It's been a busy week for spoken-word provider Audible.com (NASDAQ:ADBL).
First, Amazon.com (NASDAQ:AMZN) mentioned last week that it's launching its own digital-download store. Then, only a few days later, Audible announced a partnership with XM Satellite Radio (NASDAQ:XMSR) that prompted Standard and Poor's to pull a 180 and upgrade Audible's shares from a "sell" to a "strong buy." Over the span of these events, measured from peak to trough, the company's shares rose by 35%.
Let's start with Amazon's encroachment on Audible's turf. Although the release was vague on details and superseded by bigger news, I still think the company's entry into the digital download marketplace should be analyzed carefully. Thus, I've come up with three prominent ways that Amazon.com could spoil Audible's party. While these outcomes are somewhat dependent on what type of a store Amazon.com launches, the possibilities are worth noting.
Amazon.com could:
- Compete powerfully with Audible via lower prices. Amazon's large customer pool and status as a primary destination for book sales on the Internet could result in volume efficiencies and little need to spend additional capital on marketing. Last year, Audible's gross margin on content and service revenue was 64%, but its total operating margin was only 3%. This suggests that Amazon has some flexibility to introduce lower-priced offerings.
- Make the AudibleListener subscription program less attractive. If Amazon prices audio downloads low enough, two audio books per month for $19.95 would not be nearly as significant a savings as it is now. Since 80% of Audible's revenues come from such subscription programs, this possibility bears close watching.
- Make it harder and more expensive for Audible to sign exclusive agreements with publishers in the future. It is easier and less costly for a publisher to sign an exclusive agreement with Audible when it's the only available channel for distributing digital spoken word content; add more providers to the mix and the price of exclusivity goes up.
Still, there are serious hurdles Amazon must clear to make any of these things happen. The company will have to find a way to provide enough meaningful content to rival Audible's rich publishing agreements, more than half of which are exclusive. Amazon will also need to resolve the technological issues surrounding the compatibility of downloaded digital files with a multitude (more than 120) of available listening devices.
Ultimately, the impact of Amazon's entry into this market will depend on just how much money the company wishes to spend on this venture. With books being its core offering and an integral part of its brand, my guess is that Amazon intends to pursue digital content vigorously.
And let's not forget that there is one more possibility here -- if Audible's partnerships and user loyalty prove to be a bigger moat than initially thought, Goliath may just decide to purchase David outright.
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Fool contributor MarkoDjuranovic does not own shares of any company mentioned in this article.
