The House Of Cards Wobbles

Why is Amazon so absolutely determined to wring further concessions out of Hachette Book Group?

The answer has arrived, as investors knew it would, as soon as Amazon released its quarterly reports. The figures tell the whole story, and for those who grumbled long ago about the irrational exuberance that drove up the behemoth's stock price, they are having their day.

Jeff Bezos has earned enough out of his brainchild to buy up the Washington Post, but overall the company is losing money. You could go into business for yourself and sell goods at a low cost, but if that low cost doesn't cover expenses, you aren't turning a profit. Not that you want to turn much of a profit anyway, because that is what gets taxed and if you are lucky enough to have a clever accountant you'll draw a nice salary for yourself but never pay any sort of share to the government.

At any rate, Amazon has posted a net loss in the second quarter, despite an increase in sales. Investors were expecting a loss, given the costs to expand offices and distribution centers that are actually investments in future growth. The loss, however, was much more than anticipated.

There is a limit to how low you can price goods. A time will come when investors won't want to take a chance on you because you aren't turning things around as you should. People who invest in your company, the stockholders, start to thinking that they might lose their investment if you run the company into the ground and go into receivership or if the debt has to be restructured or if the company itself has to be broken up into bits and sold off to appease the creditors.

If you sell low, you have to buy low, or the system collapses.

There are economies of scale, of course, and Mr. Bezos has structured Amazon to take advantage. Hence, the notion of an "everything" store where the consumer enters and leaves with everything. Maybe you only came for the deep discount on the e-book, but there are so many other items there and you won't have to get out of your pajamas to make the purchase and that free shipping, well, it's a bargain. For Amazon, there are plenty of goods to be sold at a higher profit margin and that higher profit margin can make up the difference on the loss leaders. Because Amazon buys in such large quantities, they can pocket a portion of the discount they receive from the supplier and pass along a much smaller discount to the consumer.

Amazon needs to pay less for books so it can maintain its level of discounting to the end consumer while increasing its profits on every book sold. If it does not, that loss per share figure is going to stay stubbornly high, and investors are not enamored of corporations in which the loss per share does not decline over time.

The investors start questioning corporate decisions, like adding a line of smartphones to compete with Apple when Apple has such an enormous head start. And when investors ask too many questions at annual meetings, the board of directors gets nervous because their jobs depend on the votes of the stockholders and it's just as easy to tick 'no' on the ballot as it is to vote 'yes' on the retention question.

Besides the unexpectedly high quarterly loss is the advice for the third quarter. The operating loss is predicted to be far, far higher than it was for the same quarter last year.

A boycott of Amazon, if it takes hold, could very well tumble the house of cards that is already wobbling. Yet to give in to Hachette's demands would lead to a decline in discounts granted by the other publishers, and then the cost of doing business would go up instead of down.

Where will Jeff Bezos find the glue to hold his cards together?