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The competition will lie on consumer’s capturing

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.

EXECUTIVE SUMMARY

1. The current market analysis shows: •  Apple succeeds in its skimming strategy •  Amazon fails in its volume strategy (iPad being 1st on devices market) •  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

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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%)

Apple’s strategy generates more profits than Amazon’s

Revenues  2010  Apple:    

$5  423  M      

iPad:  $5  346  M    

E-­‐books:  $77  Mn  

Revenues  2010  Amazon:                  $2  098  M  

Kindle:  $1  512  M  

E-­‐books:  $586  Mn  

Profits  2010  Apple:    $2  954  M  

iPad:  $2  931  M  

E-­‐books:  $23  M  

Losses  2010  Amazon:  $  -­‐26  M    

Kindle:  $28  M  

E-­‐books:  $  -­‐54M  

•  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

Market share devices 2010

Market share Ebooks 2010

iPad 41%

Kindle 39% Other 20%

Amazon 61%

iPad 8% Other 31%

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(Source: press research)

But, Amazon’s business model is more appealing to publishers and readers

Amazon   Apple  

Average  selling  price  of  an  ebook   $9,45   $10,91  

Average  purchasing  cost  of  an  ebook   $10,32   $7,64  

features   Amazon   Apple   B&N.com  

Printed  book  retailer  

Content  accessibility  

InteracPon  

Ubiquitousness  

Comfort  

Storage  

•  iPad’s success is mainly explained by the range of functionalities it offers and is not based on the reading experience

•  Publishers and readers should favor Amazon’s pricing model Ø  Amazon should emphasize: 1. its edge over printed book retailers (lower cost of books, storage of books and instant access) 2. that the iPad is not a good-enough reading tool

We assume that $26 is the average price of a hardcover and that as many hardcovers are sold as backpapers

Weak Average Strong

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(Source: BCG study)

Yet, forecasts do not show improvements in Amazon’s results

We show the scenario preserving more the Amazon’s bottom line. If Amazon adds functionalities, it can lose up to $2 bn.

Ø  Amazon has to change its trajectory to capture the publisher’s margin

Apple: 32%

Amazon: 45%

Other e-readers:

23%

iPad: 57%

Kindle: 29%

Other devices: 15%

Profits  Apple  2015:  $10  586M  

iPad:  $10  457M   E-­‐Books:  $129  M  

Revenues  Apple  2015:  $19  603M    

iPad:  $19  171M     E-­‐books:  $432  M  

Profits  Amazon  2015:  $-­‐2  M  

Kindle:  $54  M   E-­‐books:  $-­‐56  M  

Revenues  Amazon  2015:  $3  509M    

Kindle:  $2  903M     E-­‐books:  $606  M  

MARKET SHARE DEVICES 2015

MARKET SHARE E-BOOKS 2015

55% 30% 2% -9%

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.

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(Source: press research, BCG study and self estimation)

Amazon should conquer consumers by being more adapted to the digital environment

Paper and printer: 35%

Shipping: 7%

Returned books: 13%

Marketing: 13%

G&A expenses: 9%

Depreciation: 3%

Editing: 5%

Royalties: 15%

Fixed costs: 30%

Variable costs: 70%

Marketing: 29%

G&A expenses:

20% Depreciation: 7%

Editing : 11%

Royalties: 33%

Fixed  costs:  67%  

Variable  costs:  33%  

Cost  of  a  book  for  Amazon:  between  $9.3  and  $12.38       Cost  of  an  e-­‐book  for  Amazon:  $10.32        

Average  cost  of  an  e-­‐book  for  a  publisher:  $4.11        

Average  cost  of  a  book  for  a  publisher:  $9.80  

We assume that publishers have an average profitability of 5% on books:

Possibility to fix it to a certain extent

Ø  Amazon must carry on focusing on volume but should fit to the dematerialized economy in changing its business model

•  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

BOOKS E-BOOKS

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(Source: Market Background)

Amazon’s new strategy: overcoming the barrier to adoption and locking-in the customer  

Current situation

SAME STRATEGY

PROPOSED STRATEGY

Aggressive strategy on

device sales

Customer Lock-in through monthly

subscription

Negotiation of global licenses

with publishers

High profitability

and secured revenues

First mover advantage

on weakened competition

Exhausting competition on device

sales

Threat on e-Books sales

Challenge on

wholesale model

Higher exposure to competition

•  Sales of the device at $99 Objective: reaching a market penetration of 25% in 2015

•  $19.99 monthly subscription, unlimited access •  Objective: democratize the market to occasional readers •  Advantage: large volume increase

