Doing the math - Kindle Unlimited

Salvador Mercer

· #2 · Feb 20, 2015

I read somewhere that it may not be profitable for them but that they are 'seeding' the fund to make it sustainable longer term. For one thing they gave away a lot of free KU subscriptions as part of their promotions, I think for like 6 months so it will be interesting to see what they end up doing.

Yes, others should and will chime in that are smarter than me

Good topic.
SM

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B&H

· #3 · Feb 20, 2015

Because at its core, Amazon is a cash arbitrage business. If you read the everything store you'll know that Jeff is an incredibly smart wall street guy who was a protege of a boutique firm that did experimental trading using very clever math. Jeff knows there us no margin in retail, but there is the potential for massive cash throughput with generous 90 and 180 day supplier credit terms.

During the period between customers buying goods and Amazon paying its suppliers Amazon gets to sit on billions of dollars in liquid capital in multiple currencies. Unlike wall street investment firms and hedge funds, Amazon gets this capital interest free, they can then use it to trade on the markets where Jeff knows better than anyone he can get a better return on capital than almost any business on earth.

Apple do something similar, they have a whole division investing the billions they have in the money markets.

The more turnover Jeff has, the bigger 90 day capital mountain he has, the more investment returns they generate the more they can discount retail to squeeze out competition.

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Jim Johnson

· #4 · Feb 20, 2015

Martitalbott said:
I just don't get it.

If my sales are down from say 1000 a month to 500, their income from my books is sliced in half also, right?

So 500 times 35% of $4.00 (pretend sales price) is $700.00. That's a lot of subscriptions they have to sell to make up the difference, and I'm only one little guy. How can Kindle Unlimited actually be profitable for them?

Anybody? I know you guys are smarter than me.

I'm willing to bet the number of subscribers has no direct correlation to the amount of money in the KU/KOLL pot.

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Elizabeth Ann West

· #5 · Feb 20, 2015

There's been information in their shareholder reports about how the average Amazon Prime user spends $500 more a year on various items on Amazon.com than a non-Amazon Prime user. I believe that statistic is from 2013. There are 79 million Amazon Prime users. So Amazon's revenue for THAT program is $99 + $500 for each of those users.

Amazon uses the Prime program to promote their own imprint books (kindle first program), to draw traffic to the site. All of us here talk about our permafree books and 99 books as being loss leaders, well, to Amazon, WE are the loss leaders.

Ebooks, with their little to no overhead costs, are nearly pure profit for Amazon. Then, when you start leveraging those nearly pure profit products to bring people into your store EVEN more, you're really winning.

I am a KU user, but not a KU author. I have spent additional monies every single month in the program above my $9.99 because I discovered a book I wanted to read that wasn't in KU and was an Also Bought, especially on some non-fiction titles. Yesterday, I read the 9 Days Novel book, a KU title, then I bought James Scott Bell's Writing from the Middle because Amazon showed me that title (I'm a huge James Scott Bell writing book fan) and I didn't have that title. I almost passed because of the cover, but that's another story entirely. Anyway, Amazon got $3 in revenue from me they wouldn't have if I hadn't been in the store to grab 9 Day Novel book. They make at least $1 on that purchase.

It's like super stores that run specials on things people need all the time, if I can get you to come to MY grocery store for milk because my milk is $1 cheaper than the other grocery store in town, chances are you aren't ONLY buying that milk, you'll buy other stuff. Amazon has to keep us coming into the store more often, because if we're not on the site, not on our Kindles, not reading in the app, we aren't buying more books.

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Elizabeth Ann West

· #6 · Feb 20, 2015

Here's another possibility where it really costs them nothing. . .

Today is A Summer Shame's LAST day in KU. Yesterday, I had 4 sales on the book and 2 borrows on Amazon.com. Amazon's cut every time I sell a book is $1. So they MADE $4 yesterday. Assuming a borrow rate of $1.50 (higher than it has been), they're going to pay me $3 for those 2 borrows. They still netted $1 yesterday on that book with it being in KU.

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Gone 9/21/18

· #7 · Feb 20, 2015

Elizabeth Ann West said:
I am a KU user, but not a KU author. I have spent additional monies every single month in the program above my $9.99 because I discovered a book I wanted to read that wasn't in KU * * *

From posts here I get the impression some of the anti-KU people just don't accept this fact. I'm a KU subscriber, but that doesn't mean I've stopped buying books too, and KU is helping me discover new authors. I'm sure there are subscribers who refuse to read anything outside the program they have to pay for, but that isn't true for all of us.

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loriann

· #8 · Feb 20, 2015

I have also bought a lot more non-KU books since getting a KU subscription from the also boughts and recommendations based on my KU borrows than before.

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cinisajoy

· #9 · Feb 20, 2015

Quick thought Marti.
Your income did get cut in half. On the other hand how many subscribers in KU pay their $10 then only borrow one or two books. At Amazon's cut of $1 per book (based on 2.99 price), Amazon just made 8 or 9 dollars that they use to fund other books.

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dianapersaud

· #10 · Feb 20, 2015

cinisajoy said:
Quick thought Marti.
Your income did get cut in half. On the other hand how many subscribers in KU pay their $10 then only borrow one or two books. At Amazon's cut of $1 per book (based on 2.99 price), Amazon just made 8 or 9 dollars that they use to fund other books.

It's just like a gym membership. Some people will use it like crazy the first month or two then forget about it or only buy one or two books. I wonder what the statistics are on % of people who are voracious readers vs lazy or non readers. In my family, 3 of us devour books while 1 doesn't.

Amazon, like any company who offers subscription services, is making money, or they wouldn't do it.

