An unanticipated discussion thread followed my post before the holidays about Amazon’s Price Check app and the controversy it stirred. The discussion was unanticipated because I felt at the time the post was fairly non-controversial. But there was much to be said about the death of local bookstores, Amazon’s sales tax situation, fairness, and community.
Now that the holidays are behind us, let’s talk Amazon again.
Because my instinct is to applaud business innovation, I wanted to explore these topics a bit more thoroughly than a comment thread allows. Like some of the commentators, I too feel angst about disappearing bookstores, the threats to print books, and our migration away from traditional publishing practices. Yet I come to this cogitation from an admittedly sympathetic position relative to Amazon’s success — I think they’ve been really smart, executed a lot of risky long-term strategies very well, invested and re-invested wisely, been ahead of trends almost uniformly, and continue to make savvy, audacious moves while other companies sit and watch.
I’m not alone in this attitude. Recently, Diane Mermigas, covering the rapid adoption of the Kindle Fire, wrote on the MediaPost blog:
Once again, Amazon’s CEO Jeff Bezos is looking like the smartest guy in the room. He can teach just about every company in any industry a few things about innovating for, connecting with and monetizing connected consumers.
But there are just as many complaints about Amazon. Are they sour grapes? Are they legitimate? Is there a silver lining to this apparent cloud? Is it all correct, both the good and the bad? Here’s a representative list of the common complaints about Amazon, and some further consideration.
Amazon doesn’t charge sales tax, giving it a big pricing advantage and decimating communities — Amazon doesn’t have to charge sales tax in all but a handful of states, so Amazon’s customers don’t uniformly pay sales tax. The complaint is that this gives Amazon a big pricing advantage. This complaint doesn’t make sense to me when the base price on nearly every item I find on Amazon is lower than the base price I find in local retail shops. When I shop at either a physical store or Amazon, I look at the price. Period. And I compare that price to the price I would pay elsewhere. Amazon usually has the lowest price. Often, the difference is significant. That’s the price that matters. Even if I were forced to pay sales tax on it at the same locally applicable level, Amazon’s price would be better.
I live in Massachusetts. Some Massachusetts residents drive to New Hampshire to buy things, because there is no sales tax there. Or they wait until our annual tax holiday weekend, usually in August. There are people who really focus on avoiding paying sales tax. I’m not one of them.
People who worry about communities being short-changed because Amazon isn’t forced to collect sales tax may not know that they have the perfect remedy at their disposal — that is, most states require purchasers of online goods for which no tax was collected to pay the tax at the end of the year. Remember, Amazon isn’t charging the tax in the states where it does add sales tax — Amazon is collecting the tax and sending it to the states. If you purchase goods from Amazon, and Amazon isn’t collecting sales tax on those purchases, you’re legally required to pay those taxes to your state at the end of the year in most states. I wonder what percentage of those complaining about local tax fairness are saving receipts, calculating their taxes that went unpaid, and settling with the state at the end of the year.
Amazon works its people too hard, and is a cruel taskmaster — I come at this complaint from a very jaded perspective, having worked as a janitor, waiter, retail employee, and third-shift compositor. I also think about friends and family who are employed in factories, warehouses, delivery companies, hospitals, and other parts of the economy, and they work really hard — long hours, lots of lifting, poor health insurance, endless days, and so forth. Nearly every customer-facing company I know of — from USAir to UPS to Macy’s to Cinnabon to Target — works people hard enough that some will complain.
A recent report from an “Amazon Town” in Fernely, NV, provides some interesting insights, perhaps best summarized by this quote:
“It’s like the best place to work and the worst place to work,” said Kelly Andrus, a 50-year-old Fernley resident who served as an Amazon holiday employee seven years ago. “It’s good pay, and they’re safety oriented,” but she said the managers were strict and the labor was physically demanding.
Amazon has grown quickly, added a lot of employees, a lot of new supervisors, and this will lead to complaints. There have been instances of extremely high temperatures in their fulfillment centers, horror stories of employees being fired for complaining or passing out, and so forth. How much truth there is to these isn’t clear. The fact that they tend to fade away suggests there’s some truth in the middle — Amazon is working people hard, perhaps skirting a line it shouldn’t, or perhaps hiring a higher proportion of whiners than usual as they grow. It’s hard to know. But if you want to focus on relieving people of harsh working conditions, focusing on Amazon is targeting Amazon. There may be situations more under your control, where you can help to remedy the pressures of demanding workplaces. Visit your printer and your fulfillment center. In the summer. During a heat wave. In the late afternoon. And stay until after dinner. You might be surprised what you’re tacitly enabling or accepting in the workplaces of others.
Amazon is killing local bookstores, thereby killing a part of literary culture — This line of reasoning was dealt with in detail in the original post, but it’s worth elaborating on a bit more. As Farhad Manjoo writes in Slate:
Compared with online retailers, bookstores present a frustrating consumer experience. A physical store—whether it’s your favorite indie or the humongous Barnes & Noble at the mall—offers a relatively paltry selection, no customer reviews, no reliable way to find what you’re looking for, and a dubious recommendations engine. . . . They’re economically inefficient, too. Rent, utilities, and a brigade of book-reading workers aren’t cheap, so the only way for bookstores to stay afloat is to sell items at a huge markup.
