Monday, May 19, 2014

A Total Absence of Surprise: On Amazon & Hachette

How do you transfer market share to profit? The most direct way is to charge higher prices for whatever you sell in the regions where you dominate the market. But what if the way you gained that market share was not through the highest quality products and services at fair market prices, but by underselling all of your competition? What if your whole rasison d'etre is low prices? What if your entire public persona is based on the idea of “putting the customer first?”

For it's entire life, Amazon's business model has focused entirely around infinite growth of market share. Relentlessly, obsessively, ruthlessly, using low prices to gain retail market share, first in the book world (because the ISBN metadata of books is perfect for online databases) and then, in every aspect of the retail, and now, media world it can. It has been able to sustain itself on razor thin profit margins through the extra sales generated by blatant but technically legal tax avoidance, low pay and poor treatment of its warehouse workers, and Wall Street confidence in its ability to some day, some how, any-day-now-even-though-we've-been-waiting-for-fifteen-years, start turning a profit. (A compliant Department of Justice and a disturbingly sympathetic federal judge helped too.)

If money were infinite, there would be no poor people.
But now, the tax loophole that was a basic building block of Amazon's business model, is being closed, state by state, with the likelihood of federal tax fairness increasing by the year. In the UK, awareness is being raised and pressure is being put on Amazon over how much tax they DON'T pay, by technically basing their European division in Luxembourg. And people have noticed how awful Amazon treats its workers, including the workers suing Amazon over the lost break time in America, and organizing the hell out of shit in Germany. And Wall Street is finally starting to notice that Amazon isn't making any money. Not enough to do anything meaningful yet, but the Stock Market has the emotional stability of a 13-year-old, so the risk is always there that one day Amazon will wake up no longer allowed to sit with the cool kids.

Wait. That's what "communism" means?

No matter how efficient your business is, there is an overhead floor. There is a cost to doing business and even Amazon must pay it to keep doing business. So if they can't raise their prices how do they meet that floor? The same way Walmart does, by pressuring its vendors for more advantageous contracts. Hachette just happens to be, for whatever reason, the latest vendor to feel Amazon's pressure. To anyone following Amazon's progress to “Walmart of the Internet” this should not be a surprise. To anyone with a basic understanding of retail economics, this should not be a surprise. Really, anyone who takes a second to think about Amazon's discounts, shouldn't be surprised either. If there is anything surprising at all about this most recent conflict its that the public hasn't heard about more of them. This is the natural consequence of a business model based entirely on market share with unsustainably low prices. The result is like milfoil in a pond; Amazon is sucking the money publishing needs to survive out of publishing.

Sorry, today is my day off from crippling cynicism.
But that money goes to the consumer right? And if it's good for the customer, it's good for the economy, right? You'll spend the money you save through cheap books on Amazon, elsewhere, right? When Amazon pays its vendors less, everyone downstream makes less. (Have you heard about the shrinking author advance?) When Amazon pays its employees less, every economy impacted by those employees has less wealth. Though you personally might economically benefit from Amazon's low prices in the short term, and might reinvest those savings in other aspects of your local economy, that money came from somewhere. At best, Amazon's (and Walmart's) cheap prices are a zero sum gain for the economy, but more realistically, they starve states and municipalities of tax dollars, pull money out of the economy into Bezos' space alien death laser compound, and deprive a primary, fundamental, vital mechanism of human expression the resources needed to publicize and distribute that human expression.

Unless something changes, Hachette will not be the last publisher stressed by Amazon. Even if Hachette “wins” this particular conflict, Amazon will just pressure some other publisher when that contract comes up. How would something change? Ideally, Amazon would start acting like it is a member of society, but I don't see that happening any time soon. Even less likely, is the use of existing federal anti-trust regulation to stop Amazon's predatory pricing. So, again, it comes down to readers thinking in the slightly-longer-than-short-term and shopping elsewhere, at least some of the time. Now seems like a pretty good opportunity to start. If Amazon is telling you there is a three-week wait time on a popular book, go to IndieBound and buy it from an independent bookstore. You'll get the book faster, you'll buy it from a company that acts like its a member of human society, and you'll help support the publishing industry as a whole. Of course, the whole success of this strategy is based on readers thinking through the consequences of their actions more than one step removed. Readers are still people, and if our attitude towards human driven climate change is any indication, even just one step removed is apparently too much to ask.

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