17 April 2012

What kind of gorilla is Amazon?

by Matt Rubinstein at 8:44 pm

This isn't going to end wellAn 800-pound one, obviously—but the rampaging, Manhattan-crushing terror of King Kong, or the misunderstood, nurturing crowd-pleaser of King Kong?

My always-switched-on agent was the first to forward me this piece by Charlie Stross about the giant e-tailer’s desire and ability to dominate the still-vulnerable e-book industry by controlling both the sale of e-books to the public and the purchase of those e-books from publishers—creating a monopoly in the downstream market and a monopsony in the upstream.

Stross argues that the publishers did just about everything in their power to put Amazon in this position in the first place, mostly by requiring Amazon to secure their e-books with digital rights management that locked the books to Amazon’s Kindle hardware:

By foolishly insisting on DRM, and then selling to Amazon on a wholesale basis, the publishers handed Amazon a monopoly on their customers—and thereby empowered a predatory monopsony.

I’m going to have to come back to the casual use of “predatory” here, but it’s not really necessary to Stross’s conclusion:

So, because Amazon had shoved a subsidized Kindle reader or a free Kindle iPhone app into their hands, and they’d bought a handful of books using it, the majority of customers found themselves locked in to the platform they’d started out on. Want to move to another platform? That’s hard; you lose all the books you’ve already bought, because you can’t take them with you.

Now, I also think DRM is wrong-headed and contemptible, and I make it a point never to buy any DRM-protected media unless I know that the tools exist for me to unlock it if I need to in the future. But many people don’t realise either that the DRM is there in the first place or that they can break it, and so they can easily find themselves constrained within a particular ecosystem, and that can have powerful anti-competitive effects.

However, as I hinted last time, I don’t believe that in Amazon’s case the effects are as strong as they used to be, or as many people still think. See for example Jordan Wiseman’s analysis in The Atlantic, somewhat hysterically headlined (though probably not by him) “The Justice Department Just Made Jeff Bezos Dictator-for-Life”:

Thanks to the use of DRM technology, most eBooks can only be read on a proprietary device. Amazon’s eBooks can only be read on a Kindle, or a Kindle app. Barnes & Noble’s books can only be read on a Nook. So the larger a library any one customer builds with a single retailer, the less likely it is they’ll ultimately switch.

The problem is that Wiseman and even Stross seem to blithely align Kindle devices and Kindle apps as if they’re the same thing, but they’re not.

When you could only read Kindle books on a physical Kindle, Amazon could afford to take a bath on best-sellers, and perhaps barely break even on overall e-book sales, knowing that everyone who bought a cheap Kindle book must also have bought a Kindle at a much healthier margin. This gave Amazon a competitive advantage over the few retailers of e-books who couldn’t subsidise their low prices with hardware sales, and helped to establish Amazon as the major presence in the sector.

But in response to the iPad, the iBookstore and the agency model, Amazon changed its strategy substantially. It now looks like it’s making the bulk of its money from selling e-books, not from selling Kindle hardware.

The first Kindles were priced far higher than their estimated build costs, but every Kindle since the launch of the iPad and the agency model has been priced close to marginal cost or even below it—these are the “subsidized” Kindles Stross is talking about; it’s clear that either the books or the hardware can be subsidised, but they can’t both subsidise each other.

Kindle reader apps are now available for the PC, the Mac, the iPad, iPhone and iPod Touch, and for Android phones and tablets. Amazon doesn’t say how many Kindles have been sold, but it did brag that it had shifted “well over 1 million” each week for December 2011. By contrast, Apple sold three million new iPads in the four days following launch. And every iPad is potentially a Kindle reader: right now the Kindle app is the seventh-most-downloaded free iPad app, five places above Apple’s own iBooks app. It doesn’t seem too much of a stretch to conclude that more people read Kindle books on iPads than on Kindles; and in fact they read more Kindle books on their iPads than they read iBooks.

This suggests to me that hardware lock-in isn’t what it used to be. Yes, you’re still using Amazon’s platform, but who cares? You can use it on any computer and just about any tablet that you’re likely to buy. Yes, your Kindle books will forever be accessed through your Kindle app and not your iBooks app, but that’s not such a high price to pay—many people have more than one bookshelf in their homes. It’s not as good as an open, DRM-free standard, but it’s not true to say that you can’t easily take your books to another platform (unless you’re trying to move from the Apple ecosystem).

Amazon can still price below cost, of course, but under the new arrangements it can’t expect to make up the resulting losses from hardware sales. It will quickly lose actual money—unless it can drive all its competitors out of the market, and keep them out long enough to raise prices high enough to make up its earlier losses. This is much harder than it sounds, and has led some economists to wonder whether predatory pricing is actually a real thing that ever works. And when one of the competitors you’re trying to drive out is Apple—which still sells all its hardware at a substantial margin, and could subsidise iBooks if it wanted— it’s even harder.

I also don’t think Amazon can return to its old strategy of high-margin hardware and unprofitable e-books that are only available on that hardware. By my wild guess, millions of Kindle books have been sold to people who don’t own any Kindle hardware at all, and I don’t see how Amazon can cut them loose now—either by withdrawing their apps altogether or refusing to sell them any new books. So many gallons of ink and e-ink have been lately spent explaining why Amazon is a predatory monster precisely because most customers like Amazon—for its cheap prices, yes, but also for its above-average customer service. For most people—seeing as there are more customers than suppliers around—Amazon still looks like the good guy in this fight, while the publishers are coming off as sneaky or clueless. If public opinion were to turn against Amazon—as it surely would if it suddenly cut off everyone’s non-Kindle Kindle books—I think it would be in much more trouble than it is.

Amazon might still return to a dominant position in e-book acquisition and retailing—if it ever relinquished that position—but it won’t be because of DRM or predatory pricing; from now on, it will have to be through scale economies and giving customers what they want. What that might mean for the future of publishing and even writing is, I think, anybody’s guess.

 

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