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Q4 2012: Brazil: Amazon in its way to open a digital bookstore with Kindles offering.
Amazon.com Inc is expected to set up a digital bookstore in Brazil in the fourth quarter.
Amazon seeks to get a piece of the fast-growing online retail market in the country that inspired its name.
Amazon wants to elbow its way into Latin America's largest economy with the popular Kindle e-reader and a Portuguese-language catalogue of digital books, according to Brazilian publishers and an industry source familiar with Amazon's plans.
The all-digital approach will allow Amazon to minimize the risks that a bigger retail launch would imply in a country with notorious infrastructure shortcomings and a complex, costly tax system. The company would also have to ride out a downturn in Brazil's economy that threatens to cool consumer demand.
"Brazil would be the first country Amazon enters only with digital (products) and that is because of the logistic and tax difficulties," said the industry source, who spoke on condition of anonymity because of the sensitivity of the negotiations.
"Having a full retail operation? That's the goal," the source added.
A Brazil-based operation would save the country's 200 million consumers from paying high import taxes on online orders shipped from overseas.
Two local book publishers told Reuters they have had meetings and video conferences in recent months to negotiate contracts with Amazon's head of Kindle content, Pedro Huerta.
"They told us the plan is to start between October and November," said one of the publishers, who asked not to be identified.
Amazon spokesman Craig Berman declined to comment.
Pedro Guasti, director of the Sao Paulo-based research firm eBit, says Brazil's online business has become big enough to pop up on Amazon's radar.
"This year we should reach $12 billion in sales online, a level that justifies their entry. If they wait much longer it would become very expensive," he said.
Amazon thinks it could quickly dominate Brazil's ebook market with the Kindle, boosting sales of electronic books to 15 percent of the publishing market in the first year of operations from 0.5 percent currently, the industry source said.
Amazon hopes to grab 90 percent of Brazil's ebook market, the source added, in part because many Brazilians already download content from its site using readers they bought abroad.
To gain market share quickly in Brazil, Amazon will likely sell its most basic Kindle model at a subsidized price of under 500 reais ($239), three times more expensive than in the U.S. but still bellow rival products, the source said.
Amazon has already signed contracts with around 30 Brazilian publishers and is rushing to build a portfolio of some 10,000 electronic books ahead of the end-year shopping season, the source familiar with the company´s plan said.
A publisher involved in the negotiations said Amazon is planning to price the ebooks at about 70 percent of their cover price and earn a profit margin of to 40 to 50 percent.
"Revenues for us will be insignificant, but we see it as an important channel to promote our products and sell more physical books," the publisher said, who also asked not to be identified because negotiations with Amazon are ongoing.
Amazon's move could end up prompting other U.S. competitors to expand their digital operations into on Brazil. One distributor said Barnes & Noble Inc has already approached some Brazilian publishers with its reader Nook. A spokeswoman with the U.S. bookseller said they have plans to expand internationally but had no specific comments on Brazil.
"Local companies will need to acquire foreign technology in order to survive," said the source close to the negotiations.
"I think Amazon will take small steps at first, to learn the market, but then invest in growth. Amazon is a large company, and could subsidize its operations in Brazil for years before making a profit there," said Colin Sebastian, an equity research analyst with R.W. Baird in San Francisco.
Local competitors say Amazon would first have to prove it can compete in the challenging environment.
"They are going to face the same kind of problems we always had," said Sergio Herz, director of Livraria Cultura, one of Brazil's top bookstores with a dozen locations.