Amazon Profit Driven By MarketPlace Sellers?

Everybody knows the old business school joke about selling at a loss and making it up on volume. A casual analysis of Amazon’s balance sheet and press releases suggests that they sell many things at a loss and make it up with MarketPlace revenue. Another way to look at it would be to say that Amazon runs a highly successful MarketPlace for third party sellers with a struggling retail store attached. I’ll run through the rough numbers, and you can make up your own mind. Feel free to call me an idiot if you think my estimate of MarketPlace impact is too high, I tried to be very conservative. Just do me the favor to point out the flaws. Estimates are necessary because Amazon doesn’t break these numbers out in their financial reporting for competitive reasons. They don’t give any data about Kindle sales or eBook purchases in their reports. In fact, it’s not even clear to me whether Kindle device sales are counted as “Media” or “Electronics and other Merchandise”.

Amazon reported in their 2009 Annual Statement that 30% of their unit sales came from MarketPlace vendors. MarketPlace vendors vary from large retailers taking advantage of Amazon’s storefront to sell their items, to college kids reselling textbooks and grandparents reselling gifts from their progeny. The only difference between the large sellers and the small sellers, in terms of revenues earned by Amazon, is that small sellers pay $0.99 per listing before other fees, while serious sellers pay $39.99 a month to list as many items as they desire. Both pay closing fees on certain items (it’s $1.35 for books) and a percentage of the selling price to Amazon, varying from a low of 6% on PCs and 8% on electronics and cameras, to 15% on books and 20% on Jewlery.

Now let’s estimate how many items they sell. Amazon used to report the total number of items shipped during the holiday season in a press release each year, but they stopped after 2005. That year, the Delight-O-Meter reported over 108 million items ordered from Amazon worldwide from November 1st through Christmas. I’m leaving October out of the estimate for the time being, we’ll stick it back in a couple inches down. Amazon’s 2009 sales were more than double 2005 sales (2.8X), so could lead us to estimate that Amazon’s 2009 holiday sales were 302 million items ordered. This extrapolation is a weak point in the analysis as the averaging selling price in 2009 might be appreciably higher than 2005, especially given growth in Electronics. So instead of 2.8X, I simply doubled the 108 million items to 216 million for the 209 holiday season. From Amazon’s 10K, we know that 4th quarter 2009 sales accounted for 39% of the year’s sales (it was 35% back in 2005). If we assume that holiday items sell at the same average price as year round items, it yields a first order approximation of over 338 million items shipped during the first three quarters of the 2009.

If we now estimate that October was an average month, we can include another 38 million unit orders (338 million / nine months). This should make 216 + 338 + 38 = 592 million a first order approximation of the number of orders Amazon took in 2009. For a second iteration, we now add the 38 million estimate for October to the 216 million holiday season estimate for 254 million units ordered in the 4th quarter, and recalculate the first nine months as 397 million units. That puts the total year (minus the week after Christmas) at 651 million units worldwide. I’m not going to try for a third iteration or we’ll be here all day.

Since Amazon sold about $24.5 billion in total merchandise in 2009, that would put the average item a little under $38 dollars. I expect that MarketPlace orders would average much less, unless there are lots of people buying computers and diamond rings through third party vendors, but it’s important to keep in mind that both Amazon and Marketplace sell some big ticket items, like Kindles and big screen TVs. This leaves us with the estimate that Amazon processed orders for 651 million units in 2009, with MarketPlace vendors share at 30% amounting to 195 million units. This calculation assumes that the average MarketPlace item sold for the same amount as the average new-from-Amazon item, which I suspect is extraordinarily conservative.

So, the remaining question is how much does Amazon net from the average marketplace unit sale? For a book sold by granny, we know that the minimum is $0.99 + $1.35 = $2.34, and that assumes that granny sells the book for a penny. Serious sellers save the $0.99 listing fee, but at least one professional seller I spoke to won’t bother listing books for less than $10, which means Amazon makes a minimum of $1.50 (15% of $10) plus $1.35 = $2.85 on each of his sales. And I suspect these book examples are very conservative for Amazon marketplace, where I’ve paid around $100 (around $10 net to Amazon) for a replacement laptop battery, amongst other transactions. So let’s round down the average of the two book examples and say the average unit sold through MarketPlace nets Amazon $2.50 even.

