Amazon

If the Key to Business Success Is Focus, Why Does Amazon Work?

22 May 2019

From Working Knowledge, Harvard Business School:

Brian Kenny: In the world of computer science, Jon Wainwright is kind of a big deal. A computer language pioneer, he was the principle architect of both Script 5 and Manuscript. What makes John a legend has nothing to do with programming. Let me explain.

On April 3, 1995, Jon was in need of work-related reading material. He fired up his T1 modem and navigated the fledgling internet to the beta version of a new online bookstore. With the click of a mouse, he became the very first customer to make a purchase on Amazon.com. Fluid concepts and creative analogies, the book he purchased, never became a best seller, but Amazon took off like a rocket ship and hasn’t slowed down since. With a market cap larger than all other retailers combined, including Walmart, Amazon owns 49 percent of all online sales. In the time it takes me to read this introduction, the company will earn over $300,000. Will we ever see the likes of it again?

. . . .

Brian Kenny: The case is a great foundational piece to launch into some of the ideas [of the book]. I’m going to assume that anybody listening to this podcast has purchased something on Amazon, or watched something on Amazon Prime. I had forgotten about their modest beginnings, and just how much they’ve grown and expanded and changed… Let me start by asking you … what led you to write the case?

Sunil Gupta: As you said, everybody knows Amazon. At the same time, Amazon has become quite complex. They have grown into a business that defies imagination. That raises the question, is Amazon spreading itself too thin? Are they an online retailer? Are they video producers? Are they now making movies? In strategy, we learn everybody should focus. Obviously, Jeff Bezos missed that class.

. . . .

Brian Kenny: . . . . The case takes place in 2017. . . . Start us off by setting it up. How does the case open?

Sunil Gupta: At that point in time, Amazon had just bought Whole Foods, which was very counterintuitive. Amazon has been an online player. Why is it getting into an offline business? That was against their grain as an online player. The second thing is, food is a very low-margin category. Amazon is a technology company; its stock is going to stratosphere. Amazon had been (operating) Amazon Fresh for 10 years, and hasn’t succeeded. Why don’t they give up? That was a starting point. Of course, the case describes all the other 20 things they have done in the last 20 years and asked the question, what is Amazon up to?

. . . .

Brian Kenny: Amazon and Jeff Bezos are sort of synonymous. He’s a cult of personality there, like Steve Jobs was with Apple. Jeff’s been in the news a lot lately for other reasons, you know, personal reasons. He is probably one of the best-known CEOs in the world. What’s he like as a leader?

Sunil Gupta: I don’t know him personally. Based on the research I’ve done, he certainly is very customer obsessed. He’s focused on customer. He always says, “You start with the customer and work backwards.” He still takes calls on the call center. The culture is very entrepreneurial, but also very heart driven. I mean, the idea for Amazon Prime evidently didn’t come from Jeff Bezos, it came from a person low in the organization. He’s quick to adapt the ideas if he sees some merit in it. It’s almost a 25-year-old company that still works like a startup.

Brian Kenny: Was the original concept for Amazon … I mean, he sold books originally. Was it ever really a book company?

Sunil Gupta: I think it started more as an online retailer. Book was an easy thing, because everybody knows exactly what you’re buying. It’s no concern about the quality. His premise in the online store was a very clear value proposition of three things. One was convenience, that you can shop in your pajamas, so we don’t have to fight the traffic of Boston or Los Angeles. The second was infinite variety. I don’t have the constraint of a physical store. Even if I have Walmart, which is a huge store, I can only stock so many things. As a result, you only have the top sellers. In Amazon, I can have the long tail of any product, if you will. The third was price. It was cheaper, simply because I don’t have fixed costs of the brick and mortar store. I can reduce the cost structure and therefore I can be cheaper. Those were the three key value propositions. That’s how it started. The idea was, I’ll start with books and then move on to electronics and other things. But then of course, it moved far beyond being an online retailer.

Brian Kenny: This gets into some of the ideas in your book. I was really intrigued in the book about the notion of what kind of business are we in? Just that question alone. At face value, it looked like Amazon was a retailer. They went in directions that nobody could have imagined.

Sunil Gupta: Right. The purpose of the case was to illustrate how these are all connected. From a distance they look completely disconnected, and completely lack focus. Let’s start with how the concept evolved.

The first thing was, as I said, it was online retailer. Very soon it became a marketplace. Now, what is a marketplace? They basically allow third-party sellers to also sell on the Amazon platform, which is distinct from a traditional retailer. Walmart doesn’t allow me to set up shop within Walmart, but Amazon allows me to do that. Now, why would they do that? Simply because it increases the variety that they can sell on the platform. Therefore, consumers are quite happy with the variety of the product they can get on Amazon. Amazon gets commission without having the inventory and the capital cost.

Perhaps the most important thing about becoming a platform is that it creates what we call network effects. If everything I can buy is available on Amazon, more consumers are likely to go there. Because there are more consumers, more sellers are likely to go there. It just feeds itself and becomes a virtual cycle. That’s why there is only one Amazon. Even if I start an online retail [store] that is in many ways better than Amazon, nobody’s coming to gupta.com, because buyers and sellers are not there. That became the next phase, changing from an online retailer to a marketplace. Then it went into AWS (Amazon Web Services), and you say, “How can it go into being a technology company and compete with IBM and Microsoft?” It was competing with Walmart before.

. . . .

Brian Kenny: Let me just interrupt for a second. That’s a marked change in direction. They had always been a consumer platform. Now they’re in a business-to-business play. I bet a lot of consumers don’t even know about Amazon Web Services.

