Amazon’s New “Coins” Program Is a Brilliant Strategy To Give Free Money to Kindle Fire Owners

Innovation, the Internet, gadgets, and more.
Feb. 6 2013 2:31 PM

Amazon’s Amazing New Stimulus Program

Amazon Coins is a brilliant strategy to give free money away to Kindle Fire owners.

Amazon CEO Jeff Bezos
Amazon CEO Jeff Bezos

Photo by David McNew/Getty Images

Back in November, Amazon did something a bit unusual. It issued $3 billion in bonds for no particular reason other than because it had an excellent credit rating and no outstanding debt and so could borrow money cheaply.

Yesterday it did something else a bit unusual. It announced the coming launch of Amazon Coins, a “virtual currency” that you can use to buy Kindle Fire content. It also announced that as part of the launch it’ll be “giving out tens of millions of dollars worth of Coins” to users—coins that content vendors can redeem for actual dollars. Specifically, each Amazon Coin will be redeemable for 1 cent. What kind of company borrows money just to give it back to customers and suppliers? A brilliant one that understands the underlying economics of the technology platform wars better than its rivals.

The competition among Amazon, Apple, Google, Microsoft, and others to become the dominant firm of the mobile era can be analogized to the problem faced by developing countries. Industries want to locate where skilled workers and advanced supply chains already exist. But workers and other supply chain participants only have the incentive to invest if they’re confident industries will be around. The solution, typically, is “industrial policy”—deliberate state-led efforts to subsidize specific sectors in order to foster their growth as exporters.

When this works well, it can work very well. South Korea, for example, has used a model of state-led capitalism to go from poor to rich with amazing speed. But it can also work out quite poorly, as in Egypt and many other middle income countries stuck in a web of crony capitalism and corruption.

A perhaps savvier approach is China’s much-derided “currency manipulation.” By keeping the yuan cheap relative to the dollar and the euro, China in effect offers a subsidy to any firm that wants to use China as an export base.* Thus, even a country with a fairly high overall level of corruption has been able to rapidly industrialize by letting the international marketplace decide which particular subsidized exporters succeed.

The parallel problem in the technology platform wars is the feedback loop between market size and app development. Because Apple was first out of the gate with an app-friendly smartphone and first out of the gate with a popular tablet, it’s gained a huge built-in advantage. The large market of iOS users makes iOS development an attractive proposition, and the large quantity of iOS apps makes iOS attractive for customers. Microsoft has been trying to vanquish this problem by offering direct subsidies to app developers to make sure that Windows 8 phones have versions of the most popular mobile apps. One problem with this central planning strategy is that it relies on Microsoft executives doing a good job of guessing which apps are most important to potential customers. A bigger problem, however, is that it largely serves to encourage subsidy farming—delivering a product that’s good enough to qualify for the check—rather than a real focus on excellence. Last and by no means least, this is a terrible way to encourage innovative new apps to emerge on the platform.

Amazon’s strategy is more like China’s or an aggressive program of quantitative easing. By printing money and putting it in the hands of Kindle Fire owners, Amazon will increase the demand for Kindle Fire content. More importantly, because Kindle Fire developers will expect higher future demand, they’ll have an incentive to invest in creating things for people to buy. It’s a developer subsidy, but with several advantages over Microsoft’s approach. For starters, since the subsidy directly passes through customers’ hands rather than being hidden from them, it builds goodwill and brand loyalty. More importantly, it avoids the problems with Microsoft’s central planning. The basis of competition is still who can make the apps people want to buy not who can talk executives into writing a subsidy check.

Crucially, this means the opportunity is there for independent developers and new startups. All we know is that by printing coins and showering them on the user base, Amazon will increase the volume of sales. That spurs effort by developers across the board, which should make the broader ecosystem more attractive to customers.

And where does the money come from? Let’s go back to those bonds. Amazon’s three-, five-, and 10-year bonds pay interest rates of 0.65, 1.2, and 2.5 percent respectively. That’s nothing. In fact, in inflation-adjusted terms, the three- and five-year bonds literally pay less than nothing. Apple is earning huge profits, then stacking the money up in a vault where its short-term securities earn less than inflation in today’s low-interest environment. Amazon, by contrast, is taking advantage of those low rates to skate by on razor-thin margins and even take on debt to strengthen its ecosystem. It’s a great strategy that other companies—and for that matter national governments—could learn a lot from.

Correction, Feb. 6, 2013: Due to an editing error, this article originaly misstated the name of China's currency. (Return to the corrected sentence.) 

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