A Bookseller Success Story... Amazon
The new Kindle Fire.
A couple of major, seemingly unrelated announcements came out of Amazon.com a few weeks back. We doubt they are all that unrelated, and they signify a move to a still higher level in the stratosphere of business in which Amazon has participated the past few years. The largest internet retailer now seeks to become deeply involved in the lives of its customers. It looks to compete with the likes of Apple and Facebook, rather than Barnes & Noble and Alibris. Many others have tried to make this move; few have succeeded. Many business analysts believe Amazon is poised to succeed. Let this be an inspiration for all of you booksellers out there. Amazon, too, started as a bookseller. Now, it is about to become one of the most important companies on earth.
Amazon began in the late 1990s as an internet bookseller, nothing more. Their business plan was to take advantage of the savings afforded by not having to maintain bricks and mortar stores and their staffs, and the ability to sell nationally, even internationally, from one location. These competitive advantages would allow them to sell new books at a discounted price. The model was extremely successful. People would go into a Barnes and Noble or an independent bookstore, see something they liked, and buy it from Amazon for less. It was a model similar to that of Wal-Mart and other discounters a generation earlier, when they used large stores and volume buying to undercut local merchants. People would check out what the Main Street shop was offering and then go to Wal-Mart to buy it for less.
Within a few years, Amazon had expanded its offerings. First, they went to the obvious next categories, videos, music, and used books. However, they never stopped. Amazon expanded to anything they could sell, in effect becoming the discount department store of the internet. The formula continued to reap dividends. Today, Amazon is the world's largest internet retailer.
Amazon never forgot its bookselling heritage. That was not likely out of sentimentality. Books always remained an important category for the Seattle firm. However, Amazon, in a trait they share with Apple, realized they always needed to stay out in front of the next technology if they didn't want to end up being buried like the once great bookseller, Borders. So, when electronic books were first developed, Amazon created the first electronic reader, the Kindle. At the time, many traditionalists scoffed. Who would ever give up the feel, the comfort of a physical book for an impersonal electronic gadget? Turns out millions of people, especially the young, would and did. Amazon was onto to the next great leap in books, just as they had been a decade earlier with online discounting.
I don't know whether Amazon foresaw where this would lead when they introduced the Kindle. I suspect not, but it doesn't matter. Amazon is now in the process of parlaying that electronic book reader into a sphere of business where not even they have participated in the past.
A few weeks ago, Amazon announced the production of the new Kindle Fire. This is a Kindle e-book reader that has evolved into something more. What that more is, essentially, is a tablet computer, an iPad if you will. Amazon has moved into Apple's space. For those who haven't been following, Apple, near bankruptcy in the 1990s, the almost totally vanquished PC competitor of the behemoth Microsoft, passed that company in terms of its value a couple of years ago, and now challenges Exxon for the most valuable company in the world. Apple succeeded where Microsoft stood still by using the same game-plan that Amazon now employs, getting ahead of the next wave of development. Apple recognized that consumers were looking for compact, mobile devices to keep connected to the world, so they developed their iPods for music, and then their iPhone smart phones that did far more than the ordinary cell phone. Then, they introduced their iPad tablet computer, a small portable computer that they sold tens of millions for around $500 each. People were ready to move beyond their bulky PCs, with their Microsoft operating systems. Apple totally dominates this market. They have beaten back all attempts to compete for significant marketshare, recently driving even the venerable HP from its attempt to edge in. Now, Amazon will take them on, and Amazon is a far more serious challenge than any computer or cell phone maker before them.
What makes Amazon a serious competitor is their reach. Unlike an HP, Amazon already has a relationship with millions of consumers. And, Amazon has been selling them a related electronic product in the millions – the Kindle e-book reader. Furthermore, Amazon is willing to use the strategy that gave birth to their business a decade and a half ago – undercutting the price. Apple has long been noted for innovative and superior products. They have not been known for low prices. If you want something from Apple, you better be prepared to pay up for it. Amazon's Kindle Fire tablet will retail for $199. The entry level iPad sells for $499. Experts will tell you the Kindle Fire does not have all the features of an iPad, just like a Toyota Corolla doesn't have all the features of a Mercedes. They sell a lot of Corollas anyway. There are lots of people for whom $200 is a lot more affordable than $500, and they have already made Amazon the largest online store.
However, there is something else going on here, and it promises to be much larger than all of those millions of Kindle Fire sales Amazon expects to make. The sale of an electronic gadget can be more than a one-time sale. It can draw you into the seller's world, where they can sell you more goods and services, or subject you to advertising that fills their coffers with additional revenue. Apple parlayed its music devices to sell music from its iTunes store. Amazon sells electronic books to its Kindle customers. Getting you onto their electronic devices opens the possibility of drawing you deeper into their world. Amazon may be happy to sell you a Kindle Fire at a low price as a gateway to a continuously flowing revenue stream.
