Proposal of E-Book Rental
Service for Amazon.com
By: Jennifer Bryer
Capstone Advisor: Dr. Richard Linowes
University Honors in Business Administration
Spring 2010
1
Executive Summary
Company Overview
Amazon.com, Inc. was founded in 1994 by Jeffrey Bezos. Amazon.com opened its website to the public in
July 1995, creating an online-retail site that carried a variety of products1. The products offered range from
books to electronics, clothing, and everything in-between. Amazon breaks its business into two segments;
North America, and International. Amazon introduced their first Kindle in November 2007, and has since
released updated versions of the Kindle that offer more features than the original Kindle.2 The first available
models, according to Amazon, sold out in less than six hours.3 The Kindle store which started out offering
90,000 e-books now offers over 275,000 e-books as of 2009.4 That number has recently increased to over
500,000 e-books, thus almost doubling the amount of e-books Amazon had available last year.5
Industry Overview
The e-book industry has been around since the late 1990’s. The wholesale sales of electronic books have
increased around 800% from 2002 to 2008. In 2008 the e-book net sales increased 68.4% from 2007 and
while 15% of adults in 2008 read e-books, only 8% of adults purchased one or more e-books.6 It is estimated
that by the end of 2010 e-book sales will account for 3% of total book sales and that by 2015 electronic books
will account for 20% of all book sales.7
Recommendation
Amazon should introduce an e-book rental service that allows customers to rent e-books for $0.25 a day. To
rent the book the customer would have to submit credit card information, and the customer’s credit card
would automatically be charged the rental fee after they returned the book. E-books present a way for
Amazon to expand its business since the e-book market is growing.8 Currently Amazon is a market leader in
the e-book industry, and it can use its leadership to its advantage when it creates a rental service.9
1
2008 Annual Report. Amazon.com, Inc., 17 Apr. 2009. Web. 2 Mar. 2010. <http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9MjAyN3xDaGlsZElEPS0xfFR5cGU9Mw==&t=1>.
2
Trade E-Book Publishing 2009. Rep. Simba Information, Trade Books Group. Web. 2 Mar. 2010.
<http://www.marketresearch.com/>, p.90
3
Ibid
4
"Annual Meeting of Shareholders." Amazon.com. Amazon.co, Inc., 28 May 2009. Web. 2 Mar. 2010. <http://media.corporateir.net/media_files/IROL/97/97664/ASM_09_Final_Webcast.pdf>.p. 37
5
Fowler, Geoffrey A. “Amazon’s Sales Soar, Lifting Profits”. The Wall Street Journal. Dow Jones & Company, Inc., 23 Apr 2010.
Web 25 Apr 2010.
6
Business of Consumer Book Publishing 2009. Rep. Simba Information, Trade Books Group. Web. 2 Mar. 2010.
<http://www.marketresearch.com/>, p.13
7
Bensinger, Greg. "Amazon E-Book Market Share to Fall as Industry Grows." BusinessWeek. Bloomberg L.P., 16 Feb. 2010. Web. 2
Mar. 2010. <http://www.businessweek.com/news/2010-02-16/amazon-e-book-market-share-to-fall-as-industry-grows-update1.html>.
8
Ibid
9
Ibid
Page 2
Company Profile
General Overview
Amazon.com, Inc. was founded in 1994 by Jeffrey Bezos. Amazon.com opened its website to the public in
July 1995, creating an online-retail site that carried a variety of products10. The products offered range from
books to electronics, clothing, and everything in-between. Amazon breaks its business into two segments;
North America, and International. The company also has three main groups of customers; consumers, sellers,
and developers.11 Amazon focuses on their customer, selection, price, and convenience.12 Currently the
company has websites in the UK, Germany, France, Japan, Canada, and China; and operates 25 fulfillment
centers around the world. Amazon is well known for its trademark 1-Click® Shopping.
13
Amazon’s logo
represented by the arrow pointing from the letter “a” in Amazon.com to the letter “z” represents Amazon’s
dedication to providing their customers with everything from “a” to “z”.14 With this goal in mind, Amazon
has continued to grow and expand the services and products it has to offer its customers.
Amazon had its first IPO in May 1997, and according to independent consumer research is the top performing
company in the areas of “trust” and “recommendation” in the United States.15 In 2009 the company increased
its total net sales by $5,343 million, and the earnings per share increased by $0.55 (see appendix I). Amazon
also increased its net cash and cash equivalents by $3,444 million in 2009, which means that there is money
10
2008 Annual Report. Amazon.com, Inc., 17 Apr. 2009. Web. 2 Mar. 2010. <http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9MjAyN3xDaGlsZElEPS0xfFR5cGU9Mw==&t=1>.
11
"Amazon.com, Inc. Business Summary." Mergent Online. Mergent. Web. 2 Mar. 2010.
<http://www.mergentonline.com.proxyau.wrlc.org/compdetail.asp?company=91098&Page=synopsis>.
12
"AMZN: Profile for Amazon.com, Inc. - Yahoo! Finance." Yahoo! Finance - Business Finance, Stock Market, Quotes, News.
Yahoo! Web. 02 Mar. 2010. <http://finance.yahoo.com/q/pr?s=AMZN>.
13
"Amazon.com: About Amazon." Amazon.com: Online Shopping for Electronics, Apparel, Computers, Books, DVDs & more.
Amazon.com, Inc. Web. 02 Mar. 2010. <http://www.amazon.com/CareersHomepage/b/ref=amb_link_5763692_1?ie=UTF8&node=239364011&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=left4&pf_rd_r=1575233X5E7JBX1QHT2P&pf_rd_t=101&pf_rd_p=465323191&pf_rd_i=239363011>.
14
"Amazon.com Help: A-to-z Guarantee Protection." Amazon.com: Online Shopping for Electronics, Apparel, Computers, Books,
DVDs & More. Amazon.com. Web. 26 Apr. 2010. <http://www.amazon.com/gp/help/customer/display.html?nodeId=537868>.
15
Rosenberg, Dave. "Study: Amazon.com is most trusted brand in U.S. | Software, Interrupted - CNET News." Technology News CNET News. CBS Interactive, 22 Feb. 2010. Web. 02 Mar. 2010. <http://news.cnet.com/8301-13846_3-10457727-62.html>.
