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Lending Library Gambles With Amazon’s Growing eBook Business

Lending service could hit AMZN on two fronts


As rumored back in September, Amazon (NASDAQ:AMZN) is indeed opening the very first commercially operated eBook library. The Kindle Owner’s Lending Library works a lot like Netflix (NASDAQ:NFLX), if you replace videos with digital editions of popular books.

Subscribers to Amazon Prime, the company’s premium subscription service that also grants access to a library of streaming movies and TV shows, as well as discounted shipping rates on physical goods, will be able to borrow books from the library for a month at a time. According to Amazon, the library will offer thousands of titles, including bestsellers like Moneyball and Water for Elephants, with publishers like Scholastic (NASDAQ:SCHL), Bloomsbury and Simon & Schuster.

The Lending Library is one more feather in the expansive cap that is Amazon Prime. Amazon’s premium subscription service is gaining new content support by the day. Disney (NYSE:DIS) announced Monday that it is re-upping its streaming video contract with Netflix — but it also is bringing the same ABC and Disney Channel content to Amazon Prime.

While Amazon doesn’t reveal its Prime subscription figures (much like its Kindle device sales numbers), Piper Jaffray analyst Gene Munster estimated in September that Prime has grown from 2 million subscribers in 2009 to 5 million in 2011. The Lending Library should lure in existing Kindle e-reader owners to the service — a boon considering Amazon’s revenues increase 1.5% for every 1 million new Prime subscribers, Munster says.

With the Lending Library, though, Amazon is (no pun intended) playing with fire.

The eBook trade is a rapidly growing business, but a young and fragile one. Total eBook sales in the United States have grown 1,300% since 2008, with sales across the entire e-publishing industry totaling $878 million in 2010. For Amazon, which announced in May that it sells 105 eBooks for every 100 print books, that growth is exciting — but it isn’t exactly filling the company coffers with loot. Amazon pulled down $10.88 billion in total revenues last quarter (a disappointing quarter at that), so the eBook trade clearly isn’t raking in a huge percentage of the company’s sales.

The Lending Library could stunt Amazon’s eBook trade before its greatest earning potential is met. Russ Grandinetti, Amazon’s vice president of Kindle content, told in April that the average Kindle owner buys “three times as many books” as the average Amazon customer. That average Amazon customer at the end of 2010 was spending $60 per year on eBooks — more than three-quarters of the $79 annual subscription to Amazon Prime — according to Forrester analyst James McQuivey.

Given the aforementioned rate of growth for eBook sales, it seems Amazon could be making more than the cost of a Prime subscription with eBooks alone — especially off current Kindle owners. Why limit that opportunity by giving away access to books that customers already have proven they’re willing to purchase individually?

Endangering its own growth is dangerous enough, but Amazon also has to worry about how diminishing individual eBook sales will make the Kindle store appear compared to Apple‘s (NASDAQ:AAPL) iBookstore and Barnes & Noble‘s (NYSE:BKS) Nook business. If publishers see stronger individual sales from there, they might be tempted to offer those businesses the sort of exclusive content deals Amazon currently enjoys.

For consumers, the Lending Library is one more appealing feature of Amazon Prime. For AMZN shareholders, it represents a risky change to a growing, promising business.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

Article printed from InvestorPlace Media,

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