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Amazon's threatening ebook strategy

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Amazon's threatening ebook strategy

Postby skynet » Mon Apr 16, 2012 6:41 pm

Amazon can be a good resource for stuff but there's a threatening side to the monopoly that Amazon is becoming. I guess it's hard for the very large corporations to not become a monopoly. It's in their blood. Here's an article about it.

Amazon was founded in 1994 by Jeff Bezos. And today it's the world's largest online retailer.

I submit that, as with all other large corporations, you cannot judge Amazon by the public statements of its executives; they are at best uttered with an eye for strategic propaganda effects, and at worst they're deeply self-serving and deceptive. Rather, you need to examine their underlying ideology and then the steps they take—and the actions they consider legitimate—in order to achieve their goals.

Now, first, I'd like to introduce three keywords that need defining before you can understand Amazon:


is the removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly.
Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers bypass the middlemen (wholesalers and retailers) in order to buy directly from the manufacturer and thereby pay less. Buyers can alternatively elect to purchase from wholesalers.

It should be fairly obvious by now that the internet is an intrinsically disruptive force in traditional distribution channels because it makes disintermediation very easy.

Jeff Bezos recognized this very early on, and designed Amazon to be a disruptive disintermediary: to buy wholesale and sell retail, using the internet as a tool to reach remote customers directly. Initially Amazon relied on large warehouses, but as its database expanded they moved to just-in-time ordering, whereby obscure items would be listed as available but only ordered from the supplier when a customer requested one.

(So far, so good.)

But there are two other key aspects of Amazon that we need to understand.

Firstly, it's not an accident that Bezos' start-up targeted the book trade. Bookselling in 1994 was a notoriously backward-looking, inefficient, and old-fashioned area of the retail sector. There are structural reasons for this. A bookshop that relies on walk-in customers needs to have a wide range of items in stock because books are not fungible; a copy of the King James Version Bible is not an acceptable substitute for "REAMDE" by Neal Stephenson or "Inside the Puzzle Palace: A History of the NSA" by James Bamford. But books are bulky—a metre wide galley with books stacked spine-out can hold maybe 200 books on its shelves. It takes a lot of floor space to hold one copy of everything a reader might want to buy. Even a big box store may only have room to stock 20-50,000 different titles. In contrast, Amazon's database can hold millions of titles without Amazon having to hold them as physical stock.

Moreover, a big bookstore that stocks 20,000 trade books has to either sell them or return them undamaged for credit within 90 or 120 days. Someone is paying for that credit: either the wholesaler who bought them from the publisher, or the publisher themselves. (Or the bookstore may take a gamble and pay for the books, then keep them on the shelves until they sell—but this doesn't generally happen because bookstore owners aren't suicidal.) And the availability of that credit is limited by the retailer's plausible ability to pay. Amazon doesn't need to run on rolling credit. They can list everything in print as if it's available, and order it only when they have a confirmed sale. Neat, huh?

As noted, Bezos targeted bookselling because it was ripe for disintermediation. By purchasing from the publisher directly when a customer had already bought a copy, his company could keep its overheads down—and in particular, minimize its warehouse space (never mind the cost of running premium retail outlets and paying shop sales staff). This allowed him to buy wholesale and sell retail, at a big discount compared to the regular retail trade (with their higher overheads).

So. What's wrong with this?

Well, there's nothing intrinsically wrong with this way of doing business—if that's all that was going on. But it isn't. So now we come to our two new words:


exists when a specific person or enterprise is the only supplier of a particular commodity ... Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.
Monopolies suck for their customers because they don't have to give a s*** about product quality or price: they have you, the customer, over a barrel with nowhere else to go.

A monopoly is a consumer-side problem. In contrast, there is a less-well-known corresponding supplier-side problem ...


is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only or majority purchaser of a good or service, the "monopsonist" may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers.
Monopsonies suck for their suppliers because the suppliers are systematically starved of profits by the middle-men running the monopsony. Which can lead to suppliers going bust, and a reduction in the diversity and quality of goods available (via the monopsony) to consumers.

(It's kind of like inflation and deflation in economics. Inflation is bad; deflation, its opposite, is not good, it's simply differently bad. Similarly, both monopolies and monopsonies are bad.)

And the peculiar evil genius of Amazon is that Amazon seems to be trying to simultaneously establish a wholesale monopsony and a retail monopoly in the ebook sector.

You're probably familiar with predatory pricing. A big box retailer moves into a small town with a variety of local grocery and supermarket stores. They stock a huge range of products and hold constant promotions, often dumping goods at or below their wholesale price. This draws customers away from the local incumbents, who can't compete and who go bust. Of course the big box retailer can't keep up the dumping forever, but if losing a few million dollars is the price of driving all the local competitors out of business, then they will have many years of profits drawn from a captive market to recoup the investment. (Meanwhile, helpful laws allow them to write down the losses on this store as a loss against tax, but that's just the icing on the cake.) Once the big box store has killed off every competiting mom'n'pop store within a 50-mile radius, where else are people going to shop?

Amazon has the potential to be like that predatory big box retailer on a global scale. And it's well on the way to doing so in the ebook sector.

Full Story: What Amazon's ebook strategy means
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