Amazon E-Book Sales to Hit $2.5B in 2012?(Hear that Steve?)

Last month at Book Expo America, I heard Jeff Bezos say that Amazon had been selling e-books for nearly ten years and that they needed an electron microscope to find the sales figures. Well they may not need one much longer, if Pacific Crest analyst Steve Weinstein’s projections are valid. He estimates that global sales of e-book sales at Amazon could reach $2.5 billion by 2012, based on the following analysis:

To figure this, Weinstein starts with the handiest analogue: iPod and MP3 player sales. He notes that between 2003 and 2008, digital music sales grew from 2 percent of the US market to 33 percent, largely on the back of Apple’s (NSDQ: AAPL) twin offerings. He doesn’t expect the Kindle/e-books to track as fast, but he does think the market is off to a strong start already, and that the cycle will pick up steam as the Kindle comes down in price (that’s already started) and the ecosystem matures. He also suspects the consumers will be drawn to the instant gratification aspect of Kindle titles, as well as the lower price per book. Based on an operating margin of 4% to 5% for physical books (comparable to operating margins for brick-and-mortar stores) and 15% to 20% for e-books (comparable to other forms of digital media), we estimate that e-books could add as much as $330 million to operating income.

The key figure in this analysis is not the total sales projection, but the margin ratios. If the e-book business generates an operating margin that’s 4X that of the dead tree type, you need no further evidence that Amazon will over time make this the foundation of their business model. Any innovation that offers you the opportunity to carve out two of your largest cost components – warehousing and shipping – (not to mention improving on the customer’s instant gratification experience), is clearly going to be a key component of the company’s strategy. In fact, one wonders why they aren’t giving Kindles away, in order to “iPod-ize” the market, and begin to reap the benefits of the overall growth of the ecosystem. The most logical explanation is that the capital markets still regard Amazon’s investments in digital media with a high degree of skepticism, which tends to temper the rate of spending on this type of technology. This somewhat cautious approach could end up backfiring however. If Steve Jobs chooses to enter the e-book market (despite his dismissal of the book business last year), Apple could quickly come to dominate the market for e-books, since consumers are becoming more accustomed to using their iPhones for reading along with browsing the web. The infrastructure is already in place (iTunes store), and the platform has the dominant market share, and the lure of 20% margins on $10 price points (compared with the few pennies they currently earn per song download) may just be enough to entice Apple to change course and start selling e-books.

All these developments are good news, of course, for the reading public. The outcome of this creative destruction process will be lower costs for content, as well as for the devices to read it on. I might however, have some concern for my career path if I was an assistant editor in a large publishing company.

One Response

  1. I am nt convinced Weinstein made the 2.5b in relation to sales of ebooks in 2012. Even if he did that would be rampant speculation. According to other quotes he is actually referring to sales of kindle readers including the entire period from launch to 2012. Which is quite a different thing even assuming he is right. he also says total sales to date of kindles is 40,000–which, frankly, isn’t very many.

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