We present in this document our understanding of the e-book market in 2010 and how it is likely to evolve.

1. 1

2. The competition will lie on consumer’s capturing
1. The current market analysis shows:
• Apple succeeds in its skimming strategy
• Amazon fails in its volume strategy (iPad being 1st on devices market) EXECUTIVE SUMMARY
• Competition on e-books forces Amazon to incur losses
2. Perspectives over 5 years show that:
• Amazon won’t be profitable and will lose market shares both in e-book and devices markets (10% on devices and
16% on e-books)
• iPad will maintain its high profitability on both markets (55% on devices and 30% on e-books).
3. As an investment fund, do not underestimate Amazon’s perspectives! Amazon should adopt a razor & blade
business model in locking in the customer through a monthly subscription and better fitting the digital environment
(expected average profitability per year over 5 years: $143 M)
Ø Attracting more readers by selling the kindle cheap (objective: market penetration rate of 25% in 2015)
Ø Improving the profitability per reader ($288/Reader/year)
Ø Convincing publishers to enter in this win-win momentum
4. Competitors would bargain less costly e-books with publishers because of high rate of fixed costs in the e-book
market.
• Apple will not change its strategy
• Other e-book readers manufacturers can hardly compete this business model because they are not the 1st
movers and will try to adopt a competitive business model or add functionalities.
5. Even though Google is an advertiser, its strategy is likely to weaken Apple’s and Amazon’s positions.
• Amazon’s countermove would be to infiltrate its new offer in the Android platform
• Apple can count on its brand image and does not primarily aim at reaching high volume
• Google should heavily penetrate the tablet market in investing in adapting advertising services to tablets
(Tablet advertising’s CAGR is expected to be over 20%)
2

3. Apple’s strategy generates more profits than Amazon’s
Revenues
2010
Revenues
2010
Losses
2010
Profits
2010
Apple:
Amazon:
Apple:
Amazon:
$2
954
M
$
-­‐26
M
$5
423
M
$2
098
M
iPad:
Kindle:
iPad:
Kindle:
$5
346
M
$1
512
M
$2
931
M
$28
M
E-­‐books:
E-­‐books:
E-­‐books:
E-­‐books:
$77
Mn
$586
Mn
$23
M
$
-­‐54M
Market iPad 41% Market Amazon 61%
share Kindle 39%
share Other 31%
devices Other 20% Ebooks iPad 8%
2010 2010
• Amazon tries to create a demand and stifle competitors by selling at a loss
• Apple has the biggest market share in the device market and undermine Amazon’s
efforts to create a consequent market for e-books
Ø Amazon should gain market share in the device market before all
(Source: press research)
3

4. But, Amazon’s business model is more appealing to
publishers and readers
We assume that $26 is the average price of a hardcover and that as many hardcovers are sold as backpapers
• iPad’s success is mainly
Amazon
Apple
explained by the range of
Average
selling
price
of
an
ebook
functionalities it offers and is not
$9,45
$10,91
based on the reading
Average
purchasing
cost
of
an
ebook
$10,32
$7,64
experience
• Publishers and readers should
features
Amazon
Apple
B&N Printed
favor Amazon’s pricing model
.com
book
retailer
Content
Ø Amazon should emphasize:
accessibility
1. its edge over printed book
retailers (lower cost of books,
InteracPon
storage of books and instant
Ubiquitousness
access)
2. that the iPad is not a good-
Comfort
enough reading tool
Storage
Weak
Average
(Source: BCG study)
Strong
4

