With "Kindle Unlimited," Amazon.com, Inc. May Be Taking an Unreasonable Risk

Forcing authors of different styles and genres to compete for a one large, limited pool could be terrible for business.

Jul 21, 2014 at 4:05PM

Amazon.com, (NASDAQ:AMZN) may be inadvertently pushing top-name authors and publishers to do business elsewhere, Fool contributor Tim Beyers says in the following video.

According to a detailed report at CNET, the e-tailer's terms for Kindle Direct -- the self-publishing arm that's supplying so many Kindle Unlimited titles -- give Amazon broad rights to sell as it sees fit without first getting permission from authors. Thus, roughly half a million saw their work go to the new Kindle Unlimited streaming book service without any sort of heads-up.

Yet Tim says that's not the biggest problem. Those same authors are also forced to battle it out for a limited pool of funds, with payouts tied to how often books are read compared to the rest of the available titles. In other words, Amazon's scheme favors the most popular books. Why? Perhaps Kindle Unlimited is intended to surface the most promising indie authors and then sign them to new rich and exclusive deals.

We've seen these sorts of strong arm tactics before, and sometimes they pay off. Think of when former Apple chief Steve Jobs pushed the music industry to accept single-track $0.99 downloads as a means to combat piracy. Illegal downloads fell as iPod sales soared.

With Kindle Unlimited, Amazon may be taking too many liberties. Forcing authors from different genres to compete does little to help talented newbies whose work doesn't taste like the flavor of the month. Tim says it wouldn't be surprising to see them place future work elsewhere.

Big-name publishing houses are already doing their best to circumvent the e-tailer. Earlier this month, News Corp.'s (NASDAQ:NWSA) HarperCollins imprint started selling titles directly to consumers, reports The Telegraph newspaper in the U.K.

What should investors do? Watch for more signs of a publisher revolt as authors leave for alternatives such as Scribd and Smashwords. While that wouldn't do much to Amazon stock in the short term -- this is a diversified business, after all -- CEO Jeff Bezos has put considerable resources into establishing Kindle as respected brand in the publishing world. Tarnishing that name would be bad for business over the long haul.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and 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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