E-Donnybrook

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

By Megan McArdle

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.

Indeed, it already has; shortly after the existence of the iPad was confirmed, Amazon announced an applications store for the Kindle, to rival Apple’s for the iPad, and promised publishers a bigger share of the pie. Amazon has also reportedly bought a touch-screen company that could allow new versions of the Kindle to match one of the iPad’s advantages: a color display that is critical to winning over the lucrative textbook market, and glossy magazines.

But pioneers who create a market sometimes find themselves shut out of it. Despite having expertise and name recognition on their side, first movers often lack what economists call “complementary assets”—the additional capabilities that allow them to commercialize their innovation. Like, say, decades of expertise designing cool, seductive gadgets to feed users into your store.

On the other hand, Amazon has some complementary assets of its own, notably relationships with publishers, and a vast database of customer information and product reviews that would take Apple years to duplicate. Unlike the iTunes Store, Amazon’s Kindle Store is not competing with free—although alternate formats abound, free digital versions of copyrighted works are not easily available. That may give Amazon enough time to get readers committed to its product.

Of course, as we’ve already seen, publishers, and Apple, will try to prevent that. The day after the iPad made its debut, Macmillan Publishing demanded that Amazon charge higher prices for its e-books, a demand that culminated in Amazon’s yanking both e-book and print Macmillan products off its virtual shelves. Ultimately, Amazon acknowledged it would have to capitulate to Macmillan’s pricing scheme. Other publishers will probably follow Macmillan’s lead. Since Amazon often uses discounting to gain competitive advantage, while Apple is committed to a premium pricing model, giving publishers more pricing power will help the iPad and erode the Kindle’s head start. Apple may have launched its product just in time.

But even without format lock-in, the Kindle has some formidable advantages. Aside from the small problem of reading in the bathtub, the Kindle is simply a better (and pricier) version of a book: lighter, thinner, and much easier to read with one hand. You use it the way you would use a book, on park benches and long airplane trips. The Kindle doesn’t do much of anything else, but it is an excellent book replacement.

The iPad does a bunch of things, but none of them especially well. You can’t read it in full daylight, and its battery life is much shorter than the Kindle’s. With no true built-in keyboard or ability to multitask, it’s not a substitute for a laptop—and unlike my iPhone, it won’t fit in a pocket, take pictures, or make calls. Unless you need it for one of a handful of specialty uses, it doesn’t replace anything you already have; it’s just one more thing to carry. Apple’s gee-whiz design talents are compelling, but hardly infallible: consider the fate of the Newton handheld device, or Apple TV.

But perhaps the Kindle’s biggest asset is that it can bundle e-books with … actual books. If an e-book is unavailable through iTunes, tough luck. If a book is not available in Kindle’s e-book format, well, with one click I can have it shipped in a couple of days. The convenience of one-stop shopping for a book you really want is apt to be a powerful incentive to stay in Amazon’s domain during the transition from printed books.

The triumph of the Kindle over Apple’s sleeker, multifunction device would not, however, end the competition. In the tech world, once one player achieves dominance, the next step usually seems to be an antitrust suit. Apple is no stranger to the competitive advantages that can be conferred by regulatory interventions as strategic weapons: a cheerleader for the suits that tangled up Microsoft in the 1990s, it has been a target of suits complaining about iTunes. Thus far, these have been more nuisance than threat. But if either company manages to achieve the kind of market share that Microsoft enjoyed on the desktop, it can probably expect a visit from the Justice Department. No matter how great the literary giant, it seems, none can stay on top forever.

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http://www.theatlantic.com/magazine/archive/2010/04/e-donnybrook/307985/