Posts tagged ‘Amazon’

Pricey Bits

It’s been quite awhile since I’ve found time to write an essay, but today I just couldn’t resist.

Back in March,  I predicted two things were going to happen in publishing:

  1. The prices of e-books would rise, approaching that of physical books.  At least for best-sellers and popular authors.
  2. The prices of e-book readers would continue to drop, perhaps even through the use of subsidies.

This morning, the Wall Street Journal had a front-page article saying pretty much the same thing.  While the average e-book price has dropped, the pricing of major best sellers has been creeping up, and even exceeds that of hardcovers in a few cases.

The 5-year old inside me is saying, “Nyah, nyah, told you so!”

True, this may not actually be the best thing for publishers, because the wholesale pricing model that has allowed retail prices to behave this way in many cases lowers revenue for them.  Remember, however, that production costs are basically zero.   And publishers are achieving two things they want–expanding the e-book ecosystem, and maintaining a measure of market control, avoiding the Amazonification of e-book prices.

However, as I wrote earlier, the main enabler of this phenomenon  is the inelasticity of demand for popular books.  Unlike in the beginning, e-books now offer more advantages over paper books: bookmarking, definition lookups, sharing, storage, etc.  They are, in fact, a different animal.

Moreover, once people have a reader like the Kindle or Nook, they really don’t have anywhere else to go.  Unless they want to return to lugging heavy hardcovers around, they have to pay the going rate for the e-books they want.  Bits may cost less than atoms, but that doesn’t mean they have to be priced lower.

Yes, the prices of of many less-popular e-books continue to be lower than the paper version.  And yes, people will inevitably begin to sample lesser known and/or self-published authors in an attempt to save money.  Both of these are good things, in my view.

The second part of the thesis is also coming true.  With Nook and Kindle in fierce competition, and tablets going mainstream, prices for e-readers are getting lower all the time.  Only $79 for a basic Kindle these days, though that is an ad-subsidized version.   Low reader prices drives greater adoption, which expands the e-book market, which puts more people in the position of paying high prices for lower cost editions of bestsellers.

Some mornings I just really love reading the Journal.  But not on my Kindle.  At $15 per month, the electronic version from Amazon is more expensive than the print+online subscription price I pay.

Sure is a strange world.  Who’d have thought we’d be paying more for bits than atoms?

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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December 15, 2011 at 10:45 am Leave a comment

Kindling

Recently, blogger and journalist extraordinaire Dan Gillmor tweeted about how some publisher was selling an e-book at a higher price than the hardcover.  Dan’s comment was that the publisher (Penquin in this case) just “didn’t get it.”

I think Dan’s wrong on this one.

True, an e-book should be priced lower than the hardcover.  It’s certainly cheaper to produce.  But cost doesn’t drive price, demand does.  Cost simply determines how much profit there will be, if any.

People buy e-books (and e-book readers–more on that in a minute) for a lot of reasons.  But most of them are related to convenience.  The ability to download books, a large and growing selection, the ability to carry an entire library with you, low weight, getting a new book the day it debuts without fears it will be sold out.   And yes, they’re almost always cheaper.

Consumers have always been willing to pay for convenience.

If people really like e-books, why wouldn’t they pay more for the convenience?  Now that they’ve shelled out good money for their Kindle (or Nook, or whatever) they’re sort of stuck, aren’t they?  Are they really going to go back to buying hardcovers–and trashing their e-readers–just because the book price went up?

Let me get a show of hands.  How many of you walked back into the bank to use a real teller once they started charging a few bucks to withdraw money from an ATM?  Not many, I bet.  Remember when there were hardly any commercials on cable TV, because you paid a subscriber fee for it?  Did you cut the cord because ads started showing up?  Nope.

Publishers aren’t stupid.  They’re going to charge as much as the market will bear for an e-book.  But they have to be deliberate in how they go about it.  For this to work they need two things:

  1. Enough separate e-book outlets so they maintain a measure of pricing control (no iBook store to monopolize distribution), and
  2. Enough e-book readers on the market so they have a critical mass of customers.

