Amazon Takes a Bite Out of Apple

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The only thing worse for an industry than a price war is a cost war, and that is just what (Nasdaq: AMZN  ) is doing by revising its royalties to authors of digital books available through Kindle.

The leading online retailer is offering a 70% royalty option on e-books, double the 35% rate that has held firm since the Kindle's launch in the fall of 2007.

Why is the doubling of the commission schedule not automatic? Why make authors and publishers opt-in to the new rates? Well, Amazon has several conditions tied to the higher payout rate.

  • The content creators will have to foot the delivery costs. This is not a deal breaker, since the median tab on a digital book being sent out is a mere $0.06 apiece.
  • The list price must be between $2.99 and $9.99. Most books fall into this range anyway, but it's going to keep prices honest when a publisher can make more off a $9.99 e-book than an $18.99 e-book.
  • Amazon's price must be 20% below the list price of the physical version. Here is where things start to get interesting, as Amazon begins to make sure that it's offering Kindle owners a more attractive value proposition than buying the actual books.
  • Kindle books under the 70% royalty umbrella will have to include a growing set of reader-friendly features, including the text-to-speech option that some publishers balked on, fearing that they will lose out on audiobook sales.
  • Books on the higher commission schedules cannot be offered at lower price points elsewhere. Amazon will automate the process, so it can adjust to any changes through Sony (NYSE: SNE  ) , Barnes & Noble (NYSE: BKS  ) , and eventually Apple (Nasdaq: AAPL  ) .

Ah, yes -- Apple. This is really ultimately just a preemptive strike against Apple. Everyone knows that the tablet computer is coming. Reports surfaced this week that Apple is already in talks with News Corp's (Nasdaq: NWS-A  ) (Nasdaq: NWS  ) HarperCollins to carry its books in digital form.

Amazon hasn't really been challenged by potential Kindle killers in the past, but Apple is a different critter altogether when it begins cranking up the hype machine. The "iTablet" will likely cost a lot more than the entry-level $259 Kindle, but it will also likely do a lot more. Anything that Amazon can do to disrupt Apple's game plan -- especially as it raises expectations for what publishers can get in digital deals -- may sting in the near-term, but will hopefully pay off in the long run.

Do you think Apple has a shot at dethroning the Kindle as the e-book reader of choice? Share your thoughts in the comment box below. and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Kindle owner since 2008. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (8)

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  • Report this Comment On January 20, 2010, at 2:28 PM, militauro wrote:

    Of course it has a chance. Will it succeed is another thing, but chance?? If anyone can make book reading "cool", its Apple.

  • Report this Comment On January 20, 2010, at 5:05 PM, JayWilmont wrote:

    This article is too shallow to really put things into context.

    Apple's strategy with regards to their current content stores (music, tv shows & iPhone/iPod touch apps) is to run the store at break-even, so that they can sell more music players, tv players & app players (iPods, Apple TV's, and iPhones). The more content that people can get that they can use their Apple device for, the more useful that device will be, the more demand there will be for the device, the better it is for Apple.

    While I haven't read as much about Amazon's strategy, they presumably are selling the Kindle at break even prices so that people have a good device on which to consume their main product, digital copies of books. Amazon is probably worried that Apple's (rumored) break-even eBook store will reduce demand for their (presumably profitable) eBooks.

    However, if Amazon's books are cheap/good quality/etc. & work well on Apple's rumored tablet, there could be a mutually-profitable synergy: people buying Apple's profitable tablet and using it to read Amazon's profitable eBooks. (The reverse would be bad for both companies - but Apple is not likely to make it easy to use their (rumored) eBooks to be downloaded to a non-Apple device like a Kindle).

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