Page 3
available for business development. Amazon does not pay dividends to its shareholders, and instead chooses
to maintain revenue to reinvest in future growth.16 Future growth for Amazon includes expanding into new
markets and developing new technology, such as the recent acquisition of Toucho a touch-screen maker.17
Based on the acquisition of Toucho it is thought that Amazon will develop a Kindle with touch screen
technology. Adding touch screen technology to the Kindle is one way that Amazon could make its Kindle
more competitive with Apple’s iPad which was recently released.
Amazon Kindle & E-Books
Amazon introduced their first Kindle in November 2007, and has since released updated versions of the
Kindle that offer more features than the original Kindle.18 The first available models, according to Amazon,
sold out in less than six hours.19 Amazon’s e-book sales have increased 35% since the initial sales in 2007 (see
appendix II). The Kindle store which started out offering 90,000 e-books now offers over 275,000 e-books as
of 2009 (see appendix II).20 That number has recently increased to over 500,000 e-books, thus almost
doubling the amount of e-books Amazon had available last year.21 Amazon does not release statistics on the
number of Kindles sold, or data on the Kindle books sold, although it reports that this past Christmas 2009 it
sold more Kindle books than print books.22 It is estimated the sale of the Kindle Device and e-books counts
16
"Amazon.com Investor Relations FAQs." Amazon.com. Amazon.com, Inc. Web. 02 Mar. 2010. <http://phx.corporateir.net/phoenix.zhtml?c=97664&p=irol-faq#6991>.
17
Fowler, Geoffrey A. "Amazon Acquires Touch-Screen Maker Touchco." Wall Street Journal Blog. Dow Jones & Company, Inc.,
3 Feb. 2010. Web. 2 Mar. 2010. <http://blogs.wsj.com/digits/2010/02/03/amazon-acquires-touch-screen-maker-touchco/>.
18
Trade E-Book Publishing 2009. Rep. Simba Information, Trade Books Group. Web. 2 Mar. 2010.
<http://www.marketresearch.com/>, p.90
19
Ibid
20
"Annual Meeting of Shareholders." Amazon.com. Amazon.co, Inc., 28 May 2009. Web. 2 Mar. 2010. <http://media.corporateir.net/media_files/IROL/97/97664/ASM_09_Final_Webcast.pdf>.p. 37
21
Fowler, Geoffrey A. “Amazon’s Sales Soar, Lifting Profits”. The Wall Street Journal. Dow Jones & Company, Inc., 23 Apr 2010.
Web 25 Apr 2010.
22
Allen, Katie. "Amazon e-book sales overtake print for first time." guardian.co.uk. Guardian News and Media Limited, 28 Dec.
2009. Web. 2 Mar. 2010. <http://www.guardian.co.uk/business/2009/dec/28/amazon-ebook-kindle-sales-surge>.
Page 4
for about 3.5% of Amazon’s total revenue.23 As indicated by the increased number of e-books available at
Amazon, most books currently available for sale are increasingly available in both print and digital e-book
format. This provides customers with more options in choosing which format of book to publish. It also
allows customers to have access to an inexpensive version of hardcover books, without having to wait months
for the book to be released in paperback.
When customers purchase an electronic book from Amazon’s Kindle Store they are not actually “buying” the
book, rather they are purchasing a license to use the book.24 Amazon’s website specifies that: “Upon your
payment of the applicable fees set by Amazon, Amazon grants you the non-exclusive right to keep a
permanent copy of the applicable Digital Content …” The company includes the following restrictions on use
of e-books, “Unless specifically indicated otherwise, you may not sell, rent, lease, distribute, broadcast,
sublicense or otherwise assign any rights to the Digital Content or any portion of it to any third party, and you
may not remove any proprietary notices or labels on the Digital Content.”25
Strengths
One of the greatest strengths of Amazon in the e-book industry is that Amazon has one of the largest
selections of e-books available. The vast selection of e-books that Amazon currently has available for
consumers is likely to make Amazon more attractive to consumers in comparison to other e-book retailers.
Consumers in today’s society are always looking for variety and availability in what they want when they
want it; and having a greater selection of e-books ties into this mentality. While a consumer might have to
23
Fowler, Geoffrey A. “Amazon’s Sales Soar, Lifting Profits”. The Wall Street Journal. Dow Jones & Company, Inc., 23 Apr 2010.
Web 25 Apr 2010.
<http://online.wsj.com/article/SB10001424052748703876404575200454015777306.html?mod=WSJ_latestheadlines>
24
Seringhaus, Michael. "Kindle: How To Buy A Book But Not Own It." New & Events. Yale Law School, 5 Aug. 2009. Web. 2
Mar. 2010. <http://www.law.yale.edu/news/10288.htm>.
25
"Amazon.com Help: Kindle (U.S. Wireless) License Agreement and Terms of Use." Amazon.com: Online Shopping for
Electronics, Apparel, Computers, Books, DVDs & more. Amazon.com, Inc. Web. 02 Mar. 2010.
<http://www.amazon.com/gp/help/customer/display.html?nodeId=200144530content>.
Page 5
look through many other sites to find the e-book they are looking for; there is a higher probability that the ebook will be available at Amazon do to its large number of books.
Amazon also has an advantage in the e-reader market in comparison to companies like Barnes and Noble and
Apple. Purchasing a Kindle is a hefty investment for most consumers, which makes it less likely that
consumers who have already purchased a Kindle would switch to using another device. Also since the only ereader compatible with e-books purchased at Amazon’s e-book store is the Kindle, consumers who want an ereader with access to the widest selection of books are more likely to purchase the Kindle than other e-book
readers.
Amazon has extended access to the Kindle. Now Kindles will be available at select Target stores.26 Previously
the Kindle could only be purchased online, and not all potential consumers would feel comfortable with
purchasing a Kindle without having an opportunity to try out the products. The lack of access to testing a
Kindle before the product is purchased can be a major turn off for customers, especially considering the large
investment that consumers are making when they purchase a Kindle. Having the Kindle available at Target
stores creates the opportunity for potential customers to test out the Kindle before they purchase the product.
The availability of the Kindle in Target stores also increases the exposure of the Kindle to customers who had
no previous knowledge of the product, or didn’t really understand the product. Placing the Kindle in Target
stores increases the potential number of Kindle customers and is likely to increase the number of Kindles sold.
