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Originally Posted by SteveEisenberg
Whether this is true depends on how they do their accounting.
If you are selling at cost, you are losing a lot of money because of the many overall corporate costs that have to be shared between business lines, including staff salaries, computers, real estate, electricity (can be a big item for companies with server farms), debt service, and taxes.
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But that is *exactly* where the myth flounders; Amazon was NOT selling *everything* at cost. They sold *some* books at a discount *sometimes*.
Anybody who's been around here long enough is aware that, pre-agency, it was *common* to find some books cheaper at Fictionwise, some cheaper at Amazon, some cheaper at BoB or Diesel or even Sony, all depending on the sales and promos going on. The consensus was that *on average* Amazon had lower prices but that if you were willing to shop around and spread your buys you could save money over just going straight to Amazon. Agency did away with that for BPH titles and made Amazon the absolute low-cost source *all the time*. Plus it kept BPH titles out of the indie ebookstores leading o the demise (so far) of Fictionwise and BoB.
The whole "Amazon predatory pricing" myth is based on a 19th century accounting model where every single item sold is supposed to bring in some profit in that transactin instead of modern retailing and accounting where you take a holistic look at entire lines of business and allow for sophisticated marketting techniques such as basket pricing to *increase* sales and overall profits.
BTW, speaking of ebook accounting, there is also *this*:
http://seekingalpha.com/article/1528...orted-revenues
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When accounting for the sale of an ebook through an agency agreement, Amazon.com booked as revenue only the commission it got from the publisher, say 30%. All of this commission was booked as revenue at 100% gross margins, much like Amazon.com does with all the other third party (3P) sellers.
Now, upon ending these agency agreements, Amazon.com will be booking those same revenues as a merchant. What's the difference? Amazon.com will book as revenue 100% of the ebook's price, and then consider it has 30% gross margin on it. This means that -- for the same level of ebook sales -- Amazon.com will:
- Book significantly higher revenue, for instance, for what were previously $300 million in ebook revenues Amazon.com will now book $1 billion in revenues;
- Book a higher 1P revenue growth rate, as many ebooks will no longer be 3P sales, they'll migrate to 1P;
- Book a lower 3P revenue growth rate, as many ebooks will no longer be 3P sales;
- Book the same gross margin, but a lower gross margin percentage as the same gross margin will be applied on higher revenues. This is the opposite effect to the effect that was inflating gross margins, due to the fact that 3P revenues are booked at 100% gross margins;
- The change won't impact operating profits or net profits.
Revenue won't be comparable
The impact from ebook sales migrating from 3P to 1P will be significant on overall revenues. Jeff Bezos has said that ebooks are a "multi-billion" dollar category. As such, Amazon.com is selling more than $500 million per quarter on average. Each $100 million that migrates from 3P to 1P will turn into $333 million in revenues, or an additional $233 million in revenues on sales that are physically unchanged. For $0.5 billion, the total potential would be for revenues to be inflated by $1.17 billion in a single quarter, or 7.4% of the present consensus estimate for Q2 2013.
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Expect a lot of handwringing over this although nobody fretted when Agency went into effect and we saw the opposite effect.
(Or *didn't* because, since Amazon doesn't break out ebook numbers, those details stayed in-house.
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