By February 1, 2008

Amazon and Audible and Apple. Oh My!

The acquisition of digital audiobook seller Audible by Amazon.com has sparked a bit of controversy and raised quite a few questions in the last few days.

In particular, will Amazon and Audible continue its relationship with Apple and iTunes? Will Apple see Amazon as a competitor in the digital space, and sever ties on its end? Will Audible drop its proprietary DRM scheme? And is Angie having Brad’s love child?

While the answer to the last question is an unqualified “yes” (twins, in fact), the others are more difficult to interpret.

But let’s give it a whirl, shall we?

Numbers…

Let’s start by looking at the numbers.

According to the agreement, Amazon.com will purchase all of the outstanding shares of Audible.com for $11.50 per share, or a 23 percent premium from their closing price of $9.33 on Wednesday, in a transaction valued at approximately $300 million.

Audible has maintained an exclusive relationship with Apple since 2003, with over 20,000 audiobooks for sale via the iTunes Store.

iTunes accounts for 27% of Audible’s revenues.

And Apple supports Audible’s .aa audiobook format in iTunes, and across its entire line of iPods and in the iPhone.

Audible itself maintains a library of over 80,000 titles including books, periodicals, podcasts and material from talk radio shows.

And Audible controls an astonishing 95% of the online audiobook market, with over 400,000 members. Also included in Audible’s portfolio are nearly 400 content partnerships, with 60% of them exclusive.

When the transaction is complete, Amazon will have added about $90 million in annual sales to its revenues. Media accounts for 59 percent of Amazon’s sales, most of that still being physical books, CDs, and DVDs.

So, what can we derive from this?

Amazon…

Well, first off, Amazon isn’t going to unilaterally cut off Apple. It would be foolish in the extreme to spend $300 million dollars for a company and then immediately drop its biggest customer, lopping off over $24 million dollars in annual revenue in the process.

Further, such a move might tend to alienate Apple, who could then decide to terminate its DRM licensing agreement with Audible and drop .aa audiobook support from future generations of iPods and iPhones.

Which in turn would essentially leave Audible dead in the water, with no access to legions of iPod owners and no market for its products whatsoever aside from a few second-tier third-party MP3 players and whatever support they can build into the Kindle.

Now, an obvious counter-move would be for Audible to then switch its entire library over to DRM-free MP3s.

But that would be an expensive proposition, take quite a bit of time, and would also require Amazon and Audible to renegotiate contract and agreements with the publishers. And as Amazon was unable to get them to drop DRM requirements for the Kindle, I’d say the chances of them being able to push through such a change for audiobooks are slim at best.

Though such a drastic scenario could do the trick.

Another alternative exists, in that Amazon could use the forthcoming SDK to develop its own player software, though that would only regain access to a limited subset of iPod customers, namely those that own a Touch or iPhone.

Nope, it’s clearly in Amazon’s best interests to maintain the status quo.

But what about Apple?

Apple…

This one is more problematic, since Apple could see Amazon as a competitor in the online digital space, bringing them to either drop Audible’s audiobooks from iTunes, or drop format support from its iPods, or both.

But the same rules apply here as well.

If Audible is pulling in $24 million dollars in annual revenue from iTunes, then Apple’s making a decent amount of change from their side of the deal as well. Apple could try to sidestep Amazon and go directly to the publishers, but as we mentioned earlier, Audible has 60% of those locked up in exclusive agreements.

Further, with close to a half-million subscribers out there, dropping format support could be a major public relations problem for Apple. I personally have over 150 audiobooks I’ve purchased from Audible over the years as a subscriber, and I know I’d be very upset (and very vocal) if Apple chose to render my entire digital library worthless.

So if Apple pushed over the cart they’d lose money, anger a fairly large number of customers, and —perhaps most importantly— make their iPods and iPhones less valuable to a lot of people.

Remember, Apple is engaged in a razor-and-blade strategy with digital content and its media devices. It needs plenty of cheap content in order to keep selling iPods and iPhones and Touches and iPads and whatever else is coming down the product pipeline.

And over 400,000 people buying iPods and iPhones in order to listen to their books equates to over $100,000,000 in sales. Or given iPod/iPhone replacement rates, perhaps $75,000,000 in sales. Annually.

Again, it’s probably in Apple’s best interests to maintain things as they are, as well.

Conclusion…

So Audible needs access to Apple’s customer base, and Apple needs lots of content so that happy customers keep buying iPods and iPhones.

Any questions?

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