eBook Readers: Stock Investing Strategy to Profit from Disruptive Technology

Sam Subramanian PhD, MBA

Disruptive technology is a technological innovation that disrupts status quo by either displacing existing technology or introducing a new concept to society. The automobile and digital photography are examples of disruptive technologies that have changed society by replacing horses and films. From an investor’s perspective, recognizing a disruptive technology early helps to not only earn spectacular profits but also avoid secular losers.

eBook Readers: The Next Disruptive Technology

Electronic book readers or eBook readers are likely to become a disruptive technology that reshapes how information is distributed and consumed in the early 21st century.

Benefits of eBooks and eReaders to Users, Students, and Publishers

Digitization of information allows readers to download dozens of books on the fly and makes everything variable. Users can change text size, annotate interesting parts, look up words and instantly share thoughts with friends.

Amazon's Kindle is the current market share leader in eReaders enjoying a first mover advantage.

eReaders allow students to personalize educational content to best suit their needs. eBooks will eliminate the burden of lugging textbooks through campuses while reducing book costs.

eBooks kill a major nuisance for publishers … used textbooks. They also reduce distribution and inventory costs.

Growth Forecasts for eReaders

eReaders are rapidly catching on. Research firm mediaIDEAS and Forrester Research estimate sales of eReaders worldwide and in the U. S. to reach 6 million units and 3 million units, respectively in 2010. That is up from worldwide sales of 1.1 million units in 2008.

Looking to the longer-term mediaIDEAS projects worldwide eReader sales to rapidly increase to 115 million units by 2013.and soar to 446 million units by 2020 as adoption becomes as ubiquitous as cell phones today.

So, how can one profit from increasing adoption of eBook readers?

Growth Stock Investing Strategy

Growth stock enthusiasts can find a few worthwhile plays among eReader manufacturers. The list of eReader makers currently includes Amazon (AMZN) with Kindle, Sony (SNE) with Reader, and Barnes & Noble (BKS) with Nook. Apple (AAPL) is expected to debut its much-anticipated iPad on April 3.

Among these companies, the real race will likely evolve to one between Amazon and Apple. Kindle with the first mover advantage is the current market share leader. Given Apple’s prowess at making insanely great products, competition from iPad is likely to be intense.

Growth and valuation characteristics of key stocks featured in growth and value stock investing strategies to play the eBook-eReader disruptive technology.

Shares of Internet search titan Google (GOOG) are another means to play the revolution in electronic books and readers. Google has scanned over 10 million books into an electronic database called Google Books (previously called Google Book Search and Google Print).

Google's strategy is to deliver eBooks to any device with a web browser. The company is leveraging its Android operating system and partnering with eReader makers like Sony, Barnes & Noble, Spring Design, Samsung, and enTourage Systems to bring content in Google Books to users.

Value Stock Investing Strategy

If the valuation metrics of Amazon, Apple, and Google shares look scary, another way to play the shift to electronic readers is to own shares of content providers like book and newspaper publishers.

Academic publishers McGraw-Hill (MHP) and John Wiley (JW/A) have announced strategic alliances with enTourage Systems to deliver content to enTourage eDGe, a device that functions as a eBook reader and more. McGraw-Hill has also started a digital learning service Connect that bundles interactive learning tools with books.

Most of the top U. S. newspapers are now planning to offer daily editions on eReaders. The New York Times (NYT) already sells subscriptions for the Kindle, Nook, and Sony’s Reader devices.

eReaders can provide a turning point for the beleaguered publishing industry. The industry however needs to develop appropriate economic models and modify content to take advantage of technology. Assuming Rupert Murdoch, Chairman of News Corp. (NWS) is right in saying ‘Content is not just king, it's the emperor of all things electronic’, shares of content providers can become worthwhile value plays.

Investing in Mutual Funds and Exchange-Traded Funds

While there are no pure-play mutual funds or exchange-traded funds focusing on eBook readers, some technology and media funds provide meaty exposure to specific companies mentioned here. They include Berkshire Focus (BFOCX), Baron iOpportunity (BIOPX), Fidelity Select Multimedia (FBMPX), Fidelity Select Technology (FSPTX), SPDR Morgan Stanley Technology ETF (MTK), First Trust Dow Jones Internet (FDN), and PowerShares Dynamic Media (PBS).

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