Sunil Gupta: Correct. That was not saying in a traditional sense, “This is my market.” That’s simply saying, I have this capability. There’s a demand for this capability. Can I do it?” Part of that was opportunistic, also. If you remember in 2001, the dot.com bubble crashed. If you’re a B2C company, you hedge your bets and get into B2B business. Part of that may have been luck. And then Amazon started producing hardware, Kindle, and now competing with Apple.

You sort of say, why is an online retailer getting into hardware production? If you think a little bit about it, the answer is very easy. Kindle was designed to sell eBooks as people move from buying hard copy books to downloading eBooks. The Kindle is the classic razor and blade strategy. I sell razors cheap in order to make money on the blades. I’m not making that much money Kindle, but I’m making money on e-books, which is very different from Apple’s strategy. Apple actually makes money on devices, but Amazon is not making money on devices, or at least not making huge money. Similarly, it moved into online streaming of the video content and suddenly became a competitor of Netflix. You say, “Why is a retailer becoming a competition of Netflix?” Again, if you think a little about it, the answer becomes clear. As you and I moved on from buying DVDs [to] streaming the stuff, that’s what Netflix did. They used to send the DVDs to us.

. . . .

Amazon is very good in moving with the customer. If the customer moves from buying books to e-books, Amazon moves in that direction. If customers move from buying DVDs to streaming, it moves in that direction. Now, can Amazon do it? Of course, they can. They have AWS. Netflix is one of the largest AWS customers.

. . . .

Brian Kenny: Are they leading or following? Are they creating a market? In the beginning it seemed like they created something entirely new. Now, are they anticipating, or are they just sort of reacting to what’s happening?

Sunil Gupta: It’s a combination of both. In some ways they are following the consumer behavior. [When consumers started] moving to streaming, Amazon was not the first—Netflix started the streaming thing, and then Amazon comes up with it. If you think about it, Amazon not only distributed third party content on videos, but now they have Amazon Studio. They are making movies. The competition now becomes Hollywood instead of Walmart.

You sort of say, “What has gone wrong with Jeff Bezos? Why is he making movies?” Making movies is a pretty expensive business and highly risky. Again, the key is to understand the purpose of the movies, which is to hook consumers on Amazon Prime. If you remember, Amazon Prime started at $79 dollars per year. The benefit at that time was two-day free shipping. Now, you and I are smart enough to do the math, saying, how many shipments do we expect next year, and is $79 worth it? Bezos does not want you to do that math. He basically says, “Oh, by the way, I’ll throw in some free content, some free music, some free unique movies.” Now you can’t do the calculation. Why does he care about Prime? Right now, Amazon has about 100 million Prime customers globally. Let’s say I get an average 100 dollars per year, that’s $10 billion in my pocket, before I open the store.

Link to the rest at Working Knowledge, Harvard Business School

PG has one quibble with the OP: He doesn’t think anyone “fired up his T1 modem” to look for a book in 1995.

Whenever PG used a T1 to access the internet in those ancient days, a T1 was referred to as a line. It was quite expensive and it ran 24/7/365. He always accessed a T1 through a corporate network center which operated behind locked doors inside a series of large glass boxes.

Connecting to the internet on a T1 line was silent while doing so through a modem on your desk was not.

PG realizes that Brian in the OP was probably trying to speak metaphorically, but apt metaphors tend to accurately reflect the reality of the object or action upon which the metaphor is based.

PG’s mother and sister are former English teachers, so perhaps he has some sort of recessive gene that promotes occasional bouts of rule-based overreach.

Amazon’s Antitrust Paradox

12 May 2019

From The Yale Law Journal (footnotes omitted):

In Amazon’s early years, a running joke among Wall Street analysts was that CEO Jeff Bezos was building a house of cards. Entering its sixth year in 2000, the company had yet to crack a profit and was mounting millions of dollars in continuous losses, each quarter’s larger than the last. Nevertheless, a segment of shareholders believed that by dumping money into advertising and steep discounts, Amazon was making a sound investment that would yield returns once e-commerce took off. Each quarter the company would report losses, and its stock price would rise. One news site captured the split sentiment by asking, “Amazon: Ponzi Scheme or Wal-Mart of the Web?”3

Sixteen years on, nobody seriously doubts that Amazon is anything but the titan of twenty-firstcentury commerce. In 2015, it earned $107 billion in revenue,4 and, as of 2013, it sold more than its next twelve online competitors combined.5 By some estimates, Amazon now captures 46% of online shopping, with its share growing faster than the sector as a whole.6 In addition to being a retailer, it is a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading provider of cloud server space and computing power. Although Amazon has clocked staggering growth—reporting double-digit increases in net sales yearly—it reports meager profits, choosing to invest aggressively instead. The company listed consistent losses for the first seven years it was in business, with debts of $2 billion.7 While it exits the red more regularly now,8 negative returns are still common. The company reported losses in two of the last five years, for example, and its highest yearly net income was still less than 1% of its net sales.9

Despite the company’s history of thin returns, investors have zealously backed it: Amazon’s shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor’s 500.10 As one reporter marveled, “The company barely ekes out a profit, spends a fortune on expansion and free shipping and is famously opaque about its business operations. Yet investors . . . pour into the stock.”11 Another commented that Amazon is in “a class of its own when it comes to valuation.”12