It’ll happen gradually, but e-book prices will drift up.  They may never exceed hardcover prices–perhaps they’ll end up somewhere between that point and retail paperbacks.  Whatever the level, it’s clear publishers will be raising prices on more titles in the future–particularly popular authors and hot books.

Which brings me to my second point.  If publishers and sellers require lots of e-book devices in the market to maximize profits from e-book sales, what do you think will happen to the price of e-readers?

If you answered “they’ll drop like a stone”, go to the head of the class.  When you expect to make most of your money from the blades, why in the world would you charge people for razors?

Sure, e-readers might not actually become “free”.  Perhaps they’ll be subsidized like cell phones by the operators whose networks are used to download the e-books.  Sign up for AT&T service (NYSE:T) for 2 years, get a starter cell phone, and we’ll even throw in a Kindle.  Or agree to buy 2 e-books a month from Barnes and Noble (NYSE:BKS) over the next year, and your Nook costs you nothing.

Consider this:

  • The number of available e-readers has grown significantly
  • You can already read e-books on other (multi-purpose) platforms like PCs or tablets
  • Apple (NASDAQ: APPL) has sold more than 8 million iPads already, while Kindle sales are at best less than half that
  • Entry-level e-readers have dropped dramatically in price since they premiered (though new ones with more features still command a premium).

E-reader prices will trend downward to the point where they’ll be as cheap as, well, firewood.   And as that happens, e-book prices start to rise.

This all maximizes publisher profit .  It also increases revenue for distributors like Amazon (NASDAQ: AMZN) and Barnes & Noble who provide the devices.  They will more than make up the cost of e-readers with increased profit on e-book sales.

The real beauty of this strategy is that it effectively takes the cannibalization of physical book sales completely off the table.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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March 10, 2011 at 11:55 am 1 comment

Location, Location, Location

Location, location, location.  That’s the mantra of what drives value in the real estate industry.  However, the modern version might well be, “Location, just less of it.”

Today, Barnes & Noble (NYSE: BKS) announced it is putting itself on the block, looking for a buyer as it struggles to survive in a world of digital books.

[Frankly, I’m not so sure it’s digital books that are causing the problem so much as online purchases.  Certainly, digital books are growing wildly, but off of a very small base–according to Publisher’s Weekly, they amount to only about 1% of the market.  So maybe not a short-term catastrophe, though it’s certainly a future threat.]

Either way, the problem with Barnes & Noble is real estate.   One of the key ratios by which they are measured is return on assets–and with their large number of expensive stores, the fewer pricey books they sell, the more the operating metrics plummet.   It’s almost like reverse leverage.

For years now, booksellers have sought other means to drive traffic into their retail outlets, peddling music and videos, opening in-store cafes, offering reading areas, etc.  All to generate a higher return on their store  “assets”.

I have this strange feeling of deja vu.

Blockbuster (BLOKA.PK) now trades on the Pink Sheets  for exactly the same reason.  They too were fixated on driving traffic to their stores.  They too operated under the assumption that their true competitive advantage was their locations, and they had to keep earning a return on those assets.  This caused them to make some rather odd decisions, such as enticing people to drive to their stores just to fill up a media player with movies to take home.  Meanwhile, Netflix ate their lunch shipping discs (and now simply bits) directly to customers.

Similarly, Amazon (and others) killed Toys R Us, who had a similar problem with too much real estate and the accompanying high overhead.  Why drive your car to the crowded store (along with acquisitive children badgering you for every bright and shiny thing they see) when you could have Christmas delivered to your door?  And cheaper too.

It’s really a shame, as I still enjoy browsing in bookstores. Checking up on favorite writers to see if they have something new.  Finding an unfamiliar author to take a chance on.  But there’s no question they are struggling.

