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Amazon’s POD Policy Threatens Its Value


The Downside of Exclusion



The Wall Street Journal got it wrong. Amazon.com’s recent ruthlessness won’t lead to higher profits.

In 2005 Amazon bought BookSurge, a print-on-demand company. Most books are printed in large batches; POD technology, however, allows publishers to print just a few copies of a book very quickly.
   
In March Amazon announced that sometime in the future, the only POD books it will sell would be those that use Amazon’s printing facilities. So on-demand authors who bypass the Seattle company’s printing press won’t have access to the 15 percent market share Amazon is estimated to have among domestic booksellers.
   
In an analysis in The Wall Street Journal on March 28, Jeffrey A. Trachtenberg wrote, “The move will likely generate significant profit for Amazon, which has evolved into a fully vertical book publishing and retail operation.”
   
I disagree, because such customer-limiting practices destroy consumer value. Some POD authors inevitably won’t submit to this threat of exclusion and therefore will have their products banned by Amazon. The company’s core business is being a Web middleman between consumers and producers, so anything that reduces the quantity of products it sells (even though the number of books printed by its BookSurge will increase) also decreases its value.
   
But even if every single POD author agrees to use BookSurge for books sold on Amazon, the company’s exclusionary policy will still destroy consumer value. Consider an author who had been using a different on-demand provider. This author probably got a better deal in price or quality, or else he would’ve freely gone with BookSurge.
   
By compelling this author to use BookSurge, Amazon will either increase the price or decrease the quality of many of its POD books — meaning Amazon customers will get a worse deal than customers of other online book providers and could take their business to those competitors’ sites.
  
 Amazon is sacrificing its retail operations to boost BookSurge’s sales. By weakening its core business, Amazon is daring rivals to steal away some of its $32 billion market capitalization. And by reducing the number of products it sells, the company is signaling loudly that customer satisfaction is no longer its overwhelming goal. Such a signal might well draw new competitors into the online bookselling market.
   
Amazon’s exclusionary tactics will also reduce the company’s market feedback. It now sells POD books printed by BookSurge and POD books printed by other printers. Customers may like one better than the other, which would be reflected in sales numbers and allow the company to modify the products accordingly.
   
But by selling on-demand books printed only by BookSurge, Amazon will have no easy way of determining how consumers would have valued each product previously. The quality of one product could increase and the other decrease, keeping overall sales flat, for instance. In this scenario Amazon couldn’t know one of its products was actually losing appeal with customers.
   
Finally, forcing BookSurge on POD authors will make it harder to assess BookSurge’s managers. Large companies such as Amazon often have trouble accurately evaluating their employees’ labors. One useful way of seeing how managers of a revenue-producing division are performing is to look at the sales they generate.
   
But Amazon has ensured that regardless of the quality of BookSurge, it will always have many customers, thus depriving itself of a useful management measure.


James D. Miller is an associate professor of economics at Smith College in Northampton, Mass. His latest book is Singularity Rising: Sur­viv­ing and Thriving in a Smarter, Richer and More Dang­erous World (BenBella Books), on sale in October.


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