Amazon is Nobody’s Friend, Part Oneposted by
The following article was written by Alan Beatts and first ran in the Borderlands Books September Newsletter. It is provided here courtesy of Borderlands Books. Since the majority of Hellnotes visitors are avid readers, we believe it’s important to stay informed about the world of books and publishing, and we offer this article in that spirit. Enjoy …
Amazon is Nobody’s Friend, Part One
In all the years that I’ve been writing articles for this newsletter, I’ve never made a habit of “Amazon-bashing.” Sure there have been a few times that I’ve made little comments about some of their poor choices and ethical screw-ups, but over all I’ve pretty much left them alone.
This article will be a change from that relative silence.
The reason that I’m finally being truly critical about Amazon is two-fold. First, at this moment a huge number of book buyers are facing a choice. All the former Borders customers out there have to decide where they are going to get their books now that Borders is closed. There are three choices: 1) Barnes and Noble. 2) Amazon. 3) An independent bookstore. At first glance, it will seem that I’m trying to deter customers from shopping at Amazon (and, it won’t break my heart at all if you choose to avoid Amazon after reading this). But what is more important to me is that I provide you with information so you make as informed a choice as possible. Your dollars are your economic votes. Where, how and with whom you spend your money determines what businesses survive and thrive. Just like any election, I think an informed group tends to makes wiser choices.
Second, I was talking to a few friends about Amazon and I realized that my opinion of them has shifted in the past ten years. When they started up, my attitude was very much live and let live. They had their business ideas and I had mine. I figured there was room enough for both of us. But, as I’ve watched them grow, seen their business choices and their effect on my field, I’ve come to the conclusion that they are not a positive influence on the business of words & stories. During that same conversation with my friends, I also realized that there is a long list of things that they’ve done and attitudes that they have that I think are pretty lousy, either because I think that they are not ethical or just not … nice. Once I considered the totality of my opinion about Amazon, I decided it was time to say something.
Bear in mind that I’ve made a considerable effort to look at Amazon from the standpoint of someone who loves books and reading. Though driven by ideas and opinions informed by my experience as a bookseller, what you’ll find below is not the ranting of a bookseller outraged at the competition. It is instead my complaints against Amazon as a reader and booklover.
Amazon has -
(A) Been a deceptive and pervasive influence on ecommerce.
(B) Consistently tried to eliminate other businesses to increase their hold on the book market.
(C) Engaged in pricing designed to cripple competition and manipulate its suppliers and customers
(D) Made avoiding sales tax a cardinal part of their business model.
(E) Chosen an ebook business model and format that’s bad for the consumer.
In addition, I just don’t believe that they play nicely or fairly, even by our admittedly lax standards of corporate citizenship. In many ways, Amazon is the very model of an unethical, ruthless corporation that cares about nothing other than growing and making a profit.
And here’s why …
(A) “Been a deceptive and pervasive influence on ecommerce.”
Amazon is much bigger and more pervasive than one might think. They have a fondness for buying companies in fields that they are interested in and then continuing to operate them under their original names while changing the back-end and fulfillment over to Amazon’s systems. Notable web-retailers that they own are: Zappos.com, Diapers.com, Soap.com, Pets.com.
All of those companies are big retailers in their specialties and, by buying them out and keeping the names, Amazon eliminates competition while maintaining the illusion of consumer choice in the marketplace.
Another ubiquitous company that has Amazon hiding behind the curtain is The Internet Movie Database (IMDb). IMDb is an interesting property since it gives Amazon two things. First, if and when they want to do this, it’s a built-in market to sell movie downloads, video streaming, or regular DVD sales. It would be easy as pie to set up a sidebar that incorporates one-click purchasing of any movie right from the information page of IMDb. But the second benefit is harder to see. Amazon is constantly working on improving the recommendations that appear whenever you search for something on their site. By looking at data about what movies individual users look up at IMDb, they can gather tons of information along the lines of “people who look at movie A go on to look at movie B 73% of the time, that means that there is a common interest between those two movies”.
Another hidden Amazon property is of one of the best ebook reader applications for EPUB format files. (EPUB is the free and open-sourced ebook format supported by many publishers. It is not the format Amazon uses for the Kindle nor is it one that is very easy to read on the Kindle.) Lexcycle makes Stanza, which is a great program that I used to use all the time. It’s simple, clean, fast and works on Mac, Windows, and iPhone/iPad. Now it’s 100% owned by Amazon and still the top EPUB reader. As in the case of companies like pets.com and soap.com, Amazon maintains the illusion of consumer choice while actually owning their own business and their seeming competition.
