The online business that I am going to compare and contrast is the online bookseller, Amazon, against any traditional bookseller. The question is really, how are there any traditional booksellers still in business? Amazon enjoys so many competitive advantages over the traditional bookseller and has so transformed the way in which customers think about purchasing books, that it is not long before the traditional bookseller no longer exists. The internet has provided a current example of creative destruction (Schumpeter, 2007, p.66,67) in Amazon.
Tax advantages
Amazon currently enjoys a tax advantage, which helps to lower the selling prices to the customers. The traditional booksellers have complained bitterly with regard to this advantage, but to date, to no avail. From Amazon’s help desk;
”The amount of tax charged depends upon many factors, including the identity of the seller, the type of item purchased, and the destination of the shipment. Items sold by Amazon.com LLC, or its subsidiaries, and shipped to destinations in the states of Kansas, Kentucky, New York, North Dakota, or Washington are subject to tax. For sales tax purposes, electronically delivered products (e-books, e-documents, and electronically delivered software) are considered to be shipped to your credit card billing address. No sales tax is charged when purchasing gift cards; however, purchases paid for with gift cards may be subject to tax” (Amazon, n.d. para 1).
Thus if you live in a tax-exempt zone, there is no local/state sales tax added to your order. This immediately confers a price advantage to Amazon compared to any traditional book retailer located in a State, and selling books is a commodity business, price matters.
Worldwide market
Amazon sells to a worldwide market, composed potentially of six billion individuals. Compare that to the demographic that a brick and mortar outlet is selling to. Further, the traditional bookseller has to maintain a physical presence in each demographic location to service that demographic. This requires a tremendous investment in plant and property, with all the local zoning laws to comply with. Should the traditional bookseller decide to initiate an online presence, they will cannibalize their sales in two ways: (i) same-store sales and (ii) online sales vs in-store sales. Amazon by contrast has one website that services all of their sales worldwide, although this has increased to add efficiency to logistics in individual countries. They compete only with their competition, not themselves (Feather 2000, p.30).
Network effects confer advantages
Amazon is open for business twenty-four hours a day, seven days a week, three hundred and sixty-five days a year. I can browse the books, and other items, at any time of the day or night that I choose. By contrast, I am limited to the physical book store by their opening hours. Further, I have to travel to their physical location. With Amazon, they are a few computer clicks away. As computer technology migrates to mobile technology, I can be anywhere.
The sale is digitalized and can be processed in seconds, debiting my credit card that is held online. Again sales can be fulfilled at any time, day or night. In the early days of online sales, the security of credit details was an issue. Credit card companies actually possess the legal resources to pursue fraud, far more effectively than the individual. Further, encryption technology is moving forward constantly, making online purchases ever safer. You are not exempt from credit card fraud just by physically holding your card. There is all manner of electronic devices that steal card details. You are actually safer, shopping online, where the Corporate interest aligns with your own.
Lower inventory levels
The need to hold physical inventory is vastly reduced and almost eliminated by Amazon. By contrast, the physical retailer must hold a vast inventory of books that are to be sold. Further book browsers, if they are not respectful, create incremental wear and tear damage on the inventory, necessitating Balance Sheet write-offs. No such problems for Amazon; the working capital freed up, allows substantial investment in systems facilitating sales.
The networking effect of successful internet ventures has conferred to Amazon buying power advantages comparable, or exceeding, the buying power of the large chain booksellers. I am referring to Barnes & Noble, which recently declared Chapter 11 bankruptcy (Feather 2000, p.54). This buying power, combined with low inventory levels, confers to Amazon a tremendous price advantage; one that has, as we have seen, bankrupted one of the largest physical booksellers in the industry. Walmart has provided the evidence conferred to a business through buying power advantages, and in economics, this is given the term monopsony. Unlike a monopoly, a monopsony can only benefit the consumer through lowering their purchasing prices (Fishman 2006, p.83).
Ability to browse, purchase at any time, and associated damage
One advantage touted by the physical booksellers is that you have your book immediately, you don’t have to wait. This argument however is full of fallacies. First, the assumption is made that the purchase can be made at any time of day or night, any day of the week, and on Christmas Day. This is clearly not the case. By contrast, I can execute a purchase at any time on Amazon. With overnight delivery, the net time from order, purchase, and delivery are potentially less from Amazon, than by taking the time to travel to a physical location to purchase your book.
Customer service
Another argument sometimes put forward, customer service. I have bought books from Amazon and physical booksellers. Without a doubt, the better service came from Amazon. Let me provide a specific example: a marginally damaged book, in the physical shop, no discount provided, the negotiation was frowned upon. By contrast, when I received a marginally damaged book from Amazon, an e-mail describing the issue, within four hours I received an apology and a 100% refund. No contest.
Every book that I have ever bought on Amazon, when ordered, when delivered, etc, is kept electronically on my account and can be accessed by me at anytime day or night. By contrast, the employee who sold me the book in a traditional bookseller, guaranteed, will have zero recollection, if in point of fact, they even still work there. Why is this an issue? If I can make these book purchases tax-deductible, I require accurate details. Amazon provides all the detail required.
In conclusion, as Amazon has proven over the past fifteen years now, the online model is dominant because it provides the customer with cheaper prices, better service, total flexibility, tax advantages, and none of the disadvantages. None of these advantages can be provided by a traditional bookselling model, for the reasons already outlined. Switching to an online model, due to the first-mover advantage and network effect advantages negate traditional bookselling models adapting or evolving to an online model.
References
Amazon: Help, Sales Tax Requirements. Web.
Feather, F. 2000. futureconsumer.com. Warwick Publishing. Chicago.
Fishman, C. 2006. The Walmart Effect. Penguin Books. Victoria, Australia.
Friedman, T. 2005. The World is Flat. Penguin Books. Victoria, Australia.
Schumpeter, J. 2007. The Theory of Economic Development. Transaction Publishers, London, UK.