April 18, 2012, 7:57 AM — In the mid-1990s, I ran across what looked like an incredible story: A teenager, dubbed the Whiz Kid, was selling a ton of computers from his parents' home. Newspapers told the story complete with images of the teenager talking on his cell phone-which, at the time, was a big deal.
So I called the teenager and spoke to him and his dad. Turns out, his dad had set up a business to buy computers via a distributor and sell them directly to companies at cost. That's right, no margin. The dad and his son moved lots of computers because they were undercutting everyone's price.
The business wasn't about making money, rather just a publicity stunt for the teenager. While companies could get computers on the cheap, business models with a hidden agenda and no margins aren't good for anyone down the road.
The Whiz Kid story came to mind as I thought about the drama going on with Amazon, Apple, book publishers and the Department of Justice over alleged price fixing of e-books.
In this scenario, Amazon is the teenager with a not-so-hidden agenda.
Amazon set the price of an e-book at $9.99, a low-ball number with a tiny, if any, margin. Critics point out that Amazon overall makes little profit on a whopping $48 billion in revenue. Amazon's goal is to offer e-books at a huge discount and seed the e-book reader market with Kindle devices, which, in turn, will create a monopoly that forces customers to buy e-books only from Amazon.
And it was working: Amazon quickly grabbed 90% of the e-book market, writes CIO.com's consumer tech blogger Bill Snyder.
We can thank Apple for putting the kibosh on Amazon's evil monopolistic scheming. With the iPad, book publishers had another e-book distribution option. E-books on Apple's iBookstore rose to the range of $12.99 to $14.99 under Apple's agency pricing model, which allows book publishers to raise the price of an e-book while Apple takes a 30% cut. As a result, Amazon's market share fell to 60%.
If Amazon is the teenager in the Whiz Kid story, then book publishers are the value-added computer resellers, known as VARs. They are victims but not completely innocent.
In the early days of computer distribution, VARs often did little more than receive a computer from a low-margin mass distributor, slap on a 30% markup and push the box to the corporate customer. I doubt VARs got together and fixed the price, but it was an industry standard practice.