Business April 2010

E-Donnybrook

No matter who wins the battle between the Kindle and the iPad, it marks the return of machines as market-makers.
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Jimmy Turrell

Can it be a coincidence that J. D. Salinger died the same day the iPad was introduced? After all, Salinger belonged utterly to the era of typewriters and overflowing ashtrays and dog-eared paperbacks yellow with age. Perhaps he could not live long in a world where the Next Big Thing in publishing was not an author, but an electronic reading machine. Forget the literary giants who once traded barbs at Elaine’s or the Algonquin. Now the battle over the world’s literary territory, a contest on the epic scale of Mothra vs. Godzilla, is between Amazon’s Kindle and Apple’s iPad.

These devices have the potential to change how books are sold, in much the way that the MP3 player has reconfigured the music industry. Distribution networks will be transformed, power relationships will shift, and everyone will move to a new way of doing business.

In some ways, this transformation is as big for the technology industry as it is for publishing. The iPad and the Kindle, like the iPod before them, represent something slightly remarkable: the return of the machine as market-maker. Amazon, one of the rare “New Economy” firms to survive the dot-com bust, is now trying to turn itself into an old-school hardware manufacturer. Even more remarkably, it may succeed.

Unless you’re under 20, you’ve probably heard the Legend of Microsoft more than once. IBM thought of software as an accessory for its enormous, expensive computers. That’s why, in the early ’80s, the company let the upstart Bill Gates keep the rights to the MS-DOS operating system and sell it separately from the computers. As the mainframe business waned and PCs became a commodity, that turned out to be a colossal strategic error.

Ever since, power in the technology sector has ebbed away from the machine, toward “platform agnostic” applications that made hardware less relevant. Microsoft’s battles for dominance in the operating-system market were followed by the browser wars against Netscape. Then even software became less strategically important, as market power shifted toward the gateways to the Internet: e-mail and search engines.

Hardware is still a competitivearena—gaming consoles have been slugging it out for decades. And of course, there was Apple. After a foray into licensing its operating system, Apple took back control of the hardware, creating a more stable and consistent user experience at the cost of some flexibility. But while Macs had devoted fans, most computer users chose PCs for price and flexibility.

Not until the iPod did Apple demonstrate that its business model—controlling the hardware and operating system—could still dominate a market. And the iPod also created potentially lucrative revenue streams by selling content.

After all, Apple can sell only so many MP3 players or iPhones. But it can push a seemingly limitless number of songs and videos through the iTunes Store. Once you’ve invested in creating a digital-content outlet, the cost of selling an additional unit is low, and you have virtually unlimited economies of scale. Someday, Apple may well make more money by selling content and applications than by selling pretty machines.

That’s presumably why Amazon launched its own service for video and music downloads. Its modest success put competitive pressure on Apple. But without a winning device that seamlessly integrates with its store, Amazon’s digital-media service could not achieve the ubiquity of iTunes.

Books, however, are different. Until the iPad, no Apple device had offered anything comparable to the portability, readability, and battery life of a Kindle, or a book. With a big enough head start, Amazon had the chance to become the primary retailer of digital reading material. Moreover, if enough users acquired libraries of books in its proprietary format, Amazon could maintain that competitive advantage almost indefinitely, because of switching costs: users who adopted a different, technologically incompatible brand of e-book would lose their whole library.

But now the iPad will make it hard for Amazon to achieve that kind of effortless lock-in—just as several years ago, Amazon’s MP3 downloads helped to defeat Apple’s quest for lock-in with its proprietary copy-protected music.

By one estimate, Amazon has sold 1.5 million Kindles, and on Christmas Day 2009, e-book sales exceeded hard-copy sales for the first time in Amazon’s history. Those are pretty impressive figures for an expensive new device with uncertain market potential. But they pale next to iPod sales, which reached nearly 250 million by the end of 2009. If Amazon wants to win the e-book wars, it will need to radically step up its game.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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