We’re left with 195 million units at $2.50 profit each, for $487 million dollars profit. Yes, I know that it costs Amazon something to run the MarketPlace, but we’ve been so conservative at every turn that I’m going to ignore that as part of the noise and consider some other numbers. Amazon’s reported net income for 2009 was $902 million. That profit remains after they lost $849 million dollars on shipping. Under what I think is a very conservative estimate, more than half of Amazon’s net profit came from MarketPlace vendors. Another bit of conservatism was interpeting Amazon's holiday season as Nov 1st to December 25th (and not bothering with the week after Christmas), when in other places, they imply that the holiday season is Thanksgiving to Christmas.

Now let’s go back and look at a few of the variables. $38 dollars for the average unit selling price does seem awfully high, no matter what the Delight-O-Meter extrapolation suggests. If you had been asked to guess the average selling price of an item on Amazon, I wouldn’t be surprised if you’d chosen $20, which would almost double the number of units sold, and almost double the MarketPlace earnings so they accounted for all of Amazon’s profit. But let’s leave the average selling price alone and consider the average Amazon net per MarketPlace item. At $5.00 net per marketplace transaction, all of Amazon’s reported profit would come from MarketPlace. It true that some advanced MarketPlace vendors have been moving to “Fulfillment By Amazon” and saving a little on fees, but it really only makes sense for higher average ticket items, and my understanding is that it hasn’t really caught on yet. And if the average MarketPlace transaction was really $38, a number we stuck with to hold down the total number of items sold, it would almost certainly put Amazon’s net per MarketPlace transaction over $5.00. And don't forget our assumption that average item prices had risen. If the average selling price in 2009 was the same as 2005, what with all the inexpensive eBooks on Kindle, falling electronics prices, etc, the total items sold would have been a couple hundred million higher.

All of this suggests one conclusion. That it’s very difficult for any other bookstores selling new books, online or off, to compete with Amazon without losing their shirts. Amazon’s secret may be that they’re losing their shirt as well, but making it up in MarketPlace.

Is Amazon’s Kindle Killing Book Publishing?

Amazon filed their 10K annual report on Thursday and two numbers jumped off the virtual page at me. First, Amazon’s international media sales (no Kindle component to speak of) were up 19%, bringing the total to $6.8 billion. Amazon’s North American media sales were up 11%, bring the total to $5.94 billion. In the three years prior to Kindle’s release, Amazon’s International media sales (books, music, movies) grew just a little faster than their North American sales. Since the Kindle began to take off in late 2007/early 2008, the North American media rate of sales growth has lagged international media rate of sales growth by 37%. One possible explanation is the Kindle sales are cannibalizing growth from Amazon’s North American book sales, and Amazon is betting the future farm on capturing the eReader market.



Update: According to news feeds, Amazon has announced they will back down and compromise with Macmillan.

Most of the publishing world is Tweeting from the sidelines as Macmillan and Amazon face off in a power play over the future of book publishing. Trade publishers are finally waking up to the fact that Amazon’s growing power as the world’s leading book retailer puts their businesses in a precarious position of dependency. This isn’t a simple argument about the retail pricing of eBooks. Increasing eBook sales lowers the volume of paper books printed and forces up the marginal cost of publishing on paper. The result is a positive feedback loop for eBooks and a death spiral for paper books. Quoting myself from a couple years ago when pointing out that Amazon’s US book sales were poised to pass the bricks-and-mortar sales of the whole Barnes&Noble chain, "I can't predict exactly how far into the future the day of reckoning will arrive for large publishers, but it's clear that Amazon can control the timetable with the pace of their investment in POD and Kindle." It appears for Macmillan, the day of reckoning has arrived.

