Amazon had its new Kindle announcements today. The news is that prices came down; at least on devices. Basically, everything about Amazon is about getting their devices into people’s hands. The baseline Kindle is now just $69. It is still not free and nor is it given away with Amazon prime for reasons I articulated last year; there is still some value in having people fork out something for this. The touch Kindle has been upgraded with a backlit display and also gets a price drop. Finally, much work has been done for the Kindle Fire — Amazon’s US only tablet. It is faster, has more storage, has a better screen and now comes in a variety of sizes. The flagship line has 32GB of storage and an 8.9 inch HD display for $499 and has 4G LTE connectivity for only $49 per year. That’s $549 per year. Replicate that with an iPad and it will cost you $959.

It is tempting to suggest that Amazon are clearly competing on price compared with Apple. But, in reality, it is a different business model. Apple don’t try to make money from content (apps, books etc) and various calculations suggest they don’t which is why they cede pricing control to others. That means they make money when they sell devices and so they have to earn a mark-up there. And that is why Apple’s content store is tied to its devices and available nowhere else.

Amazon want to maintain pricing control over content (and that has been a challenge) and pursue a ‘retailer model.’ What retailers do is provide a distribution centre for free to shoppers and then make money off sales inside the store. That is what Amazon are doing both with really cheap shipping for physical goods and also a really cheap distribution outlet in the form of Kindles. That’s one reason why you’ll find Amazon ads there (on the Kindle Fire you can’t even pay to stop them). It’s their store. To be sure, they’ll happily set up shop elsewhere (such as the free Kindle apps on devices) but they don’t have the same control there (i.e., you can’t buy books directly from a Kindle app but you can buy them from a browser on an iPad). Of course, you will note that the content Amazon sells (in all its forms) is actually no more expensive and often cheaper than the content sold on iTunes and the like. The same was true for physical goods. This is just part of a long game played by Bezos. On digital content, there are margins in every sale. Amazon intend to make it all up on volume. If Kindles are ubiquitous, they have a good shot at that.

The thing about this is that ‘business model’ competition is very different from a price war. A price war suggests there will be one winner or, alternatively, a commodification of the market. Business model competition means that coexistence is possible. Apple will likely win out on performance and so appeal to those who need that reliability — higher end consumers and commercial or industrial applications — while Amazon will appeal to those who just want to consume content cheaply and easily. To be sure, what Amazon does will constrain what Apple does and vice versa. But my guess is that it won’t result in the victory of a single business model. There is room here for a few.

[Update: it appears the Kindle Fire will be available in some other countries.]

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3 Responses to Amazon diversifies on the business model

  1. [...] Competition with Apple Posted at 5:01 on September 6, 2012 by Mark Thoma Joshua Gans: Amazon diversifies on the business model: Amazon had its new Kindle announcements today. The news is that prices came down; at least on [...]

  2. ilir Deebran says:

    The article is about quality and convenience, but economists have no theory for these concepts. Alex Gheg has released his equation that formalizes quantity, quality, variety and convenience. This equation let’s us measure what we never could before. http://www.youtube.com/watch?v=u6tFLGpcOpE

  3. [...] Gans: Amazon diversifies on the business model: Amazon had its new Kindle announcements today. The news is that prices came down; at least on [...]

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