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A worker stacks a shipping trailer with boxed items for delivery at Amazon’s distribution centre in Phoenix. (RALPH FRESO/REUTERS)
A worker stacks a shipping trailer with boxed items for delivery at Amazon’s distribution centre in Phoenix. (RALPH FRESO/REUTERS)

Digital dilemma: Amazon pushes to package up more profit Add to ...

In late April, Amazon.com Inc. invited a group of journalists to its Seattle headquarters, in part so they could listen to Marie Force talk about her amazing new life.

In the romance novel industry, Ms. Force is a superstar. Her prolific bibliography, much of it self-published, has resulted in some 2.5 million copies sold. So financially rewarding is her career as an author that she recently quit her day job, hired her own staff and bought a new Mercedes.

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Mostly, Ms. Force talked at length about an Amazon tool called Kindle Direct Publishing. In essence, KDP is a digital e-book service that allows authors to side-step the traditional publishing process by acting as their own publishers. Even though she currently has contracts with several traditional publishing houses, Ms. Force makes no secret of the fact that she is largely unimpressed with the services they provide. She says her relationship with them is one of necessity, at least until she can find some other way to get her books on the shelves at Target and other large retailers.

“It hasn’t happened yet, and when it does, I will have no further use for traditional publishing.”

Amazon’s relationship with the traditional gatekeepers of the content it sells – publishers, record companies, movie studios – has never been straightforward. On one hand, the world’s most powerful online retailer relies on those companies for the bulk of its digital media offerings – one of the fastest-growing product categories in its catalogue. But at the same time, Amazon is under growing pressure to finally start turning its massive customer base into equally massive profits. That means, in turn, that the retailer is under similar pressure to squeeze its content partners even harder for lower prices.

Or perhaps, if that doesn’t work, side-step them entirely. In a myriad of industries, from music to movies to books to the very basic business of selling things, Amazon is simultaneously playing nice with the giants of the old guard even as it goes about creating the tools, services and market conditions that may one day render them irrelevant.

Device gambit

Behind a glass case in the lobby of Day 1 North (an Amazon campus building named after a quip by company founder Jeff Bezos that it’s still “day one” on the Internet, an atmosphere ripe for innovation) there’s a copy of the very first book Amazon ever sold. It’s a a computer modelling and programming text called Fluid Concepts and Creative Analogies.

Twenty years ago, Amazon began life as a seller of physical books. Over time, the company grew to become the world’s biggest digital storefront, shipping everything from baby strollers to hot sauce.

But more recently, much of Amazon’s sales growth has come from digital, rather than physical items – everything from e-books to movies to music to mobile applications. Indeed, the company has spent billions on three lines of hardware (e-readers, tablets and, this year, a new set-top box called Fire TV) designed not to make money, but to facilitate the consumption of content.

“We price our devices effectively to break even,” said Dave Limp, vice-president of Amazon Kindle devices. “We want to make money when our customers use our devices, not when they buy our devices.”

In many ways, the strategy has worked. According to David Naggar, vice-president of Kindle, customers who purchased a Kindle e-reader or downloaded the Kindle reader app on another device bought on average four times as many books from Amazon as they did in the 12-month period prior.

Amazon’s fundamental appeal to consumers has always been predicated primarily on two factors – speed and price. The company has invested heavily in building its capacity to speed up shipments, in large part by building countless fulfilment centres around the globe. Indeed, the company has become so good at getting products to consumers quickly that it can now realistically aim for same-day delivery on many of its products.

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