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A couple months ago, realizing it would be futile to hold out any longer against the tsunami of pop cultural peer pressure, I decided to go ahead and read The Hunger Games. I jumped over to Amazon, searched for the Kindle edition, and I was presented, as usual, with a page infested with ugly strikethroughs. This is Amazon's way: Jeff Bezos will never just show what you're going to pay when you buy something from his site. He also wants to make sure you know what you're not paying. When you buy The Hunger Games for your Kindle, you won't pay $14.99, the publisher's suggested digital price. You also won't pay $8.99, the publisher's suggested price for the paperback"”which happens to be what Barnes & Noble will charge you a Nook version of The Hunger Games.
What will you pay? Either $5 or, surprisingly, $0. The zero price is one of Bezos' newer pricing tricks. You see it pop up all over the Kindle Store and Amazon Instant Video. Not only does Bezos want to make sure you know what you're not paying, he also wants you to see what you could be paying. For books, the free deal is part of the Kindle Owner's Lending Library, a plan that Amazon unveiled last September to criticism from the publishing industry. If you own a Kindle device and if you subscribe to Amazon's $79-a-year Prime plan, you can get The Hunger Games and thousands of other books for no money at all. The company did not receive permission from many authors and publishers to include their books in the program; instead, when you get a "free" book under the lending program, Amazon simply pays the publisher for the book on your behalf.
This can be pretty confusing for readers"”I'm a Prime member and I own a Kindle, but I wanted to read this book on my iPad, so when I went to click Buy, I really wasn't sure what I was paying. (I think I paid $5).
But there's something even more perplexing about Amazon selling The Hunger Games and other huge bestsellers for free. The Kindle lending program upends the conventional wisdom about Bezos' business goals for e-readers. Most people think that Amazon is selling Kindle devices at cost in order to make a profit on the sales of books and movies. But if Amazon is also giving away a lot of media for free"”4 of the Top 10 books in the Kindle Store can be had for free under the Kindle lending program"”then what is its business model for Kindle?
Giving away the razor to make money on the blades is a well-known strategy. But giving away the razor and the blades in order to make money on a subscription loyalty program as a way to sell everything else? Is that Amazon's real goal with the Kindle"”is Amazon in the device business only to sell Prime subscriptions, which the company sees as a key accelerant for sales across the rest of its site? And if that's the case, how well is that circuitous business model working out? Is the Kindle helping to sell Prime? And are those Kindle-fueled Prime subscriptions moving more sales across the rest of the company's inventory?
To tell you the truth, I have no idea. Nobody outside Amazon does. What struck me when I saw the zero price for The Hunger Games is that I simply don't know what Amazon is up to with the lending library. This is not a novel sensation: I am frequently flummoxed by Amazon, the most inscrutable of all the companies I cover regularly. Amazon is the one major tech firm whose operations, investments, and short- and long-term goals are completely hidden from the reporters and analysts who try to watch its every move.
It's not just that Amazon is secretive. There are lots of secretive companies"”Apple, of course, tops the list"”but if you watch even the most tight-lipped firms, you can usually get a sense of the general parameters of their behavior. Everyone understands the basic way that Apple is looking to make money"”sell a lot of beautiful things at a high margin"”and for all its theatrical secrecy, the company usually dishes out straight and detailed answers about its core businesses. (Want Tim Cook's perspective on carriers' incentives to subsidize the iPhone? He spent many minutes elaborating on it in Apple's last earnings call.)
Amazon, by comparison, is a black box. It's got so many different businesses across so many different product types"”it just opened a store that will sell you industrial supplies, it bought a company that makes robots, it's looking to produce movies and sitcoms, and somewhere in there it also sells books and music and computers and refrigerators and server space and on and on"”that it's difficult to discern any of the company's essential goals.
We don't know where Amazon expects to make money from in the future. Indeed, we barely know where Amazon makes money from now. The company refuses to divulge even the most basic stats about its business. Amazon's earnings calls are a comedy of opacity and misdirection; you'd have a better chance getting a guard at Buckingham Palace guard to crack a smile than to get an Amazon exec to accidentally tell you about the company's business.
The firm won't say anything about how many Kindles it sells, which models are the most popular, and whether or not the Fire has eaten into sales of the E-Ink devices. It won't disclose anything about the number and value of Prime memberships. It won't say anything about where its profits come from.
I sometimes wonder if Tom Skutak, Amazon's CFO, has to practice new ways of saying no on the company's earnings calls. Among his favorite rejections: "I can't." "Not a lot I can comment." "Not a lot I can do." "Not a lot I can help." "Not a lot I can add." "Stay tuned."
