Tuesday, August 12, 2014

Amazon’s Webmaster Thinking

Amazon is in the content business, but it thinks like a webmaster. It is an unworkable combination.

Amazon’s indifference to content has been highlighted in the headlines for two high-profile disputes. It has been squeezing two of the biggest hardcopy content providers, Hachette in books and now Disney in movies, refusing to provide key titles from these sources to its customers. Amazon says it wants improved trading terms that assure lower prices. In essence, Amazon doesn’t believe any information product should cost more than US$9.99.

To Amazon the webmaster, it doesn’t matter that popular products are missing from the store. Content to a webmaster is a fill-in-the-blank item. A newspaper, for example, may replace every single story between one day and the next, but the site stays the same. Similarly in an online catalog, if one product is absent, web surfers go on to the next product.

The problem with this attitude is that to the people with the money — the consumers shopping at Amazon — one product is not the same as another. A movie fan will not buy The Muppets Take Manhattan just because Muppets Most Wanted is not available. Most likely, the customer will go off to another retailer (for example, Best Buy), where Muppets Most Wanted is ready to order. When Amazon has less content to offer, it sells less, its revenue is lower, and the perennially money-losing holdover from the dot-com era is that much farther away from a sustainable business model.

It is not just that a smaller catalog cuts into Amazon’s revenue. Suppose Amazon got its way and all movies sold for $9.99 or less. Amazon has not gained a competitive advantage: if a Blu-ray sells for $9.99 at Amazon it will be $9.99 at Best Buy too. Worse, this means Hollywood has less money to spend to make its future movies. Suddenly there is no money for the camera assistant, the lighting assistant, the supporting cast, the special effects, or the original music soundtrack. There is no money for take 6 of a scene — take 5 will have to do. But the result is movies that are less impressive and less compelling for movie fans. These are movies that will sell fewer copies — yes, even at Amazon. With budget cuts, it goes without saying that some movies won’t be made at all. Again, a smaller catalog and lower revenue at Amazon. The same analysis holds if Amazon gets its way in book pricing. Lower royalties for book authors, who as a group are already starving, would mean fewer or lower-quality books, and sales could only go down.

It is understandable that Amazon might think lower prices are the key to its success. You have to look at where Amazon’s money comes from to see the source of this error. Amazon may have more than 100 million U.S. customers, but the big money, the money that allows Amazon to stay in business, comes from a small coterie of avid book readers. I say “small,” but this group is not small in a commercial sense. I would guess they number about half a million in the United States. They read two or more books every day. Some of them buy ten books a day, even though they must realize they will never be able to read them all. You might know someone like this. Or maybe not — a person who reads multiple books per day doesn’t have much time left to talk to even their close friends. I am reluctant to imagine the experience of people so determined to escape from the real world, but at least books are a harmless habit when compared to other forms of escapism such as watching television all day, to name just one.

The more books a customer buys, the more they influence Amazon’s view of the book-buying public, and so, in a way, Amazon imagines we all think like its ten-book-a-day customers. It is this group that feels most strongly that $2.99 books are better than $9.99 books. It is an understandable opinion if you consider that this price difference might save someone $20,000 on their annual book-buying habit. It would be the height of irony if this group, which buys so many books but takes so little interest in the ways of the world, were to determine the way the rest of us buy books.

Yet this is already the case. If avid book readers were to decide, all at once, to read the books they already had before they bought more, none of us would be able to go on buying books quite so easily. It would be the end of the book business as we know it. The layoffs at Amazon would start the very next day. Amazon would go under by the end of the quarter. Publishers, for their part, would cut back drastically. Thousands of novelists, no longer able to maintain the pretense of making a living, would retire from writing to take on other work. As a book author myself, I have no doubt that my own livelihood would suffer in this scenario — not that people buy books on information technology and economics as escapism, but that Amazon’s replacement might not go to so much trouble to make my books easy to buy. It makes me wish my status and income as an author did not so depend on a book distribution infrastructure paid for by other people’s unhealthy habits and bad decisions — remembering that every purchased book that goes unread is a miscalculation on someone’s part. I wish we could do better.

Amazon has no such vision. It is scrambling to survive, and if it shoots itself in the foot as it does so, that is just the risk it must take.

Wall Street analysts see Amazon as the heavyweight in its battle with Disney, but I don’t see it that way. Amazon makes a legitimate profit in only one area of its business, which ironically is printed books. It doesn’t mind pillaging its profitable business in the hope that its ebook platform (and other initiatives) will someday be profitable. But it has been years and years, the losses are piling up, and in the meantime, from everything I can see, Amazon’s share of the printed book business is now declining. Suppose Disney and Hachette held their ground and decided to respond to Amazon’s threats by cutting off Amazon. Hachette would be, if anything, slightly more profitable freed from the low prices and steep discounts that Amazon insists on. Disney would still be a stable, profitable business. Amazon, I am afraid, would be finished.