Copyright 2012 by John T. Reed

On 4/13/11, I wrote an article saying Groupon, Facebook, and Amazon had no sound business model.

I got criticized by those who think money and fame proves otherwise.

No, it doesn’t. I stand by my original analysis. Since I wrote that article, Amazon has moved closer to charging state sales tax, and Facebook and Groupon have gone public.

You have to have something that cannot be reproduced by competitors

My position is unchanged. A viable business model requires a unique competence that cannot be copied and reproduced by competitors. Much of the Asian high-growth business model is simply copying successful American or European products, in many cases illegally.

Amazon, Facebook, and Groupon have no such unique uncopyable assets.

In contrast,

Microsoft has the copyright on Windows and other software

Apple has patents on hardware and copyrights on software

Google has a secret search algorithm and massive economies of scale in data centers around the world; they manufacture their own servers and are now the largest computer hardware manufacturer in the world.

Amazon, whose founder and CEO Jeff Bezos was named Time Man of the Year in 1999, I have said repeatedly, is nothing but a copy of Sears Roebuck of 1899. They receive orders and mail products to their customers around the world. Sears got those orders by mail and telephone. Amazon gets them primarily by Internet, which is not a significant difference for the purpose of this discussion. Amazon is considered the premiere ecommerce business in the world. Not if they are Sears Roebuck 1899.

Amazon is your basic middleman

They are simply a middleman. The main thing going on there is receiving orders, taking the product ordered off the shelf, putting it in a mailing box, and giving it to the post office. Sears Roebuck 1899.

Do they have high-tech warehouse? Yes, but they’d better. Sears in 1899 had simple labor rules. If Amazon could get those rules, they would hire a zillion cheap human workers. The expensive high-tech warehouses enable them to avoid hiring human workers, who are a royal pain in the ass in the 21st century because of all the employee rights and mandates Democrats have given them. Those warehouse probably give Amazon few economies of scale compared to Sears 1899. They do not help Amazon against competitors. They help them against trial lawyers, FICA, ERISA, and a lot of other regulator enemies. They are mainly ways of avoiding hiring humans.

Does Amazon have any patents? Not really. Some reader last time gleefully pointed out that Amazon won a patent lawsuit about their one-step order feature. I knew that. It is not central to their business model. Plus, I have tried to use it. It does not work. In my case, whether I use one-step or normal, it always puts a credit card we cancelled years ago in as the automatic card. I have to change it in the normal order process. I cannot in the one-step. Patent that. It will not let me make the correct credit card the assumed one. It always forces me to correct the cancelled card number. Stupid. Incompetent.

Amazon’s disappearing sales tax advantage

One of Amazon’s big competitive advantages has been not charging sales tax. I pointed out that their profit margins are so thin that having to pay sales taxes would wipe out their profit. Some readers questioned my math. Well, we are all about to find out because Amazon has been forced to start collecting sales tax in state after state.

Their business model tries to be branded, but they are in a commodity business whether they admit it or not. People will buy from the cheapest source. When Amazon no longer enables people to avoid sales taxes, they will have to cut their prices by the amount of the sales taxes to remain the cheapest source. Since their profit margins are thin before paying sales taxes, where do they find 5% to 9% more slack for lowering prices?

I cut out Amazon and made lots more as a result

As I have also pointed out, no one needs Amazon. Manufacturers, like me, can all sell direct to the retail customer. People used to buy my books from Amazon. Now, Amazon searches only find overpriced used copies of my books. But Google searches for my books work just fine and my net income went up 257% the year after I cut out middlemen like Amazon and Barnes & Noble. You can read the details of all that in my book How to Write, Publish, and Sell Your Own How-To Book.

I am not the only one who has said this. I predict that Google and other search engines will reproduce the internal Amazon search capability or do it better. Other manufacturers like me will simply sell direct to consumers or businesses using the Internet and cutting Amazon out. There is some inertia to use distributors—a legacy of days gone by. It will dissipate as new companies with no legacy inertia start from day one without Amazon.


Amazon claims to be selling a lot of Kindles, but they refuse to say how many. No matter. All ebook readers will eventually be commodities like PCs or TVs. Amazon has tried to essentially turn books into the music industry where the devices that played the music—record players, cassette recorders, etc.—would only work on Amazon’s Kindle. As if RCA had tried to corner the market in records in the 1950s by trying to get a monopoly on record players so no matter whose songs you bought, you still had to buy an RCA record player to play them.

Not only did Amazon fail to do that, Apple, Nook, and so on will be supplanted by cheap or even free ebook readers.

Amazon competed with its Kindle not by making it a better way to read a book, but by browbeating publishers into selling the ebooks far more cheaply than hard copies of the books. True, we save the printing cost, but that is only about 5% to 10% of the retail price. Amazon wants somewhere in the neighborhood of 30% of the retail price. Screw them! Dell or some other commodity manufacturers will come up with cheaper ebook readers that will become the standard. Amazon, Apple, and Nook will abandon the product because they cannot survive in the commodity business, just as IBM abandoned the PC business years ago.

