Subscribe to RSS 2.0Amazon below cost?
I said when I talked about the Kindle Fire (=Amazon's lower-price cousin of the iPad) that Amazon weren't shy of selling at or below cost. They do it with regular books and e-books, so it would probably appeal to them to do it with the Fire. Well, Amazon's profits are down 73% for this previous quarter despite sales being up. Sales up but margin down could imply serious capital investment (though I think the timing would be peculiar) but it has to include lots of below cost selling too.
That's slightly worrying because it represents a gamble. Why would you sell e-readers, and perhaps e-books too, at a price that loses you money? Because you plan to make it all back - and more besides - once you've cornered a chunk of the market. If Amazon weren't planning to establish at least a partial monopoly and then extract monopoly profits I can't see why they would have allowed their margin to drop like this. Apple, by contrast, don't pay you to buy their iPads - they make a good profit on every one, so when their sales are up, so are their profits.
It seems clear to me that Amazon are intending to control a fat chunk of the e-book market. I still have no suggestions for how that control might be loosened a little, but it's probably worth spreading the word about it while there's time to plan a response.
And to be clear, I think a lot of the reason for Amazon's success is that they do a better job and are smarter than their competitors. But I think they want to be the only game in town and I want us to retain some choice (which might also help us retain some profit margins).
Comments: 5
The press report I saw said that Amazon's profit was down due to investment in the Kindle Fire. This may not mean they're selling at a loss, but could just reflect stock build in expectation of strong orders over the last quarter and writing off development expenses. I would expect to see a reversal in the next results, as all these built and paid-for (by Amazon) Kindles ship to customers and Amazon receives the revenue
Posted by: John A-W on October 26, 2011 09:14 AM
Two words: Kobo Vox
At least you can get it in Canada whereas you can't get the Kindle Fire. My thoughts are that Amazon is thinking beyond books with this device. They want you to have a mobile platform not only to read books, but also to do your Christmas shopping exclusively via their site.
Posted by: Sean Cummings on October 26, 2011 12:57 PM
John, are you saying it's partly a working capital thing? I hadn't thought of that. I would have thought if it were just about capex they'd have taken the hit much earlier, given the R&D lead times involved. This phrase from the Guardian article suggested to me that below-cost sales were a big component: "Sales soared 44% to $10.88bn in the third quarter, compared with $7.56bn in third quarter 2010, powered in part by the new generation of Kindle book readers and pre-orders for Kindle Fire, Amazon's cut-price iPad rival." On the other hand you know heaps more about corporate finance than I do...
Think you're right that the Fire is about more than books, Sean. They're certainly looking at general media consumption. They've got a lot of video and music available for download and a heap of server capability available for streaming that content. And you're probably right that they'll make the Fire an extension of their store.
Posted by: Rob on October 26, 2011 09:08 PM
Well I know for a fact that amazon sell most of our ebooks at a loss and many of our paperbacks at a tiny margin. Occasionally they sell our lead titles at a loss too. Given the nature of our books - professional business - this can only be bacuse they're trying to build market share. So I agree with Rob.
Posted by: Matthew on October 27, 2011 10:07 AM
As a reader, I'm very concerned about the amazon monopoly, especially as I live in France and own a Nook! As a French resident I can only buy kindle books or e-books from independent companies like smashwords. this makes no legal sense to me when I can buy physical books from amazon.uk and waterstone/blackwell etc
As a writer, who's been published in every which way possible except best-selling, I've found amazon incredibly pro-active in helping me self-publish ebooks and their sales information is addictive. However, the power to cut prices below cost leaves me vulnerable to taking the cut and when I try to sell my own print books I can't compete with amazon.
In this brave new publishing world, I'm not sure who's friend and who's foe.
Posted by: Jean Gill on October 30, 2011 05:09 PM