Amazon has been a big part of a decade-long trend (from Harry Potter to the Kindle to Oprah) that has made reading exciting again — people are talking about book reading devices, books to put on them, book clubs, and so forth. Local bookstores have benefited to some extent from this new focus on book reading, but they can’t take much of the credit for getting it going. And wandering the aisles of my local bookstore/coffee shop/greeting card store/haberdashery, I’ve become convinced that most bookstores are no longer bookstores except in name — they’re niche merchandise stores, and books are just another form of niche merchandise. Bookstores are transforming into gift shops. They are doing this because they can’t find a better way to sell books than Amazon’s way — and Amazon’s way demands a long-term strategy, big investments in fulfillment centers and e-commerce, and vision. But more on this below.
E-book prices are artificially low — After launching the Kindle in late 2007, Amazon offered e-books at $9.99 or lower, a significant savings off most hardcovers and many paperbacks. Amazon also kept 70% of the money in the early days. This drove publishers mad for many reasons — the pricing stance made their regular prices seem high, they were worried they’d make the same money off lower-priced items, and it made Amazon a greater retail power. However, Amazon paid them the same amount despite the lower price. Under pressure, Amazon changed to an agency model, reversing the 70/30 split. This led to the next complaint.
E-book prices have gotten too high — Now, people are buying e-readers like the Kindle, the Nook, and Kobo’s device, spending $79 to $199 up front. Some buyers have relied on lower e-book pricing generally to justify the upfront costs. Now that e-books are becoming as expensive as traditional hardcovers and paperbacks, there’s a sense of betrayal. Readers are complaining — a lot. One blogger has issued an edict banning further complaints about e-book prices:
I think it’s important to understand that eBooks are not special snowflakes; they’re just books in electronic form. As someone who prefers to read in eBook form, you are not substantially different from someone who prefers hardcovers, or trade paperbacks, or mass market paperbacks. If someone who preferred paperbacks (or at the very least paperback pricing) showed up on my site on a regular basis to whine and moan about how books should always be priced at that paperback level, on a comment thread that is meant to be on another subject entirely, I would find them tiresome too. Books: They have variable price points!
The problem isn’t Amazon’s, it’s the publishers’. Now that they own pricing again, they’re raising e-book prices significantly. Why? Either to protect print, extract profits from a fast-growing market, or both. But Matthew Ingram argues persuasively that they’re only shooting themselves in the foot. And that’s why customers are complaining — not because of Amazon, but because of publishers.
Amazon’s impossible to compete against — With their incredible market power (20 million customers per day, on average, and each is worth about $190 in sales per year), along with their acquisitions and development of publishing entities, Amazon is becoming a force to be reckoned with in many areas — e-readers, tablets, publishing, retail, hosting, music, movies. But you can compete against them. The recent Price Check app provides some examples. One of the best bits of journalism around this came recently from Radio Boston. The reporter interviewed the proprietor of a local toy store, Magic Beans. The store created an app that allows shoppers to scan as they shop, pay through their phone, and leave the store. They also get discounts as they shop with the app. The approach is driving sales, making customers happy, and increasing revenues for the store. It’s also preventing customers from using Amazon, because it increases loyalty to Magic Beans and saves them money. Our local supermarket is taking a similar approach, providing an app you can download by clicking a QR code posted in the aisles, and giving you reward points you can use for gas and extra discounts, along with the convenience of skipping the checkout line. Amazon has plenty of competition, and more is coming.
Amazon is predatory — The impressive thing about Amazon and their ilk is that they have executed — quite carefully and assertively — a long-term strategy with big implications. It was within memory that Amazon was considered a bubble company, a passing phenomenon, something bricks-and-clicks would beat soon enough. In 1997, three years after the site launched, Jeff Bezos’ letter to investors in his relatively new firm underscored that Amazon was focused on the long-term, and would make investment decisions accordingly.
Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies. Accordingly, we want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that it is consistent with your investment philosophy:
- We will continue to focus relentlessly on our customers.
- We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. . . .
We aren’t so bold as to claim that the above is the “right” investment philosophy, but it’s ours, and we would be remiss if we weren’t clear in the approach we have taken and will continue to take. With this foundation, we would like to turn to a review of our business focus, our progress in 1997, and our outlook for the future.
It’s clear to me that Amazon has been remarkably true to these and other statements about its long-term orientation to the market. For years, they’ve cultivated self-publishing approaches, e-readers, and other publishing innovations. Prior to this, they cultivated online shopping and new retail approaches. Judge for yourself, based on this from a recent New York Times article about Amazon’s long-term orientation:
The reason Amazon is earning so little while selling so much is that it is spending so much on long-term growth. It’s opening 17 new fulfillment centers — airport hangar-size storage and shipping facilities — this year and aggressively cutting prices. Its profit margin for the quarter was just 2.4 percent, and it said it might be zero for the fourth quarter. (By comparison, Wal-Mart’s margins are 6 percent on revenue of $440 billion. )
If Amazon is viewed as predatory, I think it’s because it has a better hunting strategy than its competing hunters, and is willing to forgo a large meal that might slow it down in order to stay nimble and hungry. Bezos has stated repeatedly that he wants to keep his margins so thin that nobody else could beat him on price. Then, the battle became about scale, and he seems to be winning at that, too. Maybe if bookstores could find a way to thrive on something less than 30-40% gross margins, they’d be a bit better at hunting.
Conclusion — Incumbents in many areas — books, music, movies, clothing, hosting, and more — are infamous for being unable to break away from their own success in order to strip down their value chains so they’re future-friendly. This trap manifests itself as a form of paralysis. And now the competitors who have effectively lost the game to new players — be that Amazon, Apple, Google, UPS, FedEx, or others — should look at how they can compete in a new world, defined by new rules, and dominated by a new species of company.
As Charles Darwin famously wrote:
It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.