Amazon’s legal battles last year with Hachette on the price of the publisher’s e-books unmasked an important flaw in the distributor’s digital strategy: it has been acting as if both the Kindle and the e-books were the company’s own complementary products, to be priced by Amazon as it so pleases. Hachette, however, has felt very strongly that it should price the e-books of its own writers, at a higher price point than what Amazon found desirable. (Part of the issue is that a book, once printed, is a tangible product, whether it is sold at Barnes & Noble or at Target, while an e-book can only be read with an e-book reader, which blurs the lines between Amazon as content distributor and Amazon as content gatekeeper, if not co-creator.)
Amazon’s behavior is in line with the well-known “razor and blade” business model made famous by Gillette at the beginning of the twentieth century, where a product (the razor) is sold at a cheap rate to generate demand for a more expensive complementary product (disposable blades). The fundamental question in analyzing Amazon’s strategy through this framework – widely accepted in business schools, consulting companies and multinational companies today – is to identify the razor and the blade. This is not as easy as one would think.
One possibility is to identify the Kindle reader as the cheap razor and the e-books as the expensive blades – a view strengthened by the availability of free apps allowing Kindle e-books to be read at no extra charge on a computer or on a smartphone. But, as anyone who has been following the protracted drama between Amazon and Hachette will know, Amazon has not sought higher prices for e-books. Instead, the opposite has happened: Amazon has argued in favor of higher sales volume driven by cheaper prices, while Hachette has advocated for higher prices. In other words, the publisher apparently sees its e-books as the key revenue generator (the blade) and the Kindle as the support that delivers the revenue-generating product (the razor and, unless Hachette develops its own e-book reader one day, someone else’s to boot). For Amazon, though, it is not unreasonable to conclude that its own Kindle device really is the blade – perhaps not disposable as quickly, but generating renewed demand at every technological iteration – and its partners’ e-books are the cheap razor. This, obviously, will not endear Amazon to publishing companies.
Attempting to fit Amazon’s case in this well-known and widely accepted business model also provides a simple way to articulate important challenges in the Amazon-Hachette conflict and more broadly the position of e-books in the publishing industry. First, Gillette manufactures both the razor and the blade. In that context, it makes sense to sell one product at a low cost to drive demand in the other. But which company would want to manufacture the cheap razor alone while someone else reaps the profit from selling expensive blades? Yet, the conflict between Amazon and Hachette can be interpreted exactly in those terms. Part of the issue is that Amazon’s role evolved from distributor to gatekeeper or even content co-producer when e-books came on the market. Its attempts at creating original content to read on the Kindle, for instance through the Amazon Singles program, can be interpreted as a full implementation of the original razor-and-blade model. In general, though, books are created independently of Amazon. One wonders what would have happened if Jeff Bezos, instead of buying the Washington Post, had acquired a publishing company.
Because a book’s content can be delivered through other channels such as hardcover, paperback and audiobooks, and the Kindle itself has other uses besides serving as an e-book reader – in particular to watch movies or play online games – it is ultimately a mistake to condense Amazon’s digital strategy into a traditional razor-and-blade framework. This also means that Amazon’s apparent attempts to push Hachette’s products into a “razor role” are flawed. In seeming to belittle as a “razor” a product that, for its manufacturer, is a “blade”, Amazon has created a public-relations issue for itself at a moment when investors wonder whether it will ever make good money and pay its investors back.
Perhaps it is time to update our business metaphors for the digital age. Amazon would have saved itself a lot of (often bad) press coverage if it had realized from the start that Hachette’s books were not the cheap razor to its Kindle blades. The “Amazon and Hachette” business model may become known as a model where both parties grudgingly collaborate with each other in spite of opposite price pressures to generate great value from two relatively cheap products. Only e-book readers can tell publishers which passages readers highlight most and how many readers finish their books or, if they don’t, where they stop. A reader who doesn’t finish an author’s book may be less likely to buy the next one, and knowing which chapters did not sustain his attention would be valuable information to a forward-looking publisher.
Once publishers have extracted insights from this data, they might develop strategies to put on the market books that customers will read to the end, or include private customer feedback surveys, the answers to which – in contrast with today’s Amazon.com reviews – would only be sent to Amazon.com or the publisher but would not be posted online unless the customer agrees to. The publishing industry is one of the very few industries left that at the moment do not directly ask customers (readers) for their feedback on a product (book) they have purchased. Private customer surveys would allow a broad range of questions (one hopes that “do you feel the price you paid for this e-book was appropriate for the value you derived from this book, and if not, which price range would you suggest for it?” will someday make the list), similarly to hotel surveys with an optional page to add a review on the TripAdvisor website.
Perhaps publishers would discover that the price points for certain e-books are too high, not because Amazon is telling them so but because customers are speaking their mind. Or they might become aware of issues or opportunities for improvement they would not be aware of otherwise. Amazon, through its acquisition of the online book rating site and reading community Goodreads.com, should also be able soon to make far better recommendations than what it is doing now, which amounts to listing what customers who bought this book also bought. The data made possible by e-books thus opens many new opportunities for gaining sharper insights and better serving customer needs.
While Amazon and Hachette have recently come to an undisclosed agreement, negotiations with other publishers are set to open in 2015. The next battle in the e-book price wars is already looming. Sharing the data captured by the Kindle – making the data the expensive “blade” for all involved – would be a welcome first step in re-establishing long-term partnerships between Amazon and publishers on a stronger, more collaborative footing.
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