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Friday, February 3, 2012

The Amazon Empire

Will It Fall Before It Kills The Book Industry?

Amazon is the bully of the book publishing industry and the 800-pound gorilla that all internet retailers must contend with.  They are Wal-Mart on steroids.  They may offer many goods at great prices but they threaten the industries they sell in, putting jobs and the economy at risk.  That’s not opinion.  That’s fact.

Here’s another fact:  Despite their explosive growth in revenue, they have an equally explosive growth in expenses. For 2011, amazon’s sales rose 41 percent but net income fell 45 percent. For 48.1 billion bucks in revenue the company only earned 631 million pre-tax dollars. That means for every dollar they took in, they spent about 98.5 cents. Those are horrible margins.

Amazon’s stock tanked when it warned it could post a loss in the fourth quarter, yet the stock still trades at a value in excess of 100 times its earnings.  A rule of thumb is 20 or 30 times earnings.  Apple trades at 13 times earnings.  It’s clearly over-priced. Wall Street seems to be betting that amazon’s strategy to kill the competition at any cost will pay off.

Amazon needs to be contained, otherwise, like a cancer or virus, it will infect everyone and everything before we can recover.  Amazon’s CEO, Jeff Bezos, has long desired growth at the expense of profits as he relentlessly and unapologetically seeks power and market dominance. That approach is more dangerous than one who merely wants to be rich. He wants to “own” entire industries.

Amazon keeps creating loss-leaders in hopes it can under price competition to the point competition disappears. Bloomberg BusinessWeek had a front cover story, a quite scathing one outlining why and how Amazon wants to own the book business all to itself.  When will consumers and publishers wake up and fight back?  You want an e-reader?  Buy the Nook from B&N. As a consumer you need to realize a cheaper Kindle, in the long run, will cost you in other ways.  As a publisher, I know you like selling through Amazon, but Amazon wants to be a publisher, not a partner in sales.  Amazon wants to sell e-books and it can do that when bookstores go under and when book publishers struggle to make a profit.

Books-A-Million has joined with Barnes & Noble this week to announce they will not carry Amazon Publishing titles, including those published under Houghton Mifflin Harcourt’s New Harvest imprint. That’s great. It is time the book trade cuts ties with amazon if they can’t behave.

One would like to think Amazon is not evil but right now they are Russia, circa 1980.  It’s a Cold War and things could go nuclear.

Below is a piece I ran in this blog in December that is still relevant and may be of interest to you if you haven’t yet seen it:

What Will Stop Amazon?
The book industry is fed by Amazon but it also is under a grave threat from it. Amazon is trying to not only increase its market share, but dominate it, and it will kill the competition and even the publishers in the process. So what can be done to contain Amazon?

1.      Don’t buy from Amazon, dear consumer. Amazon will listen to you.

2.      Create a government regulation of some kind that forces Amazon to stop its predatory practices of undercutting legitimate competition with below-cost pricing. Amazon will use a lot of loss leaders to win a sale.

3.      Companies and publishers should stop selling to Amazon. Either support other retailers, such as Barnes & Noble or form a company that services publishers and does not compete with them.

4.      Find a universal e-reader device that gets rid of the idea that one who owns a Kindle can only buy from Amazon. Everyone should be able to buy from everywhere – with one device.

5.      We need a scandal to break that forces Amazon to clean up its act. Maybe Jeff Bezos has a dirty secret that can be uncovered and used to blackmail him into better behavior?

6.      We need a government investigation into Amazon’s practices, the way Microsoft got knocked around under suggestions of being a monopoly, Amazon is taking over the world the way Mr. Potter bought out that small town in It’s A Wonderful Life.

7.      The public needs to be educated about what it means to buy from Amazon, how every sale with them threatens the existence of book stores and the local economy. The best price doesn’t mean the best deal for society.

8.      Incentivize Amazon to do the right thing, even if for the wrong reason, the way the US gives “aid” to enemy countries, in essence buying off the opposition. We need to placate the giant with something in hopes it won’t keep focusing its energy on putting others out of business.

9.      Hire a hacker to injure Amazon’s site. It has one selling location -- you harm the site, you kill the beast. Of course I’m not suggesting one break the law but desperate times make us think of desperate measures.

10.  We need an anti-Amazon, a store that highlights how it earns business on merit and not merely by cannibalizing others. Instead of seeing an economy run by Wal-Mart and Amazon, we need a solid business that wins because it has a good product, great service, and gives back to the community. We need Starbucks to enter the book business.

Perhaps the best way to influence Amazon is to get its stock to tank. Where is an 80’s style corporate raider when you need one? We need an Occupy Amazon movement.

Amazon’s stock price peaked in 2011 in mid-October at $246 a share, reflecting a 35% gain from a year ago. But its aggressive under-pricing has caused it to barely make a profit, sending the stock down to $170 (below the cost of a Kindle Fire).

Amazon represents the best and worst of capitalism. It is capturing market share, not just in books but in other sectors and remains the No.1 online retailer. It is aggressive, cutting-edge and deliberate. It leads, rather than follows. But it is also taking everyone else down.

Most people, with no skin in the game, don’t care which company makes money or how much, but few of us will soon be able to ignore this behemoth that kills industries, jobs and local economies. As consumers we just want our stuff cheap and fast. We’ll buy from street peddlers who likely stole their goods. We’ll buy from stores who import goods from China. We’ll buy sneakers made from sweatshops overseas. We’ll accept a business whose customer service is staffed in India. But can we turn a blind eye to Amazon when it impacts us at home?

I don’t think the average consumer gives thought to the repercussions of a Wal-Mart Amazon nation and not all of what these two companies do are bad. I don’t want to see either one go out of business, but I’d like to see them reform their ways – before it is too late.

Brian Feinblum’s views, opinions, and ideas expressed in this blog are his alone and not that of his employer. You can follow him on Twitter @theprexpert and email him at brianfeinblum@gmail.com. He feels more important when discussed in the third-person.

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