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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The decline of the north's sporting powerhouse

Yorkshire historically acted as a counterweight to the dominance of southern elites, in sport as in politics and culture. Now, things are different.

On a drive between Sheffield and Barnsley, I spotted a striking painting of the Kes poster. Billy Casper’s two-fingered salute covered the wall of a once-popular pub that is now boarded up.

It is almost 50 years since the late Barry Hines wrote A Kestrel for a Knave, the novel that inspired Ken Loach’s 1969 film, and it seems that the defiant, us-against-the-world, stick-it-to-the-man Yorkshireness he commemorated still resonates here. Almost two-thirds of the people of south Yorkshire voted to leave the EU, flicking two fingers up at what they saw as a London-based establishment, detached from life beyond the capital.

But whatever happened to Billy the unlikely lad, and the myriad other northern characters who were once the stars of stage and screen? Like the pitheads that dominated Casper’s tightly knit neighbourhood, they have disappeared from the landscape. The rot set in during the 1980s, when industries were destroyed and communities collapsed, a point eloquently made in Melvyn Bragg’s excellent radio series The Matter of the North.

Yorkshire historically acted as a counterweight to the dominance of southern elites, in sport as in politics and culture. Yet today, we rarely get to hear the voices of Barnsley, Sheffield, Doncaster and Rotherham. And the Yorkshire sporting powerhouse is no more – at least, not as we once knew it.

This should be a matter of national concern. The White Rose county is, after all, the home of the world’s oldest registered football club – Sheffield FC, formed in 1857 – and the first English team to win three successive League titles, Huddersfield Town, in the mid-1920s. Hull City are now Yorkshire’s lone representative in the Premier League.

Howard Wilkinson, the manager of Leeds United when they were crowned champions in 1992, the season before the Premier League was founded, lamented the passing of a less money-obsessed era. “My dad worked at Orgreave,” he said, “the scene of Mrs Thatcher’s greatest hour, bless her. You paid for putting an axe through what is a very strong culture of community and joint responsibility.”

The best-known scene in Loach’s film shows a football match in which Mr Sugden, the PE teacher, played by Brian Glover, comically assumes the role of Bobby Charlton. It was played out on the muddy school fields of Barnsley’s run-down Athersley estate. On a visit to his alma mater a few years ago, David Bradley, who played the scrawny 15-year-old Billy, showed me the goalposts that he had swung from as a reluctant goalkeeper. “You can still see the dint in the crossbar,” he said. When I spoke to him recently, Bradley enthused about his lifelong support for Barnsley FC. “But I’ve not been to the ground over the last season and a half,” he said. “I can’t afford it.”

Bradley is not alone. Many long-standing fans have been priced out. Barnsley is only a Championship side, but for their home encounter with Newcastle last October, their fans had to pay £30 for a ticket.

The English game is rooted in the northern, working-class communities that have borne the brunt of austerity over the past six years. The top leagues – like the EU – are perceived to be out of touch and skewed in favour of the moneyed elites.

Bradley, an ardent Remainer, despaired after the Brexit vote. “They did not know what they were doing. But I can understand why. There’s still a lot of neglect, a lot of deprivation in parts of Barnsley. They feel left behind because they have been left behind.”

It is true that there has been a feel-good factor in Yorkshire following the Rio Olympics; if the county were a country, it would have finished 17th in the international medals table. Yet while millions have been invested in “podium-level athletes”, in the team games that are most relevant to the lives of most Yorkshire folk – football, cricket and rugby league – there is a clear division between sport’s elites and its grass roots. While lucrative TV deals have enriched ruling bodies and top clubs, there has been a large decrease in the number of adults playing any sport in the four years since London staged the Games.

According to figures from Sport England, there are now 67,000 fewer people in Yorkshire involved in sport than there were in 2012. In Doncaster, to take a typical post-industrial White Rose town, there has been a 13 per cent drop in participation – compared with a 0.4 per cent decline nationally.

Attendances at rugby league, the region’s “national sport”, are falling. But cricket, in theory, is thriving, with Yorkshire winning the County Championship in 2014 and 2015. Yet Joe Root, the batsman and poster boy for this renaissance, plays far more games for his country than for his county and was rested from Yorkshire’s 2016 title decider against Middlesex.

“Root’s almost not a Yorkshire player nowadays,” said Stuart Rayner, whose book The War of the White Roses chronicles the club’s fortunes between 1968 and 1986. As a fan back then, I frequently watched Geoffrey Boycott and other local stars at Headingley. My favourite was the England bowler Chris Old, a gritty, defiant, unsung anti-hero in the Billy Casper mould.

When Old made his debut, 13 of the 17-strong Yorkshire squad were registered as working-class professionals. Half a century later, three of the five Yorkshiremen selec­ted for the last Ashes series – Root, Jonny Bairstow and Gary Ballance – were privately educated. “The game of cricket now is played in public schools,” Old told me. “Top players are getting huge amounts of money, but the grass-roots game doesn’t seem to have benefited in any way.”

“In ten years’ time you won’t get a Joe Root,” Rayner said. “If you haven’t seen these top Yorkshire cricketers playing in your backyard and you haven’t got Sky, it will be difficult to get the whole cricket bug. So where is the next generation of Roots going to come from?” Or the next generation of Jessica Ennis-Hills? Three years ago, the Sheffield stadium where she trained and first discovered athletics was closed after cuts to local services.

This article first appeared in the 19 January 2017 issue of the New Statesman, The Trump era