Reporters and financial analysts continue to speculate about when and how Amazon’s deep investments and steep losses will pay off.13 Customers, meanwhile, universally seem to love the company. Close to half of all online buyers go directly to Amazon first to search for products,14 and in 2016, the Reputation Institute named the firm the “most reputable company in America” for the third year running.15 In recent years, journalists have exposed the aggressive business tactics Amazon employs. For instance Amazon named one campaign “The Gazelle Project,” a strategy whereby Amazon would approach small publishers “the way a cheetah would a sickly gazelle.”16 This, as well as other reporting,17 drew widespread attention,18 perhaps because it offered a glimpse at the potential social costs of Amazon’s dominance. The firm’s highly public dispute with Hachette in 2014—in which Amazon delisted the publisher’s books from its website during business negotiations—similarly generated extensive press scrutiny and dialogue.19 More generally, there is growing public awareness that Amazon has established itself as an essential part of the internet economy,20 and a gnawing sense that its dominance—its sheer scale and breadth—may pose hazards.21 But when pressed on why, critics often fumble to explain how a company that has so clearly delivered enormous benefits to consumers—not to mention revolutionized e-commerce in general—could, at the end of the day, threaten our markets. Trying to make sense of the contradiction, one journalist noted that the critics’ argument seems to be that “even though Amazon’s activities tend to reduce book prices, which is considered good for consumers, they ultimately hurt consumers.”22

In some ways, the story of Amazon’s sustained and growing dominance is also the story of changes in our antitrust laws. Due to a change in legal thinking and practice in the 1970s and 1980s, antitrust law now assesses competition largely with an eye to the short-term interests of consumers, not producers or the health of the market as a whole; antitrust doctrine views low consumer prices, alone, to be evidence of sound competition. By this measure, Amazon has excelled; it has evaded government scrutiny in part through fervently devoting its business strategy and rhetoric to reducing prices for consumers. Amazon’s closest encounter with antitrust authorities was when the Justice Department sued other companies for teaming up against Amazon.23 It is as if Bezos charted the company’s growth by first drawing a map of antitrust laws, and then devising routes to smoothly bypass them. With its missionary zeal for consumers, Amazon has marched toward monopoly by singing the tune of contemporary antitrust.

. . . .

This analysis reveals that the current framework in antitrust—specifically its equating competition with “consumer welfare,” typically measured through short-term effects on price and output24—fails to capture the architecture of market power in the twenty-first century marketplace. In other words, the potential harms to competition posed by Amazon’s dominance are not cognizable if we assess competition primarily through price and output. Focusing on these metrics instead blinds us to the potential hazards.

My argument is that gauging real competition in the twenty-first century marketplace—especially in the case of online platforms—requires analyzing the underlying structure and dynamics of markets. Rather than pegging competition to a narrow set of outcomes, this approach would examine the competitive process itself. Animating this framework is the idea that a company’s power and the potential anticompetitive nature of that power cannot be fully understood without looking to the structure of a business and the structural role it plays in markets. Applying this idea involves, for example, assessing whether a company’s structure creates certain anticompetitive conflicts of interest; whether it can cross-leverage market advantages across distinct lines of business; and whether the structure of the market incentivizes and permits predatory conduct.

. . . .

This market structure-based understanding of competition was a foundation of antitrust thought and policy through the 1960s. Subscribing to this view, courts blocked mergers that they determined would lead to anticompetitive market structures. In some instances, this meant halting horizontal deals—mergers combining two direct competitors operating in the same market or product line—that would have handed the new entity a large share of the market.26 In others, it involved rejecting vertical mergers—deals joining companies that operated in different tiers of the same supply or production chain—that would “foreclose competition.”27 Centrally, this approach involved policing not just for size but also for conflicts of interest—like whether allowing a dominant shoe manufacturer to extend into shoe retailing would create an incentive for the manufacturer to disadvantage or discriminate against competing retailers.28

The Chicago School approach to antitrust, which gained mainstream prominence and credibility in the 1970s and 1980s, rejected this structuralist view.29 In the words of Richard Posner, the essence of the Chicago School position is that “the proper lens for viewing antitrust problems is price theory.”30 Foundational to this view is a faith in the efficiency of markets, propelled by profit-maximizing actors. The Chicago School approach bases its vision of industrial organization on a simple theoretical premise: “[R]ational economic actors working within the confines of the market seek to maximize profits by combining inputs in the most efficient manner. A failure to act in this fashion will be punished by the competitive forces of the market.”31

. . . .

Practically, the shift from structuralism to price theory had two major ramifications for antitrust analysis. First, it led to a significant narrowing of the concept of entry barriers. An entry barrier is a cost that must be borne by a firm seeking to enter an industry but is not carried by firms already in the industry.34 According to the Chicago School, advantages that incumbents enjoy from economies of scale, capital requirements, and product differentiation do not constitute entry barriers, as these factors are considered to reflect no more than the “objective technical demands of production and distribution.”35 With so many “entry barriers . . . discounted, all firms are subject to the threat of potential competition . . . regardless of the number of firms or levels of concentration.”36 On this view, market power is always fleeting—and hence antitrust enforcement rarely needed.