In a slight variation from their usual habits, Shelfari.com is an interesting case in that here Amazon lets their name be seen associated with the site. My bet on the reason is that, if you click on a book, you end up on a page with exactly the sort of “buy-now” feature I suggested would work on IMDb. Hard to hide the company’s involvement with that sort of connection. Though it is nice and provides some sense of impartiality that Shelfari also provides a link to Abebooks.com, a major used bookselling site with an excellent reputation among collectors . . . or at least it looks impartial. By owning Shelfari Amazon is also getting one of the benefits that I suggested relative to the IMDb, since Shelfari is all about book recommendations and making connections between books, it’s a hugely valuable source of data for Amazon’s marketing.
Returning to Amazon’s more usual habits — Abebooks.com, the original on-line listing and sales service for used and OP books, has been owned by Amazon since 2008 . . . so perhaps it wasn’t impartial for Shelfari to give them a link, eh? Thousands and thousands of small, independent bookshops list their inventory at Abebooks and many even use inventory software created by them. And all the while, they’re contributing to Amazon’s success. And customers who don’t like the way that Amazon sells used books have an alternative. At least it seems that way.
It’s gets better, though. Abebooks had a 40% stake in Library Thing, which was passed along to Amazon. Library Thing is generally viewed as the alternative / competitor to Shelfari. It’s interesting to note that, at Library Thing (where this is no sign of Amazon’s relationship), as opposed to Shelfari, clicking on a specific book takes you to a page where Amazon is listed as a seller, along with Abebooks, but they also list Google Books and Project Gutenberg (a world-wide free electronic library). And, if you click on the “Local Book Search” link, you’ll even find a listing for Barnes & Noble’s web-site. Of course, even once B&N shows up, the listing is alphabetical so they’re after Amazon and Abebooks. Tricksey, aren’t they?
For more information about Amazon’s extensive influence on ecommerce, I highly recommend this presentation from FaberNovel http://techcrunch.com/2011/05/11/how-amazon-controls-ecommerce-slides/
(B) “Consistently tried to eliminate other businesses to increase their hold on the book market.”
If the foregoing wasn’t a clear enough indication that Amazon is interested in controlling all the good parts of on-line bookselling and ecommerce in general, the pattern of Amazon’s business expansion also indicates that they are trying to fill all the niches in the book business, from publishing all the way down to selling. There hasn’t been any sign that they are going into the writing business, thank goodness, but there really isn’t any conceivable reason that they would want to do that. (It’s always been best for publishers to let anyone try to be a writer who wants to and then pick and choose what they want to pay for).
When Amazon started, they used the Ingram Book company as their major supplier. Ingram is one of the two national book distributors in the US. They buy books in large quantities from publishers and then sell them to bookstores. One of Amazon’s early moves was to kick Ingram to the curb and start running their own distribution centers and warehouses. At that point, the sales chain went from the publishers to Amazon to the customers.
But over the past few years, Amazon has been working to cut the publishers out of the loop as well. One of the first steps was with independent publishers using print on demand technology (POD). POD is a system in which individual books are printed when there is an order for them. This saves a smaller publisher the cost of large print runs and the storage expense that goes with them. For years the leading company in POD production has been LightingSource, which was used by probably 75% of the small, POD publishers.
In March 2008, Amazon informed many small and medium sized presses using POD that, if they wanted their books listed and sold through Amazon, they would have to use a company called BookSurge for their printing. It’s probably no surprise that BookSurge had been purchased by Amazon in 2005. The initial communication from Amazon was though highly deniable channels, phone calls, mostly, and some carefully phrased emails. When word of it got out, there was a huge outcry on the part of publishers and authors. Federal anti-trust agencies got involved and there was a major lawsuit that dragged on for years. The end result was that Amazon backed off (though they continued to hold people to contracts that had been signed because of their threats), the suit was settled out of court, and things were back to normal. Oh, and Amazon changed the name from BookSurge to CreateSpace to get away from the bad publicity. (1, 2)
Also in 2008 Amazon bought Audible.com, which is the major player in the market for down-loadable audiobooks, which gave them another position as a publisher and allowed them to cut other publishers out of the audiobook market (which is rapidly moving towards all down-load, rather than being sold on CD).
