Blog Post

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 (s AMZN) 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 (s AAPL).

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 the  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).

8 Responses to “Amazon vs. Apple: Round 2”

  1. @john b
    Right. Amazon grabbed the publishers’ control of pricing. And Apple put an end to that. So now Amazon threatens publishers if they don’t sign three year exclusive contracts. And you say Amazon simply looks like a bully? What would actually being a bully look like?

  2. Macmillan didn’t want more money from Amazon as far as I know. Amazon was paying them a fair wholesale rate and then taking a loss. They didn’t like Amazon setting the expectation that ebooks are all ten bucks.

    Prices are sticky. People have no idea what an ebook is “worth” until they see some prices out there. The more and the longer they see $10, they begin to think that sounds like the right price.

    Amazon’s, not Apple’s, model would lead to more competition. Under the agency model, retailers won’t have flexibility in pricing, thus limiting them in innumerable ways. It isn’t in publisher’s interests in the long run to have fewer retail outlets, though it is in their interest to keep prices higher.

    The problem is that Amazon pushed too hard for the “right” way when they were the biggest player, and pushed it too hard, making them bullies.

  3. Good item: Both Amazon and Apple will try to hogtie publishers. The writer is right: Publishers should do their best to stay out of the fight.

    Their styles vary: Amazon has a history of using low pricing to drive market share, while Apple uses high pricing to drive profit. Apparently their shareholders are happy with their respective style.

    And consumer styles vary: Some define price as value; some define innovation as value. These rarely meet in the middle. Dell buyers aren’t Apple buyers and vice versa.

    As someone who sees local business providing a level of service that neither of these ebook-cos will, and as the loser in either case, I don’t have a dog in the fight.

  4. Chris K

    $15 is too much for an ebook. They sell their new hardcovers on Amazon for less than that.

    These things need to be priced lower.

    Amazon is just trying to make sure Apple doesn’t get better deals on books.

    I’m getting an Ipad. But honestly haven’t thought about using it for an ereader. I will try an ebook or two on it, but the jury is still out on how easy on the eyes it will be.

  5. So, prices go up to $15, and the customer buys the device, and in the case of the 3g iPad, the monthly access. There’s no physical book nor distribution cost for Macmillan. Apple fans will swarm to anything Jobs will put out, but for the rest, no way. Apparently, iPad pre-sales are lower than the overhype.

  6. First, let’s get the facts right. Macmillan didn’t want to raise prices across the board. They wanted variable pricing – older, less popular books as low as $6 and new bestsellers at $15. That only makes sense.

    Amazon is in panic mode now. When Apple sells more iPads on the first month than the total number of Kindles ever sold, Amazon is going to find that their leverage with publishers is gone, so they’re fighting for everything they can get now.

  7. It was no consumer backlash at all, more like Macmillan pressure to be able to gouge their customers even more, now with Apple. It was Macmillan that wanted to rise prices and Amazon that resisted. The Kindle e-paper is better on the eyes for reading than the iPad screen, go with Amazon.