Since the initial all ebooks are $9.99, ebook prices have risen. They are now being litigated. Ultimately, the low prices are designed to make ebook reader companies like Amazon, Apple, and Nook rich. The world has little need to for ebooks. Publishers can sell their books real cheap without any help from the likes of Amazon. The future of the ebook is not yet clear, but I expect it will become a sidelight rejected by real authors and publishers because of its low pricing. It will be embraced by wannabe authors and used for public domain works and maybe achieve some success in the textbook business. Format changes will turn early ebooks into the equivalent of the 8-track cassette players and tapes of the 1960s. My first car, a 1968 Camaro, had one. Now, if I came across one of those tapes, I would have no way to play it. But I still have hundreds of regular books I bought in the 1960s and before.

Like I said, Sears Roebuck 1899

But they are so rich

One of my friends keeps teasing me because I have been saying this about Amazon since the late 90s and Bezos is still one of the richest men in America. Not at my house. I cut him out. The notion that Amazon is more competent at producing a high return on equity than its competitors is a colossal fraud.

Facebook is free. What more is there to say? Why would a company that “sells” its products and services for free be worth $100 billion? Or anything?

They say they will sell advertising. They wish. That seems to be based entirely on the somewhat private information you provide them: ID info, names of your friends, where you went to school, where you work, etc.

They have repeatedly gotten into privacy trouble. The problem is their whole business model seems to be invading your privacy and selling your private information to advertisers. They swear it’s not, but as one commenter said,

If you cannot figure out what the product that an Internet company sells is, it’s YOU. EBay sells you. Craigs List sells you. Google sells you. Wikipedia sells you. eBay, which also has no patent, copyright, or secret recipe, is getting more and more competition. Craigs List and Wikipedia do not try to make much money for selling you thereby discouraging competitors because it is very hard to sell a service cheaper than the generally free services of Craig’s List and Wikipedia.

Google adds value with their secret algorithm and massive server capacity.

Facebook sells you

In other words, Facebook has nothing but your trust. And every time they try to monetize that, they get in privacy trouble. Others have not yet replicated Facebook’s numbers of users, but I see no reason why they cannot. Google, Microsoft, Yahoo, Apple, and others could do the same or better. I also use Twitter and LinkedIn myself. Most likely, there will be a zillion Facebooks that segment the market into categories like Jewish singles, model airplane hobbyists, CFOs, and so on. Because of being more customized, there probably are not only few economies of scale in social network, there are probably diseconomies of scale caused by hampering the company’s ability to custom tailor the service by market segment.


Then there’s Groupon, the brain storm of a 30ish music major. It is an ancient idea. Promoting traffic to new businesses by offering extreme grand opening discounts. As with Amazon, all Groupon did was us the Internet to distribute coupons. In 1899, it was done by mail or hand-out flyers or newspaper coupons. Groupon has to hire and pay a ton of door-to-door salesmen, like some 1800s brush-selling company. Plus, the retailers to whom Groupon sells their service have learned that Groupon’s emailing list is mainly extreme bargain hunters, not normal customers who, if they like your pizza, will become repeat customers. The repeat business after giving away the store in the coupon promo stinks. So Groupon’s repeat business from merchants stinks.

Tellingly, insiders at both Groupon and Facebook were big on selling their stock as soon as they were allowed. That calls to mind the phrases fly by night and rats leaving the ship. They do not believe in the future of their companies. And if you bought into their IPOs, thanks, chump. I’m out of here—moving to another country—say the latest boy wonder IPOers.

IPO flops

Much has been made of the flops that Facebook and Groupon have been since their IPOs. I am not crowing about that. I did not predict that per se. I just said these companies do not have a sound business model. They can be and are being cut out where real money changes hands. And they can be duplicated by real competitors who actually know better how to be the low-cost sellers—like Wal-Mart.

The founders of these three companies are multi-billionaires. I am not. Their supporters will say that’s all that matters. No, it isn’t. I make good products that I am proud of them. I sell them at prices that are good values. Amazon, Facebook, and Groupon have done nothing but con the stock market. To the extent that any of them actually start making real profits, more competent competitors with sound business models will eat their lunch because they lack the necessary competitive advantage to succeed and remain successful. As long as they are solely in the business of selling stock, not products or services, they will produce many imitators with new twists on the now old dot-com theme. If, like blind pigs finding an acorn, they ever come across a way to make actual profits and adequate return on equity, they will be blown away in short order by truly competent companies like Apple and Wal-Mart and FedEx.

Amazon, Facebook, and Groupon are not businesses, they are buzzinesses.

