November 4, 2011

Amazon finds innovative new way to lose money: book lending


As reported in Publishers Weekly, Amazon has announced that it will offer limited book lending privileges to its Amazon Prime subscribers. The major drawbacks are twofold: (1) Amazon Prime members will not have access to any books published by agency model publishers, which includes the “big six” (Random House, Simon & Schuster, HarperCollins, Macmillan, Penguin and Hachette) and (2) Amazon will have to pay non-participating publishers for each title that is lent out under the program, since under the wholesale model, Amazon is only allowed to discount titles, not give them away for free.

Interviewed for the PW article, Evan Schnittman, Bloomsbury‘s managing director of group sales and marketing, said, “If you’re Amazon, your view is to make the Kindle as attractive as you can and to enhance Amazon Prime for its customers. They’ll lose money on every sale simply to promote more Kindles.” Amazon’s press release claims that some, but not all, publishers agreed to a “fixed” fee for the use of their content.

How much does Amazon stand to lose? Publishers Marketplace estimates that since only a fraction of Prime members have Kindles that “even if Amazon is paying full wholesale digital list price, their potential cost tops out at around $22.5 million to $40 million [and] looks to be something that they can sustain for as long as they want if it drives the Kindle ecosystem.”

As MobyLives recently reported, Amazon’s aggressive loss-leader tactics led to a multi-billion dollars drop in their stock value due to their shrinking profits. These diminished profits were a result, in part, of Amazon’s unprofitable offer of free shipping and free digital content to its Prime subscribers. The new lending service looks to be another innovative way for Amazon to lose money. How many losses is Amazon willing to assume in order to dominate the market? And when (if) they ever decide to raise their Prime rates to a profitable level, will they face the same mass exodus experienced by Netflix and Bank of America?

As David Pogue writes on Pogue’s Posts “There has to be some master plan, because Amazon is spending itself silly to pull this off….It’d be fascinating to see the spreadsheet for this plan, wouldn’t it?”

Pogue compares Amazon’s aggressive money-spewing tactics to Microsoft‘s assault on Netscape Navigator, and then makes this oblivious observation: “Microsoft was seen as evil and manipulative at the time — but so far, Amazon still seems like a good, well-loved company. ” Well-loved? Apparently Pogue has never spoken with anyone who sells or publishes books.