What Amazon's ebook strategy means

You're probably familiar with predatory pricing. A big box retailer moves into a small town with a variety of local grocery and supermarket stores. They stock a huge range of products and hold constant promotions, often dumping goods at or below their wholesale price. This draws customers away from the local incumbents, who can't compete and who go bust. Of course the big box retailer can't keep up the dumping forever, but if losing a few million dollars is the price of driving all the local competitors out of business, then they will have many years of profits drawn from a captive market to recoup the investment. (Meanwhile, helpful laws allow them to write down the losses on this store as a loss against tax, but that's just the icing on the cake.) Once the big box store has killed off every competiting mom'n'pop store within a 50-mile radius, where else are people going to shop?

Amazon has the potential to be like that predatory big box retailer on a global scale. And it's well on the way to doing so in the ebook sector.

Until 2008, the ebook side of publishing was a vestigial, if not irrelevant, irritation from the point of view of the major publishers—at less than 1% of their turnover it was lost in the line noise. However, as subsidiaries of large media conglomerates, the executives who ran the big six had all been given their marching orders about the internet: DRM restrictions would be mandatory on all ebook sales, lest rampant piracy cannibalize their sales of paper books.  (...)

Amazon has a history of investing hundreds of millions of dollars in loss-leading products and ventures solely to build market share. For AMZN, the big six insistence on DRM on ebooks was a windfall: it made the huge investment in the Kindle platform worthwhile, and by 2010 Amazon had come close to an 85% market share in the ebook sector (which was growing at a dizzying compound rate of 100-200% per annum, albeit from a small base). And now we get to 2012, and ebooks are likely to hit 40% of total publishing sales by the end of this year, and are on the way to 60% within five years (per Tim Hely Hutchinson, CEO of Hachette UK). In five years, we've gone from <1% to >40%. That's disruption for you!

Now, most ebook customers are not tech-savvy. It is possible to unlock the DRM on a Kindle ebook and transcode it to epub format for use on other readers; but it's non-trivial. (Not to mention being a breach of the Kindle terms and conditions of use. Because you don't own an ebook; in their short-sighted eagerness to close loopholes the publishers tried to make ebooks more like software, where you merely buy a limited license to use the product, rather than actual ownership of an object.) 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.

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.

by Charles Stross, Charlie's Diary |  Read more:
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