Advertisment

Amazon loss on e-book pricing could fuel trend

author-image
CIOL Bureau
Updated On
New Update

Advertisment

SAN FRANCISCO, USA: A pricing battle lost by Amazon.com Inc to a top book publisher has stoked fears that its hold on the nascent market of electronic books may be more shaky than previously thought.

On Sunday, Amazon alerted customers that it had bowed to pressure from publisher Macmillan, which insisted on charging $12.99 to $14.99 for its books sold at the Kindle e-reader bookstore rather than Amazon's standard $9.99.

The news introduced the first concrete sense that the world's largest online retailer, and its market-leading Kindle, would soon be challenged in the mass transition to digital books.

Advertisment

Amazon shares fell as much as 9 percent before closing down 5.21 percent, and then falling to $115.98 after hours.

"The thought is: Will other publishers now want to re-price their offerings on Amazon.com, which could affect their entire business model," said TD Ameritrade chief derivatives strategist Joe Kinahan.

The pricing reflects terms agreed upon by five of the six top publishers for selling e-books on Apple Inc's newly unveiled iPad multimedia tablet, the New York Times reported.

Advertisment

Amazon has long touted low prices and selection as its primary appeal to consumers, who helped push Amazon's revenue up 42 percent in its most recent fourth quarter.

Pricing has been key to pushing growth of the Kindle since its launch in 2007, but has also put Amazon at odds with publishers. Major publishing houses have complained that low prices on digital versions of its titles will cannibalize sales of higher-priced hardback copies.

Amazon's dominance in e-books gave it the clout to demand lower prices; that is, until Apple emerged on the scene with the iPad and an iBookstore last week.

Advertisment

BGC Partners analyst Colin Gillis called the concession to Macmillan "just the first repercussion to Amazon's Kindle and e-book franchise from the recently announced Apple product."

For its part, Amazon may have set itself up for disappointment by touting the Kindle's success, without providing supporting data. Last month, Forrester analyst James McQuivey told Reuters the stock could fall as much as 20 percent at the hint of Kindle's weakness.

On Monday, market watchers were surprised at Amazon's steep descent.

Advertisment

"The stock has technically broken down and it's just a matter of sellers piling up on sellers," said Michael James, senior trader at Wedbush Morgan in Los Angeles.

SELL-OFF OVERDONE?

Amazon does not disclose sales or profit data about the Kindle, only saying that millions of people have bought the device.

Advertisment

Some analysts believe Amazon sells the $9.99 titles at a loss, and recoups that through sales of its readers. That means that the higher sale price demanded by Macmillan will boost Amazon's e-book profit margin, noted at least two analysts who believe the sell-off in shares appeared overdone.

"Though Kindle revenue growth could be negatively impacted, higher prices would improve profitability," wrote UBS analyst Brian Pitz, adding that Amazon's "significant" pricing leverage should not be underestimated.

"The iPad is still untested as a reading device and we believe there is room in the market for dedicated eReaders," he said, reiterating a constant refrain from Amazon that Kindle customers are for dedicated, rather than casual, readers.

Advertisment

J.P. Morgan's Imran Khan, meanwhile, wrote that if prices on e-books were to rise to $14.99 from $9.99, volume would have to fall by more than a third in order for revenue to decline.

"We don't expect a material EPS impact," he wrote.

An Amazon spokesman cited the company's policy not to comment on share movement.

Apple rose 1.4 percent to $194.73 on Nasdaq.

tech-news