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July 26 2012

14:00

The newsonomics of Amazon vs. Main Street

Order it on Amazon. Then run to your front door and have it handed to you. The news of Amazon’s same-day delivery blitzkrieg — first explained in depth in an excellent Financial Times piece — elicited a near-maniacal laugh among newspaper companies: What next?

Of course, the impact of Amazon’s move extends well beyond the further toll it may take on the ever-shrinking newspaper business — but that crater-creating possibility may well be the biggest news of a big news summer. Advertising — in Amazon-contested markets — will never be the same.

We’ve known that newspaper advertising revenues are in a deep, downward spiral — higher single digits this year, with early budget guesses showing the same for 2013. In the U.S., overall ad revenues are half what they were five years ago, down $25 billion a year from 2007.

Here’s what most hurts most about the new Amazon threat: It aims directly at the one category of newspaper advertising that has fared the best, retail.

Classifieds has decimated by interactive databases. National has migrated strongly digital. Retail, which made up of just 47 percent of newspaper ad revenues 10 years ago, is now up to 57 percent of newspaper totals. Now that advertising, albeit in just a few markets initially, will have to compete with Amazon-forced marketplace change.

Amazon, of course, isn’t targeting newspaper revenues. It’s targeting customers — selling more to current ones and engaging new ones. Further hits to newspaper revenue are just another unintended consequence of accelerating disruption of all business as usual.

The same-day push is built on strategies long in the making. Amazon knew its day of reckoning on its sales tax exemption would come. Like all big, smart companies with legions of lawyers and lobbyists, it delayed the inevitable, and with each delay, built market strength and cash.

Now the jig is finally up. Combine revenue-starved states and the late-arriving sense that Internet business no longer needs a societal jumpstart, and Amazon is being forced to charge sales taxes, though it negotiated their arrival with great agility. The exemption allowed Amazon an incredible price advantage, and many of us have been glad to take advantage of it. Not having to charge customers four to nine percent in sales in taxes (which land-based merchants couldn’t avoid) allowed it to provide lower prices.

Amazon knew this day would come. What the market didn’t know was that sales tax settlements would lead to Amazon quickly flipping its model. It had paid sales taxes in a few states, forced to do that in places it had warehouses. So it placed those warehouses close enough to customers (Nevada for Californians, for instance) to make two-day shipping a snap. Now, with the tax changes underway (it’s estimated that Amazon will be on the hook for sales taxes for half the U.S. population) , it no longer needs to selectively place vast warehouses in only a few states — it can place them everywhere and much closer to customers.

Today, if you’re in Baltimore, Boston, Chicago, Indianapolis, New York City, Philly, Seattle or D.C. , you can place an order and it the same day through Local Express Delivery. That becomes Amazon’s base program. It is now building out that simple concept with 7-Eleven distribution lockers and much more, city by dense city. Behind that new delivery service stands an array of back-end technologies, analytics, and logistics that far surpass what anyone else possesses. Even now, to get a sense, of what’s behind the evolving system, just check out the left-hand navigation on this page.

The program builds on the smarts of Amazon Prime, whereby 10 million Amazon customers pay $79 a year and get “free” two-day shipping. Same-day is just the next logical step, both for delivery of goods and deepening of customer relationships and selling opportunities — which, remember, increasingly include media (“The newsonomics of Amazon’s Prime/Subscription Moves”).

The unintended impacts of Amazon’s same-day push will be as intriguing as the ones we can foresee. Just for starters:

  • Will local advertising expand or retract? Retailing will be more intensely competitive, and anti-Amazon appeals need to be transmitted somehow, via smartphone, websites, print, community events, and more. Was SoLoMo just a dream, or is it now a counter-strategy? (Newspaper companies efforts to become regional ad agencies, ironically, may get a boost from the Amazon move.) Preprints, which may total as much as 40 percent of the $11 billion or so U.S. dailies take in as “retail,” will be a prime front here, one way or the other. While retail advertising impacts could be substantial, brand advertising may well become more important, as online buyers decide among brands in different ways.
  • Will newspapers be forced to accept still another death blow to their fortunes, as retail ads are further disrupted? The impact on print is up in the air. Further, Find ‘n Save, a fledgling newspaper-consortium-owned Amazon competitor finds itself even more outmatched as same-day delivery further trumps one of its key differentiations.
  • Will Google, with all its eggs in the ad basket, find unexpected competition, as Amazon further disintermediates advertising itself, becoming the first and only stop between “I want this” and delivery of the good? Will advertising itself be replaced to larger degree as manufacturers are forced to differentiate themselves within Amazon, maybe moving marketing spend there?
  • What will cityscapes and shopping centers of all kinds look like if Amazon’s plans succeed? Imagine a cityscape without big box stores, Walmart, Best Buy, and Bed Bath & Beyond? Impossible, you say? How about one without Borders, Tower Records, and Blockbuster Video, all of which have left hulking holes in the American suburban landscape. Nothing is safe from digital disruption; nothing, holy or commercial, is sacred. Optimistically, a couple of dozen communities are creating next-generation uses for these eyesores, as the big box reuse movement (good rundown and reuse wiki via Slate) has been unexpectedly spawned. Will big boxes, the spirit-sapping, wallet-supporting icons of our age of disenchantment, take the brunt of Amazon’s assault, or will it be smaller stores?
  • What might it do to employment? Will CVS checkers be replaced by more truck drivers and order fillers? Or is the future simply more robotic, as Amazon’s purchase of warehouse-product-picking Kiva Systems changes the supply chain? No, it’s not sci-fi, though it appears to be the year of the “robots,” as computers do everything from local “reporting” (Journatic) to filling our orders for toothpaste and printer ink.

