Showing posts with label Corporate Finance. Show all posts
Showing posts with label Corporate Finance. Show all posts

Tuesday, May 27, 2014

Is Amazon an Author’s Friend?

The quick and easy answer to the title’s question is NO. Amazon is Amazon’s friend. All others should beware the bruin's close hug.

From time to time Amazon’s interests may be allied with authors’ interests. Amazon may help drive more income to authors than they would have otherwise obtained, but Amazon is NOT an author’s friend. I can hear a number of my author friends saying about now, “But without Amazon, I wouldn’t be—” I am going to interrupt the praise. It is not relevant whether Amazon has helped authors in the past. The important question for authors today is whether Amazon’s long-term goals will help or hurt them in the future.

Let’s step back and think about what a book sale represents. In a “pure” transaction between an author and a reader, the author writes a book, and the interested reader pays the author a mutually acceptable amount for the privilege of reading it. Self-published authors who sell person-to-person or through their website are examples of (almost) pure transactions. The author writes the book, picks a price and readers either pay the price or not. They may use an intermediary to get money from the reader to the author if it isn’t “cash on the barrelhead.”

Authors and readers relying solely on these ur-transactions leaves unresolved problems. How can readers find out the author wrote something? Before making the purchase, how can each reader determine the piece might be something she’d like to read? How can author and reader agree upon a fair price? How can the author deliver the piece to the reader? How can the reader pay the author?

Intermediaries “solve” these problems for both authors and readers by helping one or both of the parties to the transaction. Some of the possible intermediaries between the author and the reader include a publisher, a distributor, an agent, a bookstore (physical or online), reviewers, and a payment mechanism (credit card, PayPal, etc.).

It should be obvious, but is sometimes forgotten, that intermediaries are in the business to make money. If others profit, fine, but each person/corporation in the transaction stream between and including author and reader is looking to maximize profit (or minimize cost). If a transaction is a zero-sum game, then when one entity wins a bigger share of the pie, someone must lose an equivalent amount.

With the rise of eBooks one could argue that the size of the book-selling pie increased. People have bought more books, publishers are making record profits, and some authors are raking in millions. That expansion has either already ended or will end soon. Therefore, it is useful to view the author to reader transaction as a zero sum game. If Amazon increases its earnings from a single book, someone else must lose, but is it the author?

Depending on the transaction, Amazon can wear many hats, but primarily they are a distribution system. A reader orders a book on Amazon and some short time later it appears on the reader’s (either physical or electronic) doorstep. Their purported deal with the reader was clear: we make it convenient for you to find what you want (we’ll even suggest it to you), it will be relatively inexpensive to buy from us, and we will deliver it to you without fail.

As a distributor of books, Amazon makes its money through the discount it receives from the publisher for placing the publisher’s books in Amazon’s “store.” This is the reason for their current battle with Hachette. Amazon wants a bigger discount than it currently receives on eBooks. They are using physical books as the lever. Why eBooks?

Because right now publishers make much higher profit margins on eBooks than they do on print books, and Amazon wants a larger slice of that profit. Authors think a larger proportion of that profit should go to them. Publishers don’t want the profits to go to either party. Recall that large publishers only reluctantly changed their “standard” contracts to provide 25% royalties to authors on eBooks.

Anything that Amazon wins in this battle with publishers diminishes the prospects that authors will increase their royalties on eBooks. In choosing to use print books as leverage against Hachette, Amazon is directly cutting into sales Hachette authors would have otherwise earned.

Amazon has set itself up as THE marketplace of choice (and done a great job of it) and consequently many people will not realize Amazon has restricted their book choices. Not only are selected books unavailable, but even if they are available, Amazon can stop “recommending” them through their “other readers liked” or “you may also like” suggestions.

This is a battle between two parts of the transaction puzzle and consumers need to decide which has more value, Amazon’s distribution system or Hachette’s books. Publishers ceded online power to Amazon, and it will be interesting to see if they can grab some back. Unless Hachette can educate the public about how the tactics used by the normally "benign" Amazon hurt consumers, then Amazon is giving up little by restricting the books and Hachette and their authors are giving up a lot.

