NORTHERN CALIFORNIA INDEPENDENT BOOKSELLERS ASSOCIATION

HOLT UNCENSORED #129
by Pat Holt

book Tuesday, February 15, 2000:

QUESTIONING AMAZON.COM'S 'PROFIT'
'NONZERO' ON THE INTERNET

LETTERS

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QUESTIONING AMAZON.COM'S 'PROFIT'

I don't blame readers who say they're sick of hearing about Amazon.com and Jeff Bezos - I'm tired of 'em, too - but every once in a while a little humor helps us to see that the tide may be a'changing.

Over the weekend, the cartoon strip "Doonesbury" showed Mike Doonesbury worrying that because his company has "tanked," he might be seen as a failure.

"Are you kidding me?" his former boss Bernie tells him. "Mike, if you had lost a few hundred K on a local business, then you'd have the stink of death. But you lost $50 million of other people's money! That makes you bold, a player! In today's economy, nothing succeeds like big-time failure!

"Look at the chairman of Amazon.com! He lost $350 million last year, and he was Time's Man of the Year!"

Thus encouraged, Mike hopes that he is now "a promising failure." Bernie responds: "Promising? You're a HUGE failure! You should be flying!"

So let's turn back to the biggest and most popular failure in the history of Wall Street and see if maybe this time the emperor's clothes haven't become notable for their absence.

At last report, Amazon.com's declaration that its book division made a profit in the fourth quarter of 1999 was met by glowing reports from analysts and the press. This occurred despite the fact that Amazon.com "did not disclose the net margin or say how it achieved the profit," according to the New York Times.

One financial columnist who does not buy the Amazon.com line is Herb Greenberg of TheStreet.com. He did some homework and found other people on Wall Street who don't believe it, either.

"So Amazon.com says its book business is profitable. Oh yeah?" he wrote in his February 5th column. Tsk tsk. Writers who get belligerent in print should be careful of sounding too heavy-handed.

"The company's fourth-quarter earnings release was beautifully choreographed," Greenberg wrote. He contacted analysts such as "Jim Chanos of Kynikos Associates in New York, one of the country's largest short-selling funds, [who] did the math and came away with a loss for the book business - not a profit."

"[Chanos] got there by subtracting his estimates of cost of sales and Amazon's fulfillment costs. He then deducted estimated marketing and sales expenses as well as general and administrative expenses."

Analysts friendly to Amazon.com don't exactly disagree with Chanos' calculations, Greenberg explains. They say that "Amazon is telling us their definition of profit is before general and administrative costs."

This is called "contributed profit," according to the analysts. "Contributed profit? That's a new one!" Greenberg snorts. Chanos adds: "I think the company is being misleading, at best, saying books are profitable, because using my numbers they're only profitable on a gross-profit basis."

Greenberg thinks that Amazon.com's profit announcement, plus its recent deals with drugstore.com and five young Internet companies (that are supposed to pay Amazon.com more than $100 million a year), were a means of "dressing up" the company to "prime Wall Street" for "a speedy sale of additional stock, and analysts - in hopes of getting cut in on the deal - are towing the company line."

Chanos agreed: "Some sell-side analysts are selling their credibility down the river to see one more investment banking fee." Last week Amazon.com picked up $690 million in 10-year convertible subordinated notes.

Meanwhile, the company giveth: Amazon.com has also announced its new PEN/Amazon.com Short Story Award for unpublished writers. The first prize is $10,000. The winner will be chosen "by a distinguished panel of PEN judges, including David Guterson."

A reader sends this note: "Someone should write to PEN. What an insult to writers to link with Amazon. 'Whose bread I eat, his song I sing.' "

How true. If I were PEN I wouldn't fall for this, even though I agree that the charge of writers and publishers is to get literary work out to readers through all possible channels.

According to this charge, authors mustn't become engaged in "the bookstore wars." It's not their fight. They should appear in any bookstore that invites them, link up to every sales outlet that wants them, use whatever donors come forth for such things as short story contests, and so on. Literature needs to be shotgunned out so the widest-possible audience can then decide on quality and permanence.

But I dunno. Seeing Amazon.com as the Medicis of our time doesn't exactly sit well with belligerent literary folk when you consider that authors do know what is at stake (see LETTERS) and that Amazon.com is a zero-sum competitor (see article below): Every sale at Amazon.com takes away from independent booksellers who run real businesses - they make actual profits, collect and pay sales tax, support community literacy, work with schools and libraries, back local authors, host book clubs and writers groups, and on and on.

