Wednesday, December 1st, 2010

The Price of Kanye West’s Ego

Rappers have big egos. So it doesn’t surprise that Kanye West would price his blockbuster new album My Beautiful, Dark Twisted Fantasy, at $4.99 merely to upstage his dainty country-pop nemesis Taylor Swift, whose Speak Now released a few weeks earlier sold more than a million copies in a week.

But does it make sense for Amazon? Amazon usually pays record labels the regular wholesale price. Is it smart to sell the album at a loss just to boost volume? Amazon has done this before. And it followed the same strategy after it launched the Kindle e-book reader. It figured that pricing downloads at a cheap $9.99, assuming a loss on each e-book sold, would help establish the Kindle as the main e-reader before anybody came out with a rival technology.

It’s unclear to me that this will ultimately work. Apple’s strategy to take over the online music market with 99-cent songs was possible because Apple makes its money from devices like iPod players, and can afford not to make money on the music. iTunes reportedly barely brakes even. But Amazon is not going to win the device war. It doesn’t reveal sales of Kindles, but they have probably been overtaken by the iPad by now. And Kindle prices have dropped dramatically, to $129. Amazon needs to make money from the software –the books and music that it sells.

These days Amazon looks content being not a device maker but a store. It developed a Kindle application for iPad users to access its very large e-book store (much bigger than Apple’s). And it stopped subsidizing all books through the flat $9.99 pricing. Offering e-books for readers other than its own is probably the best way to remain the dominant bookstore as sales migrate online.  But the hurdle is higher in the music business, where iTunes still has 70 percent of the market to Amazon’s 12 percent. Amazon’s cheap pricing might help it gain a couple of points of market share, but how much of the gap can it close?

Incidentally, on iTunes My Beautiful, Dark Twisted Fantasy costs $9.99

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