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Prediction: eBook Readers to be 2010’s Bestsellers

Jeremy Liew, a respected VC at Lightspeed Ventures, asked his blog readers what product categories would bring strong e-commerce sales in upcoming months/years. My comment never made it to his post, so I’ll share it with you here.

The economy sucks!

The low amount of available job opportunities is influencing millions of young minds to delay joining the workforce, and simply return to school.

In fall 2008, 18.3 million students attended the nation’s 2-year and 4-year colleges and universities, an increase of about 3.0 million since fall 2000. College enrollment is expected to continue increasing, reaching a projected 20.4 million in fall 2016. The expense for books and supplies rose from $801-$904 in 2005 to $850-$942 for 2006-2007.

(National Center For Education Statistics)

It sucks even more now to be poor and smart. You’ll need one of the few limited state scholarships, since school loans are getting even harder to come by, and the 6 month gap until repayment terms take effect won’t give students enough time to secure a decent paying position in this economy. There is simply no money available for loans, although many hope Obama’s promise to make them available comes true.

Students are struggling to pay for increasing costs of education, and paying more, with inflation already taken into account, than any graduating class has before. This is due to many influencing factors, most of which are problems that have been swept under the rug by the previous generation for the next generation to fix. Since most brick and mortar retail locations on campuses across the United States charge a 30% HIGHER margin than e-commerce retailers, many more students are willing to wait until their books are delivered from online merchant origins.

However, let’s put what I’ve just told you from an e-commerce retailer’s perspective. How do you think they are feeling?

They’re feeling awesome, at least those e-commerce companies that are well managed are feeling awesome. Amazon has been making a killing ever since the economy began it’s downward and seemingly never-ending spiral.

But books/textbooks shouldn’t surprise anyone as a category winner.

From 1998 up until 2007, (around the beginning of the mortgage financial crisis), McGraw Hill dividend growth stock has delivered an annual average total return of 10.80 % to its shareholders. The majority of the gains were erased in 2007 though, when the stock dropped from an all-time high of $72.50 in June 2007 to a low of $43.46 by December that same year, due to expensive one-time changes of stock options policies, but more closely related to the mortgage crisis they were heavily invested in and rapidly selling off of their mortgage based mutual funds at a loss.

However, the important thing to know for any risk-accepting investor is that in any other single year from 1998-2008, if you invested in McGraw Hill stock between April and June, before kids went back to school, and sold the stock anytime after book buying season ended, that’s up until the end of January in the following year, you would have earned at least 15-20% on your investment. On September 8, 2008, the stock closed at $45.86. It was an average of $40 per share from February through July earlier that year.

The book publishing and buying business is very strong, and for the most part, very predictable. McGraw Hill is as close to a sure bet as exists, and the only reason they suffered along with the rest of the economy is because, like everyone else, they were suckered into investing their huge reserves of cash into risky mortgage-based securities.

So they’re already recouping their losses.

The only worry for McGraw-Hill should be electronic books and textbooks, but they say that they are preparing for the industry coming game changer and welcoming new electronic reading devices. McGraw-Hill Education says they already publish 95% of their textbooks digitally, but as of current they are not as popular because a good reading device is not yet available. Reportedly textbooks are a 5.5 billion dollar market. With Amazon Kindle 2’s new student addition, students won’t really be able to share their textbooks with other students, supposedly, or sell them back at the end of the year. Many are interested to see how the electronic versions are priced as opposed to the paper versions for that reason.

Does this sound familiar to you?

It should, since this was iTunes claim to the music industry many years ago in order for them to be able to sell music for their iPod customers. What happened since then? Well, iTunes is now DRM free, right?

Amazon’s Kindle 2 - $359

Take a look at some of Kindle 2’s competitors, (also available on Amazon):

Sony eBook -$269

Hanvon N510 - $295

Cybook gen3 ebook reader - $350

BeBook 2 - $279

irex iliad ebook reader - (€499, not reasing in US)

Companies like Amazon, Sony, Adobe and Mobipocket are hastily trying to develop a universally acceptable format for eBooks. Unlike its competitor Sony, Amazon decided to allow support for other commercial formats used on their eBook reader device. This may turn out to be either their stroke of genius moment or their darkest hour. Amazon also sells AZW compatible eBooks through their online store. And since they are the webs largest book seller, they are already quite capable of figuring out how to effectively sell eBooks too.

But college students have proven to the world that they’re willing to circumvent the music and movie industry with Nabster and Torrents, and more recently, with YouTube, Hulu, Fancast, AOL and Sling. How long does it take to download the biggest PDF? 5 Minutes? Once the DRM is cracked, the file can be digitally distributed and redistributed. If file sharing, or student group buying and sharing one textbook saves them over $900, trust me, they’ll do it. Those on the fringe already are.

Senator Harry Reid lets poor college students know how he  feels about them.

Several senators have vowed that colleges who do not crack down on file sharing will not receive financial aid. Liberals and many college campus groups call this a blatant example of pork-barreling. They say that these senators have decided that poor Americans will be turned away from college if the coffers of ancient and outdated music giants are not filled at the expense of college students. Read the full story from c-net.

What do our BuyPlayWin readers think?

Filed under: E-commerce, Uncategorized |