Let’s take a first look at the competition, as we look at the newsonomics of Amazon vs. Main Street.

In one corner, there’s Amazon. Its strengths:

  • Quick findability, in your living room.
  • Delivery to your door, or near it, now “same day.”
  • Wide selection, often more than is available locally (but sometimes less).
  • Wide-ranging and increasingly deep user reviews.
  • Guaranteed satisfaction or easy return.

In the other corner, it’s Main Street. Its appeals:

  • Buy it now. Pick it up. See, buy, use. Ad veteran Randy Novak says that more than 80 percent of retail sales now come from areas within 15 minutes of a stores’ location.
  • The visual and tactile shopping experience; NAA’s Randy Bennett points to retailers’ role as “showcasers.” Then, there’s shopping as entertainment, plainly as much heaven for some as hell for others.
  • Habit.
  • Getting out of the house once in a while.
  • Support of the local guy.

Proximity here is fascinating. The local edge has long been proximity, that 15-minutes-away appeal. Now, Amazon counters that with 12 inches away (your nearest screen) and some number of hours, as Americans do their new arithmetic on buying.

Beyond proximity, there’s price. Yes, Amazon is acknowledging that the 20-year-long sales tax furlough it got is finally ending. It knows it will have to add that 4-9 percent of sales tax to its prices across the country within several years. So where will that tacked-on pricing put it?

Let’s remember that its world-class algorithms track competitors’ pricing in real time. After all, that’s been — often to Amazon investors’ chagrin — CEO Jeff Bezos’ strategy from the beginning: sacrifice profit margin for market share and growth. Its last quarterly report showed 1 percent net profit — on $13 billion of sales. Expect it to match or beat on many items, absorbing low margins, and maybe loss leaders to win market share from Main Street.

How much room, with tight margins, will Amazon have to maneuver? That could tell the tale here. Squeezing margins — lowering prices — will have one at least near-term consumer impact. If you’re selling the same vitamins, shoes, or dog food as Amazon, you’ll have to lower some prices to compete. The cautionary tales of bookstores and music stores, and now Best Buy, show that consumers don’t find a lot of sense in paying more locally than through the web.

As we consider price, the shipping fee comes clearly into view. With Prime, the innovation that paved this road, members don’t worry about each shipping cost. Pay once — that $79 annual fee that’s been remarkably stable — you get shipping “free.” Look for Amazon to embed free same-day shipping into another similar program, Prime Same-Day, for $99 or $139, or include it for anyone spending more than $500 a year, for example; we believe that Prime members may average $1,500 in annual purchases already. As with Prime and with Amazon overall, again, build market share for the long term, even at the risks of low profitability or even loss.

There’s a lot of nuance we’ll miss in the first passes on the topic, of which Farhad Manjoo had the best. This commercial initiative is aimed of course at goods, not services. It’s the goods-selling competitive and geographic landscape — think Amazon categories like drugs, clothes, toys, and electronics — that could be transformed. Services, like those that we use today — health care, restaurants, fitness centers, and, of course, coffee shops — would be unaffected. In an ideal world, we may have less time for mundane shopping and more for more fruitful activity. Or we may have big empty buildings, fewer community jobs, and less socializing. And, maybe people will have more time to read. We’ll probably see all these things happening at once.

Amazon, of course, just wants to make money. Yet, it has already, in part, disintermediated shopping itself. Expect it to be extend its Subscribe (interesting choice of words, right?) and Save program, wherein you get small discounts for getting regular deliveries of goods, like detergent, that you reorder over and over again. Expect it to try to change our mindsets from shopping to deciding and then letting it go, and getting it delivered without a second thought — changing the very notion of shopping.

With price differentiation now driven by algorithm, with ad offers driven by those with the biggest data, and now with delivery of our daily goods newly rationalized, it looks like those that prize news creation best continue to look elsewhere for revenue. That’s one of the reasons I’ve become increasingly enthusiastic about reader revenue. Yes, newspapers could repurpose their daily delivery systems here, to actually aid Amazon, but that seems like a real longshot. The technocrats of commerce, Amazon, Google, Facebook and Apple, are the biggest game in town — and increasingly, they want to be the only one.

