Amazon Taps Its Inner Apple

By: Adam L. PenenbergWed Jul 1, 2009 at 2:00 PM

Photograph by Hugh Kretschmer

By introducing the Kindle, Jeff Bezos is emulating Steve Jobs -- and taking him on.

With his aggressive push into e-books, Bezos has traditional publishers running scared. Apple may be a different story. | Photograph by Joe Pugliese/Corbis Outline

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The struggle for this high-stakes channel may explain why Amazon can get downright nasty when dealing with recalcitrant publishers, resorting to brass-knuckle tactics to get what it wants. While friction between publishers and booksellers is inevitable, the relationship with Amazon has been particularly contentious, so much so that while many agents, consultants, and editors at publishing houses would talk freely if afforded anonymity, most would not consent to having their names appear in print. (Amazon, for its part, declined to comment for this story.) Last year, to punish publishers that refused to buckle in negotiations over divvying up revenue (and to cave to its requirement that small publishers use its BookSurge print-on-demand service), Amazon disabled the 1-click ordering buttons on a broad range of books on its Web site both here and in the U.K. -- a tactic The New York Times dubbed the "nuclear option." In a tart letter to his authors, Tim Hely Hutchinson, Hachette's chief executive in the U.K., lambasted Amazon's "increasing demands" and said if this continued, "it would not be long before Amazon got virtually all of the revenue that is presently shared among author, publisher, retailer, printer, and other parties."

Amazon is still a long way from achieving this level of hegemony. To get there, Bezos needs to win the race to nail down distribution of e-books and turn them into a mass-market phenomenon. He deserves credit for taking the first step -- propelling the e-book concept from mere curiosity to full-fledged consumer item, which he accomplished with the introduction of the Kindle. E-readers (Sony's, for example) and e-reader applications (several are available on the iPhone or over the Web) have existed for some time, but few consumers were talking about e-books until the Kindle arrived. Then it quickly began to coalesce an entire market -- much as Apple and the iPod did to MP3s and MP3 players. In some ways, Bezos has a tougher row to hoe, since music and books are intrinsically different. IPod buyers could digitize their entire compact-disc music collections and listen to songs over and over. Kindle users can't scan their existing libraries onto their device -- nor will most people reread books. Plus, digital downloaders can buy one song at a time, but most book buyers wouldn't pay for one chapter at a time.

To nab control of digital distribution, Bezos had to set prices low enough to motivate readers to forgo hardcovers and paperbacks for Kindle versions. Apple famously forced its flat 99- cents-per-song pricing on the music industry. And while, over the years, Apple has relinquished some of its power -- pricing is now tiered, with downloads running from 69 cents to $1.29 for the most popular tracks -- Jobs accomplished his mission, nevertheless. He established a virtual monopoly over digital distribution of music online, and to this day, maintains an 87% share in downloads. In the process, he poured the foundation for the iPod -- it garners 70% of the MP3 player market -- which, along with the iPhone it helped inspire, accounts for more than 40% of Apple's revenue.

Bezos certainly watched this play unfold over the years. One late entry to music downloads was Amazon itself, which has made only modest gains in the market, despite undercutting Apple on price. Through personal experience, Bezos knows how important it is to establish a hammerlock on the distribution system before another deep-pocketed foe enters the game. Even after establishing Amazon as a major online player in sales of compact discs, he was too late for digital downloads. He wasn't likely to make that mistake with e-books.

Amazon's first move when it introduced the Kindle was to foist its $9.99 price on publishers. But while Apple ends up with pennies from each song it sells (after paying for bandwidth and infrastructure), Amazon actually loses money on many titles, with publishers earning between $12 and $13 per e-book. You might think that because publishers profit from this arrangement -- they don't have to pay for paper, ink, manufacturing, warehousing, and transportation or suffer debilitating returns -- they would be pleased. They aren't. Amazon is creating a sticky price in consumers' minds and redefining the cost of a "book" just as Apple did with music. In fact, on Amazon there is a protest movement afoot as more than a thousand users tag for boycott any Kindle book listing for more than $9.99. If book buyers join forces with Amazon on price, publishers would inevitably lose.

"If you are in a position to dictate your purchase price, then you are well on the way to cornering the market," Curtis says. At that point, Bezos could head back to the negotiating table to wring even more concessions. Why should Amazon pay $12.99 for the Kindle version of a hardcover? Why not, say, half that? And like the record labels, if publishers don't want to be left out in the cold, they would have to play ball.

From Issue 137 | July 2009

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Recent Comments | 15 Total

June 24, 2009 at 6:15pm by Mark Sigal

A quickie side-note is that the list of companies that warrant serious consideration in the discussion pretty much are three at this point (Amazon, Apple, Google).

Your article focused on those three as well, but it says something about the state of the market that folks like Sony, HP, Microsoft, Disney don't jump out as the obvious game-changers in the discussion, something that I blogged about in:

Built-to-Thrive - The Standard Bearers: Apple, Google, Amazon
http://bit.ly/info/3BhUq

Check it out if interested.

Mark

Amazon Taps Its Inner Apple

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