The second consequence of the shift away from structuralism was that consumer prices became the dominant metric for assessing competition. In his highly influential work, The Antitrust Paradox, Robert Bork asserted that the sole normative objective of antitrust should be to maximize consumer welfare, best pursued through promoting economic efficiency.37 Although Bork used “consumer welfare” to mean “allocative efficiency,”38 courts and antitrust authorities have largely measured it through effects on consumer prices. In 1979, the Supreme Court followed Bork’s work and declared that “Congress designed the Sherman Act as a ‘consumer welfare prescription’”39—a statement that is widely viewed as erroneous.40 Still, this philosophy wound its way into policy and doctrine. The 1982 merger guidelines issued by the Reagan Administration—a radical departure from the previous guidelines, written in 1968—reflected this newfound focus. While the 1968 guidelines had established that the “primary role” of merger enforcement was “to preserve and promote market structures conducive to competition,”41 the 1982 guidelines said mergers “should not be permitted to create or enhance ‘market power,’” defined as the “ability of one or more firms profitably to maintain prices above competitive levels.”42 Today, showing antitrust injury requires showing harm to consumer welfare, generally in the form of price increases and output restrictions.43

. . . .

Two areas of enforcement that this reorientation has affected dramatically are predatory pricing and vertical integration. The Chicago School claims that “predatory pricing, vertical integration, and tying arrangements never or almost never reduce consumer welfare.”49 Both predatory pricing and vertical integration are highly relevant to analyzing Amazon’s path to dominance and the source of its power. Below, I offer a brief overview of how the Chicago School’s influence has shaped predatory pricing doctrine and enforcers’ views of vertical integration.

Link to the rest at The Yale Law Journal

It has been a long time since PG took an antitrust course in law school.

That said, he disagrees with the fundamental premise of the OP that, at the present time, Amazon must be reined in because it is too big and competitors are having a hard time.

PG agrees with the Chicago School argument that antitrust law is designed to benefit purchasers. If a company pushes prices down, absent some other factor, that’s a good thing. Competition that benefits purchasers is a public good. Antitrust law is designed to punish those who act improperly to push prices up.

Under PG’s view, if a seller pushes prices down for a period of time in order to force competitors out of business, then raises prices because competitors are gone, it is then that an antitrust violation occurs and the seller may be punished.

Amazon has not shown any price-increasing tendencies. PG also suggests that Amazon has a lot of competitors selling goods and services online. As far as competition is concerned, the online retail world is very easy to enter – a website, a spare room for inventory, a nearby UPS dropbox and a credit card processing service (there are lots) is about all that is needed. After all, Amazon began in Jeff Bezos’ garage.

Since the infrastructure necessary to become an online seller of goods and services is already in place and that infrastructure is not controlled by Amazon, Amazon cannot raise prices on its merchandise without leaving itself open to underpricing by competitors.

Walmart has put at least tens of thousands of merchants in small and medium-sized cities out of business.

Only a few years ago, Walmart was the bête noire of the same types of people who are complaining about Amazon’s antitrust violations today.

From The Unconvincing Antitrust Case Against Wal-Mart:

I recently picked up a copy of the July Harper’s Magazine to read an essay by Barry C. Lynn entitled, “Breaking the Chain: The Antitrust Case Against Wal-Mart.” If you can’t tell from the title, the basic point is that antitrust authorities should break up Wal-Mart and put an end to the immense havoc that the retail giant has caused the economy.

. . . .

Let me first summarize the Lynn’s argument and then discuss why they are entirely wrong as a matter of economics and sensible antitrust policy below the fold. Here are the basic moves in Lynn’s case against WM:

First, Wal-Mart is a monopsonist. Lynn writes that one in five of every American retail sales occurs at WM, and WM is dominating its retail rivals.

Second, WM leverages its monopsony power in a manner which antitrust law should prohibit. Lynn seems to have two antitrust harms in mind here.

The first is that WM has “changed the game” with respect to bargaining between supplier and retailers. WM dominates upstream suppliers by demanding lower prices, and using its own in-house brands to discipline suppliers, resulting in shrinking manufacturer profit margins. The article discusses WM’s reputation as a hard-nosed, no nonsense negotiator and cites examples of negotiations with Coca-Cola and Kraft. Lynn points to the use of “category management,” a practice where retailers delegate shelf space display decisions to a manufacturer (called the “category captain”) within a product category (say, sodas or soups).

Of category management, Lynn alleges without any substantiation that the practice has resulted in collusion by suppliers as well as retailers:

“one common result is that many producers simply stop competing head to head . . . . in many instances, a single firm ends up controlling 70% or more of US sales in an entire product line . . .. In exchange, its competitor will expect that firm to yield 70% or more of some other product line, say, snacks or spices. Such sharing out of markets by oligopolies is taking place throughout the non-branded economy . . . but nowhere is it more visible than in the aisles of Wal-Mart.”

Note the tension between the claim of supplier collusion and shrinking supplier margins. However, more importantly is the notion that category management and other changes in the bargaining relationships are necessary bad on antitrust grounds. There has been very little economic analysis of category management As a side note, Benjamin Klein, Kevin M. Murphy and are working on a paper entitled “Exclusive Dealing and Category Management in Retail Distribution,” which analyzes the economics of these arrangements as well as exclusive dealing contracts in retail . . . . From an antitrust perspective, it is difficult to imagine why category management would be any more of a concern than exclusive dealing, which is analyzed under the rule of reason and violates the Sherman Act when a number of conditions are satisfied (monopoly power, substantial foreclosure, barriers to entry, etc.). Category management only grants the manufacturer the right to favor his own product, and can be terminated by the retailer at any time, whereas exclusive dealing completely forecloses rivals from shelf space.

. . . .

The second antitrust harm Lynn points to is equally unconvincing. Lynn writes that even if WM is efficient, increased concentration in retail represents a “gathering of power unchecked and unaccountable,” and those who would defend efficiency must “view the American citizen not as someone who yearns to decide for himself or herself what to buy and where to work in a free market but to say, instead, ‘let them eat Tastykake.’”

