Wednesday, July 31, 2013

The Open Savannah: Amazon Is NOT Evil (Or "Want vs. Have")


Another day, another new series on the blog. Every Wednesday, we'll take a look at current news, trends, and events in the book industry in a feature we like to call "The Open Savannah." This week, we discuss all of the recent Chicken Littlery over Amazon's latest earnings report.

Last week, Amazon announced its latest round of quarterly earnings to much hand-wringing and consternation in the publishing world. Essentially, Amazon fell short of earnings projections by $30 million--obviously a ton of money, just not necessarily to Amazon--and posted a 2 cents per share loss as opposed to a projected 5 cents per share profit (the horror!).

And yet, Amazon's stock price jumped above $310 per share before settling down into the $306/share range.

A lot of folks in the publishing world seem to think that this is bald-faced evidence of predatory pricing by Amazon; after all, if Amazon isn't turning a profit, why are people buying their stock? It must be that they're planning on monopolizing everything, then really jacking up the prices, giving authors less of the sale price, and making everyone extremely unhappy in the process!

Uh...no.

Let me back up; in another life, I was an antitrust lawyer. Hard to believe, I know, but I used to deal with all kinds of FTC, DOJ, and even foreign antitrust merger clearance issues on a daily basis.

I say that just so you know that I have some idea of what I'm talking about when it comes to monopolies and all of that good bread-and-butter antitrust stuff.

One huge misconception is how difficult it is not only to run a predatory pricing scheme on a worldwide scale, but also how rare such schemes actually are. Back in the day, it might have been easy for Smith's General Store in Padooka, Kentucky, to lower prices to run Jones's General Store out of business and then jack up the prices on all of the goods: what exactly was the alternative for Padooka residents? Drive to Otherville? Hardly!

Hypothetically, let's just say Amazon is in a predatory pricing scheme; they aren't lowering prices for the benefit of consumers, but rather are doing so just to jack prices back up "someday," in the future.

Okay, what's the endgame then? 

I say that in all sincerity; I still haven't heard a viable answer.

Let's say that Amazon runs a bunch of companies out of business, as they may have already done (Circuit City and Borders say hi). Let's say Amazon chews through pretty much everyone in retail, if you're willing to go that far--again, this is just a thought experiment.

Amazon still has to contend with the likes of Wal-Mart, Target, and other stores that serve an important need: "I need this right now." And that's without thinking about global "sleeping giants" like Alibaba and the like, who can undercut Amazon to near-supply levels of pricing.

As much as I love Amazon Prime, there are still some things that I either need right now, or simply prefer to drive over to Target, Wal-Mart, or the grocery store to get due to convenience and immediacy; sometimes I can't wait the two days. I'm not a logistics master; I can't plan ahead for every purchase because quite simply there are things that I want at a given moment, and my wants are always shifting.

Amazon is constantly looking to decrease the time between "want" and "have;" they've started their Amazon Fresh program for groceries, and continue to build new fulfillment centers around the country. In fact, these expenditures were a large part of their reason for missing on earnings this past quarter; groceries need refrigerated warehouses, and a lot of them.

You know what doesn't need millions of square feet of warehouse space? Or cost but mere fractions of a penny per copy to maintain?

Ebooks.

I would argue that Amazon already enjoys very fat margins on ebooks; even on bargain bin $0.99 titles, after paying the $0.25 or so credit card transaction fee, if Amazon takes 70%, they still clear about $0.55 per copy, or 55% of the sale price, all but maybe a penny or two of digital "infrastructure" pure profit. The total amount per copy only goes up as prices rise.

Not only that, but in terms of digital sales, Amazon has an important distribution advantage; the time between "want" and "have" can be measured in fractions of a second. Though there is a potential inefficiency to be exploited by an enterprising company that can create a quick "open source" solution to delivering content to mobile devices of all types, currently loads of folks have Kindles and Kindle Apps, and Amazon can get them Kindle books in the blink of an eye.

The margins are already great and the time between "want" and "have" is ideal on digital sales, so assuming a monopoly, which would you rather do if you're Amazon: decrease the take that authors get, which (1) would piss off authors, (2) could cause authors and publishers to raise prices, which would alienate customers, and (3) cause a huge PR hit that might open the door to an enterprising new distributor;

OR

Try to sell even more digital goods on current terms and prices? This incentivizes content providers (in our case writers and publishers) to continue producing more content, which should keep people buying digital "goods."

That's another upside for Amazon; "goods" is in quotes because they aren't selling "goods" at all--rather they're selling limited licenses to access content. That means that theoretically, each person will have to buy their own copy, thus increasing potential profits down the road.

Maybe my glasses are a bit too rose-colored. Maybe I drank too much kool-aid delivered to me in a smiling Amazon Prime box. But from a competitive standpoint, it just doesn't make any business sense for Amazon to spend the resources to monopolize the market (dodging the FTC and DOJ all the while), drive competitors out of business, and then jack up prices. Far better to sell more of the high-margin goods you already have on current terms while expanding infrastructure to decrease the space between "want" and "have."
That is, until Amazon-branded 3D printers are available to produce any good one can think of at a moment's notice, thus utterly changing our concept of "commerce" and remaking our economy completely.

But that's for another post entirely...

What do you think? Amazon: friend or foe? I've heard arguments from the other side, but for the life of me, if you're a reader or writer, I'm not sure why you'd buy into them. Nevertheless, feel free to air your grievances in the comments.

Happy Hunting!

-D.J.
D.J. Gelner is the co-founder and CEO of Hunt to Read. Email him directly at djgelner@hunttoread.com.

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