Does Amazon EVER need to make money on e-books?
You can’t keep losing money on something forever and stay in business, right?
Actually, yes…yes, you can.
You can even prosper that way.
The trick is that the thing on which you lose money has to “inspire sales” that make you money.
I’m speaking as a former brick-and-mortar bookstore manager, and that’s one of the main difference between the way consumers see things and suppliers (whether retailers or creators) see things.
Consumers see things in terms of the single transaction they are doing. Let’s say that a soft drink company changes the flavor of your favorite soda. You hate it. They lose you as a customer, and you figure they are going to go down in flames because of it.
However, if ten other people become customers because of the new flavor, it’s a net win for them, right?
Retailers (and creators) think in terms of populations of sales. It’s not each individual transaction which matters: it’s all of them.
It’s also not only all of the transactions of the same type. Let’s say they changed that flavor of soda, and almost everybody hated it. However, the flavor is part of a line of sodas…and they all got the same sort of change. The other flavors see increased sales because of the change. That’s also a net win.
In that case, it would be logical to discontinue the one (now) bad-selling flavor, right?
What if people who bought sodas also bought chips, and the company made more money on chips than on sodas? With the new flavor, only ten percent as many people buy it…but those people buy so many more chips (maybe the old flavor was saltier…and now they crave chips for the salt) that the company ends up making more money?
In that case, you’d keep making the less salty chips.
I was recently responding to one of my regular readers and commenters, Roger Knights.
Roger suggested that eventually, the investors and/or Amazon would want Amazon to make money on e-books.
That seems logical…but they wouldn’t want that to happen if losing money on e-books was making them more money on something else.
Let’s think about a restaurant.
When you sit down at a restaurant, they typically will give you a glass of ice water for free.
That ice water has significant costs associated with it:
- The water bill
- The electricity for the freezer for the ice
- The capital investment in that freezer
- The capital investment in water glasses
- The expense to clean the glasses (water, detergent)
- The salary expense for the server to bring it…and to keep refilling it, typically
- The salary expense for the person who cleans the table
- The expense to replace broken glasses
- Expenses associated with when people spill the water, especially if it might wreck a menu
I could keep going.
The restaurant is losing money on every glass of water.
However, they may be making money on the meal…and if a restaurant refused to bring you free water, you might not stick around for the meal (or might not come back).
That would be true if the restaurant was in business for twenty years: they’d never have to make money on the glasses on water, because those glasses inspire other sales.
Could e-books be the “glasses of water” for Amazon?
We don’t have to say the following is true for everyone, but let’s say it is true for a substantial number of Amazon’s customers:
- They buy e-books from Amazon
- They want something on which to read the e-books, so they buy a Kindle
- When they want to get a tablet, they look at a Kindle Fire, because they like the Kindle…and they want the option to read those e-books on the Fire. In my case, part of that is wanting the Fire for text-to-speech in the car, even though I own a Paperwhite
- When they have the Fire, they get a free month of Prime
- Once they try Prime, they stay with it…and spend a lot more money on high profit items (like diapers, I would think)
Amazon is then making a profit on that customer, even though they could be losing money on every e-book sale to that person…forever.
Amazon never, ever needs to make money on e-book sales if the e-book sales inspire other sales which make them more money than they lose.
That’s why I don’t really worry about there being a day when Amazon suddenly raises e-book prices across the board. I hear people being worried about that, especially if they end up with less competition.
Even if they had no competitors, they could still lose money on e-books.
Let me give you an analog from when I managed that bookstore.
We sold TV Guide…and the cover price was sixty cents back then.
We gave a ten percent discount on magazines, so we sold it for fifty-four cents.
The profit margin on magazines was considerably below the profit margin on books…let’s say (although I don’t remember exactly) that we paid the distributor forty-eight cents for it…meaning that we made six cents on each sale.
Well, only directly.
We had those “costs of sale”.
We had to pay a sales clerk to sell it. This was some time ago: let’s say they made six dollars an hour, and that it takes a minute to sell the magazine on average. A six dollar an hour salesperson costs about 1.67 cents a minute.
In that one minute to sell it, we are now down to about 4.33 cents of profit.
However, we also had to “receive” the magazine when it came in. That’s more salary.
We had to pay rent on the space in which it sat until it sold.
We had to take into account “shrinkage”, due to shoplifting (yes, they got stolen), and damage (people would pick up a TV Guide just to check something…and maybe bend the pages to where somebody wouldn’t buy it).
We had expenses for doing the payment to the distributor.
We lost money on every TV Guide sale.
However, people who bought the TV Guide often came in every week to get it…and some of them left with several books.
It was because of those “inspired sales” of the other books that we sold TV Guides.
Amazon doesn’t depend on e-book sales, or even p-book (paperbook) sales. They make a lot of their money with web services, and with acting as fulfillment centers for other sellers.
This, by the way, is why the publishers (and many other bookstores) hated Amazon’s $9.99 price point for some well-known books. Amazon was losing money on many of those, but Amazon could afford to lose the money.
Not because Amazon was such a big bookseller, but because they can make their money on other things besides books.
That doesn’t excuse illegal collusion to raise prices. Do people who sell bottles of water have a case against restaurants giving it away? Could they get the Department of Justice to step in and force the restaurants to charge for water? Well, maybe in France ;), where they are passing laws to make customers pay more to get an Amazon book delivered than they used to pay.
Not in the USA, though…not as far as I know.
I also think Amazon isn’t always losing money on e-books, even calculating in costs of sale. That might make a difference legally.
As readers, we reap the benefits of Amazon charging so little for e-books.
I believe authors are likely making more than they used to make. Certainly, that’s true for many non-brand-name authors, who may be making more independently publishing.
Is there a risk that the downward price pressure pushes tradpubs (traditional publishers) out of business? If price-matching eventually drives the price of a new Stephen King novel to $4.99, how can the publisher afford to pay enough to Stephen King to keep the mega-author from going independent? Would the low price point kill the business?
Hypothetically…but publishers can find other ways to monetize books. That includes adaptation rights (for movies and TV shows), and I think it will include subscription services.
I can even see the possibility of paying somebody like Stephen King a salary, rather than royalties. Sure, it would be a big salary, but it might be worth it.
I’m sure a lot of authors would take a $50,000 salary, with a requirement to turn out x number of books a year as a deal.
That may, actually, be a good way to go.
Stop paying authors based on individual sales, which is a very complicated process.
Pay them a salary (and benefits).
These sorts of things have been done before, and in other industries. Comic book writers are employees, right? TV screenwriters?
I assume that’s how those work. 🙂
There might be no doubt about exclusivity in a case like that. Amazon could employ authors, and have exclusive rights to their work and adaptations. Writers would be subject to performance reviews, of course: if there isn’t enough interest in what you produce, you could be put on a performance improvement plan…and eventually, if things didn’t pick up, terminated.
Hm…I’ve gone a bit far afield here! 🙂
The bottom line is that book sales can be below the bottom line for Amazon…as long as they inspire other sales.
What do you think? Does Amazon’s long term strategy include making money on every e-book sale? Is what they are doing “predatory pricing”, or a legitimate business practice? Feel free to tell me and my readers what you think by commenting on this post.
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