An American Editor

March 5, 2012

Priming the Pump: Amazon’s Prime Program

A small brief in a recent Bloomberg’s Businessweek, titled “Amazon Is Said to Have Fewer Prime Subscribers Than Estimated,” caught my eye. The brief in the print magazine was expanded in the online version (which is linked above).

The reason it interests me is, of course, Amazon’s exclusivity program that has enticed 100,000+ books to its program, as well as for the question of how long can Amazon continue to ignore its obligations to shareholders and continue to deliberately lose money on parts of its business. According to the article, “Even with less adoption than expected, the Price promotion has weighed on Amazon’s shipping costs. Those expenses jumped 55 percent to $4 billion last year, dwarfing the $1.55 billion Amazon gets in shipping fees from customers.” In a company Amazon’s size, if the figures were millions of dollars, I think everyone would sit back and yawn. But billions of dollars raises eyebrows. A $2.45 billion loss on shipping alone is not insignificant.

The number of Prime members raises another issue. What did authors believe when signing up for the exclusive program? There is a huge difference between 3 to 5 million actual Prime members and the expected (by analysts) 10 million members.

For me, the real problem with Amazon, aside from its ongoing attempts to monopolize the publishing industry, is the secrecy of its numbers and how shareholders and consumers alike are willing to give Amazon a pass on disclosure of true, accurate numbers, a pass that they are unwilling to extend to other public corporations.

I also wonder what will happen when Amazon decides that it is time to stop losing money and that each area of its business must at least break even. What will happen to the authors who bought into its program? What will happen to the consumers who are part of the ecosystem?

Can we can the “but you can strip the DRM from Amazon’s ebooks and convert them to other formats” response. Yes, you can do that, but most people who bought into the Amazon eco system cannot or will not. It really isn’t a viable response. You can also probably write an app for the iPad; I can’t, have no interest in learning to do so, and won’t. Just because a small percentage of users won’t be and aren’t affected by the closed eco system, doesn’t make it less of a closed eco system.

Although authors are looking at Amazon through a different set of eyeglasses than the consumer, doesn’t mean they don’t have something to worry about with the closed eco system, especially if Amazon follows up, as it may well have to in order to balance its books, by saying to indie authors either give us long-term exclusivity at a price we set or your books can no longer be sold on Amazon. Right now Amazon can’t say that to the big traditional publishers, but it is sure working toward being able to do so.

This is why numbers, real numbers, are so important. How can an author decide what is best for the author long-term in the absence of hard numbers. This problem also exists with Barnes & Noble. In the absence of knowing hard numbers, we are left with puffery. Amazon says it has sold millions upon millions of Kindles, and we all simply swallow it. It smacks of the Ponzi scheme where investors are asked to believe that investing will bring 100% returns (the Bernie Madoff dream).

It may well be true that Amazon has sold 20 million Kindles and that every Kindle owner buys (not freebies) at least 5 ebooks every year; however, it may also be true that Amazon has sold only 10 million Kindles and that 9 of 10 Kindle owners only download free ebooks, never actually buying a single ebook.

But it is important for authors to know how Amazon stacks up against B&N, Kobo, and Sony, for example, in sales of hardware and ebooks. Maybe Amazon outsells its competitors 7:1 on both fronts; maybe combined the competitors outsell Amazon 3:1 on both fronts. If the former, then Amazon exclusivity looks like a smarter business decision; if the latter, it doesn’t.

Amazon has been coy about real numbers. Why? The answer usually given is that it doesn’t want to alert its competitors to its real sales numbers. I fail to see the logic in this. If I knew that Amazon was outselling its competitors by 10:1, as a consumer, I would be more inclined to buy the Kindle because it is more likely to be around 10 years from now. Disclosing the real numbers cannot give competitors any competitive advantage but instead might serve to induce more sales.

No, there is some other reason why real numbers are not on the table, and I think the Businessweek brief is an indication why: Amazon isn’t doing as well as it says or leads investors and consumers to believe. I think if the real numbers were known, Amazon’s stock would drop and authors would be less willing to be Amazon exclusive.

What amazes me most is that people are willing to make decisions based on speculation when it comes to Amazon, but in other instances demand to know the real numbers. As I said earlier, it reminds me of a Ponzi scheme — the desire to believe what we want to believe and hear. No one seems to worry that the ebook/Kindle portion of Amazon may be a house of cards.

The one thing that is certain, is that investors are starting to grumble and eventually Amazon will have to divulge the information, if for no other reason than to satisfy investor grumbling. When it does, those of us who have swallowed Amazon’s pronouncements wholeheartedly had best be prepared to absorb the news. It may well turn out that Amazon’s performance is much better than what is speculated, but it may also be that it is much worse. In the meantime, I wonder how long Amazon will continue to absorb all of the losses being reported before making demands on consumers. Time will tell.

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