A New Chapter in Google Books - Analyst Blog

Google Inc's (GOOG) online bookstore is likely to hasten the digitization of paperbacks and hard covers, dramatically increasing the availability of online books.

In addition to the 200,000 odd titles from leading publishers, such as Random House, Penguin Group, Simon & Schuster and Pearson, the company is also offering 2.8 million out-of-print books where copyrights may or may not have expired. Google is entangled in legal warfare there, although it has not asked for sole distributorship.

Google will be splitting ebook profits in a couple of ways. The first is through the agency model (most of the top publishers prefer this). Here the publisher fixes the price, keeps 70% of the returns and Google keeps the balance.

For sales not based on the agency model, Google intends to fix prices based on market rates, offering 52% of the publishers' original list price to the publishers and keeping the balance. Google has also roped in small book stores, offering to share its own cut with them for sales generated through them. The broad-based approach has generated enthusiasm among publishers and small booksellers alike.

Customers still view the ebook as a cheaper alternative, so publishers are likely to eventually (if not immediately) bring down prices to $10 or so that most ebook customers are willing to pay. The other thing that could happen is the non-agency model doing much better than the agency model, ensuring higher returns for Google. Either way, the pricing strategy appears sound. 

While Google's ebook store is available from practically any device with a browser, including ebook readers, such as Barnes & Noble's (BKS) Nook, Sony Corp's (SNE) Reader and Apple Inc's (AAPL) iPads, it will not be accessible from Amazon.com's (AMZN) Kindle. Google also has an ebook widget, which brings users from other sites directly to its bookstore.  

Kindle users will not be able to download any ebooks from Google's online store, meaning that they would not have access to the free books offered by Google. But Kindle users have other advantages, such as a wider selection excluding the free editions being offered by Google.

But given that the big publishers are happy with the arrangement and most have joined hands with Google already, Amazon's ebook selection may be eclipsed by Google soon. Kindles also enable device storage, which we think is a more attractive feature compared to the cloud-based storage being offered by Google. Additionally, Kindle allows highlighting and marking, making studying online easier and this feature is not yet available for Google books.

For Google, ebooks are a big deal, since this diversifies its revenue stream beyond search advertisements. It also has the potential to increase Internet usage on its Android-based devices. Although Google has not mentioned any specific benefits for Android devices, this could follow in the days to come.

We have a long term (3-6 months) recommendation of Outperform on Google shares and a Neutral recommendation on Amazon.com shares.

 
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