Weaknesses
The Kindle and the format of its e-books can also be considered a weakness for Amazon. The restrictions on
the types of e-books that can be accessed on the Kindle are much greater than those on other reader devices
26
Hardy, Ed. "Amazon Kindle 2 Now Available in Some Target Stores." Amazon Kindle 2 Now Available in Some Target Stores.
Brighthand.com, 25 Apr. 2010. Web. 26 Apr. 2010.
<http://www.brighthand.com/default.asp?newsID=16462&news=Amazon+Kindle+2+Target+Retail+Stores+eBook+eReader>.
Page 6
such as the Nook, iPad, and Sony Reader (see appendix III). This restricts the use of the Kindle and thus
makes it less likely that potential e-book reader consumers will purchase the Kindle when they could purchase
another reader that allows them greater access to other books. The Sony Reader and iPad both allow access to
read e-books available through public libraries, but Amazon does not. The restrictions on the Kindle place it in
an unfavorable light when it is compared to other products. This unfavorable light cast upon the Kindle is
likely to decrease the future sales of Kindles.
Another potential weakness of Amazon is that its e-books are not acceptable formats for use with other
readers, the only exception to this being the iPad, iTouch, and iPhone, all which have apps allowing for
reading of Amazon e-books through those apps. By restricting access to the e-books it sells Amazon is cutting
back on potential profits that it could gain by supplying consumers who have other e-readers with books.
Having a more open formatting of its e-books would allow Amazon to reach a wider audience and
consequently sell more e-books. The only downfall to such a method is that Amazon must weigh what is more
important to it: the sale of the Kindle or the sale of e-books. To encourage the sale of the Kindle the company
restricts the format of its e-books. Removing the restriction on its e-books would result in less of an incentive
to purchase the Kindle reader.
Removing the restrictions on the reader, but not the e-book restrictions would result in more sales of the
Kindle, but less sales of the e-books. The restrictions on both the Kindle and the e-books are both potential
weaknesses for the company and result in loss of potential sales. Removing either restriction without
removing the other restriction could result in a loss of sales of the restricted item, with an increase in sales in
the non-restricted item. As long as Amazon maintains formatting restrictions on its e-books and Kindles it is
creating a weakness within its company that can be exploited by its competitors. It is important that Amazon
realizes this weakness and takes steps to address it.
Page 7
Opportunities
E-books present a way for Amazon to expand its business since the e-book market is growing.27 Currently
Amazon is a market leader in the e-book industry, and it can use its leadership to its advantage.28 Customers
are already familiar with the e-book format that Amazon has since Amazon has a controlling share of the ebook market. Since customers are already familiar with the e-books at Amazon they would be less likely to
seek out other websites and more likely to accept innovations in the e-book product if it were to come from a
recognizable source like Amazon.
Currently Amazon uses a Video On-Demand rental service for select movies. Adaption of this technology to
e-books has the potential of opening up a new market for Amazon: e-book rentals. Expansion into this market
of e-book rentals would allow Amazon to have a first mover advantage in a new market that would result in
an increase in market share and the ability to maintain some of the market share that it is at risk of losing by
2015.29 Also entering the e-book rental market would expand the potential uses of an Amazon Kindle which
would likely result in an increase in purchases of the Kindle. This is a tremendous potential opportunity that
Amazon should strongly consider adopting. Libraries already have the technology for renting the books so all
Amazon would have to do is adjust the technology to suit their specific needs.
Threats
Amazon’s dominance in the electronic book market is threatened both by the introduction of alternative ereaders and the opening of other e-book stores. The main direct competitors to Amazon’s e-reader/store
formula are: Barnes and Noble, Apple, and Sony. Each of these three companies has both an e-book store and
27
Bensinger, Greg. "Amazon E-Book Market Share to Fall as Industry Grows." BusinessWeek. Bloomberg L.P., 16 Feb. 2010. Web.
2 Mar. 2010. <http://www.businessweek.com/news/2010-02-16/amazon-e-book-market-share-to-fall-as-industry-grows-update1.html>.
28
Ibid
29
Ibid
Page 8
an e-reader. Thus they all provide alternatives to using the Amazon Kindle and the Kindle Store. Additionally
all of these readers; Nook from Barnes and Noble, iPad from Apple, and Sony Reader from Sony; allow for
the reading of a greater number of e-book formats in comparison to the Kindle.
One of the greatest potential threats to the Kindle is the iPad, since the iPad has an app that allows for access
to books from the Kindle Store. The availability of the Kindle app on the iPad means the Kindle Store is no
longer limited to just one reader. Amazon thus loses one advantage the Kindle previously held, being the only
e-reader with access to Amazon’s Kindle Store, which has a large number of e-books. The iPad also uses
touch screen technology, and has access to Apple’s app store and thus differentiates itself as being more than
just an e-reader. Amazon’s Kindle is primarily an e-reader while the iPad incorporates many functions, one of
which is an e-reader. Amazon must make efforts to update the Kindle and the services that they offer in order
to remain competitive in the expanding e-book market.
Industry Trends
Overview of Book Retailing
There are four main channels for selling books: bookstores, online channels, book clubs, and other locations.30
There has been an increased emphasis on customer loyalty programs to keep from losing customers to other
channels, such programs include Amazon Prime, Barnes and Noble’s $25 Membership, and Border’s free
Reward program.31 In general more women than men buy books, this is evidenced throughout purchasing
30
Trends in Trade Book Retailing 2009. Rep. Simba Information, Trade Books Group. Web. 25 Apr 2010.
<http://www.marketresearch.com/>, p.9
31
Ibid, p.15
Page 9
patterns in all four channels.32 One interesting note in buying patterns is that 25 to 35 years-old consumers are
more likely to buy books online when compared to the tech savvy 18 to 24 year-old consumers.33
Overview of the E-book Industry
The e-book industry has been around since the late 1990’s. The wholesale sales of electronic books have
increased around 800% from 2002 to 2008. In 2008 the e-book net sales increased 68.4% from 2007 and
while 15% of adults in 2008 read e-books, only 8% of adults purchased one or more e-books.34 This
difference is most likely accounted for by the large availability of free content. 35 In 2009 the number of adults
who had purchased an e-book increased to 9%.36 It is also estimated that in 2009 6,000 new e-book customers
were joining the market.37 More men than women read e-books at a rate of 22% of readers as compared to
16%, but more women purchase print books.
