Amazon's Dance With the Devil

In every competitive pursuit, participants look for ways to improve their odds. Wrestlers starve themselves to make weight. College applicants take prep courses to improve their SAT scores. Lawyers hire experts to enhance their arguments.

But there's a point in a competition where society acknowledges foul play. We call athletes who take steroids, cheaters; students who copy another's work, plagiarists; and witnesses who lie, perjurers.

What do we call companies that bend or break the rules?

Amazon.com (Nasdaq: AMZN  ) may have crossed that line with its latest move to undermine its bricks-and-mortar competitors, and it's not the first time the dot-com giant has engaged in shady tactics.

All the world's a showroom
Price comparison apps, which allow consumers to scan bar codes at local stores and check prices online, are nothing new. Last weekend, however, Amazon took this tactic one step further by offering consumers a 5% discount  -- up to $5 -- off certain items if they checked the prices at a store. One of the obvious benefits for Amazon is that the more information it has on competitor pricing, the more it can refine its pricing algorithm to beat competitors and attract consumers. Critics, such as U.S. Sen. Olympia Snowe, accused the company of "an attack on Main Street businesses," and retail groups denounced the offer.

Showrooming, as the practice of trying out products in a store and then buying them online is known, has long been a concern of retailers like Best Buy (NYSE: BBY  ) and Barnes & Noble (NYSE: BKS  ) , as well as independent stores, but Amazon's move shed an ugly light on that custom. What was once something a shopper might have done secretly, Amazon is now shamelessly promoting. Many have called into question the long-term effects of this purchasing strategy, and a recent study showing that nearly 40% of Amazon book-buyers checked out the product in a bookstore first only confirms retailers' fears.

The price comparison stunt has also sparked the ire of some authors, an important constituency for Amazon. In a New York Times column, Richard Russo took a survey of his fellow writers: Dennis Lehane called the move "scorched-earth capitalism." Scott Turow questioned the legality of such a measure, and everyone in the group condemned it in one form or another.

Books, strangely, were excluded by the offer, but the assault on that culture was palpable for the authors. Amazon had already established that reputation when it refused to sell Macmillan's books after the publishing house adopted a new sales model that would allow Amazon's competitors to sell e-books without having to take a loss on every sale.

The overriding sentiment among the authors appears to be that in mastering the business of selling books, Amazon is killing the culture.

E-books
In addition to the uproar over the price comparison offer, there's now a new way Amazon is squeezing authors.

Its new Kindle Direct Platform (KDP) Select program allows writers and publishers to promote books in Amazon's new lending library, and then receive a payment proportional to the books' downloads. There's a catch, though: Any books available through the program cannot be sold elsewhere, not on any other website or even the author's own personal blog. The intention appears to be to lure independent authors with a stake in a monthly jackpot, in December it's $500,000, who will then become increasingly dependent on Amazon for future sales since they've forgone the opportunity to sell through other outlets. One writer equates this with attempting to turn authors into sharecroppers.

Fire sale
Amazon roused more rabble with the release of the Kindle Fire, its answer to Apple's (Nasdaq: AAPL  ) iPad. The device has garnered a number of complaints both for its usability and its one-click purchasing, which causes problems because users may accidently purchase items, and children or anyone with access to it can order goods on the owner's account. The device comes with your Amazon account information preloaded.

One software engineer had purchased two Fires as gifts for his children but returned them after realizing there was no way to turn off the single-click ordering. "There was no password or pin, nor any kind of confirmation," he said. Amazon suggested he could "deregister" the device after each purchase, but that would cause his apps to stop working.

Even more concerning to privacy watchers, the Fire's browser will transmit all connections to Amazon. They'll have a record of everything you've done on the Web, what other stores you shop in, and what prices you're being offered. An Apple employee said that information was "What every store lusts for."

In part 2 of this article, I'll take a look at some of Amazon's questionable business practices from before the recent outcry. Stay tuned. Right or wrong, Amazon has been rewriting the rules of retail for years now, and with them they have brought in the largest transition traditional business has seen in years. They are just one of the leaders profiled in The Motley Fool's special free report "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." To check out the other company changing the future of retailing as we know it, Click Here Now—it's free!

Jeremy Bowman holds no positions in the companies listed above. The Motley Fool owns shares of Apple, Amazon.com, and Best Buy. Motley Fool newsletter services have recommended buying shares of Apple and Amazon.com. Motley Fool newsletter services have recommended writing covered calls in Best Buy. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On December 16, 2011, at 6:26 PM, sunk818 wrote:

    I don't know why Amazon is being vilified with the price comparison app. Even before there was an Amazon, people have been comparison shopping all sorts of products offline and online. With the advent of smartphones, the process has become more efficient. 10 years ago, a USA retailer called WalMart could import from China and sell to the USA. Today, you can buy directly from China. It is just the market making itself more efficient. If it was not Amazon, it would be me recording prices on a piece of paper and checking my computer when I get home. There's nothing new being done here... just more efficiency.

    > I detest and abhor the cheerleading against Barnes & Noble.

    > If there's one thing this country needs, it's *more* bookstores - not less.

    We can use more books, but I don't see a point in having more bookstores necessarily. We have the library. We don't need a private venture to be supported. As it is, even Amazon 3P (third party) book sellers are undercutting Amazon.

  • Report this Comment On December 17, 2011, at 3:51 PM, 1984macman wrote:

    @ sunk818:

    "We have the library. We don't need a privare venture to be supported."

    Yeah, and once upon a time Ronald Reagan said we could make a plastic copy of a Giant Redwood, so we should be able to cut them all down.

    You, sir, are a bona fide ignoramus.

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