Loss Leaders, Predatory Pricing, and Why Amazon Isn’t the Defendant Today

5176687673_0e638f874e[1]So Apple finally lost the price fixing lawsuit today, an event that surprised almost no one. What with Apple’s 5 co-conspirators having already settled, a settlement already in place in Europe, and the solid case presented by the DOJ, there was little chance that Apple was going to win.

But there is one question that seems to still be circulating today. A lot of people, including one in my comment section, wonder why Amazon was not on trial today. After all, Amazon’s pricing policy is clear evidence (in some minds, at least) of their nefarious plans to destroy their competition.

Today I thought I would take some time and point out the difference between what Amazon’s actual pricing policies and what many assume to be those policies.

First, a couple definitions.

Loss Leader

  • A loss leader, or simply a leader, is a product sold at a low price, at or below its market cost to stimulate other sales of more profitable goods or services. Using a loss leader, often a very popular good or service, is a type of sales promotion—a marketing strategy that focuses on pricing strategy.

Predatory Pricing

  • The practice of selling a product at low prices in order to drive competitors out, discipline them, weaken them for possible mergers, and/or to prevent firms from entering the market. It is an expensive strategy. In the United States there is no legal (statutory) definition of predatory pricing, but pricing below marginal cost (the Areeda-Turner test) has been used by the Supreme Court in 1993 as a criterion for pricing that is predatory.

The thing is, many people are pointing at Amazon offering loss leaders and proclaiming that Amazon is engaging in predatory pricing. I have lost count of the number of times that I have heard or read that Amazon is trying to drive their competition out of the ebook market, with the subsequent goal of raising ebook prices.

There are several problems with that claim, the first of which is that there is absolutely no evidence to support the allegation. In fact, if this really were Amazon’s goal then for the past 5 plus years they failed utterly to accomplish it.

Rather than see competitors abandon the ebook market, we have seen many, many companies get into ebooks since Amazon launched the Kindle Store in November 2007. Amazon has largely pursued the same ebook pricing policy since they opened the Kindle Store (with the exclusion of agency ebooks), but in spite of Amazon’s predations they now have more competitors than before, including:

  • B&N
  • Kobo
  • Google
  • Samsung
  • Apple
  • Baker & Taylor

Update: A reader reminded me that Samsung, Sony, Apple, and Google are not in the ebook market to make money from ebooks but to support their other businesses. I have said that before, but I’m bringing it up again because these are competitors that Amazon won’t be able to drive out of the ebook market. Here is why.

Another issue with the claim that Amazon is engaging in predatory pricing is that Amazon is continuing to pass up an opportunity to sell Epub ebooks. Surely if Amazon wanted to drive out the competition then they would pursue the potential customers that own non-Kindle ereaders, right?

Funny how that hasn’t happened in the 3 years since Amazon stopped trying to turn a profit on hardware, isn’t it?

But never mind the evidence of your own eyes; let’s instead look at what the Dept of Justice concluded after investigating Amazon, Apple, and the price fixing conspiracy.

As you might recall, last September Judge Cote issued a ruling that signed off on the proposed settlement between 3 of the conspiring publishers and the DOJ. In that ruling (PDF) Judge Cote dismissed the many claims made by publishers and others that Amazon was engaging in predatory pricing:

Second, the Complaint asserts that Amazon’s e-books business was “consistently profitable.” Moreover, to hold a competitor liable for predatory pricing under the Sherman Act, one must prove more than simply pricing “below an appropriate measure of . . . costs.” There must also be a “dangerous probability” that the alleged predator will “recoup its investment in below-cost prices” in the future. None of the comments demonstrate that either condition for predatory pricing by Amazon existed or will likely exist. Indeed, while the comments complain that Amazon’s $9.99 price for newly-released and bestselling e-books was “predatory,” none of them attempts to show that Amazon’s e-book prices as a whole were below its marginal costs.

The tl;dr version is that Amazon has always made at least some money on ebooks, and that means there’s no proof that Amazon’s pricing policies meet the definition of predatory.

And that, my dear, is the short answer for why Amazon isn’t on trial.

image by edenpictures

43 thoughts on “Loss Leaders, Predatory Pricing, and Why Amazon Isn’t the Defendant Today

  1. I think the mistake here is to assume the discussion is about ebooks. Its not. This is predatory pricing if you include books as a whole as the timeframe Amazon required included selling the hardback and the ebook at the same time. If you have a choice of spending $9.99 on an ebook or $24.95 (or even $15) on print, then most people are going to gravitate to the cheaper online price.

    If on the otherhand, ebooks came out a few months after the hardback, then the point is moot.

    So what’s the advantage to amazon favoring ebooks over print? It gets valuable reading data, lockin to its kindle store (most people aren’t going to try and switch between stores) and more marketshare.