Amazon is not the only bookstore to restrict what books a reader can buy. Independent bookstores often refuse to carry books by Amazon Publishing (including their imprints such as Thomas & Mercer for mysteries, thrillers & suspense or 47 North for science fiction, fantasy and horror) because Amazon (unfairly they’d say) competes with them.

Amazon is not some monster as many blogging authors have proclaimed. They are a for-profit enterprise attempting to increase their profits. If publishers are to win this battle, they need to fight back by cutting into Amazon’s distribution power. Why not allow authors to sell eBooks on the author’s website, allowing fans to buy directly in whatever format they prefer? It surely would be easy to produce snippets of hypertext to allow direct transfer of the transaction to the publisher where a sale could link into their accounting systems. How many of JK Rowlings (even writing as Robert Galbraith) fans would buy directly from her—especially if the price were lower than they could get elsewhere as there would be no necessity of paying Amazon its cut? But I digress from the question of Amazon being friendly to authors.

If self-published authors are thinking this does not apply to them—it’s just a tussle between corporate behemoths and another reason to avoid traditional publishing—they should look no further than to what Amazon recently did to authors utilizing its Audible services for producing audio books. Amazon lowered its royalties paid for exclusive deals from a 50% to 90% scale to a flat 40%. For nonexclusive deals the royalties decline from a 20% to 70% scale to a flat 25%. Those changes clearly removed money from the author’s pocket and tucked it safely and securely into Amazon’s.

Amazon’s business model has been to initially gain market share even if that means incurring financial losses. While they dominate the market they (1) gather massive consumer data, which they can use (or sell) and (2) once they become dominant they can start raising prices to recoup earlier losses. The new royalty terms for Audible are still better than large publishers pay, but for authors, they aren’t moving in the right direction. How long before self-published Kindle books produced through KDP Direct suffer a similar fate? We shall see, but my guess is that Amazon will reduce those royalties as well.

Consumers ultimately will decide the outcome of the battle between publishers and Amazon. Even self-published authors should root for the publishers. If the publishers win, it may be possible to increase royalties on eBooks. The more Amazon grabs of the current profits, the less is available for authors.

Repeat after me: Amazon is not my friend, but I do have to learn to live with it.

~ Jim

Wednesday, October 6, 2010

Where’s the Jail Time?

Almost as soon as the most recent recession hit, I began to read stories about the illegal activities in the real estate market. The one story I haven’t read since then is about arrests of the hundreds, or perhaps thousands, of mortgage brokers who broke the law by fabricating data on mortgage applications to allow them to sail through the approval process. They collected their fees or commissions; the rest of us are paying the price.

In bringing up children one of the more important lessons parents can instill is that actions bring consequences. Yet when it comes to illegal activity in the business world, that rarely seems to be the case. Oh yes, I know companies are fined – big deal. I’m talking here about individuals paying the consequences. There have been notable exceptions: Ivan Boesky, Michael Milken and Martha Stewart come to mind. Yet where are the little guys that made this mortgage mess possible – the ones who knowingly allowed borrowers to fabricate income for example?

Since nothing much has happened to mortgage brokers in the last two years, I suppose I will be disappointed. However, with the newest revelations about individuals knowingly signing false affidavits as part of the foreclosure process, I am once again forced to ask the question: where is the arrest warrant?

Take for example, Jeffrey Stephen of GMAC Mortgage LLC. Assuming the allegations are correct (see for example STOPA Law Blog) I think Mr. Stephen should be arrested for false statements to the court. (I’m not a lawyer, so I don’t know the correct terms – the point is lying to courts is clearly illegal—that’s why they have to sign affidavits.) To the extent Mr. Stephen’s direct supervisor knew he was signing affidavits without proper verification, he too should be subject to legal repercussions and termination at the least. If at some level within the GMAC hierarchy someone really didn’t know what was going on, that person should also be fired for incompetence – they should have known.

Will this happen? I’m not holding my breath.

