2014: The Amazon War

A popular joke is that in the future, people will identify based on their loyalty to one of the global corporations dominating society. People will self-identify as Google or Apple or Amazon. If you are a reader, Amazon is the default bookstore. Google has your email and personal information, which they share with the state. Apple is a weird cult of people who fashion themselves tech-savvy so they insist on products requiring zero technical skill. Brand loyalty is now personal identity.

Anyway, lost in it all is Amazon is not a healthy business. By the standards of finance, the stock is over priced by a factor of 24. That’s right. They have a P/E of 487 as of right now. For a bio-tech startup, that’s OK, but for a mature business it is staggeringly high, unless they have some new invention in the works. That stock price would have to fall to $13 for the stock to be prized at a typical P/E. But, nothing about modern finance makes much sense, based on the old economics.

Amazon’s power over the publishing and bookselling industries is unrivaled in the modern era. Now it has started wielding its might in a more brazen way than ever before.

Seeking ever-higher payments from publishers to bolster its anemic bottom line, Amazon is holding books and authors hostage on two continents by delaying shipments and raising prices. The literary community is fearful and outraged — and practically begging for government intervention.

This is the sort of thing a business does when they have run out of other options. They have squeezed every cent from their supply chain. They have automated everything that can be automated. They have baffled the markets with their drone stuff, but no one is buying that much longer. They either start posting better results or there will be a rush for the exists. That does not mean they are the new Enraon, but it suggests they need to find a new thing to keep the plates spinning.

“How is this not extortion? You know, the thing that is illegal when the Mafia does it,” asked Dennis Loy Johnson of Melville House, echoing remarks being made across social media.

Amazon is, as usual, staying mum. “We talk when we have something to say,” Jeffrey P. Bezos, the founder and chief executive, said at the company’s annual meeting this week.

The battle is being waged largely over physical books. In the United States, Amazon has been discouraging customers from buying titles from Hachette, the fourth-largest publisher by market share. Late Thursday, it escalated the dispute by making it impossible to order Hachette titles being issued this summer and fall. It is using some of the same tactics against the Bonnier Media Group in Germany.

One of the under discussed facts about the “new” economy is these tech giants are mostly skimming operations and rentiers. A book from Amazon is the same as a book from Fred’s book shop. You’re not saving money on the production of the book or getting anything extra from Amazon. They make their money from convenience and that has a small premium. Much of their success depends on using networks developed by other firms, for which Amazon pays nothing.

That could be what’s coming next for Amazon and NetFlix. The ISP’s will begin throttling their services unless they pay for their usage. Those costs will be passed to the customers of these services instead of financed by everyone else. That’s the theory, but these giant firms have a lot of power, so they can probably avoid it. Money may not buy happiness, but it can buy a lot of politcal power.

But the real prize is control of e-books, the future of publishing.

Publishers tried to rein in Amazon once, and got slapped with a federal antitrust suit for their efforts. Amazon was not directly a party to the case but has reaped the rewards in increased market power. Now it wants to increase its share of the digital proceeds. The publishers, weighing a slide into irrelevance if not nonexistence, are trying to hold the line.

Late Friday afternoon, Hachette made by far its strongest comment on the conflict.

“We are determined to protect the value of our authors’ books and our own work in editing, distributing and marketing them,” said Sophie Cottrell, a Hachette senior vice president. “We hope this difficult situation will not last a long time, but we are sparing no effort and exploring all options.”

The Authors Guild accused the retailer of acting illegally.

“Amazon clearly has substantial market power and is abusing that market power to maintain and increase its dominance, which likely violates Section 2 of the Sherman Antitrust Act,” said Jan Constantine, the Guild’s general counsel.

The trouble for Amazon is they have a monopoly on things that can be duplicated, to some degree, by smaller players. Producing book, digital or analog, is not an art exclusive to Amazon. Further, Amazon does not do much to promote book sales on their platform. Further, the rest of supply chain is becoming easier to replicate on the small scale. Small business can ship just as cheap as Amazon. In other words, lots of people can start selling books on-line if Amazon becomes a problem.

4 thoughts on “2014: The Amazon War

  1. How Amazon makes money escapes me. Case in point:

    My wife likes to use German made Dove soap bars in grapefruit & lemongrass scent. Amazon sells them and last week I ordered twelve bars for her for circa $18 with free shipping. Five days later the soap arrived delivered in a US Postal fixed rate box that would cost me at the Post Office about $7. Their margins have to be thin. Btw, I have Amazon Prime and the order was fulfilled by an associate vendor.
    Dan Kurt

  2. My guess: Investors are pricing Amazon based on the expectation that it will become the monopoly online retailer… or that the Feds will allow it to gain the 60-70% market share that will make it the dominant player in the market and allow it to set prices for the entire market.

    If some guy selling cars or computer becomes the dominant player, that’s one thing since he just dominates one market. Letting Bezos dominate retail is another thing altogether, since he can set prices for many markets.

  3. I had a bookstore for many years and can say from experience that publishers have brought many of their woes upon themselves. Always ready to cut deals with the largest retail outlets (and Amazon became the largest), they consistently undercut independent store’s ability to pay the light bill. They now have few outlets willing to pay the rent for a few square feet to display their new product, shine the lights on it, dust it off. We told customers which books were a good read and had many ways of otherwise developing interest in new titles. With the demise of the local bookstore publishers have lost a vital laboratory for their marketing and an important partner in sharing the risk and expense associated with the launch of new titles and authors. It’s really their own fault.

    • I agree. It is one of the thing Marx got right. Capitalism tends to eat itself looking for profit. Music did the same thing.

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