Dangdang Expects 20% Profit Margin on E-Books
Southen.com, 1/11/12
Li Guoqing, CEO of Chinese B2C e-commerce site Dangdang (NYSE: DANG), said today that the profit margins on e-book sales are considerably higher than those from sales of printed materials, reaching an estimated 20%. Dangdang receives 60% of revenues under a 60/40 split with publishers: its ultimate profits from e-book sales are difficult to predict, as it is beginning sales on a small scale.
Li said that Dangdang plans to use the coming three years to grow e-book downloads beyond sales of paper books, though he cautioned that e-book sales would not exceed sales of paper books within the next three to four years.
According to Li, Dangdang has seen profits from sales of paper books begin to decline. While in previous years, Dangdang sold printed books at an average of 26% below retail price, discounts increased to 30% and - starting April 15 of last year - 33%, meaning that profit margins from the sales of printed materials are extremely thin in the face of high logistics costs.
Dangdang's mission over the next year, Li said, will be to make 10% of its book-buying customer base - roughly 2 mln customers - into purchasers of e-books. The company has lost some customers owing to spotty logistics service, and hopes to win them back with e-books. Dangdang also hopes to entice 30% of its iPad-using customer base to try e-books at least once - both initiatives targeted at heavy and frequent readers. As smartphone prices continue to fall, Dangdang also hopes to see increased adoption of e-books by low-income consumers.
Li said that one of Dangdang's challenges in introducing e-books would be to persuade publishers to participate despite publisher concerns about piracy, the loss of control over copyright protection, and short-term effects on business. Roughly half of China's publishers have not signed deals with Dangdang. Dangdang reportedly sought to persuade the publishing industry to go along with two other plans - one of which was to offer free e-book downloads to customers who purchase the print edition of a title; another of which was for Dangdang to assume responsibility for DRM-licensing titles to be viewable on up to three home or office computers, and to be lendable once, as print titles are typically lent 1.52 times on average - but was rebuffed.
Dangdang will bear the costs for e-book conversion in the short term, Li said, adding that the company would have to construct an industry chain before publishers would begin seeing profits from e-books. Dangdang is confident that it will be able to grow e-book offerings to 1 mln titles over the next three years, 500,000 of which it predicts it will be able to convert to e-book formats for a mere RMB 80 mln. Dangdang will begin to split e-book conversion costs with publishers once the market matures, and will ultimately expect publishers to bear e-book production costs themselves. As the company enjoys friendly relationships with publishers, it will not be required to pay publishers their 40% of e-book sales revenues up front.
Li also revealed that Dangdang plans to release hardware e-book readers priced at RMB 499 and 299 this April, as well as a 3G and touchscreen-enabled model for RMB 699. The company's e-book strategy continues to revolve around its advantages in the area of content, however, and it will develop support for a range of e-reader devices rather than pursuing a closed model like Amazon's.
Editor's Note: For more information on this topic, please see "Dangdang to Launch E-Book Reader in April 2012," MD 12/21/11 and "Dangdang Details E-Book Market Entry Plan," MD 1/10/12 issues.
Keywords: revenue share online literature mobile literature Li Guoqing e-commerce Internet margin piracy profit strategy B2C e-book copyright Dangdang DANG revenue
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