Amazon Getting Smoked On Macmillan Settlement, Goldman Provides Its Perspectives
At last check Amazon stock was preparing to finally fill that gap down to $100.
The reason: investor concern over what the settlement with Macmillan will mean for the company's top and bottom line, and how AMZN's weakness could transfer over to negotiations with other publishing houses. Goldman, always one to jump in the fray, and still sticking with its $160 price target (or a cheap 34x the firm's 2011 EPS estimate) provides the following color.
Strategic retreat by Amazon will be financial defeat for consumers
On Jan 29, Amazon suspended selling books published by Macmillan in physical and electronics formats, due to Macmillan warning it would delay Kindle versions of Macmillan titles unless Amazon raises front list e-book pricing from $10 to $15, and shifts from a consignment to an agency model. On Jan 31, Amazon’s weblog acknowledged “[w]e want you to know that ultimately, however, we will have to capitulate and accept Macmillan's terms” in order to provide Kindle owners with a full range of titles.
(1) The direct financial impact of raising prices from $10 to $12-$15 should be to boost Amazon’s margins on front list e-books (which we estimate at under 1% of its sales). We assume Amazon’s gross margin at a $10 price is low, zero, or negative, while its gross margin at $15 should jump to 30%.
(2) The strategic implications of Amazon retreating may include: slower uptake of e-books and e-readers (Nook and iPad as well as Kindle); and Amazon losing control of e-book pricing, and thus of one competitive advantage versus Apple.
(3) Macmillan’s participation in Apple’s iBooks bookstore carries risks for publishers: Apple could move to a central role in e-book retailing, without feeling the dependence on books as a stand-alone business that Amazon still does; popular authors may dis-intermediate publishers by working directly with e-book retailers if they view $10 as a more appropriate price for front list e-books. We estimate an e-book costs publishers and retailers $7 less in printing, shipping, and returns than a hard cover.
So far, investors seem to be focusing on the negatives for the book retailer formerly known as Amaz[i]n.