h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

Sorry, naive question coming up...

How are places like amazon and cdnow managing to make such huge losses? I'm sure I saw a news report where amazon were shown to be shipping out a pile of books the height of Canary Wharf every day. I can only presume they were making a loss on each and every book sold or something. But they don't seem THAT cheap do they?

So, how does a little village bookshop, which probably sells about ten books on a busy weekend, manage to keep going year after year, while amazon.com sells vast quantities and ships them straight from a warehouse somewhere and doesn't actually make any cash.

Or have I missed something? Duh.

A lot of web retailers are indeed selling items at a loss. Many of them also manage to turn a loss by spending huge amounts on expensive advertising campaigns -- something your village bookshop never needs to do.

The mantra has been "market share at all costs" -- sell things too cheaply, or even at a loss, or even give them away, so long as you get mindshare. The assumption is that once Amazon is known to everyone on the planet and has wiped out all serious competition, it'll be able to raise prices or cut back on promotion and advertising and start making a profit. (Bezos actually said that Amazon would be profitable if it didn't have to advertise. Yeah, and I wouldn't have to go to work if I could lay golden eggs.)

Real-world retailers like HMV survive in spite of their high prices because often there's nowhere else nearby selling the same stuff. You're paying for breadth of selection, and for convenience. But on the web, I can search hundreds of retailers at once; it doesn't matter if nobody has the range of stock Amazon has -- so long as each of them has maybe a hundredth of the stock, in different niches, I can get the same range by shopping somewhere else. In addition, the cost to me of shopping somewhere else is very small -- the travel time is zero, the shipping costs are probably the same, and the waiting time until delivery is about the same too.

So, I don't see how Amazon can win big in the long run. The second they raise their prices to a level where they can turn a profit, it's just too easy for me to click a few links and buy the same range of stuff somewhere else. HMV and Virgin recognized this -- that's why their online stores sell at prices below their real stores: they have to.

Amazon would argue that people won't do that; that they'll stick with the brand they know, even if it means paying more for less. There's some evidence for that -- look at all the people in the UK who still get long distance phone service via British Telecom. Amazon may be able to turn a modest profit and stay in business. I don't think they'll ever give the kind of returns to investors that their stock price high suggested they ought to be giving, though.