Amazon (AMZN) is frequently touted as the future of retail, and its Kindle e-reader has been at the epicenter of a massive shift in the publishing industry as books have begun to go digital. Kindle Fire tablets kicked off a rush to the cheaper 7-inch tablets that forced even Apple (AAPL) to cave and release the smaller, cheaper iPad Mini.
So what do we make of the new “Amazon Source” program that encourages brick-and-mortar retailers — especially independent bookstores — to put Kindle devices on their shelves in exchange for a discount on the hardware and a cut of future Kindle e-book sales? To me, it sounds like Amazon is worried, and the move seems like an admission that online retailing has its limitations.
Whenever Amazon is criticized about its inability to turn a profit despite soaring revenues, people often point out that the company’s strategy includes selling its popular Kindle devices at cost, forgoing profit on the device.
Instead, the profits are generated later as Kindle and Kindle Fire owners buy e-books and other digital content. However, that approach takes a hit — or at least pushes the payback time even further into the future — when customers buy their Kindle device from an independent bookstore instead of directly from Amazon. Here’s the plug from Amazon’s press release:
“Amazon Source makes it easy for independent bookstores and small retailers to earn additional revenue by selling Kindles. Booksellers can receive 10% of the price of Kindle books purchased from the devices they sell. The first order is worry-free for retailers — Amazon will buy back the inventory for up to six months after the first order, no questions and no penalties.”
Retailers can buy Kindle devices from Amazon at a 6% discount from the MSRP and receive 10% of the price of every Kindle e-book purchased using the device over the next two years. Or, they can forgo a cut of the e-book sales and go with a 9% Kindle discount, instead.
Booksellers’ reactions to the offer haven’t exactly been enthusiastic. Many of them basically view Amazon as their archnemesis, and some are describing Amazon Source as “a dagger disguised as an olive branch.”
Whether retailers take advantage of the program or not, the question is why Amazon would offer it in the first place.
First, let’s look at those Kindle devices. Amazon has a problem with cyclical buying patterns; consumers buy them for the holidays, then things go quiet. When the original Kindle Fire was released, it sold 4.8 million units over the 2011 holiday quarter, but then sales plummeted to 750,000 units the following quarter. Every consumer electronics manufacturer sees a Christmas peak (Apple’s iPad sales dropped 23% from their holiday peak in the same year), but Amazon’s 84% drop indicates a bigger problem.
The problem isn’t quality or price, it’s availability.
Amazon may be the leading online retailer, but the majority of shoppers still spend their money in brick-and-mortar stores — more than 90% of U.S. retail sales in 2012 were in stores. And it’s been getting tougher to find Kindles in U.S. stores thanks to backlash from retail giants over Amazon’s aggressive tactics.
Walmart (WMT) and Target (TGT) both carry a wide range of tablets and e-readers in-store, including Apple’s iPads and Barnes & Noble’s (BKS) Nook, but both have removed Kindle devices from their shelves. Online shopping traditionally increases during the holidays as gift-givers avoid busy malls, and Amazon’s Kindles have benefited from that seasonal spike. But without having the devices in front of consumers the rest of the year, sales are suffering.
They may not have the same presence as a Walmart or Target, but independent book sellers’ customer base is Kindle’s target demographic. However, there’s one problem with Amazon Source — outside of any animosity the booksellers might feel.
It’s always been considered the quirky also-ran of e-readers, but Rakuten’s (RKUNF) Kobo operates a big online e-book store with 3.5 million titles — which are free from Kindle’s proprietary DRM, meaning they can be read on competing e-readers from Sony (SNE) or Barnes & Noble. Kobo sells a line of e-readers, including the Aura HD (currently my go-to device among my collection of e-readers — even above my Kindle), and the company offers Android tablets that compete directly against the Kindle Fire. And Kobo was there first.
Kobo already offers a program that gives booksellers a 5% discount on hardware and splits profits on Kobo e-books sold using the device (typically 8% to 20% per title) without any time limit on the profit sharing. Kobo has close to 500 independent bookseller signed up on the program, and it’s hard to imagine one of these stores jumping on Amazon’s offer. Sure, they’ll make an extra buck or two selling a Kindle, but they’ll likely see less money from e-book sales if they sell a customer a Kindle instead of a Kob. And that Kindle e-book profit will dry up altogether in two years.
We’ll have to wait and see what kind of uptake Amazon sees with Amazon Source, but the program’s very existence illustrates the fact that Amazon’s online advantage can sometimes be its weak spot too. Especially when it comes to Kindles.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.