On Friday Amazon stopped selling books published by Macmillan, one of the largest publishing groups in the world, in a dispute over eBook pricing and distribution control. Nobody outside of Macmillan and Amazon knows for sure what their existing deal was, though it’s widely reported that Amazon was losing money selling Kindle versions of Macmillan bestsellers by paying Macmillan more than Amazon’s selling price. Nor does anybody outside of Amazon and Macmillan know what percentage of Macmillan’s overall sales have been going through Amazon. Macmillan’s heavy presence in the education market, from elementary right through university, makes them less vulnerable to Amazon’s boycott of their books than publishers dependent entirely on leisure readers. It’s also unclear whether the whole issue would have come to a head this week without the announcement of Apples iPad, and their support for a pricing model that leaves more control in the hands of the publishers.

Make no mistake about what’s at stake here. Publishers don’t want to find themselves in a position couple years down the road where Amazon can start dictating the wholesale pricing for publisher content. This can only if Kindle remains the dominant eBook reader, something I suspect has grown a little less likely with Amazon's actions this week. The current stand-off has brought out the usual commentary by instant eBook experts who have never published a book on paper or electronically. They don’t have a clue about economics of publishing, the time invested by an author or the money invested by a publisher, and endlessly repeat the mantra that authors and publishers are all stupid and will earn more money through increased volume. If the volume doesn’t materialize, that can only mean that the price isn’t low enough. I guess there’s a quantity of alcohol or emotional age that makes watching people falling on their backs while trying to limbo under a pole hilarious, but substitute “going out of business” with “falling on their backs” and you may sober up. For a hair of the dog, consider the “creative destruction” preached by our economic sages and how well that’s turned out for us all.

Just a week ago, Booklocker and Amazon settled Booklocker's anti-trust class action lawsuit over Amazon’s threat to remove “Buy it now” buttons from Booklocker’s titles on Amazon if Booklocker didn’t agree to have Amazon print their books. At the time, Amazon claimed that the move was necessary to better serve their customers, a nonsensical claim at best, yet one that is being used today in regards to the eBook distribution model. In the settlement agreement, Booklocker won what they had sought, Amazon’s agreement not to remove their “Buy it now” buttons, and Amazon paid $300,000 to Booklocker’s law firm for the legal costs of the suit. One wonders if Amazon’s lawyers had kept the button removal monster in a cage during the lawsuit, and set him free once the settlement was signed.

Given the lack of solidarity within the publishing "community" during Amazon's POD take-over, I doubt that Macmillan will see a groundswell of support from self publishers or small trades. The question of who will “win” the Amazon vs Macmillan war (and the winner appears to be Macmillan)can be influenced by the other large publishing groups. As much as they depend on Amazon for sales, Amazon depends on them even more for books. Nobody outside those publishers and Amazon knows if they have contractual commitments that will prevent them from telling Amazon that they are changing model under which they are will to provide Amazon with eBooks. But even if the CEO’s of the other publishing groups have the legal ability to turn the tables on Amazon, they may not have the desire. For the time being, Macmillan’s loss is their gain, and as far as anybody knows, the large publishing groups aren’t losing money on their Kindle titles under the current regime. The future? Well, that’s off in the future somewhere, and it’s much more fun to make money today and not worry about it.

Amazon also surprised the small publishing world last week with the announcement of a new Kindle business model to be launched this summer. The new model for Digital Text Platform users will up the author/publisher share from 35% to roughly 70%, in return for the author/publisher agreeing to a maximum list price of $9.99 and a minimum 20% discount from the paper price. The 70% royalty will be based on the sales price, which will be determined by Amazon in a manner that's not entirely clear at this point. The deal is nearly irrelevant for my own self publishing business since I only sell my weakest title through Kindle due to formatting constraints, but all of these events stacking up since the first of the year should serve as a welcome reminder that absolute power makes a negative impression. Or maybe that’s absolute numbers make negative signs positive, or some CEO's found courage in a bottle of Absolut and stood by Macmillan.

eBook Case Study And Experience Selling eBooks

First, I should point out some major differences between my own eBook sales and selling eBooks for Kindle or iPhone. I am selling PDF files using eJunkie as the download service and PayPal as the credit card processor. This is a very different than selling to registered customers who are buying yet another eBook for their sunk-cost device with a single-click through from a trusted big name vendor. It also means that my eBook sales have zero dependence on the cataloging or ranking of a retailer site. This case study is a follow up to an earlier post in which I tried to establish if eBook sales were hurting print sales.