Here is an email from a reader and my response:

I thought your latest article was rather insightful, but I do have one quibble with your assessment of ebooks. You have likened them to 8 track players due to their novelty, but are they not more like mp3's in terms of their disruptive effect on the marketplace? True, their native format promoted by Amazon probably will not last through the end of the decade, but there were multiple attempts by Sony and Apple to develop and source a native music code exclusively for their players. Market forces eventually led to the end of these endeavors. And while CD's still exist, they hardly constitute a bulk of music sales in today's age.

I think the same could be said of ebooks. The fact that Borders went bankrupt shows that there is little market for two large Brick and Mortar booksellers. Now, I'm sure you'll contend that much of that traffic could have been transferred to direct sales, but I think that the use of any portable device, be it a tablet, netbook or e-reader, is definitely leading to diminished sales of physical books.

John T. Reed response:

8 tracks allowed listening to recorded music in a car for the first time. That's pretty revolutionary. The "success" of ebooks is based entirely on their low cost in relation to printed books. That low cost is based entirely on a large business mistake made by publishers in caving in to Amazon's $9.99 price point. They are now trying to get out of it and being sued by Justice as a result. What Amazon is "destructing" is the trade book business, not the printed format. With no content other than amateurish $2 books, Kindles are not very useful. The public and publishers seem unable to accept the notion that sometimes the electronic version is not better than the old fashioned one.
VHS beat Betamax. They are both gone. Cassettes beat records. They are both gone. CDs and MP3 will be gone. Books, have been steady for 600 years. Printing technology has gotten much better. Brick and mortar book sellers have destroyed themselves via Crown books discounting and Amazon ebook discounting. People love book stores, but they will not have any soon because of the discounting.
Discounting is not a business model. A business has to have a competitive advantage over competitors. And they have to have a product or service that they can produce and sell profitably and take market share away from competitors while doing so. If Amazon is going to compete on price, they ultimately lose to the manufacturers. It is impossible for a middleman to succeed in a commodity business when distribution has evolved such that manufacturers, growers, and service providers can go direct to the ultimate customer.
One writer said Amazon aspires to be the world's best Internet middlemen. The phrase “Internet middleman” is a contradiction in terms. The Internet eliminates middlemen.
Amazon is a product of the crude notion that the digital and Internet versions of everything are better than the prior versions. But there is also the issue of content in the broad sense of all types of products. The digital and Net innovations are about content. Amazon has no content. They are superfluous. No one has any need for them but legacy guys who see them as distributors like stores. But they are not like stores because they compete with stores. Legacy manufacturers are scared of losing distributors. They need to get over that fast. Non-legacy new companies will start with no distributors, like Dell did. Legacy companies with brains like me kill all their distributors in a stroke switching to Net distribution entirely. Dell blew away powerful predecessors. I jacked my net income 257% by getting rid of Amazon and B&N, etc.
Read my lips: a book is a portable device. It does not malfunction. It does not become obsolete. You can read it in bright sunlight. It costs less than the Amazon commercial lady's sunglasses—by far. It is rarely stolen. It is easily replaced if lost.
I typically take two books on a trip in case I finish one. I often buy buys at book stores while traveling. My car typically has several books in it. My house has over 3,000. We cataloged them. Unless you are going to Mars and will not have commo with earth, you do not need a "device" that holds 50 books.
Other readers have said I am wrong about Amazon being a sound business model because they like to buy from them. SO DO I! That makes my point. We like to buy from them because the price and service they give is great. But a sound business model earns an attractive return on equity, not just popularity for giving away the store. Amazon has been described as a company that sells dollar bills for 90¢. Groupon sells $10 pizzas for $5 and leaves the pizza guy with just $2.50. This is called “buying the business.” You can buy a lot of business if you have a lot of money, but it is not a viable business model. That is an easy way to become popular. But it is not a sound business model. Amazon is in the business of creating buzz around their stock, They cannot compete with anybody on any product or service because their costs will always be higher than the content owners’.
Stores are better than Amazon in two ways: instant delivery and no shipping. You can instantly deliver by Net, but no one seems to be able to make money doing that (exceptions at very low price points like iTunes’ 99¢). Amazon has had the advantage of no sales tax, but that is going away. Amazon has greater variety, but that is partly fake because they were doing things like taking the list of all books in print and saying it was the books they had for sale. In fact, they were offering for sale zillions of books they could not get from the publishers like mine. See my web article on why I do not sell through them. But day-by day, the difference between searching for a book on Google and searching for it at Amazon is disappearing. That is from a consumer's standpoint. From the publisher's standpoint it is something like when I sold through Amazon, I made about 5$ or 6$ on a $30 book. When I got rid of Amazon, B&N, et al, I made something like $26 on that same book. So publishers and authors have enormous incentive to get rid of Amazon, by making it as easy to order direct as from Amazon. But the public's incentive to use Amazon rather than Google, is marginal, and falling when they start having to pay sales tax and when publishers simply refuse to let Amazon sell the book.

The final page of the 6/11/12 Fortune has an article by Stanley Bing. It disses Facebook and similar “startups” as more or less tricks designed to part passive Main Street investors from their money.


John T. Reed