Subsequent moves on the part of Amazon to build a bigger place in publishing have included starting their own publishing arm, aggressively buying up the ebook and POD rights to out-of-print backlist titles from almost any author who will hold still long enough to sign a contract, and by tying ebook distribution to POD publishing contracts (in a not-going-to-get-the-Feds-on-our-backs-again sort of way).
But the biggest piece of integration has been the Kindle. If you own one, Amazon is not quite your only possible bookseller (there are some work-arounds) but it’s darn close to being that way. And if you’ve bought books in Kindle format, you’re going to be an Amazon customer, in one way or another, until you’re willing to “throw” those books away. Or until you die, I suppose. No wonder that they’re quite happy to sell the devices at a loss.
(C) “Pricing designed to cripple competition and manipulate its suppliers and customers”
Pricing products is a complex process and the ethics of it are even more complex. The idea of having “loss leaders” in business (i.e. items that are sold at below cost to attract customers who, one hopes, will buy other items as well) is a well established practice. I think it falls into a sort of grey area in terms of ethics, though there are places where it’s prohibited – for example, in France is it illegal to sell books, specifically, for less than cost.
However, when a business engages in pricing with the intention of manipulating the market for their long term benefit, when pricing is used to eliminate competition and therefore consumer choice, or when prices are fixed to manipulate suppliers — to my mind, all those cases slip from the soft, dove-gray of well-it’s-probably-alright into the more charcoal-gray of I-don’t-think-that’s-OK-at-all.
Amazon has a big vested interest in moving the reading public towards ebooks. Aside from the obvious reasons (the size of their market share and so forth) there is a bigger and more compelling one. Regardless of its advantages, Amazon labors under a huge handicap compared to physical bookstores. For many readers there is no possible substitute for looking at actual books on an actual bookshelf, just browsing along and looking at whatever catches your eye. But when it comes to ebooks, there is no difference between looking at them on Amazon’s website and looking at them on any other website. So, the move towards ebooks eliminates Amazon’s handicap versus physical bookstores. The other big advantage for Amazon is that ebooks take up no space and they require no investment in inventory. All you have to have are some big computers and some good data connections, both of which Amazon has more than they know what to do with.
Kindle ebook readers are sold at a loss and always have been. I honestly wonder if they were ever meant to make money; I’m betting not. But the Kindle has done exactly what Amazon planned. It’s caused ebooks to take off in a major way and it’s changing the behavior of consumers. That’s perhaps not an unethical way to do business but it certainly is ruthless and profoundly manipulative.
Also on the topic of pricing at a loss: Amazon was so committed to building its business that for years and years they lost money at a awe-inspiring rate. Between 1993 and 2003 they lost 3 billion dollars. In fact, in 2001 alone they lost 1.4 billion. But during that time they set a permanent expectation in the minds of consumers that they always had the lowest price. And during that same period Amazon was responsible for countless independent bookstore going out of business. And the real reason that those stores closed wasn’t that Amazon was doing a better job at bookselling than they — it was just because they couldn’t afford to lose as much money as Amazon. It’s interesting to notice that Amazon’s discounts from retail are much smaller and less universal than they used to be. The preceding is a textbook example of predatory pricing: “predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors”. (3)
$9.99 is a magic number in retail. It’s a price that makes people think, “That’s cheap, it’s not even ten bucks!” So it’s no wonder that Amazon decided that was the right price for ebooks. For quite a while, that was the price that an ebook at Amazon sold for, regardless what it cost Amazon (often, much more than $9.99). Publishers became concerned that Amazon’s pricing of ebooks was causing a perception on the part of the public that any other price was inflated and unfair. The question of what an ebook actually costs, compared to a physical book, is a topic for another time, but certainly there are some novel length works of fiction that cost the publishers more than that to produce. But more importantly, it is the right of the publisher to set the price of their books. They can blow it, set it too high, and the book won’t sell. In which case they learn better the next time. But the publisher is the entity “making” the book. They can set their costs, decide what sort of quality is needed for what elements (editing, cover art, and so on), estimate what the market will pay and so forth. They control the process of “manufacture”, if you will, and that means they get to set the price.
But it’s certainly not Amazon’s place to set the price that publishers can charge for books, electronic or not. They have the right not to buy something if they think it’s overpriced and won’t sell, but that’s about it. And in this case, Amazon wasn’t trying to set the price for one book or even all the books from one publisher. They were trying to set the price for _all_ ebooks. Based on the specific laws regarding price fixing, what Amazon was doing wasn’t illegal since they weren’t collaborating with any other sellers. But, since they represented around 80% of the ebook market at the time, they really didn’t need to collaborate with anyone.
