Apple (NASDAQ:AAPL) is expanding its position in the e-book ring. The company's new operating system, Mavericks, will bring iBooks, Apple's literary version of iTunes, to Mac computers. The change could prove the often overlooked e-book service to be a fresh competitor for major e-reading player Amazon (NASDAQ:AMZN), which already allows users to read e-books on both their e-readers and computers.
Understanding the Market
Apple launching iBooks on its computers is significant. NBC News explains, "Of those who have read an e-book in the past 12 months, 42 percent said they read it on a computer; 41 percent on an e-book reader; 29 percent on a cellphone and 23 percent on a tablet." Furthermore, according to PEW Internet Libraries, "46% of computer owners consume e-books on their computer." That is a large potential market for Apple.
Of course, there could be some difficulties for the tech giant. For instance, Apple is coming to the table with a smaller title catalog. There are currently 1.8 million books available on iBooks, which is about 10% less than the roughly 2 million titles currently available in Amazon's Kindle Store. Apple iBooks is also not nearly as competitive on price as Amazon, which offers e-books at discounts similar to its other goods.
But, Apple has a few other things that Amazon simply does not.
The Tablet Advantage
One of Apple iBooks' most important advantage is the fact that it already exists on many devices. As of March 2013, iBooks has been downloaded 130 million times, which is rather impressive considering that the app comes preloaded onto every iPad.
Plus, Apple's iPad is more popular than Amazon's Kindle, despite the fact that an iPad costs roughly twice that of a Kindle. In fact, in the US, there are almost twice as many active iPad users as Kindle users. "The number of people in the US who actively use a Kindle Fire reached 17.4 million this March," says NewZoo. "Compared to 30.5 million active users for the iPad, with 6.5 million using both devices."
iBooks vs. Kindle
Books viewed in Apple iBooks looks remarkably close to those viewed on an iPad using the Kindle app -- both in appearance and functionality, including sharing -- but there are some differences which could make iBooks stand out, especially now that iBooks will be available on a computer. For instance, iBooks provides users with detailed information as to how many pages are left in a chapter, more font choices, and more display options.
Apple iBooks also allows readers to scroll continuously through the document rather than flip imaginary pages (Note: iBooks still updates page numbers while in scrolling mode, and users can choose scrolling or page-based viewing).
Amazon, Media, and Pricing
Amazon held roughly 60% of the e-book market as of the end of 2012, but without its pricing advantage it will not be in top place for long.
Amazon wrote in its 2013 annual report that one of its biggest risks is "changes in usage or adoption rates of the Internet, e-commerce, digital media devices and web services, including outside the U.S." -- and no wonder. Media is an immense part of Amazon's net sales, accounting for $9.2 billion, or over 26% of the company's North America net sales in 2012.
However, for as big as that number sounds, Amazon is slipping.
In 2011, digital media accounted for almost 30% of the company's net sales, but that number pales in comparison to 2010, when Amazon's net digital media sales was closer to 37% of its total net sales. Internationally, the effect of media on the company's net sales is even greater. Amazon's international net sales attributable to media stood at $10.8 billion, or over 40% of net sales, in 2012 -- but that is a sharp decrease from previous years. Media accounted for almost 46% of Amazon's international net sales in 2011 and nearly 52% of its international net sales in 2010.
Going forward, this trend is likely to continue.
A Shrinking Market
With slipping sales, Amazon's pricing advantage is not going to last -- and there is not likely to be a comeback. The market is shrinking. "The e-book market isn't growing at the caffeinated level it was," said Simba Information analyst Michael Norris. "Even retailers like Amazon have to be wondering, how far can we go - or should we go - to make our prices lower than the other guys if it's not helping us with market share?"
There can not be much room left to cut prices, even for a company that has traditionally focused more on market share than profits. "The money Amazon lost on e-book discounts in 2008, 2009 was covered, at least in part, by the high price of Kindle hardware," said Nate Hoffelder of the Digital Reader. "Now that the Kindle is being sold so cheap, Amazon no longer has the hardware income to act as a cushion."
For Apple, The Sky's The Limit
Apple, on the other hand, is in an entirely different position. The popular tech company had $8.5 billion in net sales attributable to media in 2012 according to its annual report for FY2012 filed October 31, 2012 -- or just over 5.4% of its net sales. That number is a little lower percentage-wise than FY2011, when media net sales stood at 5.8% of net sales -- but the decrease is to a far lesser extent than that experienced by Amazon and still represents a year-over-year 35% increase in net sales volume attributable to media. Plus, net media sales grew by 28% the year before -- indicating a trend.
In other words, one company is rapidly losing digital media market share while another is gaining it -- and those numbers are only going to get larger now that Apple is bringing iBooks to Mac computers.
If Apple's net digital media sales continues at its current pace, the tech giant should see a 40-45% increase in digital media net sales next year -- and that would be before iBooks for computers is even released. Once the 46% of computer owners who read e-books on their computers or the 42% of e-book users who use a computer to read their e-books are added to the equation, Apple's digital media net sales could increase by 56% to 60%, easily.
In summary, the iBooks software already exists on many devices, including Apple's tablet market leader iPad, and it functions well. Amazon has a singular advantage in price, but even that difference is not seen on every title and it is not an advantage the company is likely to hold for long. Of computer users, nearly half use their computers to read e-books, and there are more people who read e-books on a computer than on a dedicated e-book reader, smartphone, or tablet. As such, Apple making an entry into the computer-based e-books market could be huge.
Investors will not get to see the effects of iBooks on computers until the new operating system launches this fall, but I think it could be worth a long position. Apple is currently trading at $438.89 on a 52-week range of $385.10 to $705.07 with a one-year target estimate of $541.04. Even if consensus forecasts are off, that is a strong return, but I think offering iBooks on computers could push the target estimate even higher.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.