eBooks

• Q3’10 eBook reader shipments rose 24% Q/Q to a record high 3M units, but were below expectations. We believe there was a cumulative 1M eBook displays and eBook readers in inventory at the end of the quarter. This can be attributed to weakness in China and delays in shipping the new Kindle 3, part of which is a result of manufacturing problems associated with the new Pearl panels from E Ink. However, those problems were solved by the end of the quarter and the Kindle 3 is having a strong Q4’10.
• We expect Q4’10 eBook reader shipments to rise 93% to 5.7M led by new products from Amazon and Barnes and Noble. Panel prices also fell 20% in Q3’10, enabling brands to promote and discount more aggressively.
• Amazon took share in both Q3’10 and Q4’10. Its share reached 57% in Q3’10 and we expect it to reach 60% in Q4’10. For all of 2010, we believe Amazon sold 7.1M Kindles. Sony remained #2 in Q3’10 despite a soft quarter. However, in Q4’10, we expect Sony to fall to #3.
• For 2010, we expect 12.97M eBooks to sell with Q4’10 accounting for 44% of shipments.
• We also believe B and N’s NOOKcolor introduction will boost the eBook reader market. It is better suited for magazines, children’s books and web surfing than the Kindle.We expect B and N to quickly surpass Sony as the #2 eBook reader supplier, starting in Q4’10. We expect the NOOKcolor to approach 4M units in 2011 and expect other brands to offer LCDs, especially if they can maintain the $250 price as the 7” electrophoretic and LCD prices are similar translating to higher margins on the LCD eBook.
• We have raised our 2011 eBook reader forecast to 24.5M units. This can be attributed to greater consumer comfort with eBooks, lower pricing, the NOOKcolor introduction, less price competition with the iPad and growing eBook reader functionality. On consumer comfort with eBooks, Amazon sold 3X more eBooks in the first 3 quarters of 2010 than the first 3 quarters of 2009. On pricing, we expect to see more low-end eBook readers at $99 on display and other component reductions. Also, with the iPad and other slates sticking to larger sizes (9.7”-10.1”) and $500-$700 ASPs, there will be less price competition between eBooks and iPads/slates, boosting the eBook outlook. Finally, we expect to see a growing number of eBook readers adopt touchscreen and pen inputs in 2011.

iPads

• With lower than expected panel shipments in Q3’10, iPad shipments were also below expectations at 4.2M.
• In Q4’10, based on panel shipments of >6.8M, we expect iPad shipments of 6.1M units resulting in total 2010 shipments of 13.6M.
• In 2011, we expect iPad shipments of 42.4M, 38M of which will be iPad 2 which we expect to begin shipping in Q1’11.
• Due to the wealth of competing products introduced, we expect shipments of slates or iPad like devices to reach 19M units in 2011, up from 764K units in 2010.
• The slate market is expected to get crowded with PC, SmartPhone and eBook suppliers all introducing products in 2011. Known companies participating include Acer, Asus, BenQ, Dell, Hanlin, Hanvon, HP, Lenovo, LG, RIM, Samsung, Sony, Toshiba and more.
• Apple is expected to lead throughout 2011, maintaining a 69% share of the 2011 iPad/slate market which is expected to reach 61.4M units. After Apple, other phone brands are expected to lead in 1H’11 with PC brands overtaking phone brands in 2H’11.

Financial Analysis

• With a 95% share in frontplanes, an 85% share in EPD panels and royalties generated on every AFFS panel, E Ink has the highest margins in the display industry at 31% in Q3’10 and guided up in Q4’10. They should continue to enjoy its position as most profitable panel supplier for some time.
• The benefits of being a dedicated online retailer continue to show through for Amazon relative to traditional booksellers. Only Amazon had positive operating margins in Q3’10 and the same will hold true in Q4’10.
• With eBook sales rising and accounting for a rising percentage of their sales, Barnes and Noble and Borders are forced to consider closing stores, financial restrucuring or merging to boost profitability.

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