Regardless of the legality of it, thanks to a risky action on the part of John Sargent, the CEO of Macmillan (one of the six major US publishers), at the beginning of last year, Amazon doesn’t get to set ebook prices for the big publishers at all anymore and neither does any other retailer. The short version is that Sargent went to Washington state to meet with the folks at Amazon to talk to them about ebook pricing. After months of discussions regarding publisher concerns that Amazon’s low prices were damaging the public perception of the value of ebooks, Sargent had come with an ultimatum. He told them that Macmillan was switching to the “agency model” for ebook sales. What it meant was that publishers would set the price and retailers would take a commission on the sale to readers rather than the old model in which publishers sell to retailers, who then sell to readers at a price that the retailer determines.
The folks at Amazon, including Jeff Bezos, were not pleased at all. They refused and Sargent got on a plane home. It a remarkable fit of petulance, while Sargent was still in flight, almost every single one of Macmillan’s books, physical and electronic, were removed from Amazon’s web site. A few days later, Amazon agreed to the agency model with Macmillan and shortly thereafter, accepted the same terms from four of the other five major publishers (the one hold-out, Random House, went to the agency model in February of this year).
For more details about what happened, I’d suggest you look at this article in the NY Times http://www.nytimes.com/2010/01/30/technology/30amazon.html and this blog post from John Sargent himself http://blog.macmillanspeaks.com/macmillan-ceo-john-sargent-on-the-agency-model-availability-and-price/.
(D) “Avoiding sales tax a cardinal part of their business model”
I don’t like to pay taxes and I understand that other people don’t like to either. But if I am going to have to pay them, it’s important to me that they’re applied equally and fairly across the board. Amazon has made part of their business model the avoidance of sales tax practically from day one. Jeff Bezos, the founder, has even stated publicly that reducing sales tax was on the forefront of his mind, both when planning the company and when choosing Washington state as a location. In fact, their systematic avoidance of sales taxes has been so aggressive that employees traveling to California have been issued business cards reading “Amazon Digital Services” (an Amazon subsidiary that doesn’t sell physical products) rather than “Amazon.com” to reduce the threat of California arguing that they were conducting business in the state. Other tricks have included identifying states that were risky as “red” states and requiring staff to consult with corporate lawyers before traveling there on business as well as conducting employment interviews via video conference rather than in person so that the Amazon representatives weren’t actually in the state in question. (4)
The theory of sales tax is that it needs to be collected and remitted by businesses that are active in a state. The usual test for this is whether the business has a “nexus” within the state. “Nexus” has been traditionally proven by having physical locations or sales staff within a state. But there are two other underlying parts of the sales tax theory that have been conveniently ignored during the rise of ecommerce.
The first part is that the requirement of “nexus” was originally put in place based on the assumption that a business that is not located in a state won’t be conducting very much business there. Granted, there have been catalog retailers for well over 100 years but purchasing items through a catalog was always a second-best choice when you couldn’t get something locally and the prices were usually higher (when shipping was factored in) than buying from a local merchant. But now, that underlying assumption is deeply flawed because of the number of purchases made over the internet and the way that buying on-line is progressively becoming the preferred choice.
The second part is that, in most states (California for one), sales tax is _still due_ even when the purchase was from an out-of-state company. It’s just that the burden of paying it falls on the buyer rather than the seller (and here, at least, they call it “use tax” rather than “sales tax”). Granted, enforcement of that tax is awe-inspiringly lax but the principal is still there. So really, the bottom line question is not whether the tax is due but whether the business has to collect it and send it to the state or if that burden is on the consumer. Either way, the tax is due.
And that brings us around to the principal of sales tax. It’s there to support the costs of running the state government. Which is going to cost just as much regardless of whether Amazon has to collect tax or not. Moreso, as residents in the state, we’re going to have to come up with the money to pay for that government or the state will go broke. What’s really happening here is that, to drive sales to their business, Amazon is fighting really hard to maintain their ability to look like they’re giving the average San Franciscan, for example, a 8.5% discount as compared to a local business.
A local business which, I should point out, contributes much more to the state and local economy than Amazon ever will (via property taxes, payroll taxes, re-spending of profit in state, and so on).