. . . .

The data don’t match the theory. Taking Lynn’s antitrust theories on their own terms, perhaps the best place to start is that the data simply don’t agree. Retail margins have remained nearly constant for the past twenty years . . . .  Barriers to entry at retail are negligible, and because supracompetitive profits are dissipated through competition, payments to retailers are ultimately passed through to consumers.

What about prices? Lynn talks a great deal about the good old days of antitrust before the Reagan administration where the “goal was to enforce a balance of power among economic actors of all sizes, to maintain some degree of liberty at all levels within the economy.” The essay is essentially an ode to these discredited days of antitrust when consumer welfare took a back seat to attacking concentration for its own sake. For example, Lynn describes comments by then AG William French Smith that “bigness is not necessary badness” as “radical” and “astounding.” Really? Not to any undergraduate student of industrial organization. But what about prices? Does Lynn consider any of the competitive benefits of Wal-Mart, or is the antitrust case against Wal-Mart to be made at the expense of the consumer in the name some fuzzy principle of antitrust populism? Lynn’s essay says very little about prices except the following:

“to defend Wal-Mart for its low prices is to claim that the most perfect form of economic organization more closely resembles the Soviet Union in 1950 than 20th century America. It is to celebrate rationalization to the point of complete irrationality.”

Does anyone really believe that a retailer who earns 30% retail market share by competing vigorously for consumers is the equivalent to a central planner? I hope not. Retail competition is incredibly robust, as is easily observed by watching retail profit margins over the past 20 years in which concentration has increased substantially. To describe Wal-Mart’s negotiations with large manufacturers like Coca-Cola and Kraft as analogous to central planning activity is ridiculous.

Luckily, there is economic evidence that Wal-Mart is in fact very good for consumers.

Link to the rest at The Unconvincing Antitrust Case Against Wal-Mart

PG suggests that bigness is not badness. Bad actions by large or small entities is badness.

Walmart (“Low prices every day”) and Amazon (“Free Shipping” “Prime Day) are especially beneficial to middle class and lower class consumers for the simple fact that those consumers can buy more with their dollars.

PG suggests that the current consumer-oriented antitrust regimen is far more friendly than its predecessors, such as the now-gone Fair Trade laws which granted producers the right to set the final retail price of their goods, limiting the ability of chain stores to discount.

Even if a retailer wanted to sell products to consumers at a lower price and believed it could do so profitably, Fair Trade laws allowed manufacturers to prohibit such discounting. Essentially, Fair Trade laws allowed manufacturers the right to engage in legal price-fixing, a practice that only benefitted inefficient retailers, not consumers.

 

The Amazon Effect Hits Fifth Avenue

7 May 2019

From The Wall Street Journal:

Global retailers once seemed to pay whatever it took to lease space on Manhattan’s Fifth Avenue. That doesn’t appear to be the case anymore.

The section of the avenue that stretches about 10 blocks from Saks Fifth Avenue at East 49th Street to the southeast corner of Central Park is one of the city’s major tourist attractions, boasting luxury brands like Gucci, Rolex and Tiffany & Co.

Real-estate brokers said that for years many major retailers were willing to accept thinner margins or even absorb losses at a Fifth Avenue location because the prestige and marketing power of the address was worth the cost.

But the rise of e-commerce has made it tougher for fashion houses and other retailers to justify sky-high rents when sales at the Fifth Avenue store—or for the company overall—have been in a slump.

The result: It isn’t only outdated malls and poorly-located shopping centers in the American heartland that are struggling. One of the world’s most-trafficked and premier shopping corridors is feeling the strain, too.

“A lot of these Fifth Avenue stores are emotional brand statements and almost churches to the brand,” said Oliver Chen, a senior equity analyst at Cowen Inc. But rent expense matters too, he added.

. . . .

On those prime blocks the availability rate, which reflects vacancies and expiring leases that haven’t been filled, reached 25% in the first quarter. That is down only slightly from 27.5% in the fourth quarter—the highest availability rate since Cushman began tracking the Fifth Avenue strip in 2006. In the first quarter of 2018, the availability rate was 17.4%.

. . . .

In recent months, other apparel retailers such as Gap Inc. and Tommy Hilfiger have closed their flagship stores along Fifth Avenue to focus more on their e-commerce platforms as part of a new strategy to have fewer stores, the companies said. Tommy Hilfiger also closed its store on Collins Avenue in Miami as it reshapes its retail strategy in North America.

Ralph Lauren Corp. also closed its flagship Fifth Avenue store in 2017.  The space has remained vacant since.

Link to the rest at The Wall Street Journal

Amazon wants to pay the New York Times and BuzzFeed to expand so it can reach more shoppers outside the US

7 May 2019

From Vox:

Amazon has a pitch for some US-based publishers: Expand overseas. We’ll make it worth your while.

The world’s dominant e-commerce player is in talks with big American publishers, including the New York Times and BuzzFeed, about deals that would reward them for expanding their international presence, specifically in consumer-oriented shopping sites.

Amazon already pays internet publishers that refer shoppers to the company via “affiliate links” embedded on their site, but it thinks that business could grow significantly if US publishers had more readers outside of America.

. . . .

It’s also an indicator that even though Amazon dominates online commerce, it still thinks it needs help getting shoppers inside its giant site. While Amazon is the place shoppers go to find something specific — it is increasingly challenging Google in the search results race as shoppers head directly to Amazon to look up a specific item — affiliate links can drive shoppers to stuff that Amazon is particularly interested in selling or that shoppers may not have known they could get from Amazon.

