A comment to one of the many Amazon posts Passive Guy has made recently included a link to Borderlands Books, a San Francisco fantasy, science fiction and horror bookstore selling new and used books.
Of specific interest was an essay written by owner Alan Beatts entitled Amazon is Nobody’s Friend, Part One
Excerpts from a much longer piece:
The reason that I’m finally being truly critical about Amazon is two-fold. First, at this moment a huge number of book buyers are facing a choice. All the former Borders customers out there have to decide where they are going to get their books now that Borders is closed. There are three choices: 1) Barnes and Noble. 2) Amazon. 3) An independent bookstore. At first glance, it will seem that I’m trying to deter customers from shopping at Amazon (and, it won’t break my heart at all if you choose to avoid Amazon after reading this). But what is more important to me is that I provide you with information so you make as informed a choice as possible. Your dollars are your economic votes. Where, how and with whom you spend your money determines what businesses survive and thrive. Just like any election, I think an informed group tends to makes wiser choices.
. . . .
(A) “Been a deceptive and pervasive influence on ecommerce.”
Amazon is much bigger and more pervasive than one might think. They have a fondness for buying companies in fields that they are interested in and then continuing to operate them under their original names while changing the back-end and fulfillment over to Amazon’s systems. Notable web-retailers that they own are: Zappos.com, Diapers.com, Soap.com, Pets.com.
All of those companies are big retailers in their specialties and, by buying them out and keeping the names, Amazon eliminates competition while maintaining the illusion of consumer choice in the marketplace.
. . . .
Another hidden Amazon property is of one of the best ebook reader applications for EPUB format files. (EPUB is the free and open-sourced ebook format supported by many publishers. It is not the format Amazon uses for the Kindle nor is it one that is very easy to read on the Kindle.) Lexcycle makes Stanza, which is a great program that I used to use all the time. It’s simple, clean, fast and works on Mac, Windows, and iPhone/iPad. Now it’s 100% owned by Amazon and still the top EPUB reader. As in the case of companies like pets.com and soap.com, Amazon maintains the illusion of consumer choice while actually owning their own business and their seeming competition.
In a slight variation from their usual habits, Shelfari.com is an interesting case in that here Amazon lets their name be seen associated with the site. My bet on the reason is that, if you click on a book, you end up on a page with exactly the sort of “buy-now” feature I suggested would work on IMDb. Hard to hide the company’s involvement with that sort of connection. Though it is nice and provides some sense of impartiality that Shelfari also provides a link to Abebooks.com, a major used bookselling site with an excellent reputation among collectors . . . or at least it looks impartial. By owning Shelfari Amazon is also getting one of the benefits that I suggested relative to the IMDb, since Shelfari is all about book recommendations and making connections between books, it’s a hugely valuable source of data for Amazon’s marketing.
. . . .
(B) “Consistently tried to eliminate other businesses to increase their hold on the book market.”
If the foregoing wasn’t a clear enough indication that Amazon is interested in controlling all the good parts of on-line bookselling and ecommerce in general, the pattern of Amazon’s business expansion also indicates that they are trying to fill all the niches in the book business, from publishing all the way down to selling. There hasn’t been any sign that they are going into the writing business, thank goodness, but there really isn’t any conceivable reason that they would want to do that. (It’s always been best for publishers to let anyone try to be a writer who wants to and then pick and choose what they want to pay for).
When Amazon started, they used the Ingram Book company as their major supplier. Ingram is one of the two national book distributors in the US. They buy books in large quantities from publishers and then sell them to bookstores. One of Amazon’s early moves was to kick Ingram to the curb and start running their own distribution centers and warehouses. At that point, the sales chain went from the publishers to Amazon to the customers.
. . . .
(C) “Pricing designed to cripple competition and manipulate its suppliers and customers”
Pricing products is a complex process and the ethics of it are even more complex. The idea of having “loss leaders” in business (i.e. items that are sold at below cost to attract customers who, one hopes, will buy other items as well) is a well established practice. I think it falls into a sort of grey area in terms of ethics, though there are places where it’s prohibited — for example, in France is it illegal to sell books, specifically, for less than cost.
