Reading Ken Auletta’s recent New Yorker article on the iPad and the Kindle, I first thought of “the razor or the blade.” While Amazon loses money on books in order to sell Kindles, razors were precisely the opposite. Get a cheap razor, buy blades for a lifetime, and Gillette has an unending stream of revenue. Doing the opposite, Amazon has dominated e-book sales.
Amazon also broke other rules:
Price taker or price maker? Six publishers control 60% of the business. These classic oligopoly stats mean that they should have control over price and yet Amazon was able to charge $9.99.
A New Pie? According to Auletta, for a $26 hardcover book, the publisher gets 50% of each sale, pays the author 15% of its revenue, covers publishing expenses, and also accepts returned unsold copies. Now, with e-books selling for $9.99, the revenue pie has changed.
Which market? Instead of competing against other publishers, maybe now all media based activities have a toe in the same market with everyone vying for a piece of the consumer’s time.
Perhaps the one rule that has not been broken relates to innovation. As entrepreneurs implement new ideas, existing firms will be forced to change or disappear.
The Economic Life
Joseph Schumpeter best explained the march of new ideas as creative destruction.