Thursday, September 20, 2012

Amazon & Apple: Is their proxy war getting hotter?

Earlier today, according to ReutersWalmart notified its store managers that the company would no longer carry Amazon's Kindle eReaders and tablets once its existing inventory and committed purchases run out. Walmart confirmed its decision with Reuters, but didn't specify the reason(s). In May, Target announced that it would no longer carry Kindles, and like Walmart, it never made an official public statement about the reason. However, CNN noted that Target had just been authorized by Apple to begin selling iPads, and that it planned to add Apple "mini-stores" within 25 of its locations.

There are two reasons being cited by observers as to why Walmart might have decided to drop Kindles:
  1. Amazon may not have offered Walmart a sufficient discount, or
  2. Walmart may see Amazon as an increasingly large competitor for general merchandise sales, and doesn't want to support a competitor any longer.
Both of these reasons make sense, and either one of them may be true, but let's sideline that discussion for a bit.

At Publishers Lunch Deluxe, Michael Cader reported on Apple's efforts to get evidence from Amazon for its defense in the government's eBook price-fixing case. According to Cader, Apple has been trying to compel the Justice Department to turn over the transcripts of interviews with 14 Amazon managers and executives. Those interviews weren't taken under oath. The Justice Department argued that the interviews are protected work product, and aren't subject to release. However, Justice has given Apple the names of everyone at Amazon who was interviewed, and said that Apple could take depositions directly from those people. In addition, the Justice Department has released all of its email communications with Amazon and all of the documents and data it received from Amazon during its investigation.

Apparently, Apple took up the Justice Department on its idea, and filed subpoenas to force the 14 Amazon employees to give depositions. Then, last Friday, September 14th, Amazon filed a motion in Seattle Federal court to quash the subpoenas, on the grounds that Amazon isn't a party to the litigation. This week, Apple filed a motion with Judge Denise Cote, who's in charge of all of the U.S. cases related to eBook price-fixing, to move Amazon's motion from Seattle to her court. Judge Cote is now considering Apple's motion.

I don't know that much about the law regarding who can and can't be compelled to provide depositions and discovery documents. What I do know is that if Apple does eventually get the right to enforce its subpoenas, Amazon is going to want to put strict limits in place to prevent any confidential information that's not directly related to the price-fixing case from being revealed to Apple.

That brings me back to the title of this post, and to my first point. Clearly, Apple and Amazon are competing in more areas, and in the U.S., Amazon is currently the only serious competitor to Apple in tablets, based on sales. Apple is widely rumored to be planning to announce a smaller iPad next month. Target dropped Amazon shortly after signing a deal to carry Apple's iPads, and now, a month before the smaller iPad's expected release, Walmart has also dropped Amazon's Kindles. Does that mean that Apple might have made Walmart's getting the small iPad conditional on dropping Amazon? It's certainly possible, but rather than getting into legally murky waters, Apple could have required Walmart to give its products a certain amount and type of display space--a very common condition in retail distribution deals. Walmart would have to get that space from somewhere, and "independently decided" (wink, wink, nudge, nudge) to take it from Amazon. Another perfectly legal option would be if Apple offered Walmart co-op funds if it did certain things (for example, PC manufacturers get reimbursed for part of their advertising costs by Intel if they include that four-note musical theme at the end of their commercials.) These payments amount to a discount--and if Target is already getting them, Walmart would be at a competitive disadvantage if it didn't get them as well.

All of this adds up to "shadows on the wall" suggesting a proxy war between Apple and Amazon:
  • Amazon is using the Justice Department as a proxy against Apple to get agency terms and Most Favored Nation clauses terminated, and
  • Apple is using Target and Walmart as proxies to hinder Amazon's ability to sell Kindles in stores.
If this "proxy war" model is correct, I'd expect Best Buy to be the next retailer to drop Kindles. Apple has dedicated sales space in most Best Buy stores, and a lot of leverage over the retailer. In addition, Amazon is a strong competitor to Best Buy, so there's plenty of reasons for Best Buy to stop selling Kindles.

You may say that this is all paranoia, and you may be right, but I've spent enough time in high tech to know that everything that's happened so far is right out of the Silicon Valley playbook. 

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