Photo by Stephen Woods used under a Creative Commons license.

May 19 2010

15:30

Andrew Keen on why “the Internet is ideology”

Is the Internet technology or ideology? Is our media culture today really more meritocratic than it’s been in the past? And when we talk about the web fostering democracy, what kind of democracy, actually, are we talking about?

Worthy questions, I’d say. They’re ones that arose last night during a debate at the National Press Club — a debate sponsored by UVA’s Miller Center for Public Affairs, and centered on another question: Is democracy threatened by the unchecked nature of information on the Internet?

Taking the “no” position in the debate were the Personal Democracy Forum’s Micah Sifry and Wikipedia founder Jimmy Wales. Taking the “yes” were Farhad Manjoo, the Slate technology columnist (and author of the homophily-focused True Enough: Learning to Live in a Post-Fact Society), and Andrew Keen, author of The Cult of the Amateur.

Unsurprisingly, given the topic, much of the discussion tread ground whose trail is, at this point, well defined. (As Sifry noted, “When I was asked to participate in this, I was astounded that there would be anybody who would defend the notion that democracy is threatened by the unchecked nature of information on the Internet.”) Also unsurprisingly, while the participants’ contributions were uniformly smart, the most provocative comments came courtesy of Keen — gadfly, polemicist, “antichrist of Silicon Valley,” and, in this case, the debater who questioned the premise of the debate in the first place. (“I think the resolution is a little dodgy,” the Brit put it, British-ly.)

In that, Keen transformed what could have been an eloquent-but-musty debate — echo chambers, but, then again, diversity! homophily, but, then again, intensity! — into a lively exchange. And whether you agree with his perspective or (vehemently) oppose it, the ideas Keen discussed last night are worth consideration, as a countervailing presence if nothing else, as we navigate between the mass democratization of the web and the insistent particularities of American democracy. With that in mind, here’s a sampling of his commentary.

On the notion that the web can harm democracy:

It depends, of course, what you mean by democracy. Jimmy [Wales]’s definition of democracy was an anti-federalist position, a sort of an idealized, direct-democracy rhetoric which suggests (and I’m quoting him now) that “It’s all about the people deciding.” But of course at the foundation this country is a representative democracy, not a direct democracy, in which the federalists won over the anti-federalists.

The premise of democracy is not about the people deciding; it’s about finding educated, high-quality political figures who will make wise decisions about the community. So I think Jimmy is falling into the old trap of appropriating democracy for his own ends.

On the notion that the Internet is, fundamentally, technology:

One of the mistakes we make about the Internet is that it’s technology. It isn’t; it’s ideology. The Internet was built by people who questioned authority. The Internet is bound up in a fundamental assault on the notion of expertise, on what Jimmy calls “the mainstream media,” which includes shows like this, The New York Times, The Wall Street Journal. And the idea that representative democracy, experts — whether in media, in politics, in the arts, in legal affairs, in intellectual affairs — are unreliable and need to be replaced by what Jimmy calls “the people” is deeply dangerous.

What I most fear about the Internet — which…we all use; I’m as addicted as everybody else — is the way we take this technology, which has no center, is flattened, has done away with authority and expertise — we take this technology to prove the ideological, idealized theories of Jimmy Wales. The truth is, we need expertise, we need authority, we need to remind ourselves of the foundations of representative democracy.

On the web’s facilitation of a mass meritocracy:

I think it’s one of the fundamental illusions — or delusions — about this critique of mainstream media: that somehow, before the Internet, it was just the rich, the privileged, who controlled the media — that it was a racket. And then the Internet came along, and suddenly the people had a voice. And that’s simply nonsense. I mean, we’re all — the four of us are all — part of an Internet elite, which is no more or less of an elite than in traditional media. But I am very troubled with this idea of the Internet replacing a flawed meritocracy. It’s simply wrong.

On the Internet’s need of a new social contract:

Many people see the Internet as a right and not a responsibility. Jeff Jarvis, who I think we’re all friendly with, said the Internet is the next society. And he may be right. In the 18th century, when we were figuring out modern industrial society, we came up with social contract theory about rights and responsibilities. I think the same is true of the Internet. It’s a reality, for better or for worse. It is perhaps the central fact of social and political life in the 21st century. And it needs to be understood not only in terms of rights — of taking, of stealing, of getting it for free, and all the other problems associated with the Internet — but also one of responsibility.

On the distinction between democracy and an informed citizenry:

The core question, in my mind, about democracy is whether the Internet culture, this highly democratized media where everyone becomes and author, where we do away with the old structures of power, where we undermine the 20th century meritocracy and we replace it with this 21st century — what I would call, perhaps mob rule, and what you could call democracy — whether that would actually lend itself to the production of a better-informed citizen.

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