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Amazon Does Downloads, Sort Of


Shoppers looking to buy Dean Koontz's alien invasion novel The Taking on Amazon.com (AMZN) see it offered as a new or used paperback. But they're given no clue that Amazon's own subsidiary, Mobipocket.com, sells the same title as a $7.99 digital or "e-book" download.

There's a reason why Amazon hasn't done much to sell books, movies, or music in digital form, even after acquiring Paris-based Mobipocket in 2005 and unveiling its internally built Unbox movie-download service in 2006. The economics just don't add up. And that's unlikely to change with the company's plan to ratchet up its digital merchandising this fall. Amazon partners and competitors expect it to open a downloadable music service on its site and sell an Amazon-branded e-book device called the Kindle. Also, Amazon announced on Sept. 4 that Unbox will offer NBCTV shows that the network pulled from Apple's iTunes. These ventures are still more an investment in the future than a near-term profit engine, and digital revenues are likely to remain tiny for some time.

Amazon's toe-in-the-water approach may seem odd, considering how it helped pioneer online shopping in the mid-1990s. You might think that fulfilling orders for digital media would be more efficient than pulling CDs off shelves, boxing them, and handing them over to UPS for delivery. But as long as digital music and e-books come with heavy restrictions on how and where consumers can use them, the market will be limited and rights holders will have the power to shake down sellers. That's O.K. if you're Apple Inc. and see music as a "door opener" for iPod and iPhone sales. But for Amazon, there's still much more money to be made shipping real stuff.

The Kindle launch could spark increased sales of e-book content, especially since users of the device will be able to shop for books and download them over its high-speed wireless connection, according to a filing with the Federal Communications Commission. Even though titles from Amazon's Mobipocket aren't well represented on Amazon's site, it has the largest selection of any e-book seller: 40,000 titles, compared with 18,000 at Sony Corp.'s (SNE) online bookstore, Connect.

Amazon wouldn't confirm any plans for an e-book reader. "We do not comment on rumors or speculation," says Andrew Herdener, an Amazon spokesman. Some industry observers think Amazon will hold the price below that of the $299 Reader from Sony Electronics.

Still, Amazon's new offerings aren't expected to change the profit equation dramatically. In early July, Unbox director Roy Price said that Amazon doesn't believe that delivering products digitally yields a higher profit margin than shipping them. In the case of movies, for instance, studios have kept wholesale prices for digital downloads high in order to protect DVD sales. In digital music, Apple sells millions of songs without handling a single CD, but margins are minuscule. "Digital music can produce a higher profit margin for the rights holders," says JupiterResearch (JUPM) analyst David Card, "but for Amazon there may not be any higher margin than what they get for the CD." Hamed Khorsand, an analyst at BWS Financial, guesses it will be three years or so before digital products make an impact on Amazon's bottom line.

The picture might change if music labels lift the software locks that limit what songs can play on what devices. For its music store, Amazon has expressed the desire to sell only music that comes without restrictions on how and where consumers can listen to it. Meanwhile, though, Amazon's offerings of digital movies and books remain chock-full of restrictions. Books sold by Mobipocket won't play on a Sony Reader. Movies and TV shows from Unbox play on most TiVo machines and portable devices--except the hugely popular iPod.

Amazon isn't shy about jumping into speculative ventures. It spent $201 million in the last quarter on a range of new technologies and announced an online payment service to compete with eBay's PayPal. Digital media delivery is another area that will require sustained investment to bear fruit.

By Scott Kirsner


Steve Ballmer, Power Forward
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