Andrew Gawith: Book industry faces a new chapter

Sales of ereaders, such as Amazon's Kindle, reached about 3 million in the US last year. Photo / AP

Amazon.com wowed investors last month when it announced fourth-quarter results which saw sales up 42 per cent to a remarkable US$9.5 billion ($13.5 billion). This in a market where consumer spending has yet to recover from the effect of the 2008 meltdown.

Let's not forget that this company that Jeff Bezos founded in a Bellevue garage in 1994 wasn't profitable for its first 10 years, but now has become the gold standard for e-commerce.

Net income has risen to US52c a share on revenue of US$6.7 billion, compared with analysts' "bullish" expectations of US39c a share on US$6.4 billion in sales. Not bad.

While the online superstore has grown vertically and horizontally from its bookshop origins, Bezos has retained a special interest in books, although not necessarily the ones that collect dust.

Last year, Bezos was quoted as saying: "I want to be able to provide every book ever published, in any language, in 60 seconds."

If you dig deeply into the recent Amazon results the most powerful result was the one about ebooks, which you typically read on the Amazon Kindle reader. When Amazon has a title as both an ebook and a physical book, then they sell six Kindle books for every 10 physical books.

When you consider that the Kindle hardly existed two years ago, this is a gob-smacking figure.

While exact figures are unknown, it's estimated that three million ebook readers sold in the US last year, compared with around one million in 2008. If that rate of growth continues at anything like the 200 per cent level, then it's apparent that ebooks will be taking over physical books in short order.

No wonder Amazon's board has authorised the company to repurchase up to US$2 billion of its common stock.

While we normally lag behind US behaviour by a couple of years it's fair to assume New Zealand will head the same way, particularly with the ill-named Apple iPad which goes on sale this month. The iPad is a tablet computer similar in functionality to the iPhone but with a built-in ebook reader. Unlike the Kindle, the iPad has a colour screen, internet surfing ability, plus a huge range of Apple applications. Over the next year, the competition between the electronic readers will drive the ebook phenomenon.

For investors this has a wide set of implications, not all of them immediately obvious. Let's consider them, from the blatant to the latent. To start with, all the booksellers, from the big chains to the small specialty store, will need to offer the ability to download ebooks, whether at their physical store or via their website.

Even the most conservative of soothsayers would also suggest that it's likely that the physical premises of booksellers will shrink and more people will never visit a physical store because they don't have to. Commercial property companies take note.

On the other hand, electronic direct mail for bookreaders will become big business. The seamlessness of sending out a virtual direct mail with samples of the latest books and the ability to buy immediately online will change the way books are marketed.

Appliance and brownware sellers will do well, at least initially. While the early price point for iPads and Kindles will probably be high, the fierce competition from a plethora of other suppliers will drive prices down and margins with them.

Any Harvey Norman or Noel Leeming managers reading this should go out now and try to get an agency for an ebook reader.

Distribution and logistics operators for books will be hit hard. Books are big, heavy and require careful packing. The industry that exists around this can reasonably expect their throughput to be halved over coming years.

The advertising industry suddenly has a whole new playing field. The opportunity for contextual advertisements will ramp up. In this way if some poor sod is reading an ebook on behavioural economics, then they will be offered the ability to subscribe to economic journals or, indeed, join up to economic user groups.

Newspaper publishers finally have something to be happy about.

There is good potential for the long-term decline of newspaper sales to be arrested or at least slowed, if people have the ability to be emailed their whole paper every morning and read it on the bus or over their breakfast.

Because there are no trees, printing presses or diesel trucks involved in the process they will be able to afford to price them cheaply, and it's a green way to go.

The integration of video that we have witnessed on the likes of www.nzherald.co.nz will continue.

Fantastical stuff, but good old-fashioned books will be on the shelves for a while yet and may be a godsend when the iPad's batteries run down.

* Andrew Gawith is a director of Gareth Morgan Investments. www.garethmorgan.com