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AMAZON.COM (TICKER: AMZN) shares are down 6% since Macmillan announced that it was switching from a wholesale pricing model to an agency pricing model (the agency model prevents Amazon from discounting e-book titles). We believe concerns over the impact of the potential change in e-book pricing and Apple's (AAPL) iPad launch have been overblown.
Even if all of the publishers move to the agency model, which is unlikely, we still expect Amazon to capture a large share of the e-book market. We also expect physical book sales, in which Amazon has a leading market position, to significantly exceed digital book sales for at least the next five years. In addition, the iPad costs two to three times more than the Kindle, and its liquid crystal display screen provides an inferior book-reading experience. Finally, we expect nonmedia sales to be the most important driver of Amazon's growth.