Saturday, October 17, 2009

Google by a Nose? Google by a load!

Electronic "book race" articles imply that Google will likely come in third in a three horse, book seller, race. Amazon, Apple, Google? I guess these folk see WalMart, Sony and the largest book seller in the world, Barnes and Noble, as plow horses, in the "also ran" category.

Amazon has a head start. It has lined up more publishers, sold more reading devices and sold more electronic books. It is the king of online retail with a solid repeat-customer base. Amazon controls price and offers electronic books at substantial discounts to hard cover prices. It constantly offers a few free books; the avid reader can easily save the price of the Kindle in 3 to 9 months. Should the avid reader buy a Kindle, a Sony, one of the readers in the growing Barnes and Noble stable or should he wait?

Apple is the mobile gadget king because it makes the best gadgets. The iPhone is kicking butt and taking names. Nokia hardly knows what happened, it was cruising along selling more phones than anyone when Apple grabbed hold of the top-line market and refused to let go. Apple has a huge presence in the online music market and is selling Kindle format books, readable on the iPhone and the iPod. The coming Apple tablet computer has been built and rebuilt and rebuilt to get it right; Apple makes quality products. The new Apple Tablet will be first rate; a high dollar purchase but a powerful, easy to use, product. The combination of Amazon books on a top quality Apple Tablet will be a formidable competitor for the $800 plus marketplace.

Google is running in a very different race. For Google the issue is not about selling X number of books or electronic gadgets for X dollars profit per book/gadget. Yes, Google will sell "Google Edition Books" for only a 37% share of revenue (making publishers and authors happy), but it has the much broader mission of making information available to all, while making profits by connecting the knowledge to the knowledge seeker.

Put another way, Amazon and Apple are operating under the Cournot theory of business profits and Google is operating under the Bertrand theory. The difference is that "Cournot businesses" limit their production to avoid dropping the price of their products to the marginal cost of production. Google is in the enviable position of benefiting when the marginal cost of information drops to the marginal cost of distribution and those costs are rapidly approaching zero.

Chris Anderson, editor-in-chief of Wired magazine, has written two authoritative works that explain the digital world and it's relationship to Bertrand theory -- "The Long Tail: Why the Future of Business is Selling Less of More" and "Free". The bottom line of these works is: 1) the cost of storage and distribution of digital goods, by the rule of Moore's Law, will continue to rapidly approach zero and, 2) the aggregate demand for these low cost goods will continue to soar--at Moore's Law compounded rates!

Google's approach to this "book race" is not to get to the finish line first but to get there with the most. Google has said to publishers and to Sony, Barnes and Noble, WalMart, Verizon and hundreds of thousands of others, "help us carry the load and we will all make money". Google is willing to go all out to reach the economies of scale needed to win. Google says to publishers, "allow us to sell your content and right from the start, even before economies of scale kick-in, we will give you 63% of the revenue". In the following breath, Google says to retailers of gadgets and books, "We have wholesale goods available at very attractive prices"! Google is staying true to its model of being willing to perform new services for zero income; patiently waiting until high volumes and continuing cost declines to push forward positive returns.

Google also makes the strong statement to consumers; "We are on your side!" Indeed, Google offers hundreds of software products to consumers free of charge. Google even says to gadget makers, "in order to help you offer your customers the best deal, we will give you your ope

in reference to: Google Editions Bookstore to Face Stiff Challenge From Amazon, Perhaps Apple (view on Google Sidewiki)

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