What Amazon's Ebook Strategy Means

This post, by Charlie Stross, originally appeared on his Charlie’s Diary blog on 4/14/12.

It seems to me that a lot of folks in the previous discussion don’t really understand quite what makes Amazon so interesting—and threatening, for that matter—to the publishing industry.

So I’m going to take a stab at explaining.

Amazon was founded in 1994 by Jeff Bezos. And today it’s the world’s largest online retailer.

I submit that, as with all other large corporations, you cannot judge Amazon by the public statements of its executives; they are at best uttered with an eye for strategic propaganda effects, and at worst they’re deeply self-serving and deceptive. Rather, you need to examine their underlying ideology and then the steps they take—and the actions they consider legitimate—in order to achieve their goals.

Now, first, I’d like to introduce three keywords that need defining before you can understand Amazon:

Disintermediation

is the removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly.

Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers bypass the middlemen (wholesalers and retailers) in order to buy directly from the manufacturer and thereby pay less. Buyers can alternatively elect to purchase from wholesalers.

It should be fairly obvious by now that the internet is an intrinsically disruptive force in traditional distribution channels because it makes disintermediation very easy.

Jeff Bezos recognized this very early on, and designed Amazon to be a disruptive disintermediary: to buy wholesale and sell retail, using the internet as a tool to reach remote customers directly. Initially Amazon relied on large warehouses, but as its database expanded they moved to just-in-time ordering, whereby obscure items would be listed as available but only ordered from the supplier when a customer requested one.

(So far, so good.)

But there are two other key aspects of Amazon that we need to understand.

 

Read the rest of the post on Charlie’s Diary.

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