However, when a business engages in pricing with the intention of manipulating the market for their long term benefit, when pricing is used to eliminate competition and therefore consumer choice, or when prices are fixed to manipulate suppliers — to my mind, all those cases slip from the soft, dove-gray of well-it’s-probably-alright into the more charcoal-gray of I-don’t-think-that’s-OK-at-all.
Amazon has a big vested interest in moving the reading public towards ebooks. Aside from the obvious reasons (the size of their market share and so forth) there is a bigger and more compelling one. Regardless of its advantages, Amazon labors under a huge handicap compared to physical bookstores. For many readers there is no possible substitute for looking at actual books on an actual bookshelf, just browsing along and looking at whatever catches your eye. But when it comes to ebooks, there is no difference between looking at them on Amazon’s website and looking at them on any other website. So, the move towards ebooks eliminates Amazon’s handicap versus physical bookstores. The other big advantage for Amazon is that ebooks take up no space and they require no investment in inventory. All you have to have are some big computers and some good data connections, both of which Amazon has more than they know what to do with.
Kindle ebook readers are sold at a loss and always have been. I honestly wonder if they were ever meant to make money; I’m betting not. But the Kindle has done exactly what Amazon planned. It’s caused ebooks to take off in a major way and it’s changing the behavior of consumers. That’s perhaps not an unethical way to do business but it certainly is ruthless and profoundly manipulative.
Also on the topic of pricing at a loss: Amazon was so committed to building its business that for years and years they lost money at a awe-inspiring rate. Between 1993 and 2003 they lost 3 billion dollars. In fact, in 2001 alone they lost 1.4 billion. But during that time they set a permanent expectation in the minds of consumers that they always had the lowest price. And during that same period Amazon was responsible for countless independent bookstore going out of business. And the real reason that those stores closed wasn’t that Amazon was doing a better job at bookselling than they — it was just because they couldn’t afford to lose as much money as Amazon. It’s interesting to notice that Amazon’s discounts from retail are much smaller and less universal than they used to be. The preceding is a textbook example of predatory pricing: “predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors”. (3)
$9.99 is a magic number in retail. It’s a price that makes people think, “That’s cheap, it’s not even ten bucks!” So it’s no wonder that Amazon decided that was the right price for ebooks. For quite a while, that was the price that an ebook at Amazon sold for, regardless what it cost Amazon (often, much more than $9.99). Publishers became concerned that Amazon’s pricing of ebooks was causing a perception on the part of the public that any other price was inflated and unfair. The question of what an ebook actually costs, compared to a physical book, is a topic for another time, but certainly there are some novel length works of fiction that cost the publishers more than that to produce. But more importantly, it is the right of the publisher to set the price of their books. They can blow it, set it too high, and the book won’t sell. In which case they learn better the next time. But the publisher is the entity “making” the book. They can set their costs, decide what sort of quality is needed for what elements (editing, cover art, and so on), estimate what the market will pay and so forth. They control the process of “manufacture”, if you will, and that means they get to set the price.
But it’s certainly not Amazon’s place to set the price that publishers can charge for books, electronic or not. They have the right not to buy something if they think it’s overpriced and won’t sell, but that’s about it. And in this case, Amazon wasn’t trying to set the price for one book or even all the books from one publisher. They were trying to set the price for _all_ ebooks. Based on the specific laws regarding price fixing, what Amazon was doing wasn’t illegal since they weren’t collaborating with any other sellers. But, since they represented around 80% of the ebook market at the time, they really didn’t need to collaborate with anyone.