The independents' market share would make the difference between profit and loss (for real) at a place like Amazon.com, because once independents are gone, Amazon.com wouldn't have to spend as much money competing for customers. Amazon.com thus spends a lot of money making itself look just as community active and "customer-centric" and supportive of writers as your local bookstore.

So the PEN/Amazon.com Short Story Award seems healthy, but in these days of "the bookstore wars," the unseen costs are disastrous, and will be felt by all of us for a long time to come.

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'NONZERO' ON THE INTERNET

About 10 years ago I started walking around the Book Review department at the Chronicle looking for serious books on history, biography, science, philosophy and social issues - not to mention literary and midlist novels.

Where had they gone, I wondered? Every year the biography category seemed to be losing ground to books about the Royal family or American presidents and first ladies. History was being overtaken by war stories. Science books seemed to hit various trends (physics, astronomy), always to the exclusion of others.

This is my windy way of saying that a thoughtful and immensely absorbing book called "NONZERO: The Logic of Human Destiny" by Robert Wright (Pantheon; 435 pages; $27.50; buy online at http://www.schwartzbooks.com ) is currently making my hairs stand on end (I mean the ones at the back of the neck) because this is one of those books we don't see too often anymore.

It's thoughtful, eloquent, wise and humorous. It articulates questions one may been asking for a lifetime without knowing it and takes a shot at answers that are difficult to grasp but worth the challenge.

If you've ever wondered if human life on Earth means something beyond its practical existence, or if it's going in some direction, or "whether history's basic arrow will on balance make us freer or less free," this is the book for you.

Of course, human destiny has been the subject of many books, but Wright brings something different - the application of zero-sum and non-zero-sum game theory that I used to think was a lot of hooey but in this author's hands makes enormous sense. It's also a timely book in light of what he calls the "current chaos" of a world overtaken by environmental breakdowns, electronic revolution, stock market volatility and health crises everywhere.

Collectively, he says, our destiny is here: We are approaching "a culmination of sorts; our species seems to face a kind of test toward which basic forces of history have been moving us for millennia," and non-zero-sum game theory is just the ticket to understand how it happened and what's to come.

While much has been written about game theory as well, Wright's conversational style makes this very complicated approach to thinking and to life so accessible that we are inspired by it from the first pages. (I did skip to Appendix I, which explains the classic example of game theory called "the prisoner's dilemma," to catch up.)

He explains game theory early on: "In zero-sum games, the fortunes of the players are inversely related. In tennis, in chess, in boxing, one contestant's gain is the other's loss.

"In non-zero-sum games, one player's gain needn't be bad news for the other(s). Indeed, in highly non-zero-sum games the players' interests overlap entirely. In 1970, when the three Apollo 13 astronauts were trying to get their stranded spaceship back to earth. they were playing an utterly non-zero-sum game, because the outcome would be equally good for all . . . "

Non-zero-sum game theory grows so intricate and thorny that we'd find ourselves drowning if it weren't for Wright's bounty of anecdotes and exclamations ("Well, that's a load off my mind!" he says, knocking Pierre Teilhard de Chardin's "fuzzy and boundless" optimism).

For example, Wright explains that a notion called "reciprocal altruism" is inherent in human nature, "rooted ultimately in the genes," because non-zero-sum play is as much an unconscious practice as it can be a theory. The emotions of gratitude, generosity, empathy and trust for "those who prove reliable reciprocators" have meant so much in the evolution of the human species that it's as though "natural selection 'recognized' non-zero-sum logic before people recognized it," he says.

What an intriguing notion. One can't help but think of the Internet's contribution to all this - the way the Internet allows each of us to tap into a collective wisdom that is positive, reliable and trustworthy (communication and trust are essential to non-zero-sum logic, says Wright, thus making "chronic cheating a tough way to make a living").

But just as observers warn that the Internet may pull its own plug and cannibalize the very information its users seek, so does Wright take us through the history of human life on Earth by showing us that all is not hunky dory in non-zero-sum land.

Along the way he argues with scholars, kids around about everything from chaos theory to evolutionary psychology, and passionately advances his point of view about such things as two sets of DNA existing in our cells for the benefit of each other ("I'm such a romantic," he sighs, "always stressing mutual benefit").

