Amazon vs. Apple: Who Wins the Digital War?

03/25/2010 1:00 pm EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says the two giants of the digital world are squaring off in a major battle over digital books, and he handicaps the fight.

Amazon.com (Nasdaq: AMZN) 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 book-selling business.

Any Amazon losses would likely be gains for Apple (Nasdaq: AAPL), which could do to [Amazon] what Amazon has been doing to brick-and-mortar competitors.

Apple's chief weapon in this battle of online giants—the iPad—will be rolled out April 3rd. 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.

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.
 
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. (It closed near $128 Wednesday—Editor.) 

Amazon’s revenue grew an impressive 37% in the fourth quarter of 2009, and it can continue to grow by doing what it does best: taking market share from brick-and-mortar retailers.

It sold an estimated two million Kindle book readers last year, and 3.1 million are expected to be sold this year. Kindle owners should eventually be able to get virtually any book they want.

Apple, though, has two big advantages. To promote Kindle, Amazon has been selling many e-books at a loss, says Spencer Wang, a Credit Suisse analyst. This annoys publishers.

[Also,] Apple is better than almost anyone at making gadgets. One of the main reasons Apple dominates music is the popularity of its iPod players and its music-playing iPhone.

The Kindle starts at $250 and is likely to get cheaper soon. Apple's iPad will start at $500; if Apple wins, it will likely be because the iPad does much more.

Many potential customers who already have deep libraries of iTunes music and video can play those on their iPad. They don't work on a Kindle or on other manufacturers’ devices. If customers buy only one device, that's an incentive to go with the iPad.

Wang of Credit Suisse believes Amazon will continue to see 7.5% annual growth in North American book sales over the next five years, even with Apple entering the market.
[But] don't buy Amazon stock expecting the kind of huge gains seen over the past couple of years.

Apple's stock, on the other hand, just keeps rising. You would be buying today at an all-time high. But Credit Suisse has an outperform rating and a 12-month price target of $275 on Apple stock, from about $229 Wednesday.

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