38
Major publishers have indicated that e-book sales don’t
account for more than 1% of total sales. The Association of American Publishers stated that in 2007 net ebook sales were $67 million. 39 According to research by Simba Information only 20% of e-book readers read
more than six electronic books in the last 12-months and the number that purchased more than six e-books
was statistically insignificant.40
32
Ibid, p.15
Ibid, p.16
34
Business of Consumer Book Publishing 2009. Rep. Simba Information, Trade Books Group. Web. 2 Mar. 2010.
<http://www.marketresearch.com/>, p.13
35
Ibid, p.17
36
Trade E-Book Publishing 2010. Rep. Simba Information, Trade Books Group. Web. 26 Apr. 2010.
<http://www.marketresearch.com/>, p.1
37
Ibid, p.1
38
Trade E-Book Publishing 2009. Rep. Simba Information, Trade Books Group. Web. 2 Mar. 2010.
<http://www.marketresearch.com/>, p.1
39
Ibid, p.10
40
Ibid, p.13
33
Page 10
There is a commonly held belief that the majority of e-books purchased are those brought by the tech/scifi/fantasy consumer segment.41 This has proven to be false; in actuality e-book sales closely mirror those of
print books.42 There is also indication that those that buy e-books only purchase a couple over an entire year.43
Many e-books contain DRM, Digital Rights Management which allows publishers to restrict use of e-books
and protect against piracy. The use of DRM has brought criticism from customers who dislike the restrictions
on their purchased material.44 Adobe’s Digital Edition’s e-book reading platform is increasing in popularity
because it is free to download, and relatively easy for consumers to use.45 The platform works for Sony
Reader, and PDF files, and ePUB files.46
Publisher Perspective
The publishing industry makes the argument that an electronic book takes the same amount of work and cost
to bring to market readiness as a print book.47 Many publishers are pushing for higher e-book prices that are
closer to the price of print books. They continually argue with retailers to increase the price of e-books, in
order to perpetuate the perception that e-books should be priced close to the price of print books. The
publishers are worried that customers will get used to artificially low prices. The inexpensive cost associated
with electronic books is reinforced by the availability of free books offered by publishers and services like
Google and Sony.48 Many classic books are no longer protected by copyright and as a result they are often
available for free from most electronic book retailers.
41
Trade E-Book Publishing 2010. Rep. Simba Information, Trade Books Group. Web. 26 Apr. 2010.
<http://www.marketresearch.com/>, p.2
42
Ibid, p.2
43
Ibid, p.2
44
Trade E-Book Publishing 2009. Rep. Simba Information, Trade Books Group. Web. 2 Mar. 2010.
<http://www.marketresearch.com/>, p.19
45
Ibid, p.84
46
Ibid, p.84
47
Ibid, p.15
48
Ibid ,p.15
Page 11
Consumer Perspective
With the availability of free content consumers are less pressured to purchase e-books and thus expect lower
prices on e-books than on print books. Also e-books are associated with very limited manufacturing and
distribution costs. Sony sells New York Times Bestsellers for $11.99, while Amazon sells them for $9.99.
These prices artificially reinforce consumers’ beliefs that e-books should be sold for substantially less than
print books. Through DRM publishers can control what devices the electronic books can be viewed on, the
number of times a book can be downloaded, and blocks copying and printing. Thus consumers who purchase
e-books are much more restricted in their use of the books compared to those who purchase print books. As a
result, customers expect lower prices for e-books.
Future Growth in the E-book Industry
All evidence points to a growing electronic book market. Purchases of e-books increased 400% between 2007
and 2008.49 Publishers are increasingly lessening their use of DRM which leaves them vulnerable to piracy. It
is estimated that the value of the music industry decreased by $3 billion as a result of piracy.50 Piracy is a
looming threat to the publishing industry which has already been hurt by the decrease in book purchases in
recent years; it is estimated to have slipped below 55% of adults.51 There is a need for companies to find
creative methods to increases e-book sales due to the considerable availability of free material in the e-book
market. The current most popular method for accessing e-books in on a PC, but mobile phones, PDAs, and
the iPhone and iPod Touch are also popular due to their compatibility with a variety of e-book formats.52
While e-books are currently only a small percentage of the book industry they have the potential to gain more
49
Ibid, p.96
Ibid, p.97
51
Business of Consumer Book Publishing 2009. Rep. Simba Information, Trade Books Group. Web. 2 Mar. 2010.
<http://www.marketresearch.com/>, p.2
52
Trade E-Book Publishing 2009. Rep. Simba Information, Trade Books Group. Web. 2 Mar. 2010.
<http://www.marketresearch.com/>, p.86-87
50
Page 12
readership as technology advances. It is estimated that by the end of 2010 e-books sales will account for 3%
of total book sales and that by 2015 electronic books will account for 20% of all book sales.53 This figure
represents substantial market growth over just a couples years.
Strengths
Currently the e-book market is rapidly growing and is likely to account for a large portion of all book sales in
the near future.54 This means that there is a large potential for growth in the industry, thus creating many
potential opportunities for those wishing to join the market. Bestseller e-books mimicking print books
indicates that the previous perception that sci-fi/fantasy books would do better than other books in e-book
format was false.55 This shows that e-books have the potential to appeal to a wide range of customers and thus
gain a stronger foothold in the book market.
Another potential strength of the industry is that it is constantly adapting and changing to fit the current needs
of customers. A number of new e-readers have entered the market in recent years, including the iPad, Nook,
and Sony Reader. This has allowed for an increase in exposure to e-book devices. Book publishers have the
perception that consumers are driving the push towards digitalization of books.56 If this is indeed the case,
then it is a strength of the e-book market because it signifies that the e-books are a product that consumers
want, and consumers are more likely to buy products they want. Having an industry driven by customer
demand also signifies that there is potential for future growth in the market as customer demand grows, future
growth which is just waiting to be capitalized.
53
Bensinger, Greg. "Amazon E-Book Market Share to Fall as Industry Grows." BusinessWeek. Bloomberg L.P., 16 Feb. 2010. Web.
2 Mar. 2010. <http://www.businessweek.com/news/2010-02-16/amazon-e-book-market-share-to-fall-as-industry-grows-update1.html>.
