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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Jeremy Corbyn speech on terrorism and foreign policy: full text

The Labour leader laid out his vision for British foreign policy. 

Our whole nation has been united in shock and grief this week as a night out at a concert ended in horrific terror and the brutal slaughter of innocent people enjoying themselves. When I stood on Albert Square at the vigil in Manchester, there was a mood of unwavering defiance. The very act of thousands of people coming together sent a powerful message of solidarity and love. It was a profound human impulse to stand together, caring and strong. It was inspiring.

In the past few days, we have all perhaps thought a bit more about our country, our communities and our people. The people we have lost to atrocious violence or who have suffered grievous injury, so many of them heart-breakingly young .

 The people who we ask to protect us and care for us in the emergency services, who yet again did our country proud: the police; firefighters and paramedics; the nurses and doctors; people who never let us down and deserve all the support we can give them. And the people who did their best to help on that dreadful Monday night – the homeless men who rushed towards the carnage to comfort the dying, the taxi drivers who took the stranded home for free, the local people who offered comfort, and even their homes, to the teenagers who couldn’t find their parents.

They are the people of Manchester. But we know that attacks, such as the one at the Manchester Arena, could have happened anywhere and that the people in any city, town or village in Britain would have responded in the same way.

It is these people who are the strength and the heart of our society. They are the country we love and the country we seek to serve. That is the solidarity that defines our United Kingdom. That is the country I meet on the streets every day; the human warmth, the basic decency and kindness.

It is our compassion that defines the Britain I love. And it is compassion that the bereaved families need most of all at this time. To them I say: the whole country reaches out its arms to you and will be here for you not just this week, but in the weeks and years to come. Terrorists and their atrocious acts of cruelty and depravity will never divide us and will never prevail.

They didn’t in Westminster two months ago. They didn’t when Jo Cox was murdered a year ago. They didn’t in London on 7/7. The awe-inspiring response of the people of Manchester, and their inspirational acts of heroism and kindness, are a living demonstration that they will fail again.

But these vicious and contemptible acts do cause profound pain and suffering, and, among a tiny minority, they are used as an opportunity to try to turn communities against each other.

So let us all be clear, the man who unleashed carnage on Manchester, targeting the young and many young girls in particular, is no more representative of Muslims, than the murderer of Jo Cox spoke for anyone else. Young people and especially young women must and will be free to enjoy themselves in our society.

I have spent my political life working for peace and human rights and to bring an end to conflict and devastating wars. That will almost always mean talking to people you profoundly disagree with. That’s what conflict resolution is all about. But do not doubt my determination to take whatever action is necessary to keep our country safe and to protect our people on our streets, in our towns and cities, at our borders.

There is no question about the seriousness of what we face. Over recent years, the threat of terrorism has continued to grow. You deserve to know what a Labour Government will do to keep you and your family safe. Our approach will involve change at home and change abroad.

At home, we will reverse the cuts to our emergency services and police. Once again in Manchester, they have proved to be the best of us. Austerity has to stop at the A&E ward and at the police station door. We cannot be protected and cared for on the cheap. There will be more police on the streets under a Labour Government. And if the security services need more resources to keep track of those who wish to murder and maim, then they should get them.  

We will also change what we do abroad. Many experts, including professionals in our intelligence and security services have pointed to the connections between wars our government has supported or fought in other countries, such as Libya, and terrorism here at home.

That assessment in no way reduces the guilt of those who attack our children. Those terrorists will forever be reviled and implacably held to account for their actions.

But an informed understanding of the causes of terrorism is an essential part of an effective response that will protect the security of our people, that fights rather than fuels terrorism.

Protecting this country requires us to be both strong against terrorism and strong against the causes of terrorism. The blame is with the terrorists, but if we are to protect our people we must be honest about what threatens our security.

Those causes certainly cannot be reduced to foreign policy decisions alone. Over the past fifteen years or so, a sub-culture of often suicidal violence has developed amongst a tiny minority of, mainly young, men, falsely drawing authority from Islamic beliefs and often nurtured in a prison system in urgent need of resources and reform. And no rationale based on the actions of any government can remotely excuse, or even adequately explain, outrages like this week’s massacre. But we must be brave enough to admit the war on terror is simply not working. We need a smarter way to reduce the threat from countries that nurture terrorists and generate terrorism.

That’s why I set out Labour’s approach to foreign policy earlier this month. It is focused on strengthening our national security in an increasingly dangerous world.

We must support our Armed Services, Foreign Office and International Development professionals, engaging with the world in a way that reduces conflict and builds peace and security.

Seeing the army on our own streets today is a stark reminder that the current approach has failed. So, I would like to take a moment to speak to our soldiers on the streets of Britain. You are doing your duty as you have done so many times before.

I want to assure you that, under my leadership, you will only be deployed abroad when there is a clear need and only when there is a plan and you have the resources to do your job to secure an outcome that delivers lasting peace.

That is my commitment to our armed services. This is my commitment to our country. I want the solidarity, humanity and compassion that we have seen on the streets of Manchester this week to be the values that guide our government. There can be no love of country if there is neglect or disregard for its people. No government can prevent every terrorist attack.  If an individual is determined enough and callous enough, sometimes they will get through.

But the responsibility of government is to minimise that chance, to ensure the police have the resources they need, that our foreign policy reduces rather than increases the threat to this country, and that at home we never surrender the freedoms we have won, and that terrorists are so determined to take away. Too often government has got it wrong on all three counts and insecurity is growing as a result. Whoever you decide should lead the next government must do better.

Today, we must stand united. United in our communities, united in our values and united in our determination to not let triumph those who would seek to divide us. So for the rest of this election campaign, we must be out there demonstrating what they would take away: our freedom; our democracy; our support for one another. Democracy will prevail. We must defend our democratic process, win our arguments by discussion and debate, and stand united against those who would seek to take our rights away, or who would divide us.

 Last week, I said that the Labour Party was about bringing our country together. Today I do not want to make a narrow party political point. Because all of us now need to stand together. Stand together in memory of those who have lost their lives. Stand together in solidarity with the city of Manchester. And – stand together for democracy.

Because when we talk about British values, including tolerance and mutual support, democracy is at the very heart of them. And our General Election campaigns are the centrepieces of our democracy – the moment all our people get to exercise their sovereign authority over their representatives.

Rallies, debates, campaigning in the marketplaces, knocking on doors, listening to people on the streets, at their workplaces and in their homes – all the arts of peaceful persuasion and discussion – are the stuff of our campaigns.

They all remind us that our government is not chosen at an autocrats’ whim or by religious decree and never cowed by a terrorist’s bomb.

Indeed, carrying on as normal is an act of defiance – democratic defiance – of those who do reject our commitment to democratic freedoms.

But we cannot carry on as though nothing happened in Manchester this week.

So, let the quality of our debate, over the next fortnight, be worthy of the country we are proud to defend. Let’s have our arguments without impugning anyone’s patriotism and without diluting the unity with which we stand against terror.

Together, we will be stronger. Together we can build a Britain worthy of those who died and those who have inspired us all in Manchester this week. Thank you.

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