Introduction

Let’s get one thing straight from the start: Apple and Amazon are not friends. To put it into market terms, both companies would like nothing better than to have customers to themselves, wrapped up in their own seamless media universes: iTunes, iPad, and Apple TV on the one hand; and Kindle, Amazon Prime, and Fire TV on the other.

So, why

• Amazon releases a version of its Kindle Reader on Apple’s iPad, allowing users to access its library of exclusive digital books? Doesn’t that diminish interest in the Kindle device?
• Apple ever allows a Kindle app in its App Store in the first place, as it also sells e-books through its own iBooks app?

Even though these platforms are competing aggressively with each other, along certain dimensions they are collaborating,” says Zhu. “We call them ‘frenemies.’

How frienemies work

In a new working paper, Frenemies in Platform Markets: The Case of Apple’s iPad vs. Amazon’s Kindle, the researchers use a complex mathematical model to get to the bottom of just why enemies might decide to share a locker. It boils down to a difference in how they make their money.

• “Even though both make money from hardware and content, their profit foci are quite different.
  • Amazon is not really making a profit on hardware sales. It prices its hardware low as a way to encourage people to buy a lot of e-books.”
  • Apple, on the other hand, makes several hundred dollars on each iPad sale, able to charge a premium because of the hundreds of other features it offers through the App Store.

Making Up For Lost Sales

Those different strategies do more than just reduce competition between the two platforms, they also actually drive them to work together.

• “By making Kindle Reader available on the iPad, Apple will be able to attract more iPad buyers. The additional profit Apple generates from hardware sales more than compensates for the reduced e-book sales through iBooks.”
• “At the same time, Amazon will be able to sell more e-books, and the additional profit Amazon generates from e-book sales is greater than the loss in reduced Kindle device sales.”

That collaboration could make the two platforms differentiate themselves further, causing Apple to focus even more on device sales and Amazon more on book sales for their profits.

Through their mathematical model, this phenomenon is shown to hold true in the face of multiple scenarios. The mathematical model allows us to investigate how various factors such as different platform production costs and exclusive content affect the two platforms’ incentives to work together.

Other examples

Amazon recently listed its Chinese e-commerce site as a virtual store on the massive Chinese exchange Alibaba, which would seem like a direct conflict. But since

• Amazon makes its profits from product sales to consumers, while
• Alibaba makes money from service and advertising fees from merchants,

both could help the other increase its overall bottom line.

Similarly, Microsoft raised eyebrows for making its proprietary MS Office available on Apple‘s iPad. But Microsoft has always been primarily a software company – by charging a premium to unlock advance features on its Office apps, it might be able to more than makeup for lost revenue from decreased Surface sales.

When It’s Better To Be Enemies

Not all competitors have the potential to become frenemies, however.

• Microsoft and Sony still compete bitterly to persuade video game producers to create exclusive content for their gaming consoles – Xbox and PlayStation. In that case, the two platforms are making their money in the same way, leaving them insufficient room to collaborate.

The future popularity of Frienemies

Zhu and his collaborators predict that as digitization increasingly de-couples hardware and software in many industries, corporate frenemies may become more common.

• With the increasing emphasis on added software services in automobiles, for example, car companies may have the incentive to use competitors’ software in their dashboards (car sales vs. value-added services).
• “Firms’ business models today are increasingly multisided, which allows them to generate profits from multiple sources.