54
Ibid
55
Trade E-Book Publishing 2010. Rep. Simba Information, Trade Books Group. Web. 26 Apr. 2010.
<http://www.marketresearch.com/>, p.35
56
Ibid, p.132
Page 13
Weaknesses
Research shows that three-fourths of e-book readers read at least one free e-book.57 This is a major weakness
in the industry because it indicates that free books are likely cutting into potential profits from e-books. The
increased use of e-books indicates a potential market that could bring growth to a company if those e-books
are purchased. The availability of free e-books decreases the likelihood that potential customers will purchase
books. There are numerous free e-books available through public libraries, and through Google. Google
Books has numerous free books available for consumer use. Also many e-book sellers, like Amazon allow
access to free chapters from e-books. This practice is also being adopted by many publishers.
The free access to chapters and books decreases the consumer’s need to purchase e-books in order to gain
access to them. It also potentially decreases customer’s perceived cost of e-books.58 As previously mentioned
there is great tension between consumers who believe that the price of e-books should be significantly less
than those of print books and publishers who argue that the cost of producing print and e-books is very similar
and therefore they should be similarly priced.59 The large number of free e-books that consumers have access
to online, in addition to the samples chapters of e-books; has the ability to perpetuate the perception that ebooks do cost a lot less; else why would they be free?
Opportunities
Many public libraries offer downloadable e-books for their customers to rent for a specific period of time. The
libraries use DRM technology to code books and e-book reader platforms such as Adobe Digital Editions and
57
Ibid, p.3
Ibid, p.21-22
59
Ibid, p.20-21
58
Page 14
MobiPocket that have the capabilities to process the specific type of DRM.60 The DRM sets a time limit on
the number of days the file can be accessed by the user. After the lending period has expired the book can no
longer be accessed by the user and the book is “returned” to the library.61 The user also has the option of
returning the book early, simply by right clicking on the title and selecting return.62 Currently e-book lending
that uses Adobe DRM is not compatible with the Kindle but does work on Barnes & Noble’s Nook and
Sony’s Reader.63
While libraries offer an e-book rental service for free there is currently no company that that provides for a
charged e-book rental service. The e-books available at libraries are severely limited in quantity and variation.
Many of the e-books available for rent are ones that are already available online for free from many sources
including Google Books; since the copyrights on the books have already expired. These similar books are
often also available for free download from both Barnes and Noble and Amazon. There is an opportunity for a
first mover advantage in this particular market, especially since the e-book market is relatively new and still
growing. Providing an e-book rental would expose e-books to more consumers who may be leery about trying
a project that they are unfamiliar with. Having a rental service would increase the exposure customers have to
e-books and thus increase the overall use and sale of e-books. A rental service has the potential to rapidly
expand the e-book market, and increase customer familiarity with the e-book format. Once customers are
familiar with the e-book format they will be more likely to purchase e-books then they would in the past, thus
adding potential buyers to the market.
60
Help- Quick Start Guide. Downloadable Media @ your library: District of Columbia. District of Columbia Public Library. Web. 2
Mar. 2010. <http://overdrive.dclibrary.org/1822EF56-F39E-41C6-B145-2C09518F31AF/10/391/en/Help-QuickStartGuide.htm>.
61
Ibid
62
Ibid
63
"Help - Basics - Adobe PDF eBooks." Downloadable Media @ your library: District of Columbia. District of Columbia Public
Library. Web. 02 Mar. 2010. <http://overdrive.dclibrary.org/1822EF56-F39E-41C6-B145-2C09518F31AF/10/391/en/Help-FAQFormat50.htm#question-4375>.
Page 15
Threats
The e-book industry is faced with threats of evolution in technology and also threats from substitute products.
Fewer and fewer individuals are buying books in the United States, in 2008 45% of Americans did not buy a
book.64 This statistic greatly worries those in book related industries because it indicates that the potential
consumers for books are shrinking. Instead people are turning towards the internet and video and computer
games. More people spend time surfing the web then they do reading a book. As readership of books
decreases the book industry as a whole is suffering as people are just not buying books. The time people spend
doing other activities, like surfing the web, dramatically decreases the amount of time that they have available
to do other activities such as reading. There is always the threat that with something as technology related like
e-books that another format may be introduced into the market that would result in the current e-book format
becoming absolute. E-book technology is also a relatively new technology so there are also many threats
associated with having books in e-book format.
As e-books become more wide spread it is likely that piracy of e-books, which already exists, will increase
greatly. The internet is the two edged sword, on one hand it allows access to e-books, but on the other it also
allows for illegal access to copyrighted material. DRM protection can only do so much, but hackers are
constantly working to break the codes and strip away the DRM protections in hopes of accessing the material.
There are some publishing companies that are thinking about removing DRM from e-books. Removing DRM
from e-books will dramatically increase the opportunities for those interested in piracy, since the lack of
restrictions on the books would make them easy to share with others.
64
Trends in Trade Book Retailing 2009. Rep. Simba Information, Trade Books Group. Web. 25 Apr 2010.
<http://www.marketresearch.com/>, p.9
Page 16
Challenges
Current Publisher Relations
Publishers like Macmillion are pushing Amazon to raise prices on e-books stating that the$9.99 price Amazon
is selling books for is artificially low.65 By selling bestsellers for $9.99 Amazon is actually losing money since
it buys digital books from most publishers at $12 to $14.66 Amazon sold the bestsellers at a loss hoping that
the low price would encourage users to visit the site and buy other e-books.67 Amazon recently agreed to
allow Macmillion to set their prices for new books at $12.99 to $14.99, and it is likely that other publishers
will follow suit.68 By increasing their prices Amazon is more open to competition from other e-book sellers.
The increase in book prices also necessitates that Amazon finds a new way to attract customers to buy ebooks.
Introducing the rental model is likely to create issues with publishers who would be concerned with the effect
the service would have on overall sales. The rental service is likely to cannibalize some e-books sales in the
short-term, but currently e-books only make up 1% of total sales. The small percentage of total revenue
associated with e-books is likely to result in publishers being more receptive to trying out rentals than the
publisher would be if the e-books accounted for a large percentage of total shares. Also Amazon would be
able to work out a deal with publishers to provide them with a small percentage of the profits from e-book
rentals which would help to mitigate the short-term cannibalization of sales. Additionally rentals and the
65
Galante, Joseph. "Top Publishers to Seek More Control of E-Book Prices." BusinessWeek. Bloomberg L.P., 5 Feb. 2010. Web. 2
Mar. 2010. <http://www.businessweek.com/news/2010-02-05/top-publishers-to-seek-more-control-of-e-book-prices-correct-.html>.
