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.

Photo: Getty
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The rise of the green mayor – Sadiq Khan and the politics of clean energy

At an event at Tate Modern, Sadiq Khan pledged to clean up London's act.

On Thursday night, deep in the bowls of Tate Modern’s turbine hall, London Mayor Sadiq Khan renewed his promise to make the capital a world leader in clean energy and air. Yet his focus was as much on people as power plants – in particular, the need for local authorities to lead where central governments will not.

Khan was there to introduce the screening of a new documentary, From the Ashes, about the demise of the American coal industry. As he noted, Britain continues to battle against the legacy of fossil fuels: “In London today we burn very little coal but we are facing new air pollution challenges brought about for different reasons." 

At a time when the world's leaders are struggling to keep international agreements on climate change afloat, what can mayors do? Khan has pledged to buy only hybrid and zero-emissions buses from next year, and is working towards London becoming a zero carbon city.

Khan has, of course, also gained heroic status for being a bête noire of climate-change-denier-in-chief Donald Trump. On the US president's withdrawal from the Paris Agreement, Khan quipped: “If only he had withdrawn from Twitter.” He had more favourable things to say about the former mayor of New York and climate change activist Michael Bloomberg, who Khan said hailed from “the second greatest city in the world.”

Yet behind his humour was a serious point. Local authorities are having to pick up where both countries' central governments are leaving a void – in improving our air and supporting renewable technology and jobs. Most concerning of all, perhaps, is the way that interest groups representing business are slashing away at the regulations which protect public health, and claiming it as a virtue.

In the UK, documents leaked to Greenpeace’s energy desk show that a government-backed initiative considered proposals for reducing EU rules on fire-safety on the very day of the Grenfell Tower fire. The director of this Red Tape Initiative, Nick Tyrone, told the Guardian that these proposals were rejected. Yet government attempts to water down other EU regulations, such as the energy efficiency directive, still stand.

In America, this blame-game is even more highly charged. Republicans have sworn to replace what they describe as Obama’s “war on coal” with a war on regulation. “I am taking historic steps to lift the restrictions on American energy, to reverse government intrusion, and to cancel job-killing regulations,” Trump announced in March. While he has vowed “to promote clean air and clear water,” he has almost simultaneously signed an order to unravel the Clean Water Rule.

This rhetoric is hurting the very people it claims to protect: miners. From the Ashes shows the many ways that the industry harms wider public health, from water contamination, to air pollution. It also makes a strong case that the American coal industry is in terminal decline, regardless of possibile interventions from government or carbon capture.

Charities like Bloomberg can only do so much to pick up the pieces. The foundation, which helped fund the film, now not only helps support job training programs in coal communities after the Trump administration pulled their funding, but in recent weeks it also promised $15m to UN efforts to tackle climate change – again to help cover Trump's withdrawal from Paris Agreement. “I'm a bit worried about how many cards we're going to have to keep adding to the end of the film”, joked Antha Williams, a Bloomberg representative at the screening, with gallows humour.

Hope also lies with local governments and mayors. The publication of the mayor’s own environment strategy is coming “soon”. Speaking in panel discussion after the film, his deputy mayor for environment and energy, Shirley Rodrigues, described the move to a cleaner future as "an inevitable transition".

Confronting the troubled legacies of our fossil fuel past will not be easy. "We have our own experiences here of our coal mining communities being devastated by the closure of their mines," said Khan. But clean air begins with clean politics; maintaining old ways at the price of health is not one any government must pay. 

'From The Ashes' will premiere on National Geograhpic in the United Kingdom at 9pm on Tuesday, June 27th.

India Bourke is an environment writer and editorial assistant at the New Statesman.

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