online marketing psychology

February 7, 2010

iPad leads to tense negotiations at Amazon

Negotiations with between big companies have always fascinated me, probably it has something to do with the world of secrecy and NDAs that surrounds them. So when details of certain agreements get public, I get excited (sort of). The story in which Amazon is entangled these last few days is very interesting.

Amazon, the world's largest online retailer, has a big piece of the book market. With its recent launch of the Kindle, an ebook reader, they started selling next to paper books also the electronic version of them. They asked a fixed price of $9.99 for all titles, which is logically lower than the price for hardcover editions of the same books. Publishers were not very happy with this deal. Not because of the fact that they get less money, Amazon pays the difference with the paper version, making a loss on every ebook to promote its device. (So if the publisher charges $15 for the normal book and the ebook costs $9.99, Amazon will pay the publisher $5) The main argument of the publishers is that cheap ebooks cannibalize the sale of paper books. But Amazon's size allowed it to get these kind of deals, as they are too big for the publishing companies to ignore. They basically told the publishers to take their offer or leave it.

Then came the iPad, also an e-reader. Apple agreed with the big publishers on a model where they would let the publisher set the price, and take 30 percent of the revenues. While Amazon mainly focuses on sales of its reader, more money might be made by taking the percentages on the content.

Seeing what Apple has done to the music industry, there is a lot of potential in this new device. And it is exactly this potential that allowed publishers to relieve some of the pressure in their contract with Amazon. Publisher MacMillian was the first to demand higher prices. Amazon tried to use its biggest asset, its online store to show their power, and in a nervous move they pulled all MacMillian titles from the store. After continued negotiations Amazon gave in  and they agreed on a model similar to the iBook store of Apple.

This showed other publishers that probably they too could get a better deal. HarperCollins and Hachette already spoke up and the others will undoubtedly follow. Amazon will have to reevaluate its pricing strategy.
One rather ironic outcome of this increased competition are higher prices of ebooks.

Another outcome for Amazon might be the damage to its brand. Pulling certain books out of its store might leave some marks.

Over at Yahoo finance there was short story about a customer:

Doug Miller, a 45-year-old information-technology consultant in Indianapolis, owns two Kindles and dozens of Amazon e-books, but was so frustrated by the removal of Macmillan books that he has put his e-book purchases on hold indefinitely. "It was Amazon that was acting monopolistic. That seriously damages my trust in them," he said. "I'm very leery of further investing in any e-book platform until I see some sort of standardization. In the meantime I'll buy paper books -- but probably not from Amazon.
The ebook market is still developing and many customers are getting introduced to the technology. While Amazon mainly focuses on sales of its reader, more money might be made by taking the percentages on the content. Although some people have lost trust in Amazon, these might only be the early adopters. So if Amazon can get them back in the Kindle camp, real damage might be avoided.

Do you think there really is some damage for to the brand?

Foto from Flickr/Brian Lane Winfield Moore

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