Amazon Can Drive Big Kindle Growth With China Launch

by Trefis Team
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Close on the heels of the launch of its e-book store in Brazil, [1] Amazon (NASDAQ:AMZN) announced the launch of its Kindle e-book store in China on Thursday. [2] With the Kindle devices already authorized by the country’s radio regulator, the Amazon Kindle hardware series may soon go on sales in the country. The company however has not yet disclosed a launch date or any plans to launch the devices.

The tablet PC market in China is estimated to be about 12 million units a year currently and the e-reader sales are poised to touch 17 million by 2014. [3] The huge market size and Amazon pricing its devices at low margins which most likely will appease the growing Chinese middle class leads us to expect that the devices will be well received and likely provide substantial upside to e-books and other content sales as well.

China’s tablet PC market is dominated by market leader Apple‘s (NASDAQ:AAPL) iPad devices with almost 70% market share. The other notable players in the market include Asustek, Acer, Lenovo and Samsung (PINK:SSNLF).

See our full analysis for Amazon’s stock here

Tough Competition Awaits Kindle e-Reader

China is estimated to be the second largest market for e-readers in the world. [3] e-Reader sales have been increasing rapidly and are expected to top 17 million units annually, equal to those estimated in the US by 2014. The market is currently dominated by local media conglomerates Hanwang Technology’s e-readers and Shanda Cloudary’s Bambook but many Chinese people buy Kindles from overseas. Brand loyalty built through the Kindle bookstore can help the devices weather the competition and an expected low pricing should see it rapidly gain a substantial market share after introduction.

Amazon may be looking to build brand loyalty through its Kindle bookstore which currently stocks about 22,500 Chinese language titles. [4] We expect an incremental roll-out will help the company leverage its brand and keep costs in check at the same time. However, competition from China’s Dangdang Inc and 360buy, both of which have platforms to sell e-books will make it tough for the company to get a foothold on the market.

Pricier Kindle Fire Range Will Have It Tough

China’s tablet PC market grew 63% in the Q3 from the previous year and was dominated by Apple Inc’s iPad which has about ~70% market share. [5] The second largest player, the Lenovo Group, has just about 10% share in the market. The driving force behind the increasing tablet sales in China has been the price drop and the devices being seen as a cheaper gadget to access the Internet.

The Kindle Fire devices have conventionally been priced at almost zero margins and a similar strategy in China can see the devices gain traction because of their low price point. However, the absence of Amazon as an online marketplace in China and dominant positions of local adversaries will mean that the company’s strategy of booking profits through sales directed to its websites through the devices may not work here in the short term. This will most likely prompt the company to price them higher depriving the devices of some of its competitive advantage.

We have a $218 estimate for Amazon which is 12% below the current market price.

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  1. Amazon Reclaims Its Namesake, Launches In Brazil With Kindle Store; Kindle Devices Coming In “Weeks”, TechCrunch, December 2012 []
  2. Amazon Is Poised To Push Into China With The Kindle, Huffington Post, December 2012 []
  3. E-Reader Market & Future Forecast Worldwide 2010 – 2014, Research and Markets, April 2011 [] []
  4. Amazon Kindle Might Finally Arrive In China Following iOS And Android App Launches, TechCrunch, December 2012 []
  5. China’s tablet market grows 63 pct in Q3; Apple is king, CNBC, November 2012 []
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