Concluding the book with "non-crazy questions," Wright leaves us with a haunting notion us as the World Wide Web grows infinitely more complex and powerful: "Could a giant global brain become conscious?"

So hooray: True, publishing is a crapshoot, and publishers tend to believe the more commercial books make the gamble safe. But take a look at "Nonzero." Who knows, if enough of us read books like this, we might see more of 'em.

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LETTERS

Dear Holt Uncensored:

I seem to have opened up a hornet's nest with my criticism of Senator Boxer. I would like to respond to some of the issues raised.

I agree with all the remarks that the sales tax is an imperfect tax. It is regressive. It is (in some ways) arbitrary. It taxes tangible property, but not intangible property or services. I would be delighted if it were replaced with a more progressive alternative.

However this option does not appear to be in the cards. Voters have been notoriously unwilling to support other more progressive options. In California, local governments and public education has been eviscerated by tax revolts in opposition to property taxes. The legislature won't raise the income tax rate. It seems that the only tax which is politically acceptable is the sales tax. A percentage here, a percentage there, nobody ever complains. I believe that this experience is similar in other states. Thus, the sales tax has become the largest source of revenue for states and the largest source of discretionary revenue for cities nationally.

Sometimes the perfect is the enemy of the good. The notion that we should support the internet tax loophole as a means of ultimately fighting sales tax is an argument with feet of clay.

Until another form of tax can replace the sales tax, we should attempt to make sure it as progressive as possible, consistent and even-handed as possible and see that it does not favor one interest against another. Unfortunately the Internet tax loophole does all of these.

It makes a regressive tax more regressive by favoring the more affluent consumers which patronize the internet. It favors internet businesses over community based businesses, by allowing them to sell tax free. In so doing, it harms state and local revenue sources in order to give an unfair advantage to a single financially powerful special interest. As electronic commerce continues to grow, based partly on its unfair tax advantage over community based business, states will be driven to raise the sales tax even more in order to recover their revenue shortfalls; thus exacerbating these inequities.

The argument that we should ignore the internet tax loophole and concentrate on fighting the sales tax is a red herring which is frequently being put out by the internet industry and its surrogates. The internet industry desperately wants to retain its privileged status so it can compete unfairly against local business. That is the real issue here.

Barbara Boxer is behaving like any other venal politician. She is supporting the special interests of Silicon Valley against the general interests of the people of California. I hope readers will write her at senator@boxer.senate.gov and send a copy to Senator Feinstein at senator@feinstein.senate.gov.

Andy Ross
Cody's Books
aross@codysbooks.com

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Dear Holt Uncensored:

[Editor's note: After Chris Volk sent a letter to Barbara Boxer (see issue #128) opposing Andy Ross's stance, I asked, "is it your point that NO sales tax should be charged, ever? Do you think this is a possibility?" Chris answered as follows.]

While I personally am in favor of reducing or eliminating regressive taxes like sales taxes (which hit the poor at a much higher rate), I don't expect that to happen.

However, I am opposed to any extension or increase in the current sales taxes - and I would specifically like to see books, magazines and newspapers exempted from sales taxes (as food and medicine is in California, clothes are in some states). Remember most of the sales tax goes to the state - local communities have no control over it (except for the additional percentages they vote in). In fact, I am not sure if Amador county gets any sales tax income at all for my sales which I make to residents of Los Angeles or San Francisco, even though I collect and remit taxes on these sales - I know the extra 1-1.25% goes to those counties/cities, but I am not sure about the basic 1% county tax.

In Sacramento recently a small increase in the property tax was passed (I think $22 per parcel per year) with the funds earmarked for the libraries: since good schools and good libraries affect property values, I think this is a lot more appropriate way of obtaining the funds - and so I voted for this increase.

There have been some proposals floated around to exempt books from sales taxes - I think the energy of the American Booksellers Association and Northern California Independent Booksellers Association could be used much more effectively (and positively) to try to get support for these proposals. After all, California has been reducing the excise tax on cars two years in a row - look at the damage cars do, and look at the benefits books produce. With our current booming economy, with the concerns about education, etc., it should be a relatively easy sell . . .

Secondly, as more brick-and-mortar stores increase their presence on the web, they will be in the same position of collecting taxes on in-state sales but not interstate ones. I would suspect that the BookSmith, for example, has significant out-of-state sales from its website. This is especially true for those stores that carve out a speciality niche.

