More on Amazon/Macmillan

This is pretty amazing. It turns out that the backstory to the Amazon/Macmillan flap is that for Amazon, e-books are themselves loss leaders:

Amazon’s business model was, in fact, the reverse of the one used so successfully by Gillette, selling razors at little or no profit but making it up on high-margin razor blades. In this case, the $9.99 retail price for the books (the blades) was actually less than the $12 to $14 “wholesale” price Amazon paid to publishers. That loss, however, was made up for by the high profit margins on the Kindles (the razors), which sell for $260 to $490.

The genius behind the deeply discounted book price is that it seems to have greatly accelerated the inevitable transition from physical books to digital ones, while allowing Amazon to build a commanding lead in the digital space. That has not sat particularly well with book publishers, which continue to get the overwhelming share of their profits from hard-copy sales and don’t welcome competition on pricing or the prospect of getting strong-armed by a dominant distributor. But as long as Kindle was the digital reader of choice for nearly 3 million consumers, there wasn’t much they could do to challenge Amazon’s dominance.

I never would have figured that a major Internet company would find it in its interests to sell information at a loss and sell hardware at a huge profit, but there you have it. The corollary to this is that if we assume Pearlstein describes the model accurately, then if you figure an average profit of $200 per Kindle that means Amazon has good reason to think that you aren’t going to buy anywhere close to 60-70 books before you plunk down more cash to upgrade yourself to the Kindle Magnum.

(via Brad Delong)

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