Will the iPad Undercut Digital Readers?
By Robert Cyran
Published: June 27, 2010, New York Times


The electronic book market is looking increasingly hot, flat and crowded. A vicious price war has broken out among producers of digital readers because of Apple’s success with the iPad. Companies like 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 three 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 over two and a half years.

Investors haven’t missed the implications. Amazon’s stock has fallen 8 percent since the iPad arrived. 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 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 13 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 part of this rise. There’s a three-week waiting list for the latest version when you buy it online, despite some kinks with its antenna. 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 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 five million e-books. It may be that many people prefer a more versatile device that allows them to browse the Web, watch videos, read e-mail 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 seem 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. Basic e-readers now go for well under $200 and will almost certainly be offered for less than $100 by Christmas, according to Gartner.

There’s a battle brewing over e-books, too. Before Apple’s iPad appeared, Amazon sold most Kindle books for $9.99 and lost about $3 a book, analysts reckon. That increased 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.
Full story at NYT.