5. Yet, forecasts do not show improvements in Amazon’s
results
Assuming that the only color device will stay the iPad, iPad will reach in 2015, a market penetration of 12% (i.e. 17.3 M
people). We assume that Amazon will not gain market share on other e-readers.
According to W. Street, financial analyst, the market share of Apple in e-books will be multiplied by 4.
Revenues
Apple
2015:
$19
603M
Revenues
Amazon
2015:
$3
509M
We show the
iPad:
$19
171M
E-­‐books:
$432
M
Kindle:
$2
903M
E-­‐books:
$606
M
scenario
55% 30% 2% -9% preserving more
the Amazon’s
Profits
Apple
2015:
$10
586M
Profits
Amazon
2015:
$-­‐2
M
bottom line. If
Amazon adds
iPad:
$10
457M
E-­‐Books:
$129
M
Kindle:
$54
M
E-­‐books:
$-­‐56
M
functionalities, it
Other e- can lose up to $2
Other
MARKET readers: bn.
devices MARKET 23%
SHARE : 15%
SHARE
DEVICES Apple:
E-BOOKS 32%
2015 2015
Kindle: iPad:
29% Amazon:
57%
45%
Ø Amazon has to change its trajectory to capture the publisher’s margin
(Source: press research, BCG study and self estimation)
5

6. Amazon should conquer consumers by being more
adapted to the digital environment
We assume that publishers have an average profitability of 5% on books:
BOOKS E-BOOKS Possibility to
fix it to a
certain extent
Average
cost
of
a
book
for
a
publisher:
$9.80
Average
cost
of
an
e-­‐book
for
a
publisher:
$4.11
Fixed Fixed
Royalties: 15% costs: costs:
30% 67%
Editing: 5% Marketing:
Paper and Royalties:
Depreciation: printer: 35% Variable 33%
29%
3% costs:
G&A expenses:
9% 70% Variable
Marketing: Shipping: 7%
13%
G&A costs:
Returned Editing : 11% expenses:
books: 13% Depreciation: 20% 33%
7%
Cost
of
a
book
for
Amazon:
between
$9.3
and
$12.38
Cost
of
an
e-­‐book
for
Amazon:
$10.32
• Assuming hidden costs of one euro per e-book, 1 e-book sold brings as much money
to the publisher as at least 2 books sold
Ø Amazon must carry on focusing on volume but should fit to the dematerialized
economy in changing its business model
(Source: Market Background)
6

7. Amazon’s new strategy: overcoming the barrier to
adoption and locking-in the customer
Goals: Customer Negotiation First mover
Aggressive High
• ebook market share: 80% Lock-in of global advantage
strategy on profitability
• creating a higher ebook through licenses on
device and secured
demand monthly with weakened
sales revenues
subscription publishers competition
PROPOSED
STRATEGY • Sales of the • $19.99 monthly • Win-win situation • Advantage: • Competition will
device at $99 subscription, unlimited with the publisher Secured costs be forced to
Objective: reaching access thanks to big and high steady follow or engage
a market • Objective: volume increase revenues in a technology
penetration of 25% democratize the market à from 8 to 35 Average $24 per competition
Current in 2015 to occasional readers million customers customer/month • Winner takes all
situation • Advantage: large • Objective: reduce situation
volume increase the cost per book
SAME Loss of
Exhausting Threat Challenge profitability, Higher
STRATEGY on e-
competition on erosion of exposure to
on device Books wholesale market competition
sales sales model shares
• Lack of • e-Books market • legally • current market • Cannot compete
profitability on share will decline jeopardized position difficult to on the technological
the Kindle with the • low profitability, maintain field
tightening of competition on • competition will • Classic/
Positive • iPad leads in
competition volumes reduce unattractive offer
Danger terms of
Negative technology • high costs profitability
7

8. A strategy enabling Amazon to be profitable
ASSUMPTIONS:
1. the objective of 25% penetration rate of the market within 5 years will be reached. Calculation based on a regular growth of customers portfolio.
2. Learning Curve: As it is a quite new market, device costs decrease with a constant rate of 30% each time cumulated production doubles
3. Amazon negotiates a yearly increase of 10% of contribution with publishers through a global license to overcome the cannibalization risk.
• Advantage: increased of volumes, secured cash flows, possibility to have discounts on advertising on the Amazon Platform
Average
yearly
profitability
of
Amazon
over
5
years:
$143
M
(vs
$
-­‐2M
the
previous
model)
Revenues
per
year:
Costs
per
year:
$4
669
M
$4
526
M
(vs
$2
098M)
(vs
$3
511M)
contribuPon
of
one
average
costs
for
e-­‐ Average
costs
of
consumer:
Average
number
of
books
per
year:
devices
per
year:
devices
sold
per
year:
$288/Consumer/year
$835
M
$3
691
M
9
750
000
(vs
$166.5)
(vs
$640
M)
(vs
$1
484M)
At last Amazon will be profitable and revenues will be growing fast (34%/year)
8