    Hence it doesn’t have to be predatory pricing to give the appearance of predatory pricing.

    1. I understand they also price their ebooks lower than the corresponding “carved on stone tablets” and “hand-calligraphed on vellum by teams of monks” editions.

  2. Of those competitors you mention:
    * Kobo and B&N are struggling.
    * For Google & Apple (& Sony by extension) the ebook market is merely just an extension of their main business (neither good nor bad, but that’s the reality).
    * I didn’t know Samsung had an ebook store (I know Sony does, and they go in #2).
    * In my life I’ve heard about Baker & Taylor. And their store isn’t the most intuitive of them.

    Also, another thing to take into consideration is this link from yesterday’s Morning Coffee: http://www.mhpbooks.com/monopoly-acheived-an-invincible-amazon-begins-raising-prices/

    1. That link was included as a joke.

      And thank you for pointing out that “For Google & Apple (& Sony by extension) the ebook market is merely just an extension of their main business”. This is true, and the same can be said for Samsung.

      You’ve just pointed out why Amazon will never be able to drive the noncompetitive out of the market. Some competitors aren’t in it for the money.

      I need to add that to my post.

        1. Borders disappeared out of ridicuously poor mismanagement.
          B&N is in trouble for overestimating the appeal of their hardware (despite all the evidence that they were killing its appeal with its app lockdown).
          Kobo isn’t really in trouble (they’re actually doing gangbusters business outside the US) but they only seem to be making minimal inroads for lack of good distribution. For a while they wouldn’t even sell to the US from their ow website).

          Let’s just say Amazon has been blessed with singularly incompetent competitors.

        2. Yes, absolutely acceptable. If Kobo and B&N closed up shop tomorrow, somebody might enter the market who’s actually interested in competing with Amazon for my ebook dollars, which Kobo and B&N evidently aren’t (B&N refuse to sell to me at all, and won’t even let me re-download the books I’d previously purchased through Fictionwise, despite having sent a dozen emails to their customer disservice department during the changeover, and Kobo’s lack of selection doesn’t make up for their terrible store design or industry-leading lack of customer service).

    2. Do you really think that anything posted by Melville House regarding Amazon can be taken seriously? I used to be able to find some humor in their rants but no more.

      Please refer to Nate’s dissection on July 5 as to just how absurd NY Times article is that Melville used as a starting point for their post.

        1. I was looking at a book yesterday and was ready to click the buy button until I saw that the publisher was Melville House. No sale and all because of that one post.

          I never cared who the publisher was of ANY book prior to the agency model. I probably could not have named more than 2-3 of them. Times have changed. Maybe I’ll get over it, maybe I won’t.

  3. And don’t forget you have to pay sales tax to B&N but not to Amazon (at the moment).

    That gave them a 5% pricing edge or more.

    1. B&N never collected sales tax from me on an eBook pre-Agency.

      Once Agency pricing started Amazon collected tax where applicable just like B&N did.

  4. So Amazon continues to not pass muster as a profitable company. By the statements above, the main reason for Amazon not being on trial is that they are technically not earning a profit. So your company represents 80% of the book industry (Bowker’s stats, not mine) in some form, and you don’t have to turn a profit.

    And I never took Nate as an Amazon-apologist, but seeing as how they will soon be the only game that matters in all book publishing unless something is done about it, I can understand why he has now written 2 pro-Amazon articles this week.

  5. I’ve been reading your site for a few weeks, and I thought the comments in this article merit a response.

    To Paul & Andres:
    whether Amazon profits from displacing print copies by selling electronic books is as best tangentially relevant to Amazon exercising predatory pricing. E-books are a new technology which disrupted existing structures of book distribution. Whether Amazon gains or not from e-books vs print books is not relevant to whether Amazon is anti-competitive or not. It’s almost like complaining that saddle-makers going out of business because of cars coming of age.

    As Nate stated, companies fail for all sorts of reasons. Companies come and go. Companies either adapt and prevail, or fail to adapt and perish. Just because a company is about to outmaneuver another doesn’t indicate foul play. I bet that if you look at the history of most major brands, it involved outsmarting an opponent that was already established, with better market penetration, more capital and more resources.

      1. Huge is relative. ;)

        Amazon has $9B cash on hand which is “nice”.
        Microsoft has $68B.
        Apple has $145B.
        Google, even after wasting $12B on Motorola still has $50B.
        Thing is, getting into ebooks doesn’t need anywhere near that kind of money. All you really need is a deal with Overdrive, Baker&Taylor, TXTR, Bluefire, etc…

    1. Absolutely. If we were talking about outmaneuvering and outsmarting other companies. B&N has had it share of failures that has made their position more precarious than it should be. Borders did the same.

