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.