When first reading this case we thought that Amazon is using Clayton Christensen’s law of conservation of attractive profits which says that when one thing becomes modular and commoditized, another thing becomes valuable. We thought that, as shown by exhibit 4, Amazon is selling the excellent Kindle at a bargain or maybe even at a loss (Kindle is better on most specifications than its direct e-ink competitors and is less expensive) in order to make huge profits on eBooks sales. A common strategy in the industry: Google gives its mobile OS Android for free because the more people will use smartphones the more money Google can make on online advertisement – its core business. But after a closer look we noticed that Amazon isn’t even making money on eBooks sales because as we can see in the document, eBooks on the ...view middle of the document...
In addition, Amazon is making it very easy and very profitable for writers to self-publish on the kindle web store. This is a real game changer. Because not only writers that cannot find a publisher are now able to publish their books with a few clicks, but even established writers are becoming more and more interested because of the more favorable offered by Amazon (up to 70% Royalties).
2. What would you identify as the most important risks and benefits of further vertical integration by Amazon into book publishing?
One of the most important benefits of further vertical integration by Amazon into book publishing is the ability to move the value from the hands of its competitors to its own. If auto publishing on Amazon platform is more attractive and easier, the more books will be available on the Kindle web store. With more books available on the Kindle, more customers will be interested in buying one. If in the same time the kindle is cheap and offers a great experience, customers will be even more interested in buying one and the great customer experience will push them to buy more and more eBooks generating more revenue (and ultimately profit) for Amazon. With this strategy Amazon is destroying value in the book industry. It’s destroying (or moving) value for publishers, for agents, for eBook readers makers and for book retailers. The only valuable element in the chain is the eBook and it is with eBooks that Amazon will make money. The principal drawback is that all the other actors in the industry might try to fight back and impede the company from accessing their contents, but the bigger it is getting in the industry the more difficult it will be for them to do that because it would mean losing a lot of money if they are not on the Kindle store and this may be already the case. Also, Amazon could become a monopolistic company in the industry and face all the legal issues Microsoft faced on the software business.