Apple, Google, Amazon and the Rise of Extreme Prices

Wednesday Mar 14th 2012 by Mike Elgan
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When the big players offer super low prices, who wins and who loses?

Technology giants like Apple, Google and Amazon are in a constant battle against myriad startups, each of which seeks to beat the big companies to new markets, and unseat them from the old ones.

Plus, the giants are constantly at war with each other, as expanding business models create overlapping territories and new rivalries.

It’s well understood that tech giants compete with product quality, marketing and even the patent courts.

But less understood is how they leverage their deep pockets to compete with extreme pricing models that competitors often can’t match. Companies use extreme pricing to gain long-term advantages against other companies who aren’t able or willing to match them dollar for dollar.

The whole issue of extreme pricing came up this week. The Wall Street Journal reported that the US Department of Justice warned Apple and its publishing partners that it plans to sue them for eBook “price fixing.”

Apple’s so-called “price fixing” involves Apple giving publishers the power to determine the price of eBooks -- as long as Apple gets its 30% cut.

It’s an attractive deal for publishers, but there’s a catch: Publishers would have to agree to not sell the same titles at a lower price via another retailer (cough) Amazon! (cough).

Apple’s extreme pricing policy appears to be a response to Amazon’s even more extreme pricing policy -- selling at a loss!

Amazon also sells its eBook reader tablets at a loss.

I believe Amazon wants to drive prices so low that less -- ahem! -- “efficient” companies can’t compete. Once most competitors have been driven from the market, Amazon will be solidly in control of the publishing industry.

Amazon appears to want to lose money in the short term to drive competitors out of the market so it can dictate prices in the long term.

Either that or Amazon just likes losing money for the fun of it.

Many authors and publishers have been freaking out for some time over Amazon’s extreme pricing. And many expressed relief over Apple’s extreme pricing.

Author Salmon Rushdie has attacked the DOJ’s lawsuit, saying the US government “wants to destroy the world of books” by attacking Apple’s extreme pricing policy.

Author’s Guild President Scott Turow called Apple’s policy a “life raft” for the industry.

Amazon wants to do a low-price scorched earth on the industry, devastating publishing companies (and authors) and thrilling cheapskate consumers. Apple wants to dictate prices industry-wide and, while demanding a hefty cut, thrilling publishing companies and authors but pissing consumers off with higher prices.

Which extreme pricing policy harms consumers in the long run? Which is anti-competitive?

I don’t know. But I can tell you these companies are using extreme pricing to competitive advantage.

Amazon and Apple’s eBook pricing models are extreme. But they’re not alone in the industry in using extreme pricing to beat the competition.

Google Sells Songs for a Quarter

Google wants to compete against Apple and Amazon in the downloadable app, music, book and movie business. The company recently re-named and re-organized its downloadable content offerings into a new service called Google Play.

To shock users into awareness, incentivize them to fork over a credit card and give Google Play a try, the company is offering a week of extreme pricing called “7 Days to Play.”

Select movie, music and book titles, for example, are for sale for as low as a quarter each. Other titles are slightly higher, but all appear to be sold at a loss, with Google paying the difference.

Losing money at scale is truly extreme pricing. But at least it’s probably temporary.

Losing money on cloud services? Not so much.

And How Do You Price the Cloud?

When it comes to downloadable content and hardware gadgets, it’s pretty easy to detect extreme pricing. But what about the cloud? How do you price something as nebulous as cloud computing?

A price war has broken out between Google, Amazon and Microsoft over the prices they charge for their respective cloud services offerings.

Earlier this month, Amazon and Google each dramatically cut prices on their various cloud services.

Microsoft was forced to respond with similar cuts.

It appears to be an all-out price war in the cloud services space. Major players appear willing to undercut each other, making sacrifices in the short term to gain customers in the long term.

It’s impossible to tell if companies are losing money and providing services at a loss. For starters, various cloud services are difficult to compare. And cloud services are like bowling scores. You don’t know how you’re doing now until you find out how you’ll do in the future.

If extreme pricing brings in far more customers, then economies of scale can make it pay off. Maybe.

As we’ve seen, both Amazon and Google are grizzled veterans of the extreme pricing approach. But Microsoft is a relative newcomer -- unless you consider consistently high software prices to be extreme.

All these giants have deep enough pockets to play a very long game. But what about startups? Are they being excluded from the market unfairly?

Do consumers benefit from extreme pricing because everything is cheaper, or does extreme pricing stifle competition and reduce the emphasis on product and service quality?

Look what extreme pricing did to customer service in the airline industry.

What is clear is that the ability to offer extreme pricing strategies has proven to be a strategic asset by the tech giants in their competition against more agile startups -- and each other.

Whether cheap tech cheapens tech remains to be seen.

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