Amazon vs. Apple: Round 2

Having gone toe-to-toe with Macmillan Publishing over e-book prices last month, only to retreat in the face of a consumer backlash, Amazon is once again talking tough with publishers. This time, however, the stakes are even higher for the Kindle-maker.

According to a New York Times report, Amazon is threatening to remove the “buy” button from major publishers’ e-books if they don’t accede to a detailed list of its demands, including that it not be undersold by other e-book retailers. Although Amazon agreed in principle following the Macmillan dust-up to let publishers set retail prices for their Kindle books while it collects a 30 percent commission, the retailer is apparently keen to maintain its most-favored nation status vs. other e-book sellers, including Apple.

The immediate bone of contention, according to the Times, is Amazon’s demand that publishers sign three-year contracts guaranteeing that no other competitor get lower prices or better terms than it does. Publishers are said to be reluctant to commit to three-year deals when prices and consumer behavior are still in flux.

Amazon’s demand also puts publishers in a tight spot with Apple, which is insisting on most-favored nation status for its iBookstore.

While Amazon may have picked the wrong fight with Macmillan, and then overplayed its hand, the outcome of theĀ  latest battle really could be critical to the Kindle-maker’s long-term strategy, not because of what it could mean for retail e-book prices but for what it could mean for the Kindle platform.

Both Amazon and Apple share the same long-term e-book strategy. Each wants its device, the Kindle and iPad, respectively, to emerge as the dominant e-reading platform. As Apple itself demonstrated with the iPod and iTunes — a strategy deliberately aped by Amazon — controlling the distribution platform gives you control of the value chain. By locking both iPod users and the record companies into the iTunes platform, Apple was able to capture the lion’s share of the value from online music (mostly by selling expensive iPods).

The key to Apple’s success in music wasn’t just the relatively low 99-cent price of individual tracks but that the value in using an iPod for music was competitive against other consumer options, including illegal downloads and other MP3 players.

For both Amazon and Apple, then, it’s critical that the value of using a Kindle or an iPad for reading remains competitive against all other options, especially at this early stage of the market’s development when consumer habits are still up for grabs.

That means not just keeping a lid on e-book prices but making sure you’re the lowest-cost provider of e-books in the market. In this case, most-favored nation means most likely to succeed.

As for how publishers should respond to Amazon and Apple’s mutually exclusive demands for favor, the situation presents a paradox. Normally, supplying both sides in a war is an enviable position for a vendor. In this case, however, the battle is over driving down prices, which is not a fight most vendors want to find themselves in.

Their best strategy is to hold the line with both and hope that no clear winner emerges quickly.

Paul Sweeting is analyst with GigaOM Pro and the author of The Evolution of the e-Book Market (sub. required).

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