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Get Four
|  | JUNE 21, 2005
 FOCUS STOCK By Scott Kessler The Sweet Sounds from AudibleThe provider of audio books and other spoken content has strong offerings and a jump on its market. That earns it S&P's highest ratingAudible (ADBL ) is the world's leading provider of digitally delivered spoken-word audio content. In our opinion at Standard & Poor's, it has been benefiting from the widespread and growing deployment of portable audio devices and associated strong demand for digital audio content. Its stock carries Standard & Poor's highest investment recommendation of 5 STARS, or strong buy. The Wayne (N.J.)-based company allows consumers to purchase and download spoken audio content to their computers and portable audio devices. It offers access to more than 70,000 hours of media and 28,000 titles, many of which cannot be obtained elsewhere. Such content includes audio versions of books, newspapers, magazines, and original productions. It offers this content via subscriptions and downloads. Consumers shop for, purchase, and download spoken-word media, generally directly from Audible's Web site or from Apple Computer's (AAPL ) iTunes Music Store. Audible is the exclusive provider of spoken-word content via iTunes. BEYOND AUDIO BOOKS. AudibleListener is the company's monthly subscription service for $14.95 to download any one book and one subscription offering (BasicListener) and $21.95 to download two audiobooks (PremiumListener). Customers can also purchase individual titles, and subscribe to one of Audible's dozens of daily, weekly, or monthly offerings. Using the company's Web site, a new customer who commits to 12 months of the AudibleListener service can receive a free or discounted audio player, which is provided as an incentive to join the program. Audible's goal is to bolster its position as the leading provider of subscription-based, digitally delivered, premium-quality spoken-word audio content. Its strategy is to increase brand awareness, expand its collection of content, produce greater distribution, expand internationally, and pursue new initiatives. In December, 2004, the Audio Publishers Assn. estimated the size of the audio-book market at $800 million. Based on Audible's 2004 net revenues of $34.4 million, it had captured a mere 1.3% of this segment. However, we think Audible's market opportunity is considerably larger than just audio books. STRATEGIC PARTNERSHIPS. According to IDC, worldwide shipments of portable audio players are expected to more than triple, from 32.8 million in 2003 to 116.1 million in 2008. In our opinion, this significant user base and projected growth offer substantial opportunity for Audible, given that 56.1 million audio devices were shipped last year, and the company had only 467,000 customers from 1997 through 2004. More than 135 kinds of devices are compatible with Audible's technology. Moreover, it has also been readying Audible Wireless, which will enable its content to be downloaded and accessed via wireless phones. It's intended to better pursue what we regard as the vast wireless-handset opportunity. Forthcoming functionality is expected to enable automated downloads of preselected content. Audible's initial noteworthy foray in this segment was its technology and marketing deal with Sprint (FON ) in September, 2004. And earlier in June, Audible announced an exclusive partnership with XM Satellite Radio (XMSR ), which we believe eventually will enable it to pursue what we consider to be the very lucrative automotive audio market. USER EASE. Given the notable current and anticipated deployments of Audible-compatible devices as well as substantial access to, and demand for, digital content, Audible sees its market opportunity as consisting of everything from audio books to talk radio, business information, publishing, magazines and newspapers, and education and related materials. These constitute a market opportunity of more than $100 billion. In addition, over the past year, Audible has launched offerings in France, Germany, and Britain. Several competitive factors will enable Audible to maintain and increase its share of the spoken-word audio market, we believe. For one, the company possesses significant technology advantages, in our view. Audible has been providing and improving its spoken-word audio offerings since 1997. It pioneered the segment and delivers appealing user functionality, much of which is supported by proprietary intellectual property. PATENT POWER. For example, Audible's patents enable customers to skip between selections, individual articles, and chapters within selections. Customers can also pause and resume listening where they left off, and can "bookmark" multiple sections of content, rather than be constrained by the rewind and fast-forward functions. Audible also offers, in our view, proven and patented digital-rights management that enables publishers to control and monetize their content. Our research indicates Audible has 10 patents related to digital audio. Interestingly, we believe it holds more patents than online stalwarts Amazon (AMZN ) or eBay (EBAY ), and it has nearly as many as technology powerhouse Google (GOOG ). FORAY INTO SCHOOLS. Audible offers tens of thousands of titles from more than 224 partners (as of the first quarter), some 60% of which are exclusive relationships. In the second quarter, it announced content partnerships with Harlequin and Pearson Education, in addition to XM Satellite Radio. We expect Audible to increasingly prioritize exclusive content. Moreover, owing to its publishing heritage and expertise, we think Audible will start to play a greater role in developing original content such as author interviews. Audible's agreement with Pearson is part of the forthcoming Audible Education initiative, which we expect to be launched during the back-to-school season. We think the program's initial focus will be higher education (the college market), life learning (including self-help, language, and business content), and test preparation (for admissions and licensing exams). Audio versions of Pearson's higher-education study guides are scheduled to be available for the 2005-06 academic year, and the companies expect to create and market education audio offerings for the general consumer later this year. Distribution is key to Audible's competitive position, in our view. Besides its exclusive-provider arrangement via Apple's iTunes, Audible also has a distribution relationship with Amazon (which we believe could be revisited subject to Amazon's indicated interest in pursuing the digital audio-books market on its own). Best Buy (BBY ) and Circuit City (CC )are traditional retail-distribution partners.
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