      A better question is: can a new ebookstore make a place in today’s ebook market?

      I think the answer is no. This hypothetical new ebookstore wouldn’t have a primary market that can subsidize the ebook market, a la Amazon/Google/Apple/Sony/Samsung. They can’t match or improve all of Amazon’s prices on all books because they’d be losing money faster than Borders did. They can’t attract peripheral costumers because these costumers are locked into Amazon (and B&N to some extend) ecosystem. Publishers might not feel comfortable risking losing the buy buttons due to an Amazon’s whim.

      Alas, many of these problems happened in the music industry transition to digital. Except I never heard Apple pulling an entire catalog on a whim. But the music companies were able to crack Apple’s ecosystem and has allowed everyone a breathing room. Apple still commands over 60% of the market, yet there is a variety of music stores available.

      1. “A better question is: can a new ebookstore make a place in today’s ebook market?”

        I would tend to agree with you but I also know of at least 3 indie ebookstores that have launched in the past 2 years years: Bilbary, The Reading Room, Zola Books. Clearly those folks don’t agree.

        1. And I wish they succeed. The market needs more competition.

          Then again, BooksOnBoard is all but a memory now.

      2. “Except I never heard Apple pulling an entire catalog on a whim.”

        Pulling books that you no longer have the contractual right to sell isn’t a “whim”.

        The publisher and Amazon failed to come to terms.

        What should Amazon do in such a case? Be specific.

        1. So Amazon never removed Macmillan’s books from sale over a dispute? http://www.nytimes.com/2010/01/30/technology/30amazon.html

          Or, tangentially, the couple of times Amazon has kicked affiliates from their affiliates program because Amazon had a dispute with the government in the place they happen to live in?

          There’s a difference between, “I can’t sell your books/music/movies” and “I won’t sell your books/music/movies”. Removing licensed goods because you couldn’t reach an agreement is correct (basically, the “can’t” version).

          But removing licensed goods because you don’t like how the negotiations are going is childish, and petty.

          Take a look at the iRadio licensing deals. I’m pretty sure that Apple could have thrown a hissy fit and gotten better deals, and done much faster. They certainly have the market share to do so. And yet, they didn’t removed any company’s music from their selling catalog because the negotiations weren’t going their way. (This isn’t to say Apple isn’t a bully in the negotiation room. They certainly are.)

          1. “Over a dispute” is not the same thing as “on a whim”.

            “Because it would lead to an unprofitable tax situation” is also not the same thing as “on a whim”.

            “But removing licensed goods because you don’t like how the negotiations are going is childish, and petty.”

            So in your opinion, a retailer is obligated to accept ANY terms a supplier might set? Choosing to no longer sell the item is not an option?

            Whatever, dude.

          2. No, dude. First, you’re putting words on my mouth. Never did I say that “a retailer is obligated to accept ANY terms a supplier might set”. What I am saying is that retailers should honor the current contract until it expires.

            When Amazon removed all of Macmillan’s books (electronic and DTB both), they did it in retaliation because the negotiations weren’t going their way. Amazon didn’t remove the DTB versions of Macmillan’s because they intended to discontinue selling their books.

            Again, contrast Amazon’s actions with Apple’s in the music industry. Apple was (and still is) a bully, and will pressure the music companies their way. But Apple hasn’t (to my knowledge, correct me if I’m wrong) removed a catalog during said negotiations. After the negotiations break down, yes. Not during.

            And when Amazon cut the affiliates from California and Minnesota, they did so without any type of warning to the affected affiliates. Many lost significant amounts of money because Amazon didn’t give them time to prepare, while still getting the so-precious links back.

            So yes, I think “not honoring your contracts just because” is both a whim, and a petty action.

          3. Responding at a higher level because there’s no reply link below (probably we’re hitting some kind of limit on nesting).

            “What I am saying is that retailers should honor the current contract until it expires.”

            So you’re saying that Amazon was in breach of contract? Did Macmillan sue? Did they win?

            “Amazon didn’t remove the DTB versions of Macmillan’s because they intended to discontinue selling their books.”

            Wait, so you’re claiming they were able to continue selling the books after removing the buy button? That’s a neat trick.

            “And when Amazon cut the affiliates from California and Minnesota, they did so without any type of warning to the affected affiliates. ”

            I can’t speak to California and Minnesota, but when the same thing happened in my state, Amazon sent me an email explaining in detail exactly why the affiliate program was no longer available (namely, the state was trying to use it as an excuse for a tax grab). I would be very surprised if the same weren’t true in California and Minnesota.