~ Jim

Wednesday, August 4, 2010

And the Band Played On…

In the last post, I talked about the future of the housing market. Today I want to look at the banking industry. To date the Federal Deposit Insurance Corporation (FDIC) has closed more than 100 banks. When the FDIC closes a bank, it finds another bank in strong(er) financial condition to take over the assets and liabilities. Since the closed bank was undercapitalized, usually the FDIC guarantees any losses over a certain threshold as part of the deal.

This process makes the entire banking system stronger and, in theory, should help promote future loans as more assets are available to strong(er) institutions.

Unfortunately, we’ve only seen the tip of the bank closing iceberg. The FDIC keeps an official list of distressed banks. Banks are included on the list based on a variety of characteristics including underperforming business loans, commercial mortgages and home mortgages. The official FDIC list of “problem” banks has increased from 416 in Q2 2009 to 775 in Q1 2010. (Note closed banks are removed from the list, so the number of banks in trouble has more than doubled when we consider the hundred plus already closed this year.)

There will be more. Banks must reflect the underwater nature of mortgages they hold; but if housing prices drop even a few percent more, it will drive an even larger percentage of mortgages under water. An estimated 14 million home mortgages are already underwater (roughly 30% of mortgages). Four million of those are underwater by over 50%. Surely these must either be restructured or foreclosed.

The total face value of all mortgages underwater exceeds $2 trillion. If the average of these mortgages is 25% underwater, that’s a half a trillion bucks. Every 1% decrease in prices leads to at least $20 billion of additional losses (and that doesn’t consider mortgages currently above water that will slip below the surface at various price declines).

In order for the economy to grow, we need investment. In order to have investment, banks must make loans. In order to make loans, banks must minimally feel a teeny bit confident in order to stop hoarding cash.

It’s clear to me this confidence is not going to come from looking at their mortgage portfolios.

~Jim

Friday, June 4, 2010

Shining a Light on the Hidden Costs of Extraction Industries

Weeks into the oil spill in the Gulf of Mexico we still don’t have a handle on what the final cost of the BP disaster will be. Maybe BP is large enough and a strong enough company that it can pay for all the damage. Maybe not. It is clear to me is we need an upfront mechanism for the extraction industries to prefund the possible environmental costs of their extraction.

To take another example, which happens to be closer to my home, Rio Tinto (and their subsidiary Kennecott) plan to open a hard rock (sulfide) mining operation in the Yellow Dog Plains of Michigan’s Upper Peninsula. Kennecott claims they will not pollute the groundwater. Their opponents point to history; no completed hard rock mining operation has NOT polluted the groundwater.

Since the mine will in all likelihood proceed (and until I am willing to give up using the minerals they will extract I can’t in good faith object to mines in general) I think the government should require Rio Tinto to post a multi-billion dollar bond to clean up any and all groundwater or other environmental contamination. If X-years (not being an environmental scientist, I don’t know how long it will take for the pollution to show up) after the mine’s operation there is still no pollution, the government can release Rio Tinto of their bond obligations.

Implementing this program will increase the costs of extraction, which will cause the minerals or oil or gas or whatever to initially cost more. It shifts the burden of the costs to the current users of the extracted material. Under the current regulatory situation, environmental costs are shifted to us years later in the form of Superfund sites, polluted drinking water, ruined saltwater marshes and depleted seafood stock. We always pay for the damage, it is only a question of who and when. I think the costs should be recognized at the same time as the natural resource is utilized.

What if the bond price is too high for one company to afford? They’ll have to form consortia. Big companies develop consortia all the time to share other risks, why not for environmental risks?

If we recognize the environmental costs of extraction while the material is being removed from the earth, we will develop a fuller understanding of the true economic cost differences between (for example) oil versus solar farms. As long as we need to use the natural resources we get from drilling and mining we will have the resulting environmental damage. Let’s be honest about the costs and account for them in a proactive manner.

~ Jim

Monday, May 17, 2010

Quality Service – It shouldn’t be so hard.

I’ll defer talk about budgets in order to discuss three recent experiences I’ve had. I am like a migratory bird, spending half the year in the Upper Peninsula of Michigan and the other half of the year in Coastal Georgia. Late last week I completed my migration to the north.

