There's been a lot of talk about the potential of a future Amazon monopoly on ebooks if the DOJ gets its way and forces the major publishers to abandon their preferred agency model in favor of a wholesale model.
Currently, publishers set ebook prices -- the charge is that they illegally colluded amongst one another to do so -- whereas under the terms of the proposed settlements, Amazon will have the option to pay publishers wholesale prices, and then sell to consumers at a loss.
Doing so brings in customers -- cheap books! -- but could put Barnes and Noble out of business, setting Amazon up as the dominant force in the industry.
The fear, then, is that Amazon locks up the market, puts most of the competition out of business, and subsequently raises prices back to sustainable levels.
Just to get this out of the way: If Apple and publishers colluded to raise prices, they should pay whatever penalty is deemed appropriate for having done so. I don't think it's a foregone conclusion that they did -- and many experts agree -- but that's what a lawsuit will sort out.
Even so, I don't think it's premature to think about Amazon's role as a potential monopoly, and the future impact that may well have on consumers, given that 1) Amazon is a business, not a charity and 2) they're out to turn a profit.
Here's what we know:
This is true of both the Kindle Fire and the $79 entry-level Kindle:
It's been widely reported that Amazon is willing to lose $10 a pop for every Kindle Fire it makes and now it appears that the online retail giant may also be planning to sell its $79 Kindle ereaders at a loss.
Research firm IHS (formerly iSuppli) has determined that it costs Amazon about $84.25 to make one of the soon-to-be-released ereaders, according to a report this week from MainStreet. That's obviously more than the $79 list price for the device and it wouldn't be the only forthcoming, below-cost product in Amazon's stable, if an earlier IHS manufacturing teardown for the Kindle Fire holds water.
The conventional wisdom is that Amazon can take a hit on hardware, because they'll make up that lost revenue on services.
Amazon Prime is a $79-a-year membership program that essentially comes with (as in: it's all free!) a good deal of the "conventional wisdom" services that bring value to both the e-ink Kindles and the Kindle Fire.
- Free 2-day shipping on anything purchased from Amazon.
- Free access to (advertisement-free!) instant-streaming movie and TV content.
- Up to 1 free book per month.
So, for $79, I'm not paying for movies because I'm streaming them for free, and Amazon isn't even making any advertising revenue. If I'm frugal, I'm borrowing books, rather than buying them. (There are entire websites devoted to helping Kindle owners find free content.) On top of all that, Amazon is paying an awful lot of money to publishers and movie/television studios in order to be able to offer these deals:
Prime is so crucial to the Seattle-based company that it is willing to lose hundreds of millions of dollars a year on the program, by some analysts' estimates. Until this year, Prime offered only quick shipping for $79 a year. But the online retailer has added services to Prime while keeping the price unchanged as a means of keeping customers loyal to Amazon's more-profitable operations.
Amazon is paying flat fees to some publishers for the rights to lend books, but for some titles the company is buying a digital copy every time a customer borrows a book.
In many cases, when a Prime customer borrows a book, Amazon pays the publisher full price for that book. Publishers are businesses too -- if you're not paying for something, you can bet Amazon is. The trend has been to add more services to Prime, not less, and the price of entry hasn't moved an inch.
And, finally, Amazon is hoping to get back into the business of selling books below cost:
[The settlement] is a big win for Kindle owners," Amazon said in a statement. "We look forward to being allowed to lower prices on more Kindle books…
Amazon is taking a loss on the hardware, taking a loss on a lot of the services, and plans to resume taking a loss on some of the content.
The Seattle-based company (AMZN) also said it may fall short of analysts' earnings estimates for the current quarter as it continues to invest in long-term initiatives, such as the Kindle Fire tablet and Amazon Prime, aimed at enticing customers to buy more and exclusively on its site.
Net income fell to $177 million from $416 million a year earlier. Revenue rose 35% to $17.4 billion. But revenue fell short of analysts' estimates. The stock closed Tuesday at $194.44, but fell as much as 11% in after-hours trading.
Amazon, it must be noted, is a publicly traded company.
If the bet is to sustain these losses in order to "entice customers to buy more and exclusively on the site" -- which is another way of saying that Amazon is attempting to buy the market out from under its competitors -- who is it that honestly believes that the low prices and too-good-to-last free offers will stick around once they've (inevitably) achieved that goal?
Amazon can't give away money forever.
This could lead to a future in which Amazon controls the publishing industry, prices normalize at a level that is higher than consumer have been groomed to expect, there's no competitive alternative to turn to, and wary publishers spitefully hold back on ebook innovation even more than they already do.