Amazon launches yet another loss-leader, but what is its plan?

The Kindle Owners Lending Library will sell a lot of Kindles – but Kindles don't make money.

Amazon's Kindle Owners' Lending Library (KOLL) is expanding to the UK later this month, according to paidContent. The program allows Kindle-owning Amazon Prime members to borrow one ebook for free each month, and has been relatively popular in the US.

Although it started with a focus on traditional titles, in recent months it has become a key vehicle for promoting self-published authors through a program called KDP Select. The payment model earns authors who opt in comparatively large sums – Amazon says that "in September, authors earned $2.29 per borrow" – and asks for a 90 day period of exclusivity in exchange.

The program is yet another example of Amazon, depending upon your viewpoint, either being a devious long-term-thinker or displaying a foolhardy disregard for profit. Self-published authors who opt-in are paid from a pool of $700,000, and for a while Amazon even put books in the program without the publishers' permission, paying the full wholesale price whenever a customer took it out. Anyone who owns a Kindle and has an Amazon Prime subscription can gain access to it – but both of those are commonly perceived to be loss-leaders.

Amazon revealed yesterday that it makes no profit on Kindle Fires or the new Kindle Paperwhite, with Jeff Bezos confirming that "we sell the hardware at our cost, so it is break-even on the hardware".

Amazon Prime, meanwhile, costs $79 (£49 in the UK), and gives subscribers access, not only to the KOLL, but also to a library of free videos (including AAA, albeit older, titles like the Iron Man 2, True Grit, Sherlock and Downton Abbey) and free two-day delivery on most things the site sells. This last aspect alone is probably enough to make Prime a loss-leader; Amazon is notoriously cagey about these sort of things, but most analysts estimate that the average Prime user buys enough that the shipping costs outweigh the cost of Prime.

Independently, these two loss-leaders make sense. Prime serves to boost customer loyalty, and allows a feeling of instant gratification of the sort which mail-order companies had previously struggled to deliver. Kindles, meanwhile, lock customers in to buying all their ebooks from Amazon, basically forever.

But the KOLL is a loss-leader which serves to boost take-up of two other loss-leaders. It's turtles all the way down, at this point.

The larger battle which KOLL is fighting is against the publishers. By offering up KDP select authors for free, it serves to break the ice between the typical reader and the typical self-published author, enabling Amazon to consolidate its control over the publishing industry.

It's a battlefront which has also seen Amazon move from enabling self-publishers to becoming a traditional one itself. The company secured the exclusive North American rights to Ian Fleming's James Bond novels in April this year for its Thomas & Mercer imprint, which prints traditional paperbacks as well as an extensive Kindle library.

All of these loss-leading strategies mean that the company's finances are not particularly similar to those of more traditional corporations. Amazon's second quarter 2012 sales were $12.8bn; its second quarter profit was just $7m. Although the profit was especially low, because it included the $65m Amazon spent buying robotics firm Kiva Systems, the distinction stands.

And it's not just the revenue:profit ratio which is out-of-kilter. Amazon's price:earnings ratio (the cost of a share versus the earnings per share) stands at over 300:1; a normal value is around 10:1. (Incidentally, one of the noteworthy things about Apple is that despite having an astronomical market cap and share price, its P/E ratio 15:1. The company isn't overvalued, it's just overprofitable.)

The high P/E ratio implies that investors expect Amazon's profit to increase at some point in the future. But there's only two ways that could happen: either Amazon vastly increases its revenue, or it vastly increases its profit margin.

It sounds almost conspiratorial, but the only way the company can really do this – and its actions indicate that it knows it – is by becoming the only player in town. Amazon's success to date has been built around winning every price war going, but once it gains control of a field, then it wins that price war by default.

The problem the company has is that its competitors aren't taking its success lying down. Wal-Mart is the latest giant of Old Retail to attack Amazon on its own turf, testing same-day delivery (£) for a flat $10 fee in a few US locations.

As the New York Times writes:

If Wal-Mart expanded its same-day shipping across the country, it could essentially transform the more than 4,000 Walmarts, along with Sam’s Club and other divisions, into distribution centers. Amazon, by contrast, had fewer than 40 distribution centers in the United States at the end of last year and has plans to add about 20 worldwide this year. . .

Wal-Mart, meanwhile, has been building up its e-commerce site as it tries to do things that Amazon cannot, such as allowing customers to pay for online purchases with cash.

