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Amazon slides after iPad launch

Amazon's Kindle e-reader

Mario Tama/2009 Getty Images

Shares of Amazon.com Inc. have sunk 6 per cent since Apple Inc. unveiled its iPad device, complete with electronic book reader, last week. But the world's biggest e-commerce player may not really be any worse off today than a week ago.

Apple clearly wants to prevent Amazon from conquering the world of e-books the way that Apple did for online music, by winning control of hardware, software and content distribution. But for the moment, Amazon retains bragging rights to having the most integrated system, which includes the electronic rights to more than 410,000 e-books and 130 international newspaper and magazine titles.

"We believe the selloff is overdone," says Brian Pitz, an analyst with UBS Securities LLC in New York.

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Investors may have been spooked in part by the much-publicized fight between Amazon and U.S. publishing giant Macmillan that erupted last weekend over pricing. At the heart of the conflict is Amazon's practice of selling many top titles for $9.99 (U.S.) as a loss leader to attract more buyers to its reading device, the Kindle.

Publishers feel Amazon is selling the books for less than they are worth and see an opportunity with Apple's entry to put pressure on the market leader. Apple, which needs to win publisher support for its device, is expected to price many of the titles in its iBook store between $12.99 and $14.99.

Amazon has now agreed to let Macmillan set prices for Kindle versions of its electronic books, leading the industry to speculate that the other five top publishers will seek new pricing terms. Investors are clearly unsettled by the developments, but analysts say that raising the price of e-books is unlikely to hurt Amazon's performance.

In the last quarter, revenue from Kindle devices and Kindle content contributed $89.2-million, or just under 1 per cent, of total quarterly sales of $9.27-billion, Mr. Pitz estimates. The company does not break out its Kindle-related revenue. Mr. Pitz estimates that Amazon sold almost 1.1 million Kindle devices in the fourth quarter, for $287.3-million. But because the company is recognizing the sale of Kindle hardware over two years, he estimates the amount booked for the quarter was just $35.6-million. Sales of books and media subscriptions for the Kindle reached $53.4-million, he estimates.

In a research note, the analyst said it is likely that major publishers in addition to Macmillan will try to use Apple's entry into the market to enforce higher pricing and a bigger share of the profits from Amazon. But he noted that Amazon still carries significant clout in the book market, accounting for up to 7 per cent of U.S. book sales, giving it significant pricing power. In addition, although higher e-book prices could hurt Kindle sales, they would improve Amazon's profitability.

"The iPad is still untested as a reading device and we believe there is room in the market for dedicated e-Readers," concluded Mr. Pitz, who has a "buy" recommendation on Amazon shares and a 12-month price target of $175.

Apple's potential impact on Kindle, as well as the broader issue of how digital content is distributed, remain key issues for Amazon's future, says Ben Schachter, an analyst with Broadpoint Gleacher Securities Group Inc. in New York.

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"The company is executing phenomenally, but that is not the issue. The issue remains valuation and the ability to forecast the slope of the company's margin curve correctly," he wrote in a research note.

Following Amazon's fourth-quarter financial results that topped expectations last week, Mr. Schachter raised his price target on the stock to $145, up from $140, but maintained his rating of "neutral," in large part because of the lack of visibility on how the electronic content market unfolds.

Amazon profit rose to $384-million or 85 cents a share, from $225-million or 52 cents a year ago. Revenue rose to $9.52-billion from $6.7-billion.

"Millions of people now own Kindles," Jeff Bezos, founder and CEO of Amazon.com, said in the financial release. "And Kindle owners read, a lot. We sell six Kindle books for every 10 physical books."

Mr. Schachter, however, says that for now Amazon is drawing most of its strength from traditional sales. Gross margins for the business in the United States rose more than 200 basis points to 23.6 per cent during the quarter. That increase is due largely to its core business of printed books and other consumer items and increased sales from its third-party business.

"We continue to be cautious on the potential for digital media distribution revenue streams to drive margin expansion for Amazon," he wrote.

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Amazon.com

(AMZN-Nasdaq)

Yesterday's close $118.12 U.S., down 75 cents

SOURCE: THOMSON DATASTREAM

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