The book business

Nicholas Clee on the surprising profitability of the online retailer Amazon

Bob Dylan and Norah Jones will perform at a private party on 16 July to celebrate the tenth birthday of Amazon, the online retailer. Only Amazon employees will attend - though the rest of us can watch, if we like, on www.amazon.com. Amazon's ability to secure these headline acts reflects the fame of its name, and what that name represents: something cool, in a mainstream sort of way. Its achievement in arriving at this anniversary as a profitable and still independent company is a raspberry to us sceptics who, thinking we knew something about the book business, saw flaws in the Amazon project.

Jeff Bezos, Amazon's founder, never intended to be a bookseller. He wanted to build the world's largest online store, and saw books as the ideal product with which to start. He was right to think that people would enjoy choosing from a huge inventory at a well-run website; but wrong to expect that the costs of these sales would be low. In Book Business (Norton, 2001), the veteran New York publisher Jason Epstein referred to Bezos's projections as "an incorrect business model, one in which costs would rise in proportion to sales while margins would remain under constant pressure from competitive discounts and high service costs".

I order a book from Amazon: The Da Vinci Code by Dan

Brown. The cover price is £6.99; the Amazon price is only £3.99,

a 43 per cent reduction that the company has to give in order to compete with its online and terrestrial rivals. Amazon will have received a discount of roughly 50 per cent (paying about £3.50 for the book) from the publisher. It makes, therefore, a profit of only 49p on this transaction, before it has paid for picking and packing and other overheads.

True, Amazon sells many books that are more expensive than The Da Vinci Code, and without giving away such high discounts. But the general point holds good: books are not high-ticket items, and, especially if ordered individually, they are expensive to supply. Of the 30 other product categories listed on Amazon.com, many are more pricey; but supplying them directly has never been associated with high margins.

What we did not foresee was Amazon's competitive successes. We thought that Bertelsmann would give it serious trouble; but, after competing for a while, the German media giant retreated. Amazon was devoted entirely to the internet, while Bertelsmann had other priorities. Enjoying the dominant position that Jeff Bezos dreamed of, Amazon is now making money. In the UK, it is one of the few booksellers experiencing growth.

Amazon has survived the disillusionment that followed the ludicrous overvaluation of internet stock at the end of the 1990s. But Wall Street is more wary now, and has at last noticed that the cost of sales at Amazon remains high. Bezos has indicated that he will carry on spending what is necessary to "take care of customers". However, investors have different priorities: they do not like companies that are, as one report has it, "too customer-friendly". Bezos's approach has won out so far; some time in the next ten years, Wall Street's may prevail.