For the love of books

Amazon's Kindle

Its a well known fact that Gillette makes more money by selling razor-blades than by selling their trademark razor. HP’s Printer division makes more money selling cartridges than it makes by selling Printers. Similarly, there are a lot of companies that make money not by selling the main product, but by selling the tied-up product. This is an old business trick and is referred to as the Razor-Blade Model(Now you know who pioneered it). Today while reading about the recently launched e-book readers-Kindle and Nook, I realized how Amazon and BN(Barnes and Nobles) are relying on this old model and forecasting huge profits in the next few years.

Microeconomics says that there are three characteristics of any market structure (be it Monopoly, Oligopoly or free market)- number of players, barriers to entry and bargaining power of producers as well as consumers. The market for book retail has almost no barriers to entry and Amazon and BN being big players have over the years managed to capture a majority market-share. As time passed, both of them lured customers with heavy discounts and the price wars just got uglier. Needless to say, customers had no reason to stay loyal and made the best of this price war; while Amazon and BN just kept bleeding.

BN's Nook

Recently, with the advent of e-book readers these two giants saw an opportunity to finally establish a captive customer base by employing this tied -up products model. Amazon launched Kindle over two years back but the product did not have the potential to penetrate the market then. It wasn`t aesthetically designed and did not bring the much expected revenues. But with recent developments in LED technology and Google’s groundbreaking agreement with Publishers, there is renewed hope that e-books might prove to be a fatal blow to the conventional paper books.

Now if this is really going to change the future of the publishing industry and the way we read books, the big players of tomorrow should emerge now. And that is precisely what Amazon, Sony and BN are attempting to do. Each of them launched e-book readers with their own non-standardized formats, with the intention of hooking on a maximum number of readers to their particular product. Amazon, being the book retail giant that it is, used its clout to arm-twist publishers into providing it e-book formats for all major releases. BN joined the bandwagon too and managed to obtain most of these titles in its e-book format. In this race, Sony got left behind because of its inability to convince customers that it would be able to provide as many titles as its competitors in its own e-book format. It is this uncertainty coupled with the marginally better product aesthetics of Kindle and Nook that have led to the emergence of two leaders in the e-books business.

Coming back to the economics of this, we can understand why neither Amazon nor BN is hoping to make significant profits from the sale of e-book readers. Also, the fact that both these e-book readers are priced the same, tells us that both these Companies understand that a price war now would cause both to bleed as they do not have any margins on the e-book reader. It will be a while before either Company would have sold significant volumes to recover the enormous product development costs.

However I feel that there is a big question mark on whether these two will actually make the money that they are hoping to make. Aren’t they undermining the smartness of techies today, who would probably soon work out a way to crack each of their proprietary formats and create millions of free copies in no time. Isn’t it going to make piracy of books even easier and much more widespread. The entertainment industry has been struggling to fight this piracy for years. Won’t Amazon and BN face this same challenge when there will be on an average, 1000 copies circulating for each legitimate e-book they sell.

But none of this seems to concern Amazon and BN who are both currently focusing on meeting the high [expected] demand for e-book readers in the upcoming festive season. While these big companies fight it out in the electronic format market, the individual customer is definitely happy with the idea of have access to a cheaper electronic copy of the book, downloadable from anywhere at all. Also, the prospect of free copies of e-books being easily available in the near future has book lovers thronging stores to pick that gadget that will be their reading companion for next few years to come.