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Look Out Publishers: Amazon Is Backburnering Book/Video Sales

People know intellectually that Amazon (AMZN) is long past simply being a book retailer. The company's latest earnings report underscores that point; only 37.5 percent of its revenue comes from media, broadly defined, and that portion continues to drop.

What once defined the company is fast approaching the status of a sideline. Instead of driving strategy, media sales will increasingly become a tool for Amazon to pursue its other goals, like selling general tablets.

Any time a retailer as influential as Amazon is in media considers the business subservient to other product lines, the impact on the rest of the industry could be tremendous. As, for instance, you can already see in how e-book pricing has depressed publishers' revenues and margins.

Gross margin throwdown
In the first six months of this year, overall gross margin for the company was 24 percent. Compare that to some other retailers:

  • Radio Shack -- 45 percent (first six months of 2011)
  • Barnes & Noble -- 26 percent (including store occupancy costs, year ending April 30, 2011)
  • Target -- 32 percent (quarter ending April 30, 2011)
  • Best Buy -- 25 percent (quarter ending May 28, 2011)
Amazon trails its competitors and it doesn't even have stores to add to its costs. For some rivals, cost of goods (what you subtract before calculating gross margin) can include substantial expenses -- store occupancy costs for Barnes & Noble or payroll and benefits for all services and distribution employees at Best Buy. Here's what Amazon includes:
Cost of sales consists of the purchase price of consumer products and content sold by us, inbound and outbound shipping charges, and packaging supplies. Shipping charges to receive products from our suppliers are included in inventory cost, and recognized as "Cost of sales" upon sale of products to our customers. Payment processing and related transaction costs, including those associated with seller transactions, are classified in "Fulfillment" on our consolidated statements of operations.
In an equivalent comparison, Amazon would be even further behind. That means Amazon needs to focus on higher margin product lines to boost its bottom line. What does that have to do with selling media? Plenty.

Going where the money is
Even though Amazon gets a bit more than 50 percent discount off media list prices according to people in the industry, it still doesn't make a whole lot of money off books and the like. Between high discounts and low average order size (books only get so expensive), even a tiny cost of processing an order doesn't necessarily leave a lot of money for the company.

As Amazon diversified -- which, to be fair, was the idea all along -- the results have been big. But to keep getting bigger, Amazon needs to further concentrate on higher margin products. That means the emphasis goes into things like electronics, which, with the Kindle, has become the big money niche for Amazon.

Amazon has become a company where e-media are turning into an excuse to sell the Kindle e-reader. As it moves into general electronic devices as well as software to run on them, its need for other media like e-books lessens -- outside, that is, using media, as Apple has done successfully, as a way to keep people locked into buying your devices.

Inverting the razor-and-blades model
Although it might seem like the razor-and-blade business model, where a company sells the razor cheaply to make real money on the blades, the effect has been exactly the opposite. Amazon, and Apple, for that matter, have made the blades cheap and the razors expensive. Why? Because they don't make the blades. They just get a cut on the sale.

To have media drive the sale of electronic devices, companies have to make the media inexpensive. Then it becomes the rationalization -- "See how cheap a book or song will be if you own one of our products?" The retailers drive down the cost of media, which has clearly happened in music and books. Media becomes expendable to everyone in the industry other than the people who produce it.


Image: Flickr user richardmasoner, CC 2.0.