A new report by the Pew Internet organization reveals surprising information about trends in e-Reader and tablet ownership. According to the report, between November 2010, and May 2011, e-Reader ownership among adults in the United States doubled from 6% to 12%. During this same period, tablet ownership increased from 5% to 8%.
Another highlight from the report is that e-Reader and tablet adoption are well below those of other popular technologies such as cell phones, laptops, DVRs and MP3 players. For example, 56% of adults own laptops, nearly 7x the 8% of adults that own tablet devices. This implies the potential for meaningful secular growth opportunities in both the e-Reader and tablet markets.
BIGGEST WINNERS
Barnes & Noble Inc (BKS) - The brick and mortar bookstore chain has become an improbable winner in the tablet/e-reader industry. The Color Nook has the lightweight characteristic and modest pricing of an e-reader but the email, video, color and game capabilities of a tablet. This great combination helped BKS establish a strong niche for the Nook Color. While new competitors have come along to compete with the iPad, the new market entrants have had enough trouble challenging the iPad on price, let alone the Nook Color.
The success of the Nook and the disproportionately large positive contributions from the tablet device are evident from the company's most recent quarterly report. During the quarter ending April 30, 2011, sales at BN.com increased more than 55% over the same quarter last year while gross profits increased 122% during the same period. The company now controls a 26% to 27% market share of the US ebook market.
Barnes & Noble is still largely dependent on its brick and mortar operations but more so than any other player in the tablet and e-Reader space, BKS is extremely leveraged to even a modest improvement in their e-Reader sales. During the quarter ending April 30, 2011, around 15.85% of sales came from BN.com. During the same quarter, 7.58% of gross profits were attributed to BN.com.
Apple Inc (AAPL) - The maker of the industry defining iPad is a clear beneficiary of the information detailed in the Pew Internet report. Though the report showed that tablet ownership growth has slowed, the low adoption rates compared with other related technologies shows a tremendous amount of upside potential. Considering how dominant the iPad is relative to the rest of the market, Apple stands to garner much of the benefits from the secular growth in tablet adoption.
During the quarter ending March 26, 2011, Apple sold 4,694,000 iPads, which contributed $2.8 billion to total sales. This figure is 11.5% of total sales for the quarter. If tablet adoption does approach the same levels as laptops and desktops, it is conceivable to think that the iPad may overtake the iPhone as the top revenue generating segment.
OTHER BENEFICIARIES
Amazon.com Inc (AMZN) - In 2007, the company's Kindle essentially created the current e-Reader industry. It does not break out sales and profit data for the Kindle, but we know that Amazon.com continues to be the largest seller of ebooks. In addition, the company's Kindle line has weathered the storm from the iPad and defended its position by reducing price and focusing on the lightweight and unique appeal of e-ink technology.
In addition, Amazon could also enter the tablet market soon. According to Engadget, Amazon is expected to debut two Samsung tablets this year, a 7 inch and 10 inch. While common sense would indicate some cannibalizing of business between the Kindle and Amazon tablets, the data from the Pew Insight presentation seems to suggest otherwise. If the tablet sales are truly additive to Amazon's existing e-Reader business, this could meaningfully drive Amazon.com's valuations. Considering Apple's recently reported iPad sales, as well as Amazon's price/sales valuation, a successful line of tablets could add 10%-30% to the company's market capitalization.
Motorola Mobility (MMI) - The company has struggled to find its niche in the industry, but the Xoom tablet is a promising product. The company may continue to struggle amongst tough competition within the Android tablet space but so long as the entire industry is growing (which it should continue to for the next few years), MMI should still benefit to some degree.
Best Buy Inc (BBY) - The big box electronics retailer has recently been suffering from poor sales and lower margins but the company stands to benefit from a broadening increase in sales of tablets and e-readers. The company tends to receive marginal benefits from sales of Apple products, but a broader collection of desirable Android-based tablets will likely drive sales and margins. If the secular opportunities from higher tablet and e-Reader adoption are realized, this could improve BBY's prospects.
Disclosure: I own BKS shares and may initiate a position in Apple over the next 72 hours.
