Amazon.com: The Wal-Mart of Android apps?

Developers who think the Amazon Appstore will be a welcome alternative to the Android Market should read the fine print

Last week I talked about the forthcoming Amazon Appstore for Android and how I thought developers could benefit from increased competition in the software distribution market. I still think that's true, but in using the Amazon Appstore as my example, I may have spoken too soon. The more I look at the fine print, the more skeptical I become that Amazon.com's move will be a real boon to Android developers.

To start, let's look at one of the Appstore's most contentious points: the fact that Amazon.com, and not individual developers, gets to set the prices for app downloads. Amazon.com says it will pay developers a royalty on each sale equivalent to 20 percent of the list price of the app (what the developer is asking for it) or 70 percent of the purchase price (what the customer actually paid), whichever is greater.

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So let's do some math. If you list your app for $5 and Amazon.com sells it for $5, Amazon.com owes you 70 percent, which is $3.50. Amazon.com pockets $1.50 -- so far, so good.

Where it gets tricky is if Amazon.com decides to discount your app. If you list your app for $5 and Amazon.com sells it for $4.99, now Amazon.com only owes you $3.49, because that's 70 percent of the new purchase price. And Amazon.com can keep discounting your app until your take drops down to $1 -- the equivalent of 20 percent of your original list price -- because that's the minimum you've agreed to accept. In other words, Amazon.com can choose to sell your app for as little as $1.43 -- a 71.4 percent discount to the customer.

How low does Amazon.com plan to go?
Mind you, Amazon.com has plenty of incentive not to discount apps that deeply. If it sells your app for $5, it earns $1.50; if it sells it for $1.43, it only walks away with 43 cents. But this equation skews just slightly in Amazon.com's favor. The $1 you earn from the discounted sale is about 28.6 percent of what you would have earned if the app had sold at list price. Amazon.com's 43 cents is 28.7 percent of the $1.50 it would have earned.

That's the worst-case scenario, though, and it stands to reason that Amazon.com will want to maximize its own profits by selling apps for as much as it can. What's troubling, however, is that it sounds as though "as much as it can" is almost never going to be full list price, because there's too much incentive for Amazon.com to undercut competing app stores as a way to drive business to its own, especially at this early stage.

That might even be OK if developers had more control of their pricing models under Amazon.com's scheme and expected to make only a certain number of sales at Amazon.com's discounted rate. But the Amazon Appstore developer agreement specifies that the list price you supply to Amazon.com must be "an amount that does not exceed, at any time, the lowest list price or suggested retail price." In other words, if you list your app for $5 on the Android Market, you cannot supply Amazon.com a higher price in anticipation of the Amazon Appstore's discount policies. You can't even sell your app for less than $5 through your own website without updating Amazon.com's list price at the same time -- and Amazon.com is free to discount it even further.

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