Oh, and before you think to yourself, “But the state doesn’t ever try to collect that use tax from me,” let me point out that California is broke as hell, all your Amazon purchases were probably made with a credit card, and the state tax board has every legal right to subpoena Amazon’s records. And then assess every single Amazon customer in California with a special tax bill (including interest and penalties). They can even garnish your paycheck to cover it.
Given it’s been estimated that California alone stands to lose 1.9 _billion_ dollars (yep, I did say “billion”) due to Amazon not collecting sales tax, it sure might be worth the time and trouble to do just that. (5)
So, how hard will Amazon fight to avoid collecting sales tax? In July they won permission to start collecting signatures for a referendum making them (and probably all web-based businesses) exempt from collecting California sales tax. To date they’ve spent over 5 million dollars promoting it and gathering signatures. And in the past they’ve cut their affiliate partners loose in entire states (New York and North Carolina being to cases in point) when laws have been passed to make them collect and remit sales tax. They also took the state of New York to court over it, and lost.
And all of this is happening while many other web retailers are voluntarily starting to collect sales tax.
Updated – After the preceding was written, Amazon cut a deal with California state legislative leaders that gives Amazon one more year of operating without collecting sales tax in exchange for ceasing their referendum. (6)
(E) “An ebook business model and format that’s bad for the consumer”
Amazon is the most successful ebook retailer in the world, by a fair margin. Depending on whose figures you believe, they sell in-between 60 and 80% of the ebooks in the US (the percentage in the UK is even higher). They also produce the most popular ebook reader, the Kindle. That they are doing so well with ebooks really isn’t a surprise. They have the best on-line store, their software gives what is arguably the best reading experience, they’ve been in the business the longest, and, perhaps most importantly, they have their existing market position as the second largest seller of physical books in the world (Barnes and Noble is still #1).
What disturbs me and what I think should bother my fellow readers, is that their ebook format is completely unique and proprietary. The problem there is that you cannot read an ebook that you bought from Amazon on anything other than a Kindle or a device that has a Kindle application available for it. Granted, as of now, there are Kindle apps for Mac, Windows, iPad/iPhone, and Android. But there’s no guarantee that Amazon will keep making them or supporting them. Given Amazon’s fondness for competition, it wouldn’t surprise me if, at some point in the future, the Kindle apps for the iPad/iPhone vanished. At that point, all the people out there who bought ebooks and want to use those devices are going to be pretty much out of luck . . . at least until they buy a Kindle.
On the other hand, the three other major ebook retailers – Apple, Barnes & Noble, and Google (plus all the independent booksellers Google partners with) – use some variation of EPUB format which is device agnostic and can be used with all the ebook readers, computers, and smart phones out there (except for the Kindle). Granted, all three of them use their own sort of copy protection but, each for specific reasons, it is much less likely that ebooks purchased through any of those companies will force you to adopt a new device if you want to keep reading your books. Also, none of those businesses are as savage about trying to dominate their industry.
Another deeply disturbing thing about Amazon’s ebook model is that they maintain and have used the ability to remotely wipe purchased books from customers’ devices. The most notable case of this was when, in July of 2009, copies of “1984″ and “Animal Farm” were deleted from Kindle readers throughout the US, despite wording in Amazon’s purchase agreement that specifically granted the right to keep a permanent copy of the applicable digital content? One of the most notable things about this event — Other than the titles affected … 1984? You’ve got to be kidding! I couldn’t make this stuff up. – was that a 17 year old student, Justin Gawronski, found that his study notes had also been deleted. He later sued Amazon, who settled out of court. There have been other incidents of this sort, involving works by Ayn Rand, among others. This type of action is possible due to the Kindle’s semi-constant wireless connection to Amazon’s servers. It would probably also work on non-Kindle devices that use the Kindle reader application, though only for ebooks purchased from Amazon.
Whether you agree with me that Amazon is a tax-dodging, price-fixing, dishonest, predatory, and greedy corporation (OK, I’m exaggerating a little here – I don’t think they’re greedy, they lost too much money in the beginning for _that_ to be true) or whether you think I’m a complete crack-pot, touchy-feely, post-hippie loser who doesn’t understand the realities of business in the 21st century, thank you for reading. I know this was an awfully long, dense bit of writing. In fact, it’s so long that I’ve decided to save the second half for next month. If you’ve the patience, in the October newsletter we’ll go for round two and I’ll explain some of the ways Amazon just doesn’t play nice. That is much more subjective but I think it’s also much more illustrative of the character of the company that is trying to get a complete lock on the books you buy.