That’s Not How Amazon Works

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Surprise, surprise, Vox.com author Constance Grady completely fails to understand how business actually works. Specifically, in this case, how Amazon.com works.

Amazon routinely takes a loss on its book sales, often charging customers less per book than it pays publishers and swallowing the difference. It’s a priority for the company to be your preferred bookseller, even if it has to take a hit; its business model can accommodate the loss, because it generally makes up the extra dollars on the last-minute impulse buys customers toss into their shopping carts. Meanwhile, on the e-book side of things, Amazon’s low prices help drive sales of its Kindle.

That’s not how this works. That’s not how any of this works.

Like most big corporations, Amazon engages in a primary business and a few dozen complementary businesses.

Let’s think through an example: Google. Google earns 78% of its revenue by selling ads on its search engine. Obviously, Google stays focused on search ads. But to keep making that money, Google must remain the dominant search engine. Also, Google wants to get more and more people using online search altogether. To help meet those goals, Google invests in business areas that complement online search: mobile phones, high speed internet connections, etc. Google doesn’t make much revenue or profit off of Android or Google Fiber. In fact, they don’t even need to make any profit to meet Google’s goals. The point of these endeavors is to keep people – preferably more and more people – using Google search, and therefore clicking on the ads that make Google money. These are the complementary businesses that Google engages in.

Like most big corporations (and many small companies, for that matter), Amazon also sometimes uses loss leaders as a sales tactic. Companies like to pick a small number of products to sell at a break-even point, or even at a loss, knowing that they’ll make it up later. People buy product or service A, but then they end up also buying product or service B while they’re shopping. The largest local gun store in town has a range attached. Given their pricing models, they can’t be making any profit off of the range itself. That’s not the goal. The range brings customers in the door – then they spend money on more ammunition, more firearms, more accessories, etc.

Both of these tactics work, and they work best when the loss leader product is also complementary to your main business. In other words, they work best when you use them together.

Ms. Grady’s post shows that she seems to have some understanding of these concepts. But she’s gotten it all backwards. Amazon’s loss leader isn’t books. Books (and, these days, other digital content such as movies and television) is Amazon’s primary business. Amazon may, indeed, occasionally take a loss on specific books. It most definitely does not do that on a general basis with books. Pay attention: Amazon sells more ebooks than print books, and has since 2011. EBooks tend to sell for less money. But because it spends less on distribution and storage costs, Amazon makes a lot more profit off of them. The same is true of streaming music and movies. Amazon has focused on the primary business of delivering digital goods for years now.

Kindles are the complementary business – and the loss leader. That’s why it sells Kindle Fire tablets for so much less than other comparable tablets. That’s why it put so much effort into dominating Kindle sales. They’ll replace Kindle Fire (kids edition) tablets for free for basically forever – so that you’ll keep buying content. That’s why they got into the FireTV market. They replaced my first Kindle e-reader for free even after I straight up told them that my two year old son stepped on it. And Kindle e-readers themselves are dirt cheap to begin with. You can buy a brand new entry level reader for only $80.

As Brian Niemeier notes, however, this article isn’t about getting the facts right. It’s about the Big 5 publishers being terrified of Amazon.

The last time I saw that many weasel words was in an MRK rant. To translate from the demagogue, they don’t know. Note to Huffpo: “And this goes on and on” is not a data point.

What Vox.com and Puffho are studiously overlooking here is the minor detail that, if any of these speculative scenarios are true, all of the books ultimately came from the publisher. The most risible theory is that unscrupulous reviewers are able to sell ARCs because review copies aren’t marked “not for resale”. Apparently, protecting their copyrights isn’t worth the expense of a ten dollar rubber stamp.

Amazon selling books through third party distributors isn’t a big deal for indie publishers or self published authors. As Brian notes, there’s no way for a third party distributor to get our books in the first place except through us – unless they’re engaging in practices that are already both illegal and against Amazon’s terms of service. This is just one more way for Amazon to sell more of our books. Ultimately, that’s a good thing.

This doesn’t mean that Amazon is our friend. Amazon cares about Amazon. But at the moment, Amazon is also good for the publishing industry.

It’s just not good for entrenched interests and old power.

Russell Newquist

My name is Russell Newquist. I am a software engineer, a martial artist, an author, an editor, a businessman and a blogger. I have a Bachelor of Arts degree in Philosophy and a Master of Science degree in Computer Science, but I'm technically a high school dropout. I also think that everything in this paragraph is pretty close to meaningless. I work for a really great small company in Huntsville, Alabama building really cool software. I'm the owner and head instructor of Madison Martial Arts Academy, which I opened in 2013 less to make money and more because I just really enjoy a good martial arts workout with friends. I'm the editor in chief of Silver Empire and also one of the published authors there. And, of course, there is this blog - and all of its predecessors. There's no particular reason you should trust anything I say any more than any other source. So read it, read other stuff, and think for your damn self - if our society hasn't yet over-educated you to the point that you've forgotten how.

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