  6. Some people are never happy. I thought Amazon was devaluing eBooks by charging too little. I guess it’s a case of “be careful what you wish for. “

  7. Before the price fixed agency pricing,, Amazon actually kept the price of ebooks *up*, not down. Sure, the 9.99 new releases were being sold at a loss. But the real story about e-books has been the profit in back list titles. After all, there is a much, much larger pool of back lists titles than this months new releases. Whenever I compared prices of older titles between Aamazon and B&N, B&N was always less expensive.

    And consider what Baen had to do to start selling their e-books on Amazon. They were contractually obligated to sell at a higher price, since Amazon won’t allow e-books that are sold in conjunction with physical books below a certain price threshold…..

    Whatever evils you want to accuse Amazon of,, forcing the price of e-books down is really not one of them, unless compared to a publisher conspiracy to raise them even higher across the board.

  8. The BAEN price increase was to allow Amazon to sell at a profit without reducing the authors’ and BAEN cuts. The extra revenue from the direct sales allows for higher royalties for the authors. If you’re already a BAEN reader, it is best to keep buying direct. Where Amazon earns their cut is by bringing in new readers who aren’t buying direct.

  9. “Surely if Amazon wanted to drive out the competition then they would pursue the potential customers that own non-Kindle devices, right?”

    And of course Kindle does just that with Kindle apps for Macs and mobile devices.

    And why does it not sell ePub titles? Can you say proprietary?

    1. Of course I can. There’s the proprietary Adobepub format, the proprietary Applepub format, the other proprietary Adobepub format only used on Barnes & Nobelpub books…

  10. Love your list of Amazon competitors. All giant corps. And BN going going gone. Meanwhile bookstores nationally are being wrecked by Amazon pricing specifically, underwritten by Wall Street.

    Like California big ag growing rice in the desert with federally funded water. And putting Midwest growers out of business.

    Nothing wrong with that? Right?

    1. The big publisher’s requirement to use DRM keeps anybody smaller out of the business. Setting up a reliable DRM server costs a lot of money, and that keeps small businesses out.

  11. I’m so tired of the Amazon’s evil predatory pricing is destroying bookstores stuff. The big box stores, with the giddy assistance of publishers, did a whole lot more damage to independent bookstores pre-ebook than Amazon has. The number of independent bookstores actually grew last year for the first time in a long while, in my opinion likely due to the vacuum created by Borders and B&N’s slow demise. Last I checked, Amazon’s still out there plugging away.

    Even so, bookstores have inherent disadvantages competing with Amazon that have nothing to do with price. They have a necessarily limited supply, Amazon’s is basically boundless. They have very high physical infrastructure costs relative to the space they use compared to Amazon. One out of every five books bought in this country is an ebook, a shift in buying habits that moved customers away from the products they sell. And the convenience factor of ordering what you want and either having it shipped to your door or beamed to your device can’t be matched by a store that requires customers to come to them.

    There’s ways around every one of these issues and the good bookshops that will survive are figuring that out. The ones that scream “no fair!” and behave like its still 1995 won’t. All of these are serious competitive challenges to physical bookstores that have nothing to do with Amazon’s pricing strategies. To claim that supposed predatory pricing is to blame is a very shallow point of view that willfully ignores market-based changes that must be dealt with.

    Just like when the farmers who lived along the Nile faded out when the river dried up and changed course, when the stream of commerce shifts, those who drew on it for survival will either migrate to new waters or blow away as their sales dry up. It’s the free market circle of life, not some evil Amazon plot for domination.

  12. In the chapter “Pitiful, Paltry” in The Battle of $9.99, Kindle VP of Content David Naggar testified that the purpose of Amazon’s $9.99 titles was exactly this: get people hooked on a new book, then entice them to buy backlist titles that weren’t so discounted.

    But publishers couldn’t seem to get past the whole, “They’re devaluing our books! Aaaah!!!” thing.

    1. They still haven’t.
      Never mind that the $9.99 price only applied temporarily and only to a handful of books at a time. Or that Walmart and Target did the same to hardcovers during their price war.

  13. A loss leader and predatory pricing look the same on the shelf. The difference is in the intent.

    You say there are more competitors to Amazon now, but Amazon controls an increasingly greater share the market.

    You cite Amazon not utilizing epub as more proof Amazon is not using predatory pricing. Amazon is using its own format to control the market by keeping it in its proprietary garden. This is no proof against predatory pricing. The two are compatible.

    Overall, I find your article way off.

    1. Amazon controls an increasingly greater share of the market?
      Uh, for the last year the conspiracy apologists have been wearing the Price Fix *took* market share from Amazon and so the Price Fix was good.

      As for proprietary gardens, Apple has one, so does B&N, and Kobo. They are smaller but they too have lock-in. And adobe. Don’t forget Adobe’s proprietary DRM!
      Proprietary gardens are all the rage these days.
      All the popular kids are doing it.

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