9. Besides Apple, direct competitor’s response would be to
follow the new order reinventing their business model
All competitors will negotiate low prices with publishers as the market order would
have shifted towards a lower price per ebook.
APPLE
‘S
RESPONSE
WILL
BE
“NOT
MOVE”
• Stay focused on devices as
– Apple’s core business is not the ebook market but the devices
– Their target is different: Apple’s customers like technology whereas Amazon’s like reading.
• Should Amazon thrive in launching this new business model, it would have exclusivity to the iPad
platform in ebook selling but would have to pay a large fee to Apple
BARNES
&
NOBLE
• Would change their business model, “pay-per-page” billing so as to sell to the customer only what it is
accessing and thus emphasizing the difference with Amazon.
SONY
• Would leverage their assets in technology and high-tech and would preferably compete with the iPad .
In any case they would hardly compete with Amazon because its position would be well
secured against followers
9

10. Google
sells
adverPsing
services
but
sPll
will
undermine
devices,
OperaPng
Systems
and
media
content
providers
Service
to
users
Service
to
ad
buyers
Access
to
content
VALUE CHAIN User
aLracMon
(e-­‐books,
&
all
AdverMsement
(Android
and
apps)
TargeMng
selling
other
digital
media)
Maximize number Retain users in Target client on its Monetize client
Objective
of Google users Google ecosystem access data database
- Number of devices - Time spent in the - Accuracy of data - Billing / traffic
KPI - Number of users by Google ecosystem - Market mapping
device - Traffic ability
OPERATING
COMPETITION ANALYSIS Google
wants
to
SYSTEM
PROVIDERS maximize
its
user
CONTENT database
PROVIDERS Google
wants
to
maximise
Pme
spent
in
its
ecosystem
Google
increases
its
Google
undermines
presence
on
all
the
iPad
value
devices
Google
undermines
Google
gives
access
Android
based
content
providers’
to
the
maximum
value
amount
of
content
devices
competes
with
the
iPad
Google’s move will probably compel Amazon to provide its offer on the Android platform to reach its objective.
Apple will resist because they have a strong brand equity and first mover advantage.
10

11. Google
should
invest
in
adapPng
ads
services
in
the
tablets
GROWTH RATE WITHIN 5 YEARS
100%
ASSUMPTIONS: 4
• Within 3 years, as many Android-based smartphones as iPads will be sold
1
(source: press research)
• Within 5 years, 60% of tablets will run Android 3
• The objective of 75% of Admob Ads in overall Android tablet Ads will be reached. 50% 5
• Ad mob will generate within 5 years 45% of the tablet advertising revenues (75% x 60%)
2 6
How
can
Google
leverage
this
environment
0%
to
increase
sales?
EASE OF IMPLEMENTATION
Spread
the
use
of
Adapt
adverPsing
Google
operaPng
to
the
tablets
system
and
apps
use
Adapt
Android
Increase
the
market
Increase
to
other
Launch
Enable
online
share
of
AdMob
in
access
to
manufacturers’
Google’s
adverPsing
for
Tablet
Ads
digital
tablets
tablet
tablet
web
(ObjecPve:
75%
ads
on
Android;
content
Indicator:
Market
device
browser
Cumulated
revenue:
$971
years)
(Google
books..)
share
of
tablets
2 3 4
running
Android
1
Ensure
a
high
level
Specific
ads
Rely
on
the
of
suitability
with
Quality
of
for
light
tradiPonal
the
OperaPng
TargePng
versions
of
search
and
System
websites
display
ad
5 6
Google should invest in technologies that allow Android to adapt to a maximum of device
manufacturers and invest in tablet advertising
11