Michael Brush: Amazon, Apple battle over the future of digital books

Company Focus3/10/2010 7:00 PM ET

Amazon vs. Apple: Battle of the books

With its new iPad, Apple is taking aim at Amazon's core business and its Kindle book reader. Can the 'e-tail' pioneer keep up as books, music and movies go all-download?

By Michael Brush
MSN Money

Amazon.com (AMZN, news, msgs) has come out on top in the digital revolution that's moving sales of books -- as well as compact discs, DVDs and lots of other products -- online.

But there's a second digital uprising afoot, and some experts think Amazon won't fare as well -- and could lose a sizable chunk of its core bookselling business.

Any Amazon losses would likely be gains for Apple (AAPL, news, msgs), which could do to its "e-tail" rival what Amazon has been doing to brick-and-mortar competitors.

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Apple's chief weapon in this battle of online giants -- the iPad -- will be rolled out April 3, with preorders starting March 12. Among the many things people will be able to do with these flat touch-screen computers: download and read digital books from Apple's new iBookstore.

Amazon has its own successful book reader, the Kindle. But Apple dominates in music downloads, so there's good reason to think it will take a big share of the market for downloadable books. "In music, Apple is the dominant player. Now Apple wants to do the same in books," says Jeffrey Liebenson an attorney with Herrick, Feinstein who was involved in some of the early music industry negotiations with Apple.

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And the iPad threat is part of a bigger-picture "digital transition" risk to Amazon that has led many investors to head for the exits.

The worry? Books are joining music in a broad shift to entertainment via digital download, and that's a game Apple tends to win.

Goodbye discs and pages

Think how this second digital revolution has changed the way we get entertainment:

  • When was the last time you bought a CD? Sales of CDs declined to 301 million last year from 712 million in their peak year of 2001, according to Nielsen SoundScan. Instead, people download music -- and Apple, with its iTunes store, dominates with a 70% market share. Amazon has 8% of the music sales market.

  • The same thing is happening to DVD sales. Video stores such as Blockbuster (BBI, news, msgs) are already hurting. Consumers will soon wonder why they should buy a DVD anywhere when they can get a movie online -- instantly.

Amazon hasn't ignored these changes. You can download music at the online retailer -- and from many other places, of course -- but Apple simply rules this game.

You can also get movies over the Internet from Amazon. Here Apple isn't dominant, but the field is crowded with strong rivals: cable companies, Netflix (NFLX, news, msgs), Hulu and Vudu, which was recently purchased by Wal-Mart Stores (WMT, news, msgs).

Books are next, and Amazon is certainly a major player in the digital book market with the Kindle. But imagine that Apple does to the book market what it's done in music. How much will be left for Amazon or anyone else?

The risk to Amazon's business is real, and it is one of the main reasons Credit Suisse analyst Spencer Wang is telling investors to avoid buying Amazon stock now. He has a "hold" rating on the online retailer and a 12-month price target of $130 a share, around where the stock sells today.

Because of these worries, investors sold out of Amazon stock earlier this year when it became clear Apple was entering the e-book market, analysts say. The stock is down from a 52-week-high at $146, though, like the market as a whole, it's way up from its lows.

Among those selling has been Amazon founder and CEO Jeff Bezos. In February, he sold 2 million shares of Amazon stock at prices between $116 and $120, according to Thomson Reuters. He sold 7 million shares in 2008-09, after selling no stock at all during 2005-07.

Continued: The strong side of Amazon

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