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jvin248

· #11 · Feb 20, 2015

Bill Gates ran Microsoft on the model that once his overhead costs were covered, every copy of Windows & Office sold was pure profit with zero cost. Or he knew he could give them away for free to get more customers and other than a little cardboard box and some disks he could do it for practically zero variable cost. Compared with old industries like building cars where it's all a massive cost sitting there. Amazon is the same way with ebooks. Hardly any cost to store (whole ebook database fits on surprisingly few drives) and authors pay the download data fees.

As noted, Amazon uses the zero cost ebooks to draw in customers. They probably track 'also boughts' ratios for authors' books and promote them on the total sales dollars generated on other products (sell a grill, power tool, ring, guitar) plus the book itself.

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KelliWolfe

· #12 · Feb 21, 2015

Elizabeth Ann West said:
I am a KU user, but not a KU author. I have spent additional monies every single month in the program above my $9.99 because I discovered a book I wanted to read that wasn't in KU and was an Also Bought, especially on some non-fiction titles. Yesterday, I read the 9 Days Novel book, a KU title, then I bought James Scott Bell's Writing from the Middle because Amazon showed me that title (I'm a huge James Scott Bell writing book fan) and I didn't have that title. I almost passed because of the cover, but that's another story entirely. Anyway, Amazon got $3 in revenue from me they wouldn't have if I hadn't been in the store to grab 9 Day Novel book. They make at least $1 on that purchase.ing more books.

OK. Here's a random data point. Since KU started and my normal sales tanked I've had enough borrows to make up a significant chunk of the difference. My affiliate sales are down massively, though, as are follow-through sales from KU titles to my back catalog that isn't in Select. I would be interested to see if other people are seeing something similar.

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Cherise

· #13 · Feb 21, 2015

B&H said:
Because at its core, Amazon is a cash arbitrage business.

...there is the potential for massive cash throughput with generous 90 and 180 day supplier credit terms.

During the period between customers buying goods and Amazon paying its suppliers, Amazon gets to sit on billions of dollars in liquid capital in multiple currencies. Unlike wall street investment firms and hedge funds, Amazon gets this capital interest free, they can then use it to trade on the markets...

The more turnover Jeff has, the bigger 90 day capital mountain he has, the more investment returns they generate the more they can discount retail to squeeze out competition.

Thank you. I tried to explain this in a different thread, and I botched it. This is exactly what is going on. The Zon does not need to make a profit on any given retail transaction. They make their money via investments, just like insurance companies do.

Also, Jeff was up front from the beginning that books were just an appetizer to get people in the door, and he would bring in the real cash by selling higher ticket items on his website. Kindle Unlimited brings people in the door often. That is its purpose: to get readers in the habit of going to the website, where they can buy everything.

It worked on me. Once I saw how convenient it was to shop the Zon for books, I started buying everything but groceries there, rather than hunt for parking and pay for gas and go out in the weather.

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Marti talbott

Discussion Starter · #14 · Feb 21, 2015

KelliWolfe said:
OK. Here's a random data point. Since KU started and my normal sales tanked I've had enough borrows to make up a significant chunk of the difference. My affiliate sales are down massively, though, as are follow-through sales from KU titles to my back catalog that isn't in Select. I would be interested to see if other people are seeing something similar.

I believe a lot of us are seeing a drastic drop in sales these last three months and for me, it's getting worse. I can't blame it on anything specific since there are so many variables, but ads are not working the way they once did, not even BookBub. Of course that might be because more authors are using it now. It's a puzzle. I should have a new book out soon, and that normally helps. Meanwhile, sales in other bookstores are steady. Maybe a little down, but I'd be in real trouble without them. I don't have any books in Select, but am thinking of writing a short story specifically for that purpose.

Didn't mean this to be a personal vent. Sorry and thanks for all the answers. I hadn't thought about the market, although I should know better. It's what Banks do with our savings accounts. I've watched them work.

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Mike_Author

· #15 · Feb 21, 2015

B&H said:
Because at its core, Amazon is a cash arbitrage business. If you read the everything store you'll know that Jeff is an incredibly smart wall street guy who was a protege of a boutique firm that did experimental trading using very clever math. Jeff knows there us no margin in retail, but there is the potential for massive cash throughput with generous 90 and 180 day supplier credit terms.

During the period between customers buying goods and Amazon paying its suppliers Amazon gets to sit on billions of dollars in liquid capital in multiple currencies. Unlike wall street investment firms and hedge funds, Amazon gets this capital interest free, they can then use it to trade on the markets where Jeff knows better than anyone he can get a better return on capital than almost any business on earth.

Apple do something similar, they have a whole division investing the billions they have in the money markets.

The more turnover Jeff has, the bigger 90 day capital mountain he has, the more investment returns they generate the more they can discount retail to squeeze out competition.

You had my attention right up until you said that Amazon deploys its cash on hand into markets that "Jeff knows better than anyone else". Are you talking about (relatively) risk free treasuries/high grade corporate bonds or are you suggesting they are taking positions in riskier markets to chase yield/return? I'm not saying this doesn't happen, however the idea that any board of directors would allow a company to collect interest spreads (which are nickels and dimes relative to the total amount of cash needed) and then deploy these wafer-thin spreads into markets where there is genuine risk to capital? Depending on the market volatility, Amazon could wipe out their year's interest arb with a couple of percent move.

Can you point me to where you read this? Was it in the annual report as I would love to read more to clarify?Amazon using their cash flow to generate income is sensible and expected, however to then deploy that into "markets" seems insane (unless we are talking nice safe cash markets paying 1-2% or unless you are talking about venture capital ideas that are part of Amazon's future strategy - reinvesting their cash into future breakthroughs is their bread and butter...)

Hopefully you mean they are just collecting a percent or so of interest (however in this risk-free market, Jeff's finance background means diddly, or at best a couple of basis points)

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