Link to the rest at Vox

How to Fight the Commoditization of Books

28 April 2019

By Mark Coker via Publishers Weekly:

The mere thought is at once repulsive and terrifying: books as commodities. After all, a book is the original divine creation of its author, right?

We typically think of commodities as undifferentiated products such as corn or wheat. To a consumer looking for flavor and nutrition, one kernel of corn is the same as another. Though higher-quality corn can command premium prices, the price ceiling is ultimately determined by what the market is willing to pay for a given product.

In this respect, books are similar to any other commodity. Books are delivery vehicles for reading pleasure. Although each book is unique, the primary reason readers purchase books—reading pleasure—can be measured and commoditized.

If we divide the hours of reading pleasure one book offers by its price, we can create a simple metric: cost per hour of reading pleasure. This metric allows one book’s pleasure-delivery potential to be compared to another’s.

Readers are unlikely to consciously intellectualize their cost per hour of reading pleasure. Yet this metric guides consumer behavior much as gravity guides water to flow downhill. In a marketplace of interchangeable options for pleasure, consumers will gravitate toward the best-quality option with the lowest price, whether that quality is measured by brand, average review, or word of mouth.

How low can prices go? With agricultural commodities, the price floor is ultimately determined by the cost of production. If farmers can’t turn profits at the given market rate for their products, they stop producing those products. When farmers stop growing, supply decreases. This then causes prices to stabilize or increase to the point where new growers are incentivized to enter the market.

For decades now, most writers—even traditionally published writers—have maintained day jobs to make ends meet. This means authors are personally subsidizing the publishing industry by continuing to write books that don’t pay the bills.

Would we expect farmers to work for free? Certainly not. Yet many writers will continue writing even if there’s no money in it. Though one writer may write for the joy of writing and another to afford groceries, both require readers. And price is often the determining factor for finding readers.

. . . .

Kindle Unlimited causes significant devaluation on two fronts:

1. Amazon is training the world’s largest community of readers to expect five-star reading experiences for what feels like free. This makes readers reluctant to pay for books, which harms sales.

2. Because Kindle Unlimited decouples book price from author compensation, it means that Amazon has stripped authors of pricing power and can pay them less.

. . . .

2. Don’t underprice: readers will pay for quality. The e-book sweet spots for quality bestselling full-length indie fiction are typically $3.99 and $4.99, and $7.99 to $9.99 are good prices for quality nonfiction.

3. Avoid exclusivity. When indie authors make their books exclusive anywhere—even for a short time—it undermines their ability to build readership at other stores. Exclusivity makes the author vulnerable to exploitation when a single retailer controls the author’s access to readers. True independent authors publish, price, and promote with complete freedom.

Link to the rest at Publishers Weekly

PG says it’s a bear competing with Amazon.

The market value of an item is what a willing buyer will pay a willing seller for a book.

If market demand is elastic, the supply will adjust itself to the demand created by prospective purchasers.

PG suggests that Kindle Unlimited is wonderful for less-known authors because buyers don’t have to risk any money to see if they like what the author has written.

The factors governing the ebook market is different than the printed book market because, in the ebook market all the author’s (or publisher’s) costs to create the product are incurred upfront. Once an ebook is created, for the author, the direct costs of selling one ebook are the same as the direct costs of selling one million books.

Amazon incurs some per-unit ebook costs in the form of server time, credit card processing fees, etc., but for someone who is already running the world’s largest server farm selling zillions of different products, the incremental costs of selling a single ebook are the tiniest drop in an enormous ocean. For the cost of sending a single printed book to a customer who takes advantage of free Prime shipping, PG suspects Amazon could sell and deliver hundreds of ebooks to customers.

On a couple of specific points Mark makes in the OP:

Because Kindle Unlimited decouples book price from author compensation, it means that Amazon has stripped authors of pricing power and can pay them less.

Authors are not stripped of anything with Kindle Unlimited. They can price their ebooks pretty much any way they want to on Amazon, subject only (as far as PG knows) Amazon’s overall $200 max price for ebooks on KDP.

If PG writes a wonderful ebook for which he decides to charge $99 for each copy, he can do so. If a purchaser believes PG’s written ramblings are worth $99 or more, PG has demonstrated he has the pricing power to sell his book for $99 to an unknown quantity of readers numbering greater than one.

Pricing power in an open market is determined by supply and demand. Does the purchaser want $99 more than she wants PG’s book or does she want PG’s book more than $99? If PG prices his book at $1.00, the purchaser’s decision analysis is the same with $1.00 substituted for $99.

With respect to Amazon and authors, if Amazon can attract the kinds and quantities of books its customers are willing to purchase by paying an author 50 cents, why would a rational author expect that Amazon should pay more?

Traditional publishers and bookstores are a far less sophisticated system for determining optimum pricing than Amazon is. Their pricing decisions are pretty much a shot in the dark. For one thing, they’re dealing with thousands of different books and authors. They’re not set up to find the optimum price for any single book because they can’t pay as much attention to sales results for a single book as the author of that book can.

If Author A writes a 300-page romance novel that 50,000 readers are willing to pay $8.99 to acquire and Author B writes a 300-page romance that 50,000 readers are willing to pay $1.99 for, how likely is it that the publisher/physical bookstore will price each book at an optimal manner? If the publisher/bookstore releases each romance at a retail price of $4.99, Author A and Author B will both have lower royalties than each would have had with optimal pricing.