66
Ibid
67
Schonfeld, Erick. "Why Amazon Cannot Afford To Lose The eBook Wars To Apple." Washington Post. 04 Feb. 2010. Web. 2
Mar. 2010. <http://www.washingtonpost.com/wp-dyn/content/article/2010/02/04/AR2010020402539.html>.
68
Galante, Joseph. "Top Publishers to Seek More Control of E-Book Prices." BusinessWeek. Bloomberg L.P., 5 Feb. 2010. Web. 2
Mar. 2010. <http://www.businessweek.com/news/2010-02-05/top-publishers-to-seek-more-control-of-e-book-prices-correct-.html>.
Page 17
inexpensive price of rentals will encourage customers to try out an e-book, which will increase exposure and
eventually increase overall sales.
Competition from Other E-Book Readers
The Kindle faces competition from other e-book readers including Sony’s Reader, Barnes & Noble Nook, and
Apple’s newly introduced iPad (a comparison of the models can be found in appendix III). Additionally, as
noted before, the majority of consumers access electronic books through their PCs. Use of phones, PDAs,
iPhone, and iPod touch are also popular methods to access e-books. Amazon does have free downloadable
software that allows one to access Kindle books on iPhone/Touch, PC/Mac, and BlackBerry. The Kindle uses
a closed platform that does not have access to e-books with Adobe DRM files like Sony’s Reader or Barnes &
Noble’s Nook. The lack of access decreases possible uses of the Kindle and hurts sales. Amazon needs to find
a way to compete with the new readers that are entering the market. The book rental service is a way to
differentiate our product from others. While it is likely that other companies might follow suit and offer their
own e-book rental services; Amazon would still have the first mover advantage in the market.
Recommendation
E-Book Rental Plan
Amazon should introduce an e-book rental services that allows customers to rent e-books for $0.25 a day. To
rent the book the customer would have submit credit card information, and the customer’s credit card would
automatically be charged the rental fee after they returned the book. The book would remain in the customer’s
database until returned. The book will appear in customers’ database, either on the Kindle, or PC/PDA and
beside the book will appear a “return book” option.
Page 18
Customers will also receive an email after 7 days rental that reminds them that they are charged $0.25 a day
for the book and that they currently owe $1.75. The email would also include a button that the customer can
click to return the book. Customers will receive a similar reminder after 15 and after 20 days. After 30 days
the book is automatically returned to Amazon, costing the consumer a total of $7.50. After the e-book is
returned the customer will receive a confirmation email that also includes options to buy or re-rent the e-book.
The reminder and automatic return are customer protections to uphold our company policy of being “The
Earth’s Most Customer-Centric Company.” While it is likely that customers will choose to return after the
first email, Amazon would still be introducing e-books to consumers and making a profit. Amazon should
work out a deal with publishers to buy the e-books from publishers at a discount, and then offer a percentage
of the rental profit to the publishers. This would reduce the potential threat that an e-book rental service would
pose for the publishing industry.
Additionally, the low cost of renting, $0.25 a day, results in a decrease in the amount of risk associated with
purchasing e-books. Many consumers are worried about purchasing e-books over physical books because they
are unfamiliar with the format of e-books. Providing consumers with a very low priced service, like renting
books for only a quarter a day will encourage people who had never thought before about purchasing an ebook to try out the e-book format and see whether or not they like the book.
The inexpensive pricing makes renting books more competitive with alternative forms of entertainments, like
renting movies. Both the Netflix model and Redbox are expensive in comparison to a $0.25 rental price for an
e-book. Having a less expansive price would also encourage reading over other forms of entertainment and
potentially increase readership. Increasing reading through book rentals could also be a potential marketing
campaign and would be a potential public relations booster.
Page 19
The rental service would start out including both fiction and non-fiction e-books, but not textbooks. The
company could look into the possibility of renting textbooks, but the high cost of textbooks would likely
necessitate a rate higher than $0.25 a day. Additionally since textbooks are published in cyclical patterns, with
new books released every couple of years, the potential to recoup the cost of the textbook through renting
would be severely limited. Books that are not reinvented or updated every couple years have a much longer
life expectancy in the market which would allow Amazon to capitalize on their investment in e-book rentals,
which is not the case with textbooks.
Finances
Amazon currently has a net profit of $902 million and has $3.444 billion in cash and cash equivalents; with an
additional $2.922 billion invested in marketable securities (see appendix I). This available cash can be used to
finance the e-book rental service which would require hiring more programmers to create the actual service
and the DRM on e-books required to provide a rental service. Amazon would also need to start a marketing
campaign for the new service. Money would also be needed for the infrastructure required to process all the
rental information and to track customer rental and returns, and the amount customers owed, etc. Barnes &
Noble acquired Fictionwise.com, an online e-book store for $15.7 million.69 It is highly unlikely that the cost
of creating an e-book service would exceed the cost of purchasing a moderately large e-book store like
Fictionwise.com. Additionally Amazon already has a large inventory of e-books which could potentially be
transformed into rental books, thus it would logically cost less. Assuming that the project does have the cost of
buying a moderately sized e-book company, $15.7 million is only a small portion of the current cash and
securities that Amazon holds for business expansion and acquisition. Amazon has the necessary resources to
start a new e-book rental service.
69
Kawamoto, Dawn. "Barnes & Noble acquires e-book seller." CNET News. CBS Interactive, 6 Mar. 2009. Web. 2 Mar. 2010.
<http://news.cnet.com/8301-1023_3-10190554-93.html>.
Page 20
Marketing
The new service would require an increase marketing expense. Amazon should follow a similar model to their
previous offer of $20,000 in a contest to create a 15 second ad for Amazon.70 The ad would be available on
the Amazon website and posted on YouTube.com. Also Amazon could advertise the new service on their
homepage as a way to introduce users to the e-book rental service. Books sold on the Amazon site would also
include a “rent-it” button in the Kindle Store, giving customers the option of renting or buying the book.
