than compete with device manufacturers. – Books will become platform-bound applications. – Publishing will become more profitable and retailers will try to integrate vertically. { – E-books are tiny drops, Internet advertisement is an ocean. – Display ads will be partly transferred from computers to mobile devices. Google – Increasing OS market shares translate directly into increased display ad revenues. – Google should keep users on browsers and out of applications.

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