Amazon!

When I started this blog, my purpose was to keep a diary of my writing. So far, I have resisted the temptation to attach pictures of kittens doing very cute things, commentary on politicians doing very stupid things or screeds on the degradation of the moral fiber of the world.

I bet you’re relieved.  OK, just one kitten picture.Kittens

Now, I beg your indulgence.

Writing has two parts: the creative journey that I set out to document, and the part about getting someone to read the end result, aka Publishing.

The part of me that spent a number of years in business analyzing companies like Amazon is nervous.

Right now, Amazon is eviscerating its competition the old-fashioned way, by offering great service at low cost in order to gain market share. As former executives say proudly in a documentary (CNBC’s Amazon Rising), Amazon targets the already weak, because they’re easiest to knock off. A very 19th Century business strategy. (Think Teddy Roosevelt, J.P Morgan and the Trust Busters.)

If you don’t think Amazon’s products aAmazon logore cheap at the price, look at their financials: strong growth at the sales line and tiny, tiny profit. 2/3 of a percent, way below subsistence. The market should punish Amazon, denying them capital and thus snuffing their growth.

Guess what? The market is willing to pay 500 times current earnings for Amazon shares when most retailers’ stock prices are 15-20 times earnings. Is the market crazy? (Stock analysts disagree with each other, as usual.) Maybe. More likely, the market looks at Amazon’s very successful operations and stated business plan and believes that Amazon will be able to raise profits substantially in the future. Which brings us to books, where Amazon started.

I can see why a business wanting to chart new ground in retail distribution would start with books: The technology that has changed music and newspapers is threatening publishing, and it looks as if publishing is not handling the challenge very well … so, it’s a good place to start, particularly if your strategy is to knock off the weaker players. To date, Amazon has extinguished a big piece of the publishers’ retail distribution system, starting with the local stores we loved, then Borders. Is Barnes and Noble next?

When Amazon owns the whole distribution system, there will be pressure to raise profits. The market won’t give anyone a pass forever. There are two ways to do that: Raise prices or reduce costs. Those of us in the writing business are part of the cost side of the ledger. Based on the predatory nature of Amazon’s business plan, it’s not too hard to see that costs will be squeezed.  And prices? Well, you already know that Amazon pricing for books is partly your call and partly Amazon’s.

Maybe we’d better pray for another trust buster.

(The Economist for June 21-27 discusses Amazon in some depth. CNBC’s documentary Amazon Rising was broadcast recently and may be available on Internet/TV reruns.)

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