Apple versus Amazon in the eBook battle
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Competition among big technology firms is changing the world we live in day after day. The eBook business is becoming the battlefield for a combat between two formidable giants like Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) in a dispute that will affect how much we pay for eBooks, what kind of content gets published and through which devices we read in the future. Needless to say, investment implications from this battle will also be very important.
The Wall Street Journal reported a few weeks ago that the justice department has warned Apple and five of the most important book publishers that it plans to sue them for price fixing in the eBook market. The move from Apple consists of an arrangement with publishers to change the way eBook prices are determined, by moving from a wholesale model to an agency one.
Under the traditional wholesale model publishers sell the eBooks to companies like Amazon for nearly half the recommended cover price. The wholesalers then have the freedom to sell the books for the price they prefer, even if it is below the wholesale price. That is precisely what Amazon did before introducing its Kindle eBook reader, selling many bestselling titles for 9.99 USD in an effort to win market share in both the eBooks and tablets markets.
But publishers didn´t like that decision, fearing that customers could get accustomed to extremely low prices and that would destroy profitability for publishing companies and also dramatically limit authors’ possibilities to make a decent living from their work. Other companies like Barnes & Noble (NYSE: BKS) are getting hurt by Amazon´s aggressive low pricing too.
Barnes & Noble has seen decreasing profit margins due to competition from Amazon over the years, and the company was forced to resort to selling other items like toys in a higher proportion in order to recover some of the lost ground from the low prices that Amazon brought to eBooks and traditional paper books markets. Barnes & Noble doesn´t have the same low cost structure or deep pockets that Amazon has, and judging by what happened to Borders it’s not a far stretch to say that Barnes & Noble´s existence could be threatened by competition.
If Amazon is trying to get competition out of the market in order to be able to increase prices once it has an even more dominant position, consumers could be in deep trouble in the future, having to pay higher prices and facing a limited variety of choice between books sellers. That´s one of the main points that publishing companies use for stating that Apple´s proposal is better for consumers in the long term.
The agency model that Apple is pushing, however, would imply higher prices for eBooks right now. Under this scheme publishers would have the freedom to choose any price they consider convenient as long as they give a 30% of that price to Apple. Consumers will have to pay higher prices nowadays if Apple is successful in changing the pricing scheme for eBooks.
One important detail regarding the competition between Apple and Amazon is that under the conditions proposed by Apple´s agency model, publishing companies would not be able to sell the same title at lower prices via another retailer, which could be a huge blow to Amazon´s low pricing strategy. Considering that Apple is the leader when it comes to tablets with its iPad model, if the Cupertino company managed to avoid pricing competition it could be able to gain a lot of market share in the eBook business, currently dominated by Amazon.
As for consumers, what pricing scheme is better for them isn´t as clear as a first glance may imply. Amazon´s model generates lower prices right now, and there is no way to prove that the online retailer would increase prices if it kept gaining market share, under that perspective Amazon looks like the good guy in this fight.
But pricing is not the only variable to consider when evaluating customer’s interests. Having the possibility to choose among different companies when buying a product is also desirable per se: customer service, product integration and many other factors could be relevant. Furthermore under Amazon´s low pricing strategy, the variety of choice in books titles could probably be lower since low prices usually reduce production levels.
We are most likely just witnessing the first steps in the competition for digital products that will generate huge amounts of money in the following years. Apple took the leadership position in digital music with iPod and iTunes, while Amazon is still the undisputed king of eBooks. Digital TV and movies are next in line, and they don´t seem to be far away. Both as investors and consumers we should be following this competition very closely.
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