We’re off the grid and centrally located between multiple cell-phone towers, none of which provides us coverage. For several years I have had satellite internet provided by a well-known provider. When I went south, I put the internet on a vacation plan. I called them up several days before my return to give them a date to restart service. Turns out they can’t take advanced orders for the change back; I would have to call the day I wanted the service resumed.

So that’s what I did. When I tried to access the internet late the day of my northern arrival, it was no go. My computer could find the modem fine; there was some problem between the dish and the modem.

I drove 14 miles (30+ minutes) to where I can get cell coverage and reported the problem. It took several tries before the online technician (who based on her accent was probably in India) understood that I could not connect my computer to the modem and talk with her on the phone at the same time. She ran tests at her end, told me the problem was fixed and that if it didn’t immediately work to unplug the modem for 30 seconds, replug it and I would be good to go.

Not correct. Still no connection.

The next morning a provider to install satellite TV arrived on time for the scheduled appointment. He installed a new dish, gave me a new receiver, got to the point where he had to call the 1-800 number to activate the account and was stymied by the lack of cell phone coverage. Now I had anticipated this problem and emphasized that concern when I placed the order. The order taker said she understood and because of the lack of phone service she took me through my package choices and I determined what I wanted ahead of the installation.

The installer’s solution to the lack of phone service was to drive to his next appointment, promising to activate my account once he returned to cell phone coverage. Once he activated it, I’d have a couple of screens to click through and voilá – I’d be getting a picture.

Wrong.

An error message appeared. I tried rebooting the system and arrived at the screen requesting that I call the 1-800 number to activate the account.

So 14 miles and 35 minutes later I called each of these providers.

The satellite internet technician on the phone decided there was nothing they could do; they’d have to send a physical technician out. They would charge me for time and expenses. Keep in mind: The connection worked before they turned it off. It didn’t work when they were supposed to turn it on. I had all the same equipment, including the same laptop.

Oh, and I’d have to wait at least 24 hours to call back and be told a number I would then have to call to arrange an appointment.

The TV folks claimed I had made arrangements through a 3rd party, not through them (despite having their account number and installation number). The technician on the phone could do nothing. On a second call, when I reported the everyone-pointing-fingers-at-one-another scenario, she put me on hold while she talked with her supervisor. Finally, they said they would call me back within an hour to have a technician return to finish the installation.

An hour later no call; and I had to leave because my plumber had already passed me by (see third story below.) So I called the TV folks again to give them my partner’s phone number (she was driving north that day and would have cell coverage for several more hours.) All the TV phone guy could do was change the phone number attached to the contract; he had no access to the information from my previous call.

Now my plumber, Scott Oberlin, provided a different level of service. When I first called him to set up the appointment to reinstall the water softener we use to diminish the effect of iron ores in our well-water, he indicated he would either be out Friday, if his other work permitted, or first thing Saturday morning.

After I made my first call to the internet folks, I also called Scott to let him know I had screwed up draining the water last fall and had a leak in a ¾” ball valve, which I hoped he could fix. I left a message and crossed my fingers.

With my second trip out the next day, I called Scott to confirm that my message was understandable (a plumber I am not) and find out when I might expect him. He had gotten the message, had the part he would need and he expected to arrive early afternoon, unless his boss gave him another in-town assignment. Ten minutes later he called back—he would be delayed, an emergency call had just come in, but he’d be out by late afternoon.

In fact the emergency didn’t take as long as he expected and so he was ahead of schedule. He stopped when he saw my car parked at the side of the road (“This your phone booth?” he asked.) I gave him keys to the house while I was waiting for the return call that didn’t arrive from the TV people. When I got home he was mostly done with the work.

The differences? Scott never overpromised. From the beginning he knew his Friday schedule was not under his control. He hoped to get to me that day, but if he couldn’t, it would be first thing Saturday morning. When his plans changed, he immediately contacted me. He’ll get my business again.

We’ll see what happens with the internet and TV people. I want their services, but they both have competitors who might be more interested in servicing me. I’ll let you know how this works out.

~ Jim