Kindle Review – Kindle Fire Review, Kindle 4 Review

The eReader market seems to be gravitating towards two separate camps i.e.

1. Amazon which wants to sell both the eReader (the Kindle) and the eBooks (via the Kindle Store).
2. An interesting collaboration between various eReader makers (Sony, iRex, Plastic Logic) and various eBook sellers (Google, Barnes & Noble).

The major reason Sony, iRex, Plastic Logic are suddenly in bed with Google and BN is the fact that the Kindle has a significant early lead. However, they must have each seen enough potential in their area of specialization to feel its worth sharing.

Lets look at what analysts think and what analysis shows us.

How profitable could the eReader market be?

Citigroup’s Mark Mahaney upped his Sales estimate (yet again) for the Kindle -

1. 1.5 million sold in 2009. $700 million total revenue (including books).
2. 2.7 million units in 2010. $1.5 billion revenue (including books).

Forrester Research upped its estimates too -

1. 3 million cumulative eReaders by end 2009. 30% of sales during November-December holiday shopping season. 
2. An additional 3 million units in 2010.

Let’s estimate revenue and profits from eReader sales in 2010 and also for 2012.

eReader Market Size and Profits in 2010

For 2010, let’s work off of the analyst estimates and add on a few assumptions -

1. 3 million eReaders sold.
2. The price cuts are obviously cutting the margins so let’s assume eReader makers are only making 20% profit on the eReaders.
3. Let’s average out (roughly) various priced eReaders to a $225 price.

That gives us -

1. $675 million revenue from eReader sales in 2010.  
2. $135 million profits.

eReader Market Size and Profits in 2012

For 2012, let us assume -

1. 10 million eReaders sold in 2012.
2. eReader makers have figured out a better model and are making 25% profit.
3. Prices are a bit lower and average out to $200 per eReader.

That gives us -

1. $2 billion revenue from eReader sales. 
2. $500 million profits.

Half a billion dollars a year wouldn’t be bad.

What are eReader sellers hoping to do long term?

Lets be frank here. If you own the platform you aren’t going to give it away for free.

Look at what Apple is doing with the iPhone i.e. a straight 30% cut. Basically, every single eReader company that gets a Top 3 position will either -

1. Try to get their own store and sell ebooks themselves. OR
2. Levy a tax on eBook sellers. 

At this point of time you obviously don’t want to say that because then B&N and Google aren’t going to gift you their range of titles and all the free ebooks.

Now, let’s look at eBooks.

How profitable could the eBook market be?

The first thing to point out is that the attach rate that Analysts are assuming is rather conservative i.e.

1. Mark Mahaney thinks it’ll be one book a month, equivalent to $10 per Kindle/eReader per month.
2. Imran Khan of JP Morgan thinks it’ll be one book and a subscription a month, equivalent to $20 per Kindle/eReader per month.
3. Forrester – Don’t have access to their estimates.

Lets be realistic here -

1. Mr. Bezos has already said that for titles that have Kindle editions available, those make up a whopping 48% of units sold. 
2. He’s also said that Kindle owners buy 2.7 times more books than they bought earlier.
3. People who are willing to pony up $250 to $350 or more for eReaders tend to read a lot.
4. The Kindle really, really encourages reading and buying books.
5. Kindle owners buy books for work/school in addition to books for pleasure.

The range for average spending per eReader owner per month on eBooks is probably between $15 and $30. Let’s take $15 per month to be conservative.

eBook Purchases in 2010 and Profits

First, let’s look at revenue and profits from eReaders -

Our assumptions are –  

1. Cumulative number of eReaders: 4 million (averaging out beginning 2010 (3 million) and end 2012 (6 million) ).
2. Revenue per eReader per year: $180 (based on $15 per month spending estimate).
3. Profits are low (10%) due to competition and establishing the $9.99 price.  

Which gives us -

1. eBook Revenues in 2010 of $720 million. 
2. eBook Profits in 2010 of $72 million.

Next, let’s look at revenue from Devices capable of reading eBooks.

These are our assumptions -

1. The current 3 million iPhone readers grow to 5 million (on average across 2010). We’re including iTablet owners.
2. iPhone owners spend $5 per month on books. That’s $60 per year.
3. Profits are 15% (10% for Kindle and 20% or more for others).

Which gives us -

1. eBook revenues in 2010 of $300 million.
2. eBook Profits of $45 million. 

Amazon’s acquisition of Stanza seems a good move now, doesn’t it.

eBook Purchases in 2012 and Profits

Let’s start with eReaders again -

Our assumptions are –  

1. Cumulative number of eReaders in 2012: 17 million (averaging out beginning 2012 (12 million) and end 2012 (22 million) ).
2. Revenue per eReader per year: $180 (based on $15 per month spending estimate).
3. Profits are higher (20%) due to the industry figuring out it can’t keep cutting prices.  

Which would give us -

1. eBook Revenues in 2012 of $3.06 billion. That’s pretty conservative when you consider Books just in the US are a $25 billion market.
2. eBook Profits in 2012 of $612 million.

Revenues and Profits from eBooks are already more than that from eReaders.

Next, let’s look at revenue from Devices capable of reading eBooks.

These are our assumptions -

1. iPhone readers grow to 10 million (on average across 2012). We’re including iTablet owners and keeping the figures low since eReaders get most of the dedicated readers.
2. iPhone owners spend $5 per month on books. That’s $60 per year.
3. Profits are 20%.

Which gives us -

1. eBook revenues in 2010 of $600 million.
2. eBook Profits of $120 million. 

What’s our total revenue and profits from eBooks in 2012?

$3.66 Billion revenue and $732 million profits. Significantly more than eReaders.

This is the conservative case. It’s possible that eReader sales and revenue are 50 to 100% higher and eBook sales and revenue are double or triple.

What are eBook sellers hoping to do long term?

Google and Barnes & Noble are hoping to turn eReaders into dumb pipes.

On a platform like the iPhone 30% of eBook price goes to the platform owner. Carve out a share for Publishers and Authors and there’s not that much left for BN or Google.

However, if you help create an environment where there is not much difference between eReaders i.e.

1. All of them have millions of free public domain books.
2. All of them have the same range of books.
3. Perhaps all of them have the same Operating System.

Then you can create a fragmented market. All the value and power transfers to your ebook store. 

Closing Thought – eBooks are a bigger market than dedicated eReaders

eBooks really are the bigger prize.

A big chunk of the $25 billion dollars a year US book industry and a big chunk of the global book industry are going to morph into the new eBooks industry.

It’ll be interesting to see which model wins out and dominates.

Filed under: publishing, thoughts Tagged: | eBook market size, eReader market size