Amazon would also employ social networking marketing through advertising on sites such as Facebook,
LinkedIn, and Twitter, etc. The total budget for marketing would be $2 million, which is only 0.33% of the
current marketing budget. Also the press that Amazon would receive from various papers, due to our new
innovative service would also work in our favor as a marketing technique.
Information Technology Development
Similar to the technology used by libraries the e-book DRM would expire after 30 days and the book would
be automatically “returned”. The technology to rent books already exists and Amazon would need to modify
the existing technology and write new code to fit the specific needs of our system. Amazon already has a
Video on Demand rental service that allows customers to rent and watch videos online or download the video
to their personal computer to watch over a 24 hour period for up to a month.71 This technology that Amazon’s
programmers and customer service already have experience working with just needs to be adapted to book
rentals similar to the format used by libraries.
70
Nycz-Conner, Jennifer. "Create an amazon commercial, win up to $20,000 and a trip to the Gen Art Film Festival in New York."
Washington Business Journal Blog. American City Business Journals, Inc., 1 July 2009. Web. 2 Mar. 2010.
<http://washington.bizjournals.com/washington/blog/working_the_room/2009/06/create_an_amazon_commercial_win_up_to_2000
0_and_a_trip_to_the_gen_art_film_festival_in_new_york.html>.
71
"Amazon.com Video On Demand: TV Shows, Movies, International Videos and More, Ready to Download." Amazon.com:
Online Shopping for Electronics, Apparel, Computers, Books, DVDs & More. Amazon.com. Web. 26 Apr. 2010.
<http://www.amazon.com/Video-OnDemand/b/ref=amb_link_83830251_6?ie=UTF8&node=16261631&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=top1&pf_rd_r=0MRVFK2VZEYY4S0B1MTQ&pf_rd_t=301&pf_rd_p=471397011&pf_rd_i=video%20on%20demand>.
Page 21
The writing of new code to adapt the DRM for a rental service requires the hiring of new programmers.
Amazon would also need the additional infrastructure to maintain records and process rentals. This would
require the hiring of more information technology managers and analysts and the purchase of servers and
Amazon would need to allocate the space in which to house the servers. Amazon’s current space would most
likely to be adequate to house the technology, but if the customers in the service grow substantially Amazon
would require additional space that would have to be purchased. Amazon would also have to provide training
for our customer service representatives so they could address the questions the customers might have on the
technology. The coding and DRM would need to be constantly adapted to prevent pirating of rented material.
The constant adaptation and changing of DRM coding would make it more difficult for hackers to crack the
DRM on the e-books and share the e-books with others, or print illegal copies of books.
Continued Customer Relations Excellence
Our company motto is about our customers and Amazon wants to be the company most focused on our
customers. E-book rentals would meet our customers’ demand for lower prices on e-books, while addressing
our publishers’ demand for increased prices. Also renting e-books would address the additional concern of
customers that when they “buy” e-books they are actually leasing rather than buying the book. Renting has a
different legal connotation than buying does, and would appease customers who are angered by their lack of
ownership rights over the e-book they have purchased. E-book would also allow us to gain access to
customers who thought e-books were too expensive and refused to purchase e-books.
The customer protections through the return notices and the 30-day automatic removal will help improve our
customer relations and avoid any possible snafus that might arise over a customer who didn’t realize he had to
return a book or else he would continued to be charged. Amazon prides itself in our dedication to our
Page 22
customers, and the e-book rental service is a revolutionary way to meet the demands of our customers, while
distinguishing ourselves from other book sellers in the market.
Page 23
Appendix
Page 24
Appendix I
CONSOLIDATED BALANCE SHEETS72
(in millions, except per share data)
December 31,
2009
2008
$ 3,444
$2,769
Marketable securities
2,922
958
Inventories
2,171
1,399
Accounts receivable, net and other
988
827
Deferred tax assets
272
204
Total current assets
9,797
6,157
Fixed assets, net
1,290
854
18
145
Goodwill
1,234
438
Other assets
1,474
720
Total assets
$13,813
$8,314
$ 5,605
$3,594
1,759
1,152
ASSETS
Current assets:
Cash and cash equivalents
Deferred tax assets
L I A B I L I T I E S A N D S T O C K H O L D E R S’ E Q U I T Y
Current liabilities:
Accounts payable
Accrued expenses and other
72
Form 10-K. Amazon.com, Inc., 19 Jan. 2010. Web. 2 Mar. 2010.
<http://www.sec.gov/Archives/edgar/data/1018724/000119312510016098/d10k.htm#tx48653_20>., p.40
Page 25
Total current liabilities
Long-term debt
Other long-term liabilities
7,364
4,746
109
409
1,083
487
—
—
—
—
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares—500
Issued and outstanding shares—none
Common stock, $0.01 par value:
Authorized shares—5,000
Issued shares—461 and 445
Outstanding shares—444 and 428
Treasury stock, at cost
Additional paid-in capital
5
(600)
5,736
4
(600)
4,121
Accumulated other comprehensive income (loss)
(56)
(123)
Retained earnings (accumulated deficit)
172
(730)
Total stockholders’ equity
Total liabilities and stockholders’ equity
Page 26
5,257
2,672
$13,813
$8,314
CONSOLIDATED FINANCIAL STATMENTS73
Year Ended December 31,
2009
2008
2007
2006
2005
(in millions, except per share data)
Income Statement:
Net sales
$24,509
$19,166
$14,835
$ 10,711
$8,490
1,129
842
655
389
432
Income before change in accounting principle
902
645
476
190
333
Cumulative effect of change in accounting principle
—
—
—
—
26
Net income
902
645
476
190
359
0.46
$ 0.81
Income from operations
Basic earnings per share (1):
Prior to cumulative effect of change in accounting
principle
Cumulative effect of change in accounting principle
$
Basic earnings per share (1)
$
2.08
$
1.52
$
1.15
$
0.46
$ 0.87
Prior to cumulative effect of change in accounting
principle
Cumulative effect of change in accounting principle
$
2.04
$
1.49
$
1.12
$
0.45
$ 0.78
Diluted earnings per share (1)
$
2.08
$
—
1.52
$
—
1.15
$
—
—
0.06
Diluted earnings per share (1):
—
2.04
—
$
1.49
—
$
1.12
—
$
0.06
0.45
$ 0.84
Weighted average shares used in computation of
earnings per share:
Basic
433
423
413
416
412
Diluted
442
432
424
424
426
Cash Flow Statement:
73
Ibid, p.18
Page 27
Net cash provided by operating activities
Purchases of fixed assets, including internal-use
software and website development
Free cash flow (2)
Page 28
$ 3,293
(373)
$ 2,920
$ 1,697
(333)
$ 1,364
$ 1,405
$
(224)
$ 1,181
702
(216)
$
486
$ 733
(204)
$ 529
Appendix II
74
Annual Meeting of Shareholders
74
"Annual Meeting of Shareholders." Amazon.com. Amazon.co, Inc., 28 May 2009. Web. 2 Mar. 2010.
