Friday, October 12, 2012

The Great Amazon Squeeze, Once Again

This week, Jeff Bezos admitted what numerous teardown analyses have shown: that Amazon sells its Kindle devices at "cost" to drive content sales. There's no indication of how optimistic Amazon is when it determines its "cost," so the general suspicion in publishing that they actually sell devices at a slight loss is still entirely plausible.

And those with memories that stretch back more than a couple of years remember that the famous $9.99 Kindle price point was also, in the vast majority of cases, selling at a loss. Since the end of the great antitrust suit means that Amazon is free to once again discount major-publisher books below its own cost, is there anyone who doesn't believe that Amazon will do so again?

(The comparison in that Forbes article is with videogames, where Sony, Microsoft, etc, do take a small loss on each $300-$500 console...but then make that up by making hefty profits on each piece of $60 software for that console, plus the gravy of direct-to-consumer DLC. I don't need to point out the differences between that and the book market, do I?)

So, to review: Amazon sells hardware at what is at best a breakeven price to sell more content, and then sells content at a loss to maintain lock-in with their customers. It must be nice to have a pile of money so large that you can burn it off idly like that.

But, if I owned Amazon stock, I know I'd be screaming right now.

1 comment:

Geoff said...

This has been a common tactic in many areas of retail during the last twenty years - provide the product at little or no profit while you drive the competition out of business, then let the prices creep back up until you are making a lot of money on still-thin margins because you're one of the few players left.

It works for one simple reason - most people are now so obsessed with getting the cheapest price that they'll happily spend an hour trying to save that extra £3 (tip: if you wouldn't work for £3/hr then there's not much point...)

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