Regardless of the legality of it, thanks to a risky action on the part of John Sargent, the CEO of Macmillan (one of the six major US publishers), at the beginning of last year, Amazon doesn’t get to set ebook prices for the big publishers at all anymore and neither does any other retailer. The short version is that Sargent went to Washington state to meet with the folks at Amazon to talk to them about ebook pricing. After months of discussions regarding publisher concerns that Amazon’s low prices were damaging the public perception of the value of ebooks, Sargent had come with an ultimatum. He told them that Macmillan was switching to the “agency model” for ebook sales. What it meant was that publishers would set the price and retailers would take a commission on the sale to readers rather than the old model in which publishers sell to retailers, who then sell to readers at a price that the retailer determines.
. . . .
(D) “Avoiding sales tax a cardinal part of their business model”
I don’t like to pay taxes and I understand that other people don’t like to either. But if I am going to have to pay them, it’s important to me that they’re applied equally and fairly across the board. Amazon has made part of their business model the avoidance of sales tax practically from day one. Jeff Bezos, the founder, has even stated publicly that reducing sales tax was on the forefront of his mind, both when planning the company and when choosing Washington state as a location. In fact, their systematic avoidance of sales taxes has been so aggressive that employees traveling to California have been issued business cards reading “Amazon Digital Services” (an Amazon subsidiary that doesn’t sell physical products) rather than “Amazon.com” to reduce the threat of California arguing that they were conducting business in the state. Other tricks have included identifying states that were risky as “red” states and requiring staff to consult with corporate lawyers before traveling there on business as well as conducting employment interviews via video conference rather than in person so that the Amazon representatives weren’t actually in the state in question. (4)
The theory of sales tax is that it needs to be collected and remitted by businesses that are active in a state. The usual test for this is whether the business has a “nexus” within the state. “Nexus” has been traditionally proven by having physical locations or sales staff within a state. But there are two other underlying parts of the sales tax theory that have been conveniently ignored during the rise of ecommerce.
The first part is that the requirement of “nexus” was originally put in place based on the assumption that a business that is not located in a state won’t be conducting very much business there. Granted, there have been catalog retailers for well over 100 years but purchasing items through a catalog was always a second-best choice when you couldn’t get something locally and the prices were usually higher (when shipping was factored in) than buying from a local merchant. But now, that underlying assumption is deeply flawed because of the number of purchases made over the internet and the way that buying on-line is progressively becoming the preferred choice.
. . . .
And that brings us around to the principal of sales tax. It’s there to support the costs of running the state government. Which is going to cost just as much regardless of whether Amazon has to collect tax or not. Moreso, as residents in the state, we’re going to have to come up with the money to pay for that government or the state will go broke. What’s really happening here is that, to drive sales to their business, Amazon is fighting really hard to maintain their ability to look like they’re giving the average San Franciscan, for example, a 8.5% discount as compared to a local business.
. . . .
(E) “An ebook business model and format that’s bad for the consumer”
Amazon is the most successful ebook retailer in the world, by a fair margin. Depending on whose figures you believe, they sell in-between 60 and 80% of the ebooks in the US (the percentage in the UK is even higher). They also produce the most popular ebook reader, the Kindle. That they are doing so well with ebooks really isn’t a surprise. They have the best on-line store, their software gives what is arguably the best reading experience, they’ve been in the business the longest, and, perhaps most importantly, they have their existing market position as the second largest seller of physical books in the world (Barnes and Noble is still #1).
What disturbs me and what I think should bother my fellow readers, is that their ebook format is completely unique and proprietary. The problem there is that you cannot read an ebook that you bought from Amazon on anything other than a Kindle or a device that has a Kindle application available for it. Granted, as of now, there are Kindle apps for Mac, Windows, iPad/iPhone, and Android. But there’s no guarantee that Amazon will keep making them or supporting them. Given Amazon’s fondness for competition, it wouldn’t surprise me if, at some point in the future, the Kindle apps for the iPad/iPhone vanished. At that point, all the people out there who bought ebooks and want to use those devices are going to be pretty much out of luck . . . at least until they buy a Kindle.
