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Originally Posted by Kali Yuga
I don't know much about Shatzkin, but he's missing something if he doesn't think Apple can handle a price war with Amazon. H'm, what could it be, it's on the tip of my tongue... oh yeah:
Apple doesn't make money off of content, by the way. They make it off of hardware, and the only reason to have iBooks in the first place is to tie people to iOS, so they keep buying iPhones and iPads and iSockWarmers and so forth. I suspect there's a limit to how much they are willing to lose on iBooks, but there's no doubt they can afford to lose a heck of a lot more than Amazon.
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This is kind of an amazing chart, but it conceals the fact that Apple makes hundreds of millions of dollars selling content through iTunes. It's just that the margin on selling content as retail is much lower than selling hardware; typically 2-3%. This is what Apple makes, and it's also what Amazon makes: the key to making money is to be very efficient and have such a high volume that the 2-3% ends up being a large number.
Amazon's profits are lower not due to them not making an appropriate margin generally, but due to them spending a lot of money building out distribution centers and developing various kindle products (which are less expensive than the distribution centers). The idea, of course, is that this will help them expand sales and once these one-time type expenses are gone, they will have increased volume from which to take their tiny margins.
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In addition, Shatzkin fails to note that the real victim here will be Barnes & Noble. If they match or beat Amazon's prices, they will lose money. If they maintain higher prices, they will lose market share. Microsoft did throw $300 million at the Nook, but at their burn rate -- accelerated by what is now a partner requirement to switch platforms -- they'll be back in the red by the end of the year.
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I wouldn't count B&N out yet; there still is a robust paper book market, and they were able to quickly grab 25% of the e-book market even before agency went into effect, despite Amazon's early moves.