<http://media.corporate-ir.net/media_files/IROL/97/97664/ASM_09_Final_Webcast.pdf>, p.38
Page 29
Appendix III
Comparing E-Readers | January 201075
How Do E-Readers Stack Up With iPad In The Mix? Use Our Chart As A Guide
Apple iPad
Amazon Kindle 2
Amazon Kindle DX
Barnes & Noble
Nook
Sony Daily Edition
Plastic Logic Que
proReader
Link
iPad
Kindle 2
Kindle DX
Nook
Reader Daily
Edition
Available
March (WiFi only)
April (WiFi/3G)
Now
Now
Now
Now
Mid-April
Price
WiFi: $499-699
3G/WiFi: $629829
$259
$489
$259
$399
WiFi/4GB: $649
WiFi/3G/8GB: $799
Size
.5 inches thick
8 x 5.3 x 0.36
inches
10.4 x 7.2 x 0.38
inches
7.7 x 4.9 x 0.5
inches
8.13 x 4 x 19/32
inches
8.5 x 11x .33 inches
Weight
1.5 lbs.
10.2 oz.
18.9 oz.
12.1 oz.
12.75 oz.
17 oz.
75
Kramer, Staci D. "Comparing E-Readers | January 2010." PaidContent.org. ContentNext Media Inc., 29 Jan. 2010. Web. 2 Mar. 2010.
<http://paidcontent.org/table/e-reader-comparison-chart/>.
30
Que
Screen Size
9.7 inches
6 inches
9.7 inches
6 inches
7.1 inches
10.5 inches
Grayscale
Grayscale
Display
Backlit IPS Color
Grayscale
Grayscale
Grayscale reading,
color nav
Touchscreen/Rot
ate
Yes/Yes
No/Manual
No/Yes
Yes/No
Yes/Yes
Yes
11 hours
7 days with
wireless
Whispersync on
7 days with
wireless
Whispersync on
10 days
7 days with
wireless on
N/A
2GB/Yes
(microSD)
1.6GB/Yes
(Memory Stick
Duo/SD)
4GB; 8GB/No
Virtual keyboard
Stylus/virtual
keyboard
Touchscreen/Virtual
Keyboard
Battery Life
Storage/Expanda
ble
16GB; 32GB;
64GB/No
Input
Touchscreen/Soft
keyboard (wireless
keyboard
available)
Keyboard
Page 31
2GB/No
4GB/No
Keyboard
Wireless/Blueto
oth
3G through
AT&T/WiFi3G
plans: up to
250MB, $15;
unlimited $30. No
contract.
Units sold through
Oct. 22, Sprint 3G;
Now 3G/roaming
through AT&T/NO
3G
(Whispernet/Sprin
t)
3G (AT&T)/WiFi
3G (AT&T)/WiFi
3G (AT&T)/WiFi/ Bluetooth
International
No deals yet; 3G
unlocked
3G Roaming
(AT&T)
3G Roaming
(AT&T)
No
No
N/A
EPUB; Audible;
Kindle (through
app);
iTunes;additional
formats NA
Kindle (AZW), TXT,
Audible (formats
4, Audible
Enhanced (AAX),
MP3, unprotected
MOBI, PRC; Native
PDF
Kindle (AZW),
Native PDF, TXT,
Audible (formats
4, Audible
Enhanced (AAX),
MP3, unprotected
MOBI, PRC
EPUB, eReader,
PDFs, MP3s, JPEG,
GIF, PNG and
BMP.
EPUB, PDF, JPEG,
BBeB, TXT, RTF,
JPEG, PNG, GIF,
BMP , MP3, AAC
Native PDF, GIF, JPEG, PNG,
BMP, ePub, and TXT; Will
work with Office, HTML via
Que software
Native Formats
Page 32
Platform
Browser
Available
Content
Bookstore
Open to approved
third-party
developers
Closed now but
SDK has been
released for
upcoming beta
and store with
approved thirdparty developers
Closed now but
SDK has been
released for
upcoming beta
and store with
approved thirdparty developers
Closed
Closed to
developers; open in
terms of multiformat, non-DRM
use.
Closed
Safari
Yes in U.S., Japan.
NA in most
countries.
Yes
No
No
No
Number of
iBookstore titles
N/A; Kindle Store;
iPhone apps
400,000-plus
books, more than
130 newspapers &
magazines, 8,000
blogs (Numbers
vary
internationally)
400,000-plus
books, more than
130 newspapers &
magazines, 8,000
blogs (Numbers
vary
internationally)
350,000 books for
sale, public
domain; about 30
newspapers,
magazines. Google
Books brings titles
to 1 million
Includes public
domain, access to
public libraries
through OverDrive
350,000 books for sale,
public domain
Barnes and Noble
eBookstore,
Google Books
Sony eBook Store
(converting to
EPUB this year),
Google Books
QUEreader.com (powered
by Barnes & Noble);
periodicals from Dow
Jones, others.
iBookstore
Page 33
The Kindle Store
The Kindle Store
Book Sharing
N/A
Between devices,
Kindle apps on
same acct.
Microphone/Spe
akers
Yes/Yes
No/Yes
No/Yes
No/Yes
No/Yes
No/No
Archive
Apple
Amazon
Amazon
Barnes & Noble
Sony
Plastic Logic
Between devices
on same acct.
14 days on many
titles
No
No
This chart was first published Jan. 29 and was last updated at 10:30 p.m. ET Jan. 31. // Edited by Staci D. Kramer. Based on manufacturer information,
additional reporting.
Page 34
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