On the other hand, the three other major ebook retailers — Apple, Barnes & Noble, and Google (plus all the independent booksellers Google partners with) — use some variation of EPUB format which is device agnostic and can be used with all the ebook readers, computers, and smart phones out there (except for the Kindle). Granted, all three of them use their own sort of copy protection but, each for specific reasons, it is much less likely that ebooks purchased through any of those companies will force you to adopt a new device if you want to keep reading your books. Also, none of those businesses are as savage about trying to dominate their industry.
Link to the rest at Borderlands Books The article about Amazon is quite a way down the page. Use your browser’s Find command (Ctrl-F on a Windows machine) and type Amazon if you want to go straight to the article.
Where to begin?
First of all, Passive Guy has a general policy of going after big guys and leaving small guys alone. It’s clear that Borderlands Books is not one of the big guys. However, Mr. Beatts’ essay is wrong in so many different ways PG has to make some comments. In light of the small guy nature of his target, PG will not give his comments the full treatment he might for a larger target.
Point number one from Mr. Beatts’ essay is “Amazon has been a deceptive and pervasive influence on e-commerce.”
PG will parse the sentence somewhat. He has no doubt Amazon is a pervasive influence on e-commerce because it is extremely successful. Smart e-commerce companies watch what Amazon does very carefully and copy many of its techniques. Any successful organization is a pervasive influence on the industry in which it operates. Apple is a pervasive influence on the tablet, smart phone and laptop markets. The University of Alabama football team as a pervasive influence on the college football markets. Barack Obama is a pervasive influence on the United States presidential candidate market.
Mr. Beatts’ case that Amazon is “deceptive” is ridiculous. Yes, Amazon has purchased other companies. Yes, in some cases, Amazon has elected to use the brand name of the acquired company. I don’t see how any case can be made that this is deceptive. In the e-commerce world, of all places, the choices for consumers are enormous and widespread. If I don’t like Amazon, I can buy 99% of the products Amazon sells somewhere else online. If I want to boycott Amazon, a 3-second Google search will allow me to see if I’m about to purchase from an Amazon subsidiary.
In making its acquisitions, Amazon understandably chooses companies that it believes will help make it more successful. Passive Guy finds no conspiratorial motivation for doing so.
PG nearly choked when Mr. Beatts talked about Amazon kicking Ingram Book to the curb. The only reason Ingram exists is because publishers have been such inefficient organizations.
A long time ago, PG worked for a law firm representing a small book wholesaler that was later acquired by Ingram.
When PG learned what the business was, he asked the president why the company was able to buy from publishers and sell to book stores at a higher price when bookstores could acquire books directly from publishers. The answer was shockingly simple. This book wholesaler could deliver books to bookstores faster than publishers would deliver books to bookstores. There was no reason at all why publishers could not become more efficient in their shipping and put the wholesaler of the business.
Ingram typically takes 10-15% of the retail price of the book for its wholesaling services. Who pays that price? People who purchase books and, indirectly, authors who write books. PG does not believe Ingram is a friend to either readers or writers. It has simply allowed publishers to offload a task that nearly every other business does on its own – take orders and deliver products in a timely manner.
The reason Amazon got rid of Ingram is Amazon decided it could do what Ingram does for less (probably much less) money. This is one way Amazon can offer lower prices.
Mr. Beatts accuses Amazon of pricing its products in a way designed to cripple competition and manipulate its suppliers and customers.
He states, “Pricing products is a complex process and the ethics of it are even more complex.”
Here is why PG likes Amazon’s pricing practices: Amazon sells at low prices. The ethics of this are clear to PG. He likes paying low prices. He can buy more stuff if prices are low. He can spend $100 on books at Amazon and get more books than if he spends $100 at Barnes & Noble.
What’s not to like?
Mr. Beatts accuses Amazon of pricing its products for its long-term benefit. I’m certain the people who own Amazon are very happy that management does this. Is Mr. Beatts saying that he does not price products for his long-term benefit?
It is not an easy thing to compete against Amazon. It is not an easy thing to compete against any market-leading organization. Ask anyone who competes against Apple. Ask anyone who competes against BMW. Ask anyone who competes against Google. Ask Mr. Beatts.