For now, Amazon's opacity seems to be working. Look at its recent earnings calls and you see that analysts have quit asking important questions about its business. Skutak wasn't even asked about Prime subscriptions during the company's last call"”this despite a recent report from Bloomberg showing that the firm has only 3 to 5 million members, half the number that some analysts had predicted. IDC says that sales of the Kindle Fire plunged in the first quarter, and E-Ink suppliers have seen a major shortfall in their business. But because they knew Amazon had no intention of disclosing Kindle sales, analysts didn't even ask about the numbers. How well is the Kindle Lending Library doing? Is it prompting Kindle sales, or Prime sales? Nobody wanted to know.
Jeff Bezos once famously declared that, in the service of innovation and its long-term success, Amazon is "willing to be misunderstood for long periods of time." He was being a bit modest there; Amazon is not merely "willing" to be misunderstood, it often tries to actively sow widespread misunderstanding. This works it its advantage; if competitors don't know what Amazon is up to, if they can't even figure out where and how it aims to make money, they'll have a harder time beating it.
But all this misunderstanding can't be an unalloyed good. Amazon is so opaque, with so many mysterious businesses and revenue streams, that you've got to wonder whether the people who work there even understand what it's up to. In business, simplicity often wins. Selling me a device to get me to buy a membership in order to get a book for free. Is Bezos crazy like a fox? Or is he just plain crazy? We have no idea.
Second to last paragraph, "This works it its advantage; if competitors..."
I resisted Prime for years, and decided to try it when it also included the KOLL and free streaming videos. Now, I buy a lot more merchandise from Amazon than I did before, because shipping is free and everything is delivered in 2 days. I don't see what's so confusing about offering a service that serves to increase the purchases your customers make.
http://ltgjamaica.wordpress.com/2012/05/06/memory-resident-malware-protection-on-virtual-machines-7/
This might be away of getting all amazon users to be customers of services that depend on AWS
I don't worry about Amazon because Amazon already won the big war and is now living large on the spoils. A decade ago Ebay and Amazon where neck to neck on who will become THE Internet marketplace and now well when the last time you heard of Ebay? Amazon launched their own Android Apps Store and they called it the "Android Apps Store" that the equivalent of telling Apple to sit down and shut the hell up and the funny thing is after a bit of rumbling that exactly what Apple did. Now Amazon is making more money off of Android Apps than what Google is making out of Play. They practically invented the modern* cloud industry before peoples even started talking about cloud. Prime is all about making serious Amazon buyers feel like VIP so that they buy even more and since Amazon is offering more and more product they do end up buying more. Amazon is not out to steal Apple or Google lunch money it out to steal Walmart lunch money on top of grabbing market from Apple, Google, Microsoft, Netflix, Valve, Home Depot, Dell, NBC... And the fun part almost nobody even realised yet how big Amazon really is now.
Actually, it may be really simple to explain Amazon's business strategy: they're confused and can't figure out how to make money on the internet, period. After all, they really don't make money. They're 'vauled' at almost $100 billion dollars by wall street, but don't even book a billion dollars a year in profit. Presently they're trading at almost 190 times earnings. The business that they're actually in is an age-old one of predatory pricing, putting other retailers out of business by undercutting their prices and being willing to lose money on every sale, and hoping--hoping--that one day they'll be few enough competitors to allow them to raise their margins. But it's not exactly clear that in the internet you can ever completely kill off your competitors and raise prices. They've put the booksellers out of business. They're putting Circuit City out and, finishing off Best Buy. That's the game they've been in for years, and they keep growing their revenues without growing their profits. And they know it, so they're circling around trying desperately to invent new business, like the kindle fire, but they're not a technology company and will get their head handed to them ultimately by apple and google and anyone else who enters the tablet space. It's one thing to put a bunch of booksellers out of business--they're little fry--it's another thing altogether to go after the big technology boys, huge companies that have bottomless resources, like google, apple or microsoft (witness the new microsoft investment in the nook). I see all these seemingly scatter shot business plans as big, wild round-house punches, desperate and without real strategy. We'll see.
Both Costco and the music industry's royalty programs very closely resembles the Prime system that Jeff Bezos is using... and they all work just fine.
With the music system, places where music is played publicly (network television, nightclubs, etc., etc.) each pay an annual membership fee. This fee is then distributed to the composers via some mysterious formula, based on how much each composers music is played.
Costco has a system too: they sell merchandise and make an average of about 14% profit on those items - enough to cover their operating costs. As one well-known lady in a commercial once asked: "where's the beef?" The beef in this case is Amazon's profit - and it's not from the sales of merchandise: it's from the average annual $50 membership fees that more than 60 million members pay to Costco each year.
From the consumer's side: with Amazon, for $79 you can read a lot of books free (on your Kindle, which you have to buy), and that can save you much more than the Prime membership fee... and that's good for the customers, because it means that the membership is worth more than it costs to purchase.
