Amazon downgraded with crowded e-book market

By Dow Jones Newswires
Posted June 28, 2010 at 11:01 a.m.

Despite its early lead in the fast-growing e-book market, Amazon.com Inc. (AMZN) faces growing competition from tech giants Google Inc. (GOOG) and Apple Inc. (AAPL), according to one analyst.

Marianne Wolk of Susquehanna downgraded Amazon to a neutral rating on Monday. In a note to clients, the analyst cited “intensifying competition” in the e-book market, which is creating more uncertainty around the company’s Kindle business.
Amazon sells the Kindle e-book reader as well as electronic versions of books for the device. Last week, the company cut the e-reader’s price to $189 from $259. It has never disclosed specific sales data for the device, though analysts believe the Kindle accounts for about 60 percent of the e-book market.

Other companies such as Sony Corp. (SNE) and book retailer Barnes & Noble Inc. (BKS) sell e-readers as well. But many analysts see Apple’s iPad as Amazon’s biggest threat. The iPad went on sale in April and 3¬† million have sold.

Google also sells electronic versions of books, and some analysts believe it is developing a tablet.

“With moves pending by Apple and Google, rising competition is raising the uncertainty regarding eReader, eBook and Book profit growth rates, capping the contribution to Amazon’s valuation from these sectors,” Wolk wrote.

“Thus, we are less confident in the multiple expansion we previously forecast,” she added.

Shares of Amazon were down 1.4 percent Monday morning. The stock is down about 20 percent since peaking above $150 in mid-April, on a split-adjusted basis.

Wolk said she estimates that the e-book business — devices and content — will comprise about 6 percent of Amazon’s total revenue by 2014. She believes that e-books and physical book sales account for 8 to 13 percent of the company’s valuation, which leaves the shares exposed as e-reader competition mounts.

“With news flow likely to raise uncertainty over the next 12 months, it is likely to reduce the multiples attached to the contribution from the Kindle and importantly lower the valuation on physical books, which should see slowing growth as eBooks accelerate,” she wrote.

Book publishers who had early deals with Amazon are likely to renegotiate to get their terms closer to Apple’s so-called agency model. Apple’s model gives publishers more control over prices and may hurt Amazon’s ability to keep its price advantage. Amazon sells many books for the Kindle for $9.99, which¬† many publishers say undervalues their products, even if Amazon loses money on them.

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