Does this mean that Amazon is evil because it is a good competitor? Does this mean that Amazon is evil because it is a big company? PG would note in passing that Amazon has not always been a big company. It first went online 15 years ago. It was tiny. Barnes & Noble was much larger than Amazon during the early years. Barnes & Noble told Amazon that it would squash Amazon like a bug if Amazon did not agree to sell itself to Barnes & Noble. Amazon grew large because millions and millions of people liked what it did and how it did it.
Mr. Beatts says “$9.99 is a magic number in retail.” However, he takes great offense at Amazon pricing e-books at $9.99. He is even more upset that Amazon sold books to readers for less than Amazon paid for them. PG has never talked to a reader who was upset at buying a book that normally would cost $20 for $9.99.
Mr. Beatts believes it is a terrible thing for Amazon to decide how much it will charge for books. He believes it is a wonderful thing for publishers to force retailers to sell books at the price publishers specify. In Mr. Beatts’ world publishers are wonderful, intelligent and kind. They always know the best price for books. Just like they know how much an author should be paid.
It is ironic that Mr. Beatts accuses Amazon of price-fixing. As regular visitors to The Passive Voice know, multiple class action suits have recently been filed against big publishers for price-fixing arising from their united action to force Amazon to adopt agency pricing, fixing prices for books across all retailers. How many readers are happy that Amazon is no longer permitted to sell books at a discount from list price? PG doesn’t see many hands being raised.
Since Mr. Beatts sells used books, here’s an idea: Why not have the publishers set the list price for used books? After all, as Mr. Beatts says “it is the right of the publisher to set the price of their books.” Perhaps a 5% discount from the original retail list price would be a great price for used books. Or even better, may be used books should cost 10% more than new books cost. After all, they’re broken in, annotated and are an environmentally responsible form of recycling. From what PG knows of big publishers, he expects they would feel good about that price. Certainly it would support sales of more new books.
Mr. Beatts says Amazon wants to avoid sales taxes. PG likes avoiding sales taxes. PG would bet that if he took a survey of visitors, most people would prefer not to pay sales taxes if they could avoid them.
Amazon does a lot of things to avoid paying sales taxes. Famously, General Electric does a lot of things to avoid paying income taxes. In fact, General Electric did not pay any income taxes during its latest tax year. Amazon did not pay any California sales taxes during its latest tax year. Individuals and organizations are perfectly free to avoid taxes by any legal means.
Passive Guy decided to explore Mr. Beatts’ feelings about sales taxes. He decided to order a book from Borderlands Books. By mail. Borderlands Books uses Biblio to sell its books over the Internet.
PG selected a nice Harry Potter book. PG decided to have it shipped to himself at an address in a state outside of California, where Borderlands Books is located. The state where the book was to be shipped has a state sales tax.
He was about to complete his purchase from Borderlands Books when – gasp – PG noticed that Borderlands was not collecting any sales tax on this sale. He was so persuaded by Mr. Beatts’ condemnation of Amazon not collecting sales tax that he immediately cancelled his order.
PG tried another experiment. He ordered the same Harry Potter book from Borderlands Books and gave a California address. He will spare you his gasp this time. No sales tax on that transaction either.
He concludes Mr. Beatts’ sales tax rule is designed to apply only to Amazon.
What Mr. Beatts again forgets to consider is who ends up benefiting if Amazon is not legally required to collect sales taxes. You guessed it, Amazon’s customers. After all, who pays sales taxes? Is it Amazon? No, it is people who buy from Amazon.
Everybody should pay more taxes. Everybody should pay higher prices. What a wonderful world.
PG has violated his initial intent when he started this response. He will conclude his rant by simply stating that if Amazon had not made indie publishing easy, the number of people making a living and hoping to make a living from their writing would be much smaller than it is today.
This does not mean that Amazon is a perfect company nor does it mean that Amazon will always be a good friend to writers. Today, however, PG suggests that Amazon is an indie author’s best friend.
He can’t say the same about Mr. Beatts.