Whatever pricing power publishers and traditional bookstores have does not benefit any individual author. Rather these players use their pricing power to maximize prices from a large group of books. Ultimately, they don’t care if Author A sells many more books priced at $4.99 than Author B sells for the same price so long as the total take from all books, including those from Author C through Author Z, meet the store’s and the publisher’s sales and profit objectives.

PG says some authors will always make more money from their books than other authors do. However, Amazon has developed a much, much more sophisticated and powerful system for determining the optimum sales price of an author’s books than any publisher or bookstore has.

If the author permits Amazon to set the price of a book at zero under Kindle Unlimited and the author is satisfied with the amount of royalties the book generates, is the author treated unfairly?

The author is not permanently locked into Kindle Unlimited (unlike an author dealing with a traditional publisher), so the author is free to withdraw the book from Kindle Unlimited (and KDP Select) every 90 days and engage in more price experimentation through Kindle or through Smashwords.

World Book Day

20 April 2019

Amazon Crossing, Amazon’s imprint for translations of books around the world, is celebrating World Book Day by giving away ebook versions of several of its best works.

The list includes mysteries, historical fiction, biography, true crime and “Book Club Fiction” (a new term for PG).

The nine books Amazon Crossing is featuring will be free until April 24.

Here’s a link to the page.

The books being featured are:

















Amazon’s E-Commerce Adventure in China Proved Too Much of a Jungle

18 April 2019

From The Wall Street Journal:

 Amazon.com Inc. is checking out of China’s fiercely competitive domestic e-commerce market.

The company told sellers on Thursday that it will no longer operate its third-party online marketplace or provide seller services on its Chinese website, Amazon.cn, beginning July 18. As a result, domestic companies will no longer be able to sell products to Chinese consumers on its e-commerce platform.

The decision marks an end to a long struggle by America’s e-commerce giants in the Chinese market. The firms entered the Chinese market with great fanfare in the early 2000s only to wither in the face of competition from China’s faster-moving internet titans.

. . . .

In a statement, Amazon said it remains committed to China through its global stores, Kindle businesses and its web services.

Amazon China’s president will leave to take on another role within the company, the company confirmed. The China consumer business team will report directly into the company’s global team.

. . . .

When Amazon first entered China in 2004 with the purchase of Joyo.com, it was the largest online vendor for books, music and video there. Most Chinese consumers were using cash-on-delivery as their top form of payment. Today, Amazon China chiefly caters to customers looking for imported international goods like cosmetics and milk powder and is a minuscule player in the booming Chinese e-commerce market.

Amazon China commanded just 6% of gross merchandise volume in the niche cross-border e-commerce market in the fourth quarter of 2018, versus NetEase Kaola’s 25% share and the 32% held by Alibaba Group Holding Ltd.’s Tmall International, according to Nomura Securities Co.

“Everyone has merged with someone,” said Chris Reitermann, chief executive for Asia and Greater China at Ogilvy, which advises Alibaba. “It became clear that as a Western internet company you wouldn’t be able to succeed at scale without a Chinese partner.”

Link to the rest at The Wall Street Journal 

Heike Geissler’s Grim Account of the Amazon Workplace

17 April 2019

From The Literary Hub:

Midway through Seasonal Associate, Heike Geissler describes a day off from the Amazon warehouse. It is spent at the Leipzig Christmas market, drinking mulled wine, and then at the fine art museum, strolling through the galleries, looking at paintings, and taking her first deep breath since getting hired for the holiday rush.

I’m thinking of this rare, tranquil moment in her book as Geissler and I visit the Guggenheim Museum on a brisk March day. I find her waiting out front, wearing a wool hat low over her face, angular and framed by blunt brown bangs. We shed our coats to bask in the warmth of Hilma af Klint’s lush, floral paintings, to take a photo together in the reflective surface of a Robert Mapplethorpe assemblage. In Seasonal Associate, art and literature serve as scarce reprieves from the dull work of the warehouse—unpacking, scanning, counting, imputing—a way to restore the creative potential “buried behind your fatigue.” Geissler knows this struggle first hand.

“When I was working at Amazon, there was no time for reading. I was too exhausted,” she told me over an impromptu lunch at The New Amity Restaurant. We split the coleslaw and pickles that came with my BLT and drank many cups of coffee.

. . . .

“There are plenty of nonfiction books written by journalists who embed themselves in bad industrial situations for a limited time, but no one has given a subjective, and literary account of 21st-century flex-time industrial work,” wrote Chris Kraus, writer and co-editor of Semiotext(e), over email.

Geissler, the daughter of a postmistress and a steel worker, grew up in East Germany and now lives in Leipzig, where, in 2010, she worked as a seasonal associate. Eight years earlier, at the age of 25, she won the prestigious Alfred Doblin prize for her debut novel, Rosa, which was met with wide critical acclaim. Less so her metafictional second book, on the difficulty of writing a second book. She then published a children’s book with an illustrator friend, relishing the freedom to experiment and collaborate. But she didn’t interview at Amazon looking for a good story.

“I needed money,” she told the audience at her New York Goethe Institute event. The mother of a young son (she now has two), writing and translating were not paying the bills.

Geissler did, however, take notes on her daily experiences in the warehouse, later assembling them into a manuscript. It was rejected by five German publishers before she decided to pull it. Instead, she re-edited and recorded herself reading several chapters out loud and put the audio files on her website. She wanted to speak to the listener directly, so she supplemented the first-person narration with a second person address.

. . . .