I chose the awkward time period of this case study, May 9th to Dec 31st of four successive years, because the eBook edition of my business title went on sale May 9th of 2008 and I wanted to compare apples-to-apples as much as possible. The reason I give paper book sales data for two years prior to the release of the eBook is to show that a downward trend was already in place for this eight year old title. In addition to actual eBook sales, I show Ingram sales (which represent the majority of paper book sales for this title), Amazon Associate sales (direct buyers from the FonerBooks website) and the number of hits on the order pages for the book. Now, on to the sales data:

Period May 9 to Dec 31st, Paper $14.95 (Amazon $13.45), eBook $11.95:

2006 – 807 Ingram, 0 eBooks
2007 - 694 Ingram, 0 eBooks
2008 – 498 Ingram, 159 eBooks
2009 – 569 Ingram, 165 eBooks

Now the combined unit sales and a look at the website marketing, including Amazon Associates sales and hits on the order page(s) for the book:

2006 – 807 unit sales, 183 Associates, 5,348 Order Page
2007 – 694 unit sales, 160 Associates, 4,648 Order Page
2008 – 657 unit sales, 83 Associates, 4,691 Order Page, 777 eOrder Page
2009 – 734 unit sales, 97 Associates, 5,115 Order Page, 805 eOrder Page

Perhaps the economic events of 2008 had a direct impact on the sales for this title about starting a business. It’s also important to note that two directly competing titles appeared on Amazon in late 2007. The sell through for the eBook, once customers click through to the eOrder page and are confronted by the license agreement and the PayPal symbol, is higher than 20% for both years. The Amazon Associates sales for the paper book dropped by almost 50% when I started selling eBooks direct, yet the eBook sales nearly doubled the lost Associate sales. International eBook buyers who suddenly have a low cost way to get the book account for part of that difference.

The main sales drivers for this title are the extensive excerpts available for free on the FonerBooks website and its visibility on Amazon (paper book only), which was built over the years. The book seems to be widely available through piracy sites, and likely was before I even began selling an unprotected PDF version. I haven’t gone through the exercise of trying to download pirated copies because I don’t put that much trust in my antivirus software and I don’t find it beneficial to my mental health. Going by Google's auto complete results, there are plenty of people looking for a freebie on file sharing sites (my more popular titles also show similar queries, including the word "free"):



The experience of selling eBooks using the simple combination of eJunkie and PayPal is working very well. Of the 1207 eBooks sold (four different titles) in 2009, there were a total of eight PayPal disputes initiated, less than one tenth of one percent. Six of the eight disputes resulted in somebody getting a free eBook, whether or not it was the intended customer isn’t clear. PayPal labeled two as “bank returns”, two as “temporary holds” that apparently became permanent, one as “non receipt” (I assume they couldn’t find the file on their hard drive) and one as a credit card company “charge back” which resulted in a $10 loss. Two of the disputes were resolved in my favor. I also issued six refunds unilaterally after noticing customers never downloaded the eBook they had paid for, and I don’t believe I ever heard from any of them. The only other overhead has been regular requests, perhaps one a month, to replace lost eBooks. Overall, I may spend fifteen or twenty minutes a week managing the eBook sales. The graph shows a strong seasonality to my eBook sales, I wonder if other publishers have seen anything similar?



I also started selling my most recent print title as an eBook for the first time this month, and overall eBook sales are up around 40% over the previous January. This should give me some data to contrast with the book published earlier that year, when I started selling the eBook a couple months before releasing the print book. Now that I’m selling three eBooks on a related subject, I’ve started seeing triple orders, one a week so far. When somebody purchases an eBook, comes back a half hour later and purchases the next one, and then returns an hour after that and purchases the last one, I take it as a vote of confidence in the quality. Only one of the three eBooks makes any mention of one of the others, and that’s at the very back, so it’s not a question of push marketing.

Readers may also be interested in a full life cycle, six year case study for a POD book I posted a few months ago. Also note that Andrew Savakis of O'Reilly has published several interesting number posts on O'Reilly's eBook sales in the past couple months, along with an argument that smartphones are the future of eBooks.