Is Amazon Inside Apple’s OODA Loop?

John Boyd was a legendary US fighter pilot during the Korean War who later became a fighter pilot instructor. He had a standing bet with his students: he would meet you in the air at 30,000 feet and you would get on his tail. He would reverse the positions and get you in his guns in 40 seconds or he would give you 40 dollars — about $375 today and a lot of money for an Air Force captain. Boyd challenged anyone and everyone including students, other instructors, and the best fighter pilots from around the world. Many took the challenge, but Boyd never lost. He was the best fighter pilot in the world and many believe the best ever.

As a Colonel, John Boyd developed a framework to help train combat fighter pilots that became known as the OODA Loop (for observe, orient, decide, and act). He argued that the key to tactical success in combat is to obscure your intentions from your opponent while you simultaneously clarify and anticipate his intentions. By operating at a faster tempo in rapidly changing conditions, you both inhibit your opponent from adapting or reacting to changes and suppress his awareness of your actions. You cause an opponent to over- or under-react to uncertainty, ambiguity, or confusion. In military parlance, adopted by many technology strategists, you get inside their OODA Loop.

As an example, Barack Obama has been well inside Mitt Romney’s OODA Loop for the past month on issues of gender equality. His statements have frequently caused Romney to react in ways that Obama has clearly anticipated and exploited. But that’s another post. Today’s question is, has Amazon penetrated Apple’s OODA Loop with respect to eBooks? It sure looks like it.

The story begins in 2001, when Amazon observes Apple’s iTunes business model. Amazon CEO Jeff Bezos must have been awed watching Steve Jobs turn digital music, which was free and widely pirated, into a money machine. Jobs integrated a device (iPods), a store (iTunes), and a wholesale deal with music labels for content under which they agreed to let him set the retail price of tracks (it would be $.99). Within a few years, Apple was the world’s largest music retailer and record stores were a distant memory (although a very fond one). Steve Jobs had figured out how to compete with free — the first but not last technology leader to perform this trick.

Amazon copied Apple in building its book market. It tied Kindles to its store and it bargained with publishers for a wholesale deal for content. Like Jobs, Bezos insisted that publishers let him set the retail price, which he targeted at $9.99 per book. It is likely that publishers in some cases set wholesale prices higher than that and Bezos lost money on early book sales, but as the market grew, his pricing power grew with it and the full cost of each eBook declined as well. Bezos knew that when Apple entered the book market late, they would be forced to either a) stick to their traditional wholesale model, where he had a significant first mover advantage, knew more about online retailing, and held a brand advantage (do you really think “book” when you think iTunes?) or b) try to compete by attracting publishers and letting them control the product price. Bezos knew he would win either way.

Bezos also knew that “talent copies, genius steals” did not apply to Steve Jobs, who never copied anybody. He had a pretty good idea that Apple would try to convince publishers to adopt “agency pricing“, which, in contrast to wholesale pricing, gives the publisher the right to set the retail price and pays the retailer a commission. Jobs knew that agency pricing would attract publishers who resented price pressure from Amazon and that publishers backed by Apple would force Amazon to raise ebook prices. But only the largest publishers were strong enough to threaten to withdraw content from Amazon — most stuck with their wholesale pricing deals. Bezos raised prices reluctantly and selectively to keep large publishers from defecting. That’s why some ebooks now cost $14.99 on Amazon, while most cost $9.99.

Better yet, Bezos also knew that the manner of Apple’s entry into the book market looked a lot like price-fixing. Price-fixing rarely gets you into trouble when, as in Apple’s music or Amazon’s book terms, you force retail prices lower, but collaborative arrangements that lead to higher prices to consumers frequently incur the wrath of the Department of Justice Antitrust Division. Bezos also understood that Apple could fall afoul of laws against price-fixing, even though Amazon, not Apple, has an effective eBook monopoly. A monopoly is generally not illegal unless you use it to jack up prices.

So what does Amazon do the day the Department of Justice discloses its investigation into Apple’s alleged price fixing? It lowers eBook prices. Apple has an estimated 15% share of the eBook market (courtesy, one suspects, of simple iPad users who don’t know any better). That share is heading nowhere but down under the agency model, which is why Apple should give it up as part of a quick settlement with the DOJ. I would not want to be eBook strategist Eddy Cue at Apple this week.

But Apple’s is not the only OODA loop in Bezos’ crosshairs. He is also deeply inside the heads of publishers, whose cockpits are blaring with enemy radar lock-in sirens — the last sound many fighter pilots ever hear. As he often does, Clay Shirky said it best:

“Publishing is not evolving. Publishing is going away. Because the word “publishing” means a cadre of professionals who are taking on the incredible difficulty and complexity and expense of making something public. That’s not a job anymore. That’s a button. There’s a button that says “publish,” and when you press it, it’s done.”

Amazon has demonstrated a much greater ability than Apple to observe, orient, decide, and act to dominate the eBook market. This is the second sign of peak Apple in as many weeks and another indication that Jeff Bezos has taken over from Steve Jobs as the reigning strategist of the technology world.
That said, eBooks is not the most important market where these two companies will go head to head. That would be payments, because nobody else has 100 million credit cards on file. Bezos should think very hard about this one. Apple owns a big piece of mobile and has the moves to be on his tail with guns blazing in about 40 seconds.