With Costco, if you're an average driver that does 15,000 miles a year and get an average of 20 miles per gallon, you'll use 750 gallons of gas each year. If you get a Costco American Express card (which costs nothing to obtain) and use it at the Costco gas stations, in addition to the average 5 cents you'll save on each gallon compared to local gas stations prices, you'll also get a Costco rebate of 3% on each gallon you get at Costco, which can be more than 10 cents a gallon... that can total as much as 15 cents a gallon for 750 gallons - and that's about $112 per year... much more than the average $50 paid for your Costco membership fee.
Bottom line: Costco and Bezos are both very smart. They've developed systems that give consumers more than they cost to buy... while turning in big profits for the 100% profit memberships... and they both copy the music industry's royalty program.
Gene Grossman - LegalMystery.com
What? You mean to say you aren't drunk on his kool-aid spiked with the intoxicating "..Random forests, naïve Bayesian estimators, RESTful services, gossip protocols, eventual consistency, data sharding, anti-entropy, byzantine quorum, erasure coding and vector clocks .." Bezos blather.
http://sec.gov/Archives/edgar/data/1018724/000119312511110797/dex991.htm
What if the opacity is just a deliberate fog to distract everyone from mischief afoot while we all go about explaining it away as an act of "crazy like a fox" eccentric genius? Here is a scam I hypothesize below which is conceivable given the opacity of their operating metrics.
As a seller of low margin/ high priced merchandise together with low-priced high margin e-books and other digital media with frictionless fulfillment costs, leaves room for all sorts of possible mischief where insiders & institutional cartel partners can buy millions of "nobody ever heard of" high margin dud books (or any digital media) and goose up reported earnings. The amount spent is "just a cost of doing business" as it would facilitate keeping the shares aloft at these lofty levels that they can sell into.
To illustrate, if just one insider, Bezos, were to "re-invest" just 1/8th of the $800 million in Amazon stock he cashed in 2010 (i.e. $100 million) for buying the bum Kindle books for which Amazon might have, say, 90%+ margins, that would drop right down to the bottom line as $90 million of earnings and is sure to astonish everyone by such a demonstration of being able to squeeze out any earnings at all when all outward signs indicate a hand-wringing prospect of profitless prosperity.
This author is not a businessperson. As others have pointed out, you only get one free book per month and to get it you have to be paying the $79 Prime membership. In addition, do you know how many iPads are out there? Us iPad owners all pay for our books. It's not worth my buying a Kindle just to get that one book per month.
The article is misleading about the Kindle Lending program. You can borrow only one book a month, and for that your are paying $79 a year as a Prime menber, which also gets you free shipping on many items. The idea that Amazon is not making money is ridiculous--it pays the salaries of many thousands of workers and executives.
Jeff Bezos' IQ is extremely high and I think it's no surprise his strategies bewilder most of us. One thing is for sure though, I believe he knows exactly what he is doing and the choices made are very intentional. To get a better grasp of just how significant his intelligence is, read this: http://techcrunch.com/2011/10/22/how-to-pitch-jeff-bezos/
You don't know how much you paid? Well, heck. You're pretty impressive tech commentator if you can't figure out how to take a look at your own account on Amazon. Not so much.
I'm not sure what the author of this article is having such a difficult time comprehending: I see Jeff Bezos' strategies as brilliant - and except for video - you can read your Amazon purchased books on a Kindle or on an iPad (with the Kindle App) or computer (again with the free App). I've got a large Amazon library of videos as well as books - if Apple would finally drop their Flash ban and incorporate Adobe's Flash technology into Apple's iOS, I'd still be buying from Amazon at highly competitive prices, but be able to watch films in my Amazon video library on my iPad - again creating more allegiance to Amazon over the high prices iTunes versions (when they are even available) of purchase-able instant videos (I have to use a kludgy, resolution killer App to do this now). Since Apple won't move on this - I'd like to see the Kindle App ungraded with Flash capacity to look at Amazon purchased movies residing on the Amazon cloud. Keep in mind, Amazon is all about providing content (at highly competitive prices) while Apple is still a hardware manufacturer - iTunes can't hold a candle to Amazon on media costs and ease of purchasing them. Bezos once again has proven his genius: he's outsmarting Apple - the highest capitalized company in the world - that may be the first trillion dollar corporation on the planet. Full integration with Amazon can only help Apple - and I believe that once consumers get it that you can own both an iPad and a Kindle Fire and see that each has its best-use settings, both companies (as well as its consumers) will further thrive.
cerebrogasm This is a great point. I am a Mac guy all the way... But I'm getting a Kindle over an iPad specifically over the flash issue. I will only be using it watch movies and read magazines. I don't need any of the other stuff iPad does.
@ImissSA @cerebrogasm : I have both; the Kindle's great for the massive reading I do, mostly history, but the iPad open on my left. Reading about the first climbs of Everest ("Into the Silence") I could simultaneously google maps, photos of the climbing teams, etc. Of course, as far as the Kindle goes, daily delivery of the NYT wherever I am in the world is okay, too.
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