How Amazon Underground will affect content pricing and business models

As interesting as the all-you-can read models from Next Issue, Oyster Books and Scribd are, I believe Amazon just introduced a new model that’s likely to be much more disruptive in the long run. I’m talking about Amazon Underground, where paid apps go to be free.

If you haven’t heard about Underground it’s a collection of paid Android apps that are now available free if you download them directly from Amazon. The initial collection is mostly games but it will undoubtedly grow over time. It’s also important to note that the catalog includes paid apps as well as those with in-app purchases (e.g., additional levels for a game); those in-app options also become free in the Underground world.

App developers get paid for engagement in the Underground model. So if their app gets downloaded but never used they earn nothing. On the other hand, if their app is wildly successful and used extensively, Underground represents a whole new developer revenue stream.

Any app developer will tell you there’s an enormous difference between the number of downloads of a 99-cent app and that same app as a freebie. Amazon gets that and may have cracked the code in leveraging free while also driving revenue.

It all has to do with advertising revenue. You may not see much (any?) advertising in some of these apps today. For example, I haven’t seen a single ad in a casino game and Office app tool I downloaded. That will undoubtedly change in the future. After all, in order to keep investors happy, Amazon’s losses today always need to point to profits and other benefits in the future.

What are those benefits?

First of all, it’s an interesting way to co-opt the Google Play store. Remember, you can only get these Underground apps direct from Amazon, not Google. I’ve got to believe Amazon’s own app store isn’t exactly thriving, so this is a great way to give it a gentle boost.

Second, all those Underground apps you download ultimately pull you deeper and deeper into the Amazon walled garden. This too might not be apparent today but it will become crystal clear when those ads start popping up. And don’t forget that you’re opting into a model where all your app usage is closely tracked. After all, that’s how Amazon determines how much to pay developers. If you’re a privacy freak, Underground is not for you.

Why should publishers care about Amazon Underground? It sounds like an interesting model for game developers but not all that applicable for books, newspapers and magazines, right?

Wrong.

I’ve been talking about advertising in books for quite awhile now and I think Underground represents a viable, incremental business model for this vision. It’s obviously not the best option for some content but I’m convinced enough publishers and authors will embrace it, so much so, in fact, that naysayers will even have to consider it.

Let’s be clear about this though: I’m not suggesting an ad-based model will generate the same amount of per-unit revenue as the paid edition. That’s simply not going to happen. If a publisher is earning $5 per copy sold of an ebook today they might only earn ten or twenty cents (at best) from each download of the Underground version.

So why would any publisher ever agree to this?

It’s all about extending reach. Sure, nobody wants to trade a $5 sale for one netting ten cents. But what about all those readers who aren’t going to buy the book, newspaper or magazine to begin with? You’re netting zero from them today and possibly ten cents from each of them in the future. All that, with no cost of goods, btw.

Here’s another interesting use-case: Underground becomes a better sampling solution. Once the service is loaded with a bunch of ebooks, readers will be able to download the entire catalog without paying a penny. Amazon won’t be on the hook for any payment till pages are read. Consumers who like what they see but get frustrated with all the ads will always have the option to go back and actually pay for the original, ad-free edition. The rest of us will simply deal with the ads and enjoy the free ride.

That sounds like a win-win model for quite a few books, newspapers and magazines.

Comments

[Adam C. Engst]

Do you see publishers creating special editions that contain hard-coded advertising? That's one obvious path, but suffers from the fact that the ads can't then be changed out or updated in any way. (I speak from experience here - we've done this with some Take Control ebooks.)

The other approach is to have a special content container, but that then runs afoul of forcing readers to maintain different content in different places.

So either you have old-style fixed advertising manually inserted into the content, or you have to change the way people read by introducing a new content container that can serve dynamic ads. Neither is ideal, alas.

If EPUB allowed data to be loaded over the Internet, that would solve the problem, but I gather that desire died in the spec committee.

[Joe Wikert]

Hi Adam. I see a model where publishers don't have to do a thing. Rather, Amazon will simply incorporate advertising functionality right in their Kindle reader app. They'll decide how frequently the ads appear and how they're presented. That seems to be the simplest way forward.

[Michael W. Perry]

Only the foolish will pay for these ads. Smartphone ads aren't as attention demanding as those on websites. On my iPhone, the ad bar is so small, I easily learned to ignore it. It's not just that I don't read it. I'm not really seeing it.

[Myron Taney]

Joe

However useful the service is to Amazon, it's a privacy invasion nightmare for consumers. Just some of the permissions requird for Underground:

Access coarse and fine location
Access info re Wi-Fi networks
Access device credentials
Record audio
Change Wi-Fi connectivity state
Open network sockets
Read the user's contacts data
Access the flashlight (wtf?)
Monitor incoming SMS messages, to record or perform processing on them (holy sh*t!)
Send SMS messages
Required to be able to access the camera device (why?)
Communicate to Google Cloud Messenger (send all your info to Jeff)
Any many, many more!

Basically, Underground is Big Brother in your pocket.

Plus it replaces the Free App of the Day, which is just sad.

[Judith Gotwald]

Among our inalienable rights is the right to advertise, advertise, advertise. It may be the only reason we innovate—to create better platforms for advertising. Into our minds, into pockets.