A word of warning about Amazon's App Store

A word of warning about Amazon's App Store

By IGDA Board of Directors

April 14th 2011 at 1:49PM

Read in full the IGDA's open letter to Amazon

To all members of the game development community:

Two weeks ago, Amazon launched its own Android Appstore. We know that many developers have been eagerly looking forward to that launch in hopes that it would represent a great new revenue opportunity and a fresh take on downloadable game merchandising. The IGDA applauds Amazon’s efforts to build a more dynamic app marketplace. However, the IGDA has significant concerns about Amazon’s current Appstore distribution terms and the negative impact they may have on the game development community, and we urge developers to educate themselves on the pros and cons of submitting content to Amazon.

Many journalists have noted the unusual nature of Amazon’s current store terms, but little has been said about the potential implications of those terms. In brief: Amazon reserves the right to control the price of your games, as well as the right to pay you “the greater of 70% of the purchase price or 20% of the List Price.” While many other retailers, both physical and digital, also exert control over the price of products in their markets, we are not aware of any other retailer having a formal policy of paying a supplier just 20% of the supplier’s minimum list price without the supplier’s permission.

Furthermore, Amazon dictates that developers cannot set their list price above the lowest list price “available or previously available on any Similar Service.” In other words, if you want to sell your content anywhere else, you cannot prevent Amazon from slashing the price of your game by setting a high list price. And if you ever conduct even a temporary price promotion in another market, you must permanently lower your list price in Amazon’s market.

These Amazon policies could have far reaching effects on game developers. The IGDA has identified five potentially problematic scenarios in particular:

1) Amazon steeply discounts a large chunk of its Appstore catalog (imagine: “our top 100-rated games are all 75% off!”). Some developers will probably win in this scenario, but some developers — most likely, those near the bottom of the list — will lose, not gaining enough sales to offset the loss in revenue per sale. Amazon benefits the most, because it captures all the customer goodwill generated by such a promotion.

2) By requiring all developers to guarantee Amazon a minimum list price that matches the lowest price on any other market, Amazon has presented developers with a stark choice: abandon Amazon’s market or agree never to give another distributor an exclusive promotional window.

3) Other digital markets that compete with Amazon (both existing markets and markets yet-to-be-created) may feel compelled to duplicate Amazon’s terms, and perhaps even adopt more severe terms in an effort to compete effectively with Amazon. In essence, we’re looking at a slippery slope in which a developer’s “minimum list price” ceases to be a meaningful thing.

4) Amazon steeply discounts (or makes entirely free) a game that has a well-defined, well-connected niche audience. The members of that niche audience snap up the game during the promotional period, robbing the game’s developer of a significant percentage of its total potential revenue from its core audience.

5) Amazon steeply discounts (or makes entirely free) a hit game at a time when the game is already selling extremely well. This sort of promotional activity may attract consumers away from competing markets and into Amazon’s arms. But it might actually represent a net loss for the developer, which was already doing quite well and didn’t need to firesale its game at that moment in time.

The IGDA’s bottom line is simple: under Amazon’s current terms, Amazon has little incentive not to use a developer’s content as a weapon with which to capture marketshare from competing app stores.

The IGDA does not have the power or inclination to dictate how others conduct their business. However, the IGDA is permitted to express its views on business practices that affect the developer community, and it is the firm opinion of the IGDA that:

1) A developer’s permission should be required by any retailer seeking to pay less than the standard percentage of a developer’s minimum list price. This could be automated and even “opt-out” with a reasonable period of notice, but ultimately, a developer’s permission should still be required.

2) Developers should have the freedom to set a minimum list price of whatever amount they see fit, without regard to pricing in other app stores.

The IGDA has formally communicated its views to Amazon, and while Amazon has been very willing to engage with the IGDA, it has thus far expressed zero willingness to adjust its distribution terms. We believe that the people currently running Amazon’s Appstore may have the best of intentions and a desire to make their development partners successful, in general. The problem, as history has repeatedly demonstrated, is that things tend to change when a marketplace achieves any degree of dominance. The terms of Amazon’s distribution agreement give it significant flexibility to behave in a manner that may harmful to individual developers in the long run. Any goodwill that Amazon shows developers today may evaporate the minute Amazon’s Appstore becomes so big that Android developers have no choice but to distribute their content via the store. It would be foolish to assume that because Amazon’s Appstore is small today, it will not become the Walmart of the Android ecosystem tomorrow.

If Amazon responds to this open letter, it will likely invoke the success of games that have already been promoted in its Appstore; for example, games that have been featured as Amazon’s free app of the day. The company may claim that the success of those games is proof that Amazon’s model works. The IGDA believes that this argument is a red herring. Amazon does not need the terms it has established for itself in order to give away a free app every day. Nor does it need the powers it has granted itself to execute a wide variety of price promotions. Other digital games platforms, such as Xbox LIVE Arcade and Steam, manage to run effective promotions very frequently without employing these terms.

Amazon may further argue that its success depends on the success of its development partners, and therefore, that it would never abuse the terms of its distribution agreement. Given that Amazon can (and currently does) function perfectly well without these terms in other markets, it is unclear why game developers should take a leap of faith on Amazon’s behalf. Such leaps are rarely rewarded once a retailer achieves dominance.

We respect Amazon’s right to stay the course, but as part of our mission to educate developers, we feel that it is imperative to inform the community of the significant potential downside to Amazon’s current Appstore terms. If you feel similarly, we urge you to communicate your feelings on this matter directly with Amazon.

Sincerely,

The IGDA Board of Directors