This means that reading Seasonal Associate feels disconcertingly immersive. You, the reader, are the one experiencing the monotony of training day, the draft that comes in from the loading dock, the flu that inevitably develops, the relief of the sick day, and then the dread of returning to work. Meanwhile the first personal narrator serves as a guide to your experience at the warehouse, the version of Geissler who has already experienced everything you are about to: the casual misogyny of the managers, the hands cut up and then wrapped, the half-hearted attempts to spend time with family after a long shift.

. . . .

At the warehouse she is spoken to like a child and treated like a “tool gifted with a voice no one wants to hear.” Everything that makes her an individual is an annoyance to her employer, who will not hesitate to automate her work as soon as it becomes cost-effective.

“There’s this whole narrative of your working life, the narrative of suffering,” Geissler said. “I’m always curious about how people live, what they have to do for money and we can change or improve that. The struggle must be to strive for better working conditions, for the best working conditions.”

. . . .

Amazon has embedded itself in consumer culture on both sides of the Atlantic. I think of the products that pass through Seasonal Associate: punching bags that come in multipart packaging, hair dryers, novelty mugs, and of course, books, thousands of books stacked up, health books, vampire books, and, in ironic twist of events, books of a writer Geissler once knew, a man who supports his family with his books, while she supports hers by boxing them.

. . . .

“There’s a large level of precarious work that creates the conditions by which you are buying a book for $9.99,” says Alex Shepard, writer at The New Republic, who has written about Amazon for the magazine. The promise of well-paid, white collar jobs in urban centers also depends on “ruthlessly cutting costs at every level. Not just in their supply chain, but in the supply chains of the companies that sell on their platform as well.”

. . . .

At her Goethe Institute event, the audience asked Geissler questions about not just Amazon, but also the possibilities of socialism, the rise of the far right, and the decline of labor rights, even in Germany, which has a strong tradition of unions and workers’ councils. German writer Kevin Vennemann, who wrote the afterword to Seasonal Associate, tells me that German readers responded to Seasonal Associate as a critique of a particularly American brand of capitalism now affecting work culture in Germany too, leading to strikes and ongoing issues with workers’ councils. In this context, Geissler has been read as a strong, new voice amid rapidly changing political and economic norms.

. . . .

“She reemerged with this book as a writer who takes a firm political stand and has theoretical tools for analyzing late capitalist working conditions. It’s rare for that kind of book to be embraced on a larger scale within German literature,” says Venneman.

. . . .

In Seasonal Associate, Geissler writes that she wishes she had done more to disturb the peace while still an employee, that she had resisted the urge to play by the rules, ingrained in her since childhood. Damaged the products. Stuck an insult inside a package. Slowed down the supply-chain. Instead, she writes, she and her co-workers took out their frustrations on each each other.

Link to the rest at The Literary Hub

PG says, in case you missed it, the author of the OP and the author of the book would like you to buy Seasonal Associate.

And, as indicated, you can buy Seasonal Associate at Amazon!

As a matter of fact, if you’re a warehouse worker, you’ll almost certainly pay less for Seasonal Associate at Amazon than anywhere else. That way, you’ll be able to buy the book and have more money left over for basic necessities.

PG says Seasonal Associate falls into the literary genre of slumming.

“I’m an intelligent, refined and educated person who spent time with the proles and this is what it was like. I hated it!!! You can’t imagine the scope of the squalor and filth. You can thank your lucky stars that you’re not a prole and have to live like that. And, while I was a Seasonal Associate, I met some proles who said they don’t like squalor and filth, but they can’t afford to go to graduate school.”

“But now I’ve been there, done that, wrote the book. I knew my publisher would want some authentic prole color from real proles for Seasonal Associate, so I got it and I’m finished with the prole scene except for talking about it in my book interviews.”

“For my next book, I think I’ll write about the empty lives of the filthy rich who live on yachts and sail around the Mediterranean with no thought for the poor. That will be a nice change from being a Seasonal Associate.”

As the author of Seasonal Associate learned, warehouse work (and a lot of other jobs involving manual labor) is physically hard work. The OP doesn’t say whether the author had ever had a job involving manual labor before, but, if she had not, then her being sore and tired after work is to be expected.

From his own experience doing manual labor significantly heavier than the author’s, PG suggests that you become physically accustomed to the work after a couple of weeks, but going home sore lasts longer than that. Eventually, your body adapts. However, if the author is in her thirties and has spent several years writing books, absent a serious and continuing workout program, her body would take longer to adapt.

This is information that anyone with experience in manual labor would understand. A Seasonal Associate without such experience would be surprised and might come to the erroneous conclusion that everybody’s work experience was the same as her own, even if they had worked in the Amazon warehouse for several months or years.

As to “late capitalist working conditions,” if capitalism is going to disappear, what will replace it?

“The possibilities of socialism” are mentioned.

That certainly worked out well for the workers’ paradise formerly known as the German Democratic Republic. East Germany was so wonderful that its citizens kept leaving paradise for West Germany. They were probably worried about the potential for adverse effects from too much of a good thing. By 1961, one in five East Germans had fled the country. That left fewer people for the Stasi, the East German secret police, to watch.

The mortality rates for both men and women were significantly better in West Germany than in East Germany. As one example, reported suicide rates were about 60% higher in East Germany than in West Germany prior to reunification. These differences persisted over a period of about 20 years despite the fact that most observers believed the reported East German health statistics were substantially massaged prior to publication.

Mortality from heart diseases and alcohol abuse was also materially higher in the East than in the West. Much of the difference between other causes of death in West Germany vs. the Worker’s Paradise was the marked superiority of West German medical facilities and a chronic lack of medical supplies in East Germany.

PG has calmed down and will stop now.

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