Is Apple Preparing to Challenge Amazon's Book Business?

The two companies compete in a lot of areas, but Amazon has thus far controlled the digital book market.

Jul 29, 2014 at 12:36PM

Apple (NASDAQ:AAPL) looks to be stepping up its battle to win book customers from Amazon (NASDAQ:AMZN) by purchasing Booklamp, a startup trying to deliver better book recommendations for readers.

BookLamp's best-known product, the Book Genome Project, scans the writing style of books a customer likes and suggests novels or authors with a similar feel. It could also break down plot themes and content, allowing for better search and discovery, TechCrunch reported. According to a source from the technology news site, "Apple bought BookLamp to power an ebook search competitor to Amazon."

Apple is currently in the digital books business with its iBooks service. But while Apple sells books, Amazon is books. That said, in an evolving market with hundreds of millions of Apple devices in peoples' hands and credit cards on file, there is no reason it can't catch up.

Why would Apple want Booklamp?
Amazon has spent tens -- if not hundreds -- of millions developing its recommendation engine. Apple has not. Instead of offering tailored choices based on purchasing history, iBooks uses top lists like Apple's App Store, as well as featured selections, author spotlights, and categories. Amazon can tell you with pretty good accuracy what you might like based on what you have already bought. Apple simply can't.

BookLamp has at least some of the technology to even the playing field, which might make iBooks an attractive alternative for Apple device users who already buy music, video, and apps for their iPads and iPhones. Apple has to offer Amazon's Kindle apps on its tablets and phones because devoted readers might buy other devices if it was not offered. If Apple could match what Amazon does -- or at least come closer -- it might follow a similar path to the one it took in dropping Google's maps app in favor of its own -- though that move did not work out very well.

That might outrage some devoted Amazon fans, but it could push people to buy books from Apple and give it a chance at a much bigger piece of the market.

How big is the market?
In the first six months of 2013, Bowker Market Research reported that e-book sales accounted for 14% of consumer spending on books. But e-books accounted for 30% of all books sold during the period. The difference between the growth of e-book unit sales and the growth of the format's share of spending reflects the lower prices of digital books, according to Publisher's Weekly.

Amazon and Apple are both very cagey about their specific sales numbers of digital books. But due to a court case, an Apple executive had to reveal some data in June 2013. While testifying in U.S. vs. Apple, in which the Department of Justice accused Apple of colluding with book publishers to set digital prices, Apple's Keith Moerer said the company had a 20% market share.

At that time, GigaOm reported that 20% was higher than most in the publishing industry would have guessed. "Most estimates had placed Apple's U.S. ebook market share at around 10%, with Amazon's Kindle at 50% to 60% and Barnes & Noble's (NYSE:BKS) Nook at 25%," the site wrote. 

Those numbers are likely different now, as Barnes & Noble's digital sales have plummeted over the last 12 months. But if we assume Apple has around 20% of the market and Amazon has 50%-60%, that leaves a lot of ground for the iPad-maker to potentially gain. 

Though sales growth for digital books has been slowing, PricewaterhouseCoopers estimates that trade e-books -- that's consumer, not educational or academic -- will account for $8.2 billion in sales by 2017. If that is correct, every 10% of digital market share will be worth around $800 million, so you can see the logic of Apple trying to up its game.

Apple and Amazon want the same customers
Both Apple and Amazon have managed to create similarly devoted, trusting customer bases. iPhone and iPad users store their credit cards with Apple without hesitation for use buying apps, songs, and, in some cases, books. Amazon has managed to accomplish the same thing by allowing its users to buy pretty much anything with a click or two. 

While Amazon has 244 million customers with credit cards on file and tens of millions using its Kindle e-readers, Apple has a truly stunning base of customers on its devices. The company sold 150.2 million iPhones in 2013 and 125 million in 2012. It also sold 71.1 million iPads in 2013 and 58.31 million in 2012. That gives the company a large potential audience for iBooks.

The biggest thing that kept Apple from gaining ground on Amazon in book sales is its inferior shopping experience. If the company can integrate the BookLamp technology to offer recommendations that are equal to or better than Amazon's, it should be able to win over customers. If iBooks gets better, it seems possible Apple could stop making Kindle available in the App Store. That would likely anger some Amazon customers who would be separated from their library of already-purchased books, causing them to leave for Kindles or Android devices.

That number would likely be insignificant, however. Most people would be able to move to iBooks easily enough, especially because it would not require a registration, since Apple already has credit card information on file for hundreds of millions of people. If Apple can build a decent digital bookstore, it should be able to take customers from its rival. 

Daniel Kline is long Apple. The Motley Fool recommends and Apple. The Motley Fool owns shares of, Apple, and Barnes & Noble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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