Probably some private equity firm will buy Barnes & Noble, and turn it around, as was the case with Toys R Us.  Perhaps even Blockbuster will survive.  Stranger things have happened.  However, one thing is for sure:

There will be a lot fewer locations.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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August 4, 2010 at 8:47 am 36 comments

Up And Down Vote

backpedaling3The Wall Street Journal had an article out yesterday that has created a real firestorm of controversy. It’s about how some of the large Internet players (such as GOOG, MSFT, and AMZN) are backpedaling on their previous Net Neutrality stances.

Moreover, they’re variously negotiating with telecablecos to gain “favored nation” or preferred treatment status on their networks.

Holy Turnaround, Batman!

Some writers quickly noted–here, and here–that Google at least is simply caching content closer to customers, just like Akamai (NASDAQ: AKAM) and other CDNs do. And that much of the Journal article reflects the kind of sensationalism many feared would appear once Rupert Murdoch (NYSE: NWS) bought the paper.

[As an aside, when I was doing research a year or two ago on Akamai, top management there vehemently denied my suggestions that they would ever be in competition with Google. Heh.]

If any of this is true, it’s a sad development, but hardly unexpected. As competition heats up for everything from ad serving to video downloads to cloud computing, everybody wants an edge. And they’re willing to pay for it.

Those that can afford to will get better services, better access, better distribution. Which means the little guys get shafted again. If you want to buy from Amazon, you get speedy page refreshes (not to mention faster access to things like S3). Google apps will work faster than, say, Zoho.

The rich do, indeed, get richer.arrow

This plays right into telecableco hands. It’s what they’ve been lobbying for, after all. (I can almost see the big, fat, spider sitting there in the middle of its web inviting them all in. ) The result will be a vertical model, with only a few players controlling the entire value chain, up and down.

If this was just about commerce, I’d be less concerned. But it’s also about access to information. And about control of content. Ultimately, it’s about exclusion and higher costs for everyone. As well as a loss of the kind of innovation that has made this country successful.

Imagine if TV stations were free to broadcast good signals from those advertisers (or news programs) that spent more. Everyone else, they deliver fuzzy pictures with the sound continually dropping out. Pay to play. Eventually, everyone gets their news and entertainment from a few large companies. Welcome to the 50’s. There’s progress for you.

Critics argue: “But as businesses they should be allowed to offer different levels of service”. If there was true competition at the last mile level, I’d be inclined to agree. However, most of the large telecablecos built their networks–and their competitive advantage–on the revenue streams from exclusive franchises and government mandated monopolies.

You and I paid for their broadband networks through our monthly TV and telephone bills, mostly at a time where we had no choices. Or they used the proceeds from bonds whose attractive terms were based on the existence of those same “guaranteed” payment streams, which is basically the same.

Now that the moats around them have been fortified, we shouldn’t think that they’re entitled to operate as normal businesses. Monopolies (or even duopolies) don’t get the same rights as firms in a free marketplace. It’s not that I believe Network Neutrality should be regulated. (I agree about the principle but not the solution.) It’s last mile competition where the natural monopoly lies, and that’s what should be regulated. Until it’s no longer a monopoly, or until the telecablecos no longer have insurmountable market power.

Or until there’s structural separation.

Many thinkers (at least the ones whose salaries don’t depend on the success of telecablecos), have long recognized the most efficient market structure is to go horizontal–one company does the infrastructure, one does the content. Each competes within its own level, but not up and down the stack.

horizontal-model

The PC industry helped this country thrive with the same model. Some companies built chips, some sold computers, some provided software. This drove innovation and helped keep costs low and falling. (Even the emergence of intra-level monopolies like Microsoft couldn’t halt the effect–some argue the standardization even helped.)

But now the big players are changing the game, in order to become even bigger. The Internet guys want to differentiate on performance, because they’re finally getting into each others businesses, and have to compete–some for the first time. The pipes guys want a piece of the content pie, because as network usage grows their costs go up, and they face resistance in trying to charge consumers more money for Internet access, especially as they’ve been billing flat rates for so long. But we will pay, one way or another.

