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.

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Senior Labour and Liberal Democrat politicians call for a progressive alliance

As Brexit gets underway, opposition grandees urge their parties – Labour, Lib Dems, the SNP and Greens – to form a pact.

A number of senior Labour and opposition politicians are calling for a cross-party alliance. In a bid to hold the Conservative government to account as Brexit negotiations kick off, party grandees are urging their leaders to put party politics to one side and work together.

The former Labour minister Chris Mullin believes that “the only way forward” is “an eventual pact between Labour, the Liberal Democrats and the Greens not to oppose each other in marginal seats”. 

 “Given the loss of Scotland,it will be difficult for any party that is not the Conservative party to form a government on its own in the foreseeable future," Mullin argues, but he admits, “no doubt tribalists on both sides will find this upsetting” and laments that, “it may take three or four election defeats for the penny to drop”.

But there are other Labour and Liberal grandees who are envisaging such a future for Britain’s progressive parties.

The Lib Dem peer and former party leader Ming Campbell predicts that “there could be some pressure” after the 2020 election for Labour MPs to look at “SDP Mark II”, and reveals, “a real sense among the left and the centre-left that the only way Conservative hegemony is going to be undermined is for a far higher degree of cooperation”.

The Gang of Four’s David Owen, a former Labour foreign secretary who co-founded the SDP, warns Labour that it must “face up to reality” and “proudly and completely coherently” agree to work with the SNP.

“It is perfectly legitimate for the Labour party to work with them,” he tells me. “We have to live with that reality. You have to be ready to talk to them. You won’t agree with them on separation but you can agree on many other areas, or you certainly should be trying.”

The Labour peer and former home secretary Charles Clarke agrees that Labour must “open up an alliance with the SNP” on fighting for Britain to remain in the single market, calling it “an opportunity that’s just opened”. He criticises his party for having “completely failed to deal with how we relate to the SNP” during the 2015 election campaign, saying, “Ed Miliband completely messed that up”.

“The SNP will still be a big factor after the 2020 general election,” Clarke says. “Therefore we have to find a way to deal with them if we’re interested in being in power after the election.”

Clarke also advises his party to make pacts with the Lib Dems ahead of the election in individual constituencies in the southwest up to London.

“We should help the Lib Dems to win some of those seats, a dozen of those seats back from the Tories,” he argues. “I think a seat-by-seat examination in certain seats which would weaken the Tory position is worth thinking about. There are a few seats where us not running – or being broadly supportive of the Lib Dems – might reduce the number of Tory seats.”

The peer and former Lib Dem leader Paddy Ashdown agrees that such cooperation could help reduce the Tory majority. When leader, he worked informally in the Nineties with then opposition leader Tony Blair to coordinate their challenge to the Conservative government.

“We’re quite like we were in 1992 when Tony Blair and I started working together but with bells on,” Ashdown tells me. “We have to do something quite similar to what Blair and I did, we have to create the mood of a sort of space, where people of an intelligent focus can gather – I think this is going to be done much more organically than organisationally.”

Ashdown describes methods of cooperation, including the cross-party Cook-Maclennan Agreement on constitutional reform, uniting on Scottish devolution, a coordinated approach to PMQs, and publishing 50 seats in the Daily Mirror before the 1997 election, outlining seats where Labour and Lib Dem voters should tactically vote for one another to defeat Tory candidates.

“We created the climate of an expectation of cooperation,” Ashdown recalls. Pursuing the spirit of this time, he has set up a movement called More United, which urges cross-party support of candidates and campaigns that subscribe to progressive values.

He reveals that that “Tory Central Office are pretty hostile to the idea, Mr Corbyn is pretty hostile to the idea”, but there are Conservative and Labour MPs who are “talking about participating in the process”.

Indeed, my colleague George reveals in his report for the magazine this week that a close ally of George Osborne has approached the Lib Dem leader Tim Farron about forming a new centrist party called “The Democrats”. It’s an idea that the former chancellor had reportedly already pitched to Labour MPs.

Labour peer and former cabinet minister Tessa Jowell says this is “the moment” to “build a different kind of progressive activism and progressive alliance”, as people are engaging in movements more than parties. But she says politicians should be “wary of reaching out for what is too easily defined as an elite metropolitan solution which can also be seen as simply another power grab”.

She warns against a “We’re going to have a new party, here’s the board, here’s the doorplate, and now you’re invited to join” approach. “Talk of a new party is for the birds without reach and without groundedness – and we have no evidence of that at the moment.”

A senior politician who wished not to be named echoes Jowell’s caution. “The problem is that if you’re surrounded by a group of people who think that greater cooperation is necessary and possible – people who all think the same as you – then there’s a terrible temptation to think that everyone thinks the same as you,” they say.

They warn against looking back at the “halcyon days” of Blair’s cooperation with the Lib Dems. “It’s worth remembering they fell out eventually! Most political marriages end in divorce, don’t they?”

Anoosh Chakelian is senior writer at the New Statesman.