Is Amazon eating itself?

From the consumer’s point of view this is all good news, but retailers are normally in business to make money. According to analysis from investment house Qineqt, over the past five years Amazon has traded at profit margins of 2.72% – slim, but acceptable given the scale of the operation. In the past year, however, that margin has tumbled to 0.69%.

Buying into the Kindle

Instead of raising the prices of its products to increase profit, Amazon has focused on entering new markets. Much of the recent decline in profits can be put down to its investment in the Kindle. But even after this investment, the company has made it clear it doesn’t expect to make money from the hardware, preferring again to focus on new customers.

“Our approach is to work hard to charge less,” said Bezos in the recent company statement. “Sell devices near break-even and you can pack a lot of sophisticated hardware at a very low price point. Our approach is working – the $199 Kindle Fire HD is the best-selling product across Amazon worldwide.”

The problem? Amazon makes nothing from those sales; in fact, analysts believe the company is making a loss. The model follows the Gillette school of marketing by which you sell razors for next to nothing in the expectation of making money on replacement blades.

In Amazon’s vision, Kindle ebook sales and other content on its Fire tablets will recoup the investment in subsidised hardware – but there remains a suspicion that the company isn’t making much on that content either.

In a trawl of Amazon’s top 20 best-selling ebooks for the Kindle, the average price was only £1.78; seven of those cost a ridiculous 20p.

Chart

Whatever the split between Amazon and the publisher in each case, the company will be making mere pennies after administration, distribution and platform costs. This aggressive tactic may be working to increase sales, according to experts, even though it could prove costly in the short term.

“People that buy a Kindle as their starter for digital books are going to build their entire libraries around that ecosystem,” says Joe Magyer, an Amazon specialist and senior analyst at The Motley Fool, a financial services company. “If you buy into it, you’re likely to stick with Amazon, and that will serve it well over the long term; it could be a good investment even though it’s killing gross margins. Amazon has to balance the razor and the blades; if you sell the razor at break-even or at a loss, and people don’t come back and buy the blades, then you’re not doing well.”

Even Amazon accepts it may struggle to sell its new platform at a profit, and that it can’t be sure customers will come back to fill their devices with videos, music and books.

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