Apple 2.0

Covering the business that Steve Jobs built

Apple's new subscription policy could cost Amazon $80-$160 million per year

February 23, 2011: 10:54 AM ET

That, says a team of Merrill Lynch analysts, is the hit it would take in Kindle book sales

Source: Merrill Lynch

The button circled at right on Amazon's (AMZN) popular Kindle app for the iPhone will have to be removed if the company wants to continue doing business in Apple's (AAPL) App Store. That's because it takes customers out of the store to Amazon's website, where readers have been buying books for nearly two years.

The prohibition against such links is one of the conditions Apple is imposing as part of a new policy announced last week -- along with a 30% cut in any so-called "In App" sales and a rule that prohibits third parties from passing that extra charge onto their customers.

"The potential negative for Netflix and Amazon," says a note to Merrill Lynch clients issued Wednesday, "is that a 30% rev. share would likely be unprofitable for new subscriptions and eBook sales within the app."

If Amazon doesn't decide to pull Kindle from the App Store -- a big if -- how much would the new rules cost it? Team Merrill has done some back-of-the-envelope calculations:

"Our Kindle model assumes 2011 Kindle media sales of $1.6bn, up from $500mn in 2010. Assuming Amazon drives 5-10% of its Kindle media sales through the current Apple app link (a rough assumption at best), then approximately $80-160mn in sales could be negatively impacted by this policy."

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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