Not everywhere, thankfully. Much of the rest of the world actually has competition in the last mile. They’ve created a more horizontal model, with providers competing “across” levels. If we fail to adopt this kind of structural separation in the U.S., we can watch our innovative spark and competitive advantages slowly drain away.

And just as many around the world laughed at us for voting to re-elect George Bush, they’ll laugh at us again, for voting to go “up and down”.

Disclosure: I hold no position in any of the stocks mentioned here.

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December 16, 2008 at 10:22 am Leave a comment

Book ’em, Dano

Goldman Sachs analyst James Mitchell is out with a report that estimates sales of the Kindle electronic book reader from Amazon (AMZN) were between 25,000 and 50,000 in the first quarter. This is hot on the heels of another estimate of 30,000 from Citi analyst Mark Mahaney.

I certainly can’t fault Mitchell’s methodology, which backs out non-Kindle items from Amazon’s unearned revenue line to arrive at an estimate (roughly 10% of that line item) for Kindle revenue and units. Except to note that he’s made some rather broad assumptions about the other items. If so, his subtraction is suspect. Notice also that Mitchell assumes his estimates of unearned revenue for the Kindle could be higher (up to 20%), but not lower, which reveals his bias.

Citi’s Mahaney has even gone so far as to suggest 3% of Amazon’s revenue (about $750M) will come from Kindles within 2 years. Worse yet, he assumes a sales ramp roughly half of the original iPod. Frankly, he’s smoking crack.

If Eliot Spitzer hadn’t brought an end to the practice some years ago (cough, cough), I’d almost think these two were trying to drum up business for their investment banks. Instead it’s probably something much more innocent, like say pumping the stock for the traders.

Why do I think e-books are, at best, a niche item? Because end users don’t need them. Yes, it saves money for publishers and retailers. But it’s unclear whether the savings that trickle down to users overcome the hassle of another $300+ device that needs to stay charged. Plus I like paper. Apparently, so do the multitudes who continue to print things out instead of reading them on a screen. (Remember the paperless society that computers were going to bring?)

Think about it: what problem is the e-book solving for consumers?

  1. Gee, if only my book was portable, I could take it with me…
  2. Pushing a button to bookmark my place is SO much easier than bending a page corner.
  3. Those nasty paper cuts.
  4. I can take my whole library with me. (Sure, I often read 10 books at a time. And I wish I could read fast enough to finish several books on a long flight.)
  5. I can download a new book whenever I need one. (Yep. And how long does that take over a pokey wireless link? EVDO isn’t everywhere. And can I read the first page while the rest is downloading?)
  6. I want my reading material to break if I drop it.
  7. It’s cheaper. (True, true. Unless you want to read blogs at $2/week or newspaper feeds at $15/month. That’s a lot to pay for portability.)

Kindle isn’t going to take off in its present incarnation. Yes, there will always be technophiles and other early adopters that get one because it’s new, or somehow cool. But regardless of whether the Kindle succeeds or fizzles, the buzz-induced sales ramp will tend to look the same at this early of a stage in a product’s life.

Have you seen hordes of gadget geeks flashing a Kindle around the way they did iPods or Razrs in the early part of the adoption cycle? I sure haven’t.

But let’s assume for the moment that the analysts are right, that Kindle will ramp smartly, that reports of large orders from Chinese manufacturers are accurate, and that Amazon won’t take a bath on the units.

Let’s even go so far as to assume e-book sales are completely complementary to paper books, that Kindle entices people to read more books and doesn’t cannibalize the traditional book revenue stream. (Live dangerously, I always say.)

How does that move the needle for Amazon? Whether you think the stock is a buy or not, is 3% of revenue really going to make it a game-changer? I don’t think so. Amazon’s a visionary company, they do a lot of things right, and I wouldn’t bet completely against Jeff Bezos.

But put your money on the whole company, and don’t pay attention to the noise.

Disclosure: I hold no position in any of the stocks mentioned here.

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May 20, 2008 at 11:01 am Leave a comment


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Scott J. Berry, NY area

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