Why eBook Reader prices will continue to fall
On June 21, Barnes and Noble lowered the Nook 3G/Wi-Fi price from $259 to $199 and introduced a WiFi only version for $149. The same day, Amazon lowered the price of its Kindle 2 from $259 to $189. Many in the media asked if this was the beginning of a price war. Without question, it is. Some have assumed that the highly successful Apple iPad is driving this. It is, but not in the way you may think.
Until recently, eBooksellers like Amazon and Barnes and Noble were using profits from the sales of their eBook readers to subsidize losses on their eBook sales. While Amazon was selling eBooks for $9.99, it had to pay publishers the difference between their sales price and 50% of the hardcover price. So, for a $26.99 book, they owed the publisher $26.99/2 minus $9.99 or $3.50. As a result, eBook reader prices and margins were high so that eBooksellers could subsidize their eBook losses.
Apple, not in the business of losing money on content, brought a different concept to publishers with its iPad. They approached publishers with the idea that they would sell books at the price set by the publisher and take a 30% commission. This approach, known as the agency model, appealed to publishers as it gave pricing control back to them. Publishers were uncomfortable letting a single publisher, Amazon, have so much control in the eBook world. They also didn’t like the $9.99 price point. They didn’t want consumers to get too attached to this price. So, when Apple launched its iPad and iBookstore, eBook prices were around $13 or approximately 50% of the hardcover price. But rather than the publisher getting all $13, the publisher would only get 70% of $13 or around $9. Thus, publishers are actually taking less money in the agency model, ~$9 vs. $13.50, but they feel more comfortable with it in that they set the prices and hope to make up for it with wider distribution through the iPad and other devices.
A few weeks after the iPad was launched, most book publishers cut deals with Amazon and Barnes and Noble to also embrace the agency model. We believe Amazon was initially against it as they had trained their customers to expect the $9.99 price. Their eBook listings now state that the price is set by the publisher if it is above $9.99.
As a result, eBook publishers like Amazon and Barnes and Noble are now making rather than losing money on every eBook sold. Therefore, there is little reason for them to keep their eBook reader prices high, especially given intense competition from the growing number of eBook reader suppliers and the iPad. Now that they make money on every eBook, they might as well be as aggressive as possible with their eBook readers to capitalize on the eBook downloading opportunity.
When the Kindle 2 was first launched, it had 48% gross margins based on cost estimates from teardowns. In addition, PVI, now known as E Ink Holdings, which is the leading eBook frontplane and display supplier, earned 30% gross margins in Q1’10. Thus, there is a lot of room for additional price reductions and strong incentives to get eBook readers in as many hands as possible.
We believe both eBook readers and the iPad are terrific devices that have their place in the market. We believe the iPad serves as an excellent tablet, a nice low-end to mid-range laptop, a companion to a higher performance laptop and as a high-end eBook/eMagazine/eNewspaper reader. It is a multi-functional device that offers a nice display for indoor reading and has enough battery life at 10 hours for many people. We believe the iPad will shrink the market for high-end eBook readers as well as rigit eMagazine/eNewspaper readers. It also creates a new book category, the video book, which is exciting to publishers. Imagine the Guinness Book of World Records with a link to each record being established resulting in a full-color video being played. Conventional eBooks can’t do that. However, it is also loaded with numerous distractions, games, videos, email, web, etc., that cause people to stop reading.
Conventional eBook readers with bistable displays offer a longer battery life, a better outdoor reading experience, less glare/eyestrain, a lighter form factor compared to the iPad at 1/2 the weight and 1/3rd the thickness and a lower cost and price. We think the competition with Apple will cause eBook readers to trend toward smaller sizes and lower price points. Although color and video will help to compete with the iPad, it will be important to minimize any cost increases and create as wide of a pricing gap as possible. As a result, we expect 6” and 5” sizes and monochrome to continue to dominate.
As we indicated in the first issue of our Quarterly eBook and iPad Shipment and Forecast Service, we expect 2010 iPad shipments to reach 11M units. Apple is looking to rapidly ramp its production in Q3’10. We expect price moves in the eBook reader market to result in shipments of 15M units.
For a quarterly view and forecast on iPad and eBook frontplane, display and device shipments and prices, please take a look at our Quarterly eBook and iPad Shipment and Forecast Service.