Amazon is in a good place to earn a lot of money. The Kindle dominates ebooks, a growing industry; the Kindle Fire is one of only two serious competitors to the iPad; and for a lot of people, "Amazon" has become to buying media what "Google" is to searching the web. But it's not the only company with a lot of advantages, and it's not guaranteed to own the future just because it was started in the 1990s.

Amazon's opaque network of loss leaders, plans for the future, and smart investments may still be leading somewhere. But it's unlikely that that place is as profitable as the company's investors hope.

A Kindle. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Getty
Show Hide image

Why Nigel Farage is hoovering up all the women I know

Beware young fogeys.

I can’t remember where I was when I first worked out that I was older than Nigel Farage. You’d think after that bombshell went off, you’d still be able to locate the crater. Anyway, there it is: the cut-price little Oswald Mosley is about a year younger than me.

I mention this not because I want to dwell on the nasty piece of shit, but because I’ve been having to face, at one remove, so to speak, the problem of young fogeyism. It seems to be all around. And not only that, it’s hoovering up women I know.

The first time it happened was with B——. She was going to come round last weekend, but then emailed to cancel the day before, because she was going to watch rugby – apparently there’s some kind of tournament on, but it never seems to end – with her boyfriend. How ghastly, I said, or words to that effect; I’d rather die.

She then made the Category One mistake of saying, “Rugby, cricket, all the same to me,” with a cheeky little “x” at the end of it.

I replied thus: Rugby is a violent and brutal game (the coy term is “contact sport”, which means you get to – indeed, are encouraged to – injure the opposing team as often as you can, in the absence of any other tactic) loved by fascists, or, at best, those with suspicious ideas about the order of society with which I doubt you, B——, would wish to be aligned. Also, only people of immense bulk and limited intelligence can play it. Cricket is a game of deep and subtle strategy, capable of extraordinary variation, which is appreciated across the class spectrum, and is also so democratically designed that even the less athletic – such as I – can play it. [I delete here, for your comfort, a rant of 800 or so words in which I develop my theory that cricket is a bulwark against racism, and rugby, er, isn’t.] Both are dismayingly over-represented at the national level by ex-public-school boys; cricket as a matter of historical accident (the selling-off of school playing fields under Thatcher and Major), rugby as a matter of policy. Have a lovely day watching it.

Two things to note. 1) This woman is not, by either birth or ancestry, from a part of the world where rugby is played. 2) You wouldn’t have thought she was one of nature’s rugby fans, as she considers that Jeremy Corbyn is a good person to be leading the Labour Party. (True, thousands of Tories think the same thing, but for completely different reasons.)

That’s Exhibit A. Exhibit B is my old friend C——, whom I haven’t seen for about five years or so but suddenly pops up from the past to say hello, how about a drink? I always liked C—— very much, largely because she’s very funny and, let’s be frank about this, something of a sexpot. She seems keen to bring someone over with her who, reading between the lines like a modern-day Sherlock Holmes, I deduce to be her latest partner. The thing is, she says, she’s not sure he can come, because he might be going beagling.

Beagling?

Well, she does come round (alone, thank goodness) and she’s looking even better than I remember, and is even funnier, too, and she shows me some of the pictures she has put up on her profile page on some dating site, and they’re not the kind of photographs this magazine will ever publish, let’s leave it at that. (One of them even moves.) And, as it turns out – and it doesn’t really surprise me that much – the young beagler she is seeing is a good thirty years-plus younger than she, and his photograph shows him to be all ears and curls, like a transporter mix-up between Prince Charles and the young David Gower. Like B——’s young man, he is not called Gervaise or Peregrine but may as well be.

What on Earth is going on here? Can we blame Farage? I can understand the pull of the void, but this is getting ridiculous. Do they not quite understand what they’re doing? Actually, C—— does, because she’s had her eyes open all her life, and B——, her youth and political idealism notwithstanding, didn’t exactly come down in the last shower, either.

So what is it with these young wannabe toffs – one of whom isn’t even rich? “You’d like him,” C—— says, but I’m not so sure. People who go beagling sure as hell don’t like me, and I see no reason not to return the favour.

Well, I can’t thrash this out here. C—— leaves, but not before giving me the kind of kiss that makes me wish Binkie Beagley, or whatever his name is, would just wink out of existence.

Nicholas Lezard is a literary critic for the Guardian and also writes for the Independent. He writes the Down and Out in London column for the New Statesman.

This article first appeared in the 16 February 2017 issue of the New Statesman, The New Times