•  Win-win situation with the publisher thanks to big volume increase à from 8 to 35 million customers •  Objective: reduce the cost per book

•  Advantage: Secured costs and high steady revenues Average $24 per customer/month

•  Competition will be forced to follow or engage in a technology competition •  Winner takes all situation

•  Lack of profitability on the Kindle •  iPad leads in terms of technology

•  e-Books market share will decline with the tightening of competition •  high costs

•  legally jeopardized •  low profitability, competition on volumes

•  current market position difficult to maintain •  competition will reduce profitability

•  Cannot compete on the technological field •  Classic/unattractive offer

Goals: •  ebook market share: 80% •  creating a higher ebook demand

Positive Danger Negative

Loss of profitability, erosion of

market shares

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A strategy enabling Amazon to be profitable

Average  yearly  profitability  of  Amazon  

over  5  years:  $143  M  

(vs  $  -­‐2M  the  previous  model)  

Revenues  per  year:  $4  669  M  

(vs  $2  098M)    

contribuPon  of  one  consumer:    

$288/Consumer/year  (vs  $166.5)  

Average  number  of  devices  sold  per  year:  

9  750  000  

Costs  per  year:  $4  526  M  

(vs  $3  511M)    

average  costs  for  e-­‐books  per  year:  

$835  M  (vs  $640  M)  

Average  costs  of  devices  per  year:  

$3  691  M  (vs  $1  484M)  

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

At last Amazon will be profitable and revenues will be growing fast (34%/year)

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Besides Apple, direct competitor’s response would be to follow the new order reinventing their business model

•  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

APPLE  ‘S  RESPONSE  WILL  BE  “NOT  MOVE”  

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.

•  Would leverage their assets in technology and high-tech and would preferably compete with the iPad .

SONY  

All competitors will negotiate low prices with publishers as the market order would have shifted towards a lower price per ebook.

In any case they would hardly compete with Amazon because its position would be well secured against followers

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Google  sells  adverPsing  services  but  sPll  will  undermine  devices,  OperaPng  Systems  and  media  content  providers  

User  aLracMon  (Android  and  apps)  

Access  to  content    (e-­‐books,  &  all  other  digital  

media)  

TargeMng   AdverMsement  selling  

Target client on its access data

KPI

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.

Objective

Service  to  users   Service  to  ad  buyers  

VALUE CHAIN

Maximize number of Google users

Retain users in Google ecosystem

Monetize client database

- Number of devices - Number of users by device

- Time spent in the Google ecosystem - Traffic

- Accuracy of data - Market mapping ability

- Billing / traffic

Google  wants  to  maximize  its  user  

database  

Google  increases  its  presence  on  all  

devices  

Android  based  devices  competes  with  the  iPad  

Google  undermines  the  iPad  value  

Google  wants  to  maximise  Pme  spent  in  its  ecosystem  

Google  gives  access  to  the  maximum  amount  of  content  

Google  undermines  content  providers’  

value  

OPERATING SYSTEM

PROVIDERS CONTENT

PROVIDERS

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COMPETITION ANALYSIS

Google  should  invest  in  adapPng  ads  services  in  the  tablets  

Google should invest in technologies that allow Android to adapt to a maximum of device manufacturers and invest in tablet advertising

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How  can  Google  leverage  this  environment  to  increase  sales?  

Spread  the  use  of  Google  operaPng  

system    

Adapt  Android  to  other  

manufacturers’  tablets  

Indicator:  Market  share  of  tablets  running  Android  

Launch  Google’s  tablet  device  

Adapt  adverPsing  to  the  tablets  and  apps  use  

Increase  the  market  share  of  AdMob  in  

Tablet  Ads  (ObjecPve:  75%  ads  on  Android;  Cumulated  revenue:  $971  years)  

Ensure  a  high  level  of  suitability  with  the  OperaPng  

System  

Quality  of  TargePng    

Increase  access  to  digital  content  

(Google  books..)  

Enable  online  adverPsing  for  tablet  web  browser    

Specific  ads  for  light  

versions  of  websites  

Rely  on  the  tradiPonal  search  and  display  ad  

ASSUMPTIONS: •  Within 3 years, as many Android-based smartphones as iPads will be sold

(source: press research) •  Within 5 years, 60% of tablets will run Android •  The objective of 75% of Admob Ads in overall Android tablet Ads will be reached. •  Ad mob will generate within 5 years 45% of the tablet advertising revenues (75% x 60%)

EASE OF IMPLEMENTATION

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