Amazon versus Apple: Think of the children!
Posted February 2, 2010on:
I’m not buying the argument put forward yesterday on PaidContent, that Amazon was the winner in its recent dustup with book publisher Macmillan. Like his neighbor Bill Gates, Jeff Bezos is an awesome games player, but for reasons that I can’t yet understand, he’s been making some bad moves lately.
Forrester Research Analyst James McQuivey argued yesterday that Amazon “is secretly pinching itself right now” because, by capitulating to Macmillan, it actually gets the better side of the deal. How? Under the previous terms, Amazon sold the publishers’ e-books at $9.99 and would frequently lose money on each transaction. But now, with Macmillan setting its own prices as high as it wants, no one loses money on any sale. So even though Amazon’s cut is only a third of the price, versus two-thirds before Macmillan rebelled, Amazon won’t lose a dime. In other words, it’s better to take a third of something than two-thirds of nothing.
While I am innumerate, even I can’t fault that math.
But I do know my history (my undergrad degree!) and I can tell you that this particular event had nothing to do with who’s making money now. It has everything to do with Amazon’s long-term vision of the Kindle as the dominant platform for reading digital texts. Bezos plays the long game, not the day-to-day game, and for his long game to work here, books have to be cheaper on the Kindle than they are anywhere else. Period. Full stop.
Remember when analysts used to lambaste Amazon, quarter after quarter, because it was losing money on every sale? Amazon would never be profitable, we were told, because it offered free shipping and was taking a bath by also charging the lowest prices for goods.
Amazon is trying to do the same thing now, with e-books: It wants to guarantee the lowest possible price to consumers, and will happily take a loss on each transaction for the moment, while it builds up good will over time. Customer loyalty is what Bezos was banking on. It’s worked splendidly so far, right?
The problem is, right now you’ve got two companies that customers love to an almost cultish degree—Apple versus Amazon—engaged in a massive stare down. And Amazon blinked.
That said, this battle for the hearts and minds of customers is far from over.