Amazon’s reluctance to reveal precise figures on its ebook sales has caused all kinds of ripples within the book world, and beyond. For one thing, it’s been partly responsible for the huge exposure given to Hugh Howey’s AuthorEarnings report. And in the case of stock analysis company Trefis, it’s driven their team to extrapolate Amazon’s ebook sales from sales of Kindle devices, using this to justify their target price of $373 for Amazon’s stock, “implying a premium of 10% to the market price.”
According to Trefis estimates, “sales of Kindle devices stood at roughly 20 million in 2013, bringing about $3.9 billion in revenues.” Proceeding from their (pretty well-founded) opinion that the Kindle franchise “appears to be a strategic pursuit by Amazon to promote and sell digital content,” Trefis then calculates on the basis of ebook sales per reader that “the company may be earning between $265 million to $530 million a year from e-books alone,” while allowing that “that’s still small in comparison to its overall revenues.” This report was first aired on April 1st, but there are no signs that Trefis was joking.
Trefis bases its calculations on a series of assumptions “reasonable enough to give us an idea of a probable range of revenues.” These are: “approximately 30 million Kindle e-readers currently in use;” “average price per e-book at $6,” with 30 percent going to Amazon; and “five e-books sold annually per Kindle e-reader owner” for the lower revenue figure, and ten per e-reader for the higher. Bear in mind also that Trefis is extrapolating from sales of Kindle e-readers alone, not from Kindle Fire tablets or Kindle apps on other devices.
Therefore, if anything, Trefis probably underestimated Amazon’s overall take from Kindle ebook sales by quite a margin. For comparison’s sake, American Association of Publishers figures put ebook sales in the U.S. at $375 million for the second quarter of fiscal year 2013 alone. Trefis also noted in its wider analysis of Amazon’s revenues that books, DVDs, and music altogether contribute only 21 percent of its sales, with general merchandise accounting for 64 percent, and Kindle hardware sales for only 2.9 percent.
It’s interesting also to see where books fit within this breakdown. If Amazon has the kind of firepower from its broader retail operation that Trefis’s analysis suggests, then it can devour any book chain or publisher at leisure. Such outfits are not supported by larger retail concerns, although arguably a publishing group like HarperCollins held within a larger media concern might enjoy similar advantages. Amazon’s supposed competitors might be thankful that it has not used more of this muscle already. Competition watchdogs might want to watch that too.
So if Trefis erred on the conservative side in its estimate of Amazon ebook sales, its 10 percent stock target may also be lowballing Amazon. All those Amazon detractors who pillory the company for plowing its profits back into expansion might want to reflect on this. It suggests that careful analysts are seeing Amazon go only higher.
If you think that’s something, a Seeking Alpha analyst estimated that his own “fair price” for Amazon was $61.80 per share. He based this on his estimate of Amazon’s revenue growth and margins.
Quote: These are: “approximately 30 million Kindle e-readers currently in use;” “average price per e-book at $6,” with 30 percent going to Amazon; and “five e-books sold annually per Kindle e-reader owner” for the lower revenue figure, and ten per e-reader for the higher.
They and their projections lost all credibility with me there. Given the numbers they cite, their research was remarkably shallow. They apparently never even read Amazon’s own royalty documentation, which can be found here:
Amazon always gets better than 30 percent for the sale of paid books–always, always, always, always, always, always. I feel like a scratched record repeating that over and over again. It’s Apple that pays 70%, takes 30%, and charges nothing for downloads. That 30 percent would work with Apple. It doesn’t with Amazon.
For ebooks in the $2.99 to $9.99 price range, Amazon does claim to pay 70 percent royalty, but from that comes what must be the most grossly inflated download charges on the Internet, 15 cents per megabyte, over a hundred times what Amazon charges for similar file downloads on AWS. Since that fee is essentially pure profit for Amazon, that puts Amazon real profit per sale in that common ebook price range in the 40+ percent range. That alone probably adds up to tens of millions to their ebook income, every penny of it coming out of the pocket of authors and publishers.
Outside that $2.99-9.99 range, Amazon pays authors and publishers a measly 35 percent, pocketing 65 percent for itself. Given the enormous number of 99 cent ebooks sold, sales in which Amazon pockets 65 cents and pays 35 cents, the low end must be quite profitable. Thankfully, Amazon does waive download fees in that range. Otherwise, some authors would find themselves going into the red with each sale.
The high end is vastly more lucrative because Amazon’s cost of transaction verses profit from the sale must be in the 1 to 99 range. That’s about $1 spent to earn $99. Who says Amazon operates with low profit margins?
If a student buys a $50 textbook, Amazon pockets $32.50 while those who created it only get $17.50. From that $32.50, Amazon must only pay a pittance, the cost of a credit card transaction and a download. It doesn’t take a heck of a lot of $32.50 profits from single sales to a woefully captive student market to fatten Amazon’s earnings considerably. For ebooks over $9.99, Amazon’s essentially got a license to print money. Ever wonder why that’s not attracting DOJ attention? It’s using a dominant market position to force suppliers, in this case authors, to take only half the going rate.
All this is, of course, why Amazon is willing to do virtually anything to own the ebook market. My rough calculations suggest that Amazon, particularly given its economy of scale, is pocketing twice as much profit per ebook sale as anyone else in the industry.
I’d take all these figures with a grain of salt. In this case, Trefis couldn’t even get right publicly available figures about Amazon royalties. There’s little reason to trust them with numbers that are little more than wild guesses.