A Bookseller Success Story... Amazon
The Kindle Fire.
Indeed, this is a formula we have seen applied in the past. Microsoft used its dominance in software to get you to use all types of Microsoft products, such as its internet browser, word processing, spreadsheets and music players, until the government put some restraints on what it considered unfair competition. In the days of traditional internet portals, AOL employed its position as the largest provider of internet connections to be the internet's major landing site. When the world moved past dial-up, it left AOL behind. AOL never made the move into high-speed access. Nokia was once a dominant player in the cell phone business, but when smart phones replaced many “dumb” ones, Nokia got replaced too. However, unlike the aforementioned vendors, who became static when they achieved leadership in their field, Amazon has not become cocky because they have achieved leadership in internet retailing and e-book readers, just as they did not allow bookselling leadership to lead them into complacency a decade ago. They recognize you need to keep swimming or the next wave will overtake you. Amazon is not just competing with Barnes and Noble and Nokia for physical devices now; they are competing with Apple, Facebook, and Google for drawing you into their world, where you will spend lots of time.... and money.
And what of the previous biggest thing in bookselling – Barnes and Noble? Along with the defunct Borders, B&N pioneered the way in bookselling in the 1980s, with their large, well-stocked stores, offering coffee and pastries to accompany soft chairs for comfortable reading. It was the place to be in the 1990s. By the turn of the century, with Amazon leading the way, B&N was left behind. They did everything wrong – expanding to music just as mp3s began replacing CDs, movies as at-home downloading replaced physical tapes and DVDs. They left electronic books to Amazon, relying upon the declining part of the market. However, very late to the game, B&N responded to Amazon and its Kindle with their own Nook e-book reader. But then, B&N surprisingly did one thing right – they made a better and cheaper e-reader than Amazon. They introduced what was something of a cross between an e-book reader and a tablet – a reader that could perform some functions of a tablet, like internet access, for a very low price. While no one has been able to generate more than a percentage or two of marketshare in the tablet business against Apple, B&N was able to gather a distant but still respectable second-place showing in e-readers, about 25% of the market.
Whither B&N now? They have neither the clout nor the deep pockets of an Amazon. They struggle to stay alive with the albatross of yesterday's new thing – large stores – hung around their neck. One wonders whether Amazon's Kindle Fire will do to Barnes and Noble's Nook what Apple's iPhone did to Research in Motion's Blackberry. The Blackberry pioneered the smart phone business, but Apple used its clout and its research and marketing genius to move past RIM's Blackberry with something better. Today, market analysts wonder whether RIM will ever be relevant to the market again. B&N faces long odds, but perhaps they can find a way to use that albatross, their retail stores, like Apple did with their retail stores, and somehow claw their way into the market. We suspect it is a long shot, and will probably require they be bought out or enter a cooperative agreement with someone with far greater resources, perhaps someone like a Microsoft making one last-ditch effort for relevance in the consumer market.
How does this tie in with Amazon's other big story – that after years of vigorous, in-your-face resistance to attempts to be made to collect local sales taxes, they backed down and agreed to do so in California in return for only a one-year reprieve? Just a few weeks earlier, Amazon terminated all of its affiliates in the state (breaking all ties with a state is the way an internet marketer can free itself from having to collect local sales tax). It then threatened to fund a ballot initiative to overturn a state law that declared local affiliates to in effect be company agents, grounds for requiring Amazon to collect sales tax on sales made to California residents. Then, suddenly, Amazon did a complete about face, dropping its battle-to-the-death opposition for a temporary reprieve. Most commentators concluded Amazon backed down, but Amazon does not back down. Why did they throw in the towel in this extreme fight to the finish?
We believe the introduction of the Kindle Fire tablet, and all it implies, is a sign that Amazon has much bigger things to focus on than fighting sales taxes in California. The vigorous, even contentious defense threatened to hurt their reputation, something Amazon can ill afford as it seeks to move to a higher playing field. And, perhaps most importantly of all, they may see a need to become more, not less involved with California. California is the high-tech capital of America, filled with people designing and building the next, new best thing. Amazon will want to be free to have agents, employees, whatever available to them in California, not be forced to flee the state because of yesterday's tax battles, leaving it and all of its brainpower to Apple. Amazon needs equal access to the state to compete equally with Apple. A few weeks ago, no one saw Amazon as a particular competitor to Apple. Now we know they are about to begin an epic struggle. Amazon is not about to be lax; not about to enter this struggle with one arm tied behind its back. Its sales tax agreement, capitulation if you will, to California is more likely an inevitable next step by a company determined to stay ahead of the market. Isn't it amazing what a bookseller can do?