The point I was trying to make, however, is that Internet businesses are good for small towns, and rural areas - even if we didn't collect a penny of sales tax.

Chris Volk
Volk & Liams, Booksellers
http://www.bibliofind.com/vibooks.html

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Dear Holt Uncensored:

As much as I would love for all book sales to be exempt from sales taxes everywhere, I have a feeling that is just a red herring to shift attention from the real issues that you, Andy Ross and the ABA are driving home. Don't forget these Internet guys are good at smoke and mirrors (ala Amazon.com).

The fact is that in a year or two, there will probably be no such thing as a pure online order or a pure in-store order. Every order will be part Internet/part store. Most are right now. So in that bifurcated environment, what is taxable or non-taxable? How do you decide? What this Internet commission on sales tax is really saying is by the size of the retailer, let the little guy pay, but not the big chains.

A reader

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Dear Holt Uncensored:

As an employee of Powell's Books for four years, at four different stores, I was rather surprised to read about Janet Taylor's major complaint concerning the customer service at Powell's. Ms. Taylor seems to have a problem with the fact that, when asking for a particular book, she is given a slip of paper that includes the color of the room, the aisle number of the section, the name of the section and subsection, and the author's name, as opposed to being walked personally to exactly where the book is located.

If she were talking about a bookstore the size of Powell's location in the Portland Airport, or perhaps one of the smaller stores located about the city, I would not be so quick to take issue with her complaint. However, the fact remains that the Powell's to which Ms. Taylor is referring is a four-story, nine-room, multimillion-volume combination of buildings that contain nearly 70 thousand feet of retail space. Add to this the fact that the first two information stands people see when entering the store are located on the lower levels, and a problem in Ms. Taylor's logic begins to appear.

In all nine rooms at Powell's City of Books, there are information stands that are staffed nearly all day with people who are able to actually walk one to a certain book. In addition, there are almost certainly employees working in the aisles who know the sections like the backs of their hands and can pull out a requested book in a number of seconds. Most bookstores in their entirety are the size of one room at Powell's. The bookstores Ms. Taylor mentioned as her preferred places to shop are minute in their mass as compared to Powell's. Hence we have the reason that a person running an information stand located on the lowest level of the store is not able to walk each and every customer up three possible levels of stairs in order to find every book requested.

I do not know the extent of Ms. Taylor's former shopping at Powell's. However, I do know that at all four Powell's locations where I have worked, customers are frequently directed to books by living, breathing humans. This process may take a few extra seconds by walking to a certain room and asking a spare employee for help, but never has it been something that does not exist. Perhaps if Ms. Taylor had taken a bit more time to ponder these facts she would have not been so quick to judge Powell's as being nearly void of customer service.

Elizabeth Miller
Powell's City of Books

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Dear Holt Uncensored:

Re your mention that readers can buy "The Home Town Advantage" (Institute for Local Self-Reliance; 101 pages; $14 paperback) online at http://www.bookstore.com .

What, no mention that this URL leads to A Clean Well-Lighted Place for Books' website? It's a nice advertisement for her book but how about a mention of the actual store that carries it?

(Also, I'm glad to see you've done yet another 180 from your last position on self-published books. So now they can be "great" instead of merely a way of avoiding the professional editing process. Noted.)

Ed Dravecky III

Holt responds: I should have mentioned the site was A Clean Well Lighted Place for Books, and thanks for making the point. Just to clear up one point: I considered self-publishing a fine old American tradition and have reviewed quite a number of "great" self-published books over the years. But I do take issue with companies that try to exploit self-published authors by offering the appearance of distribution while leaving books on shelves (cyber and otherwise), going nowhere.

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Dear Holt Uncensored:

As a member of the American Society of Journalists and Authors, I was lurking around our listserv [and came upon] a few members [who] were asking each other how they could make more money becoming amazon.com associates (the organization's site itself is an associate, alas). I had once before taken the time to point out the cons that went along with the pros, but it took the following for me to jump in again -- and I'll put my answer afterward.

Message text written by Pat McNees, editor of "Dying: A Book of Comfort":

I wish there were a way that we could promote our books and at the same time promote independent booksellers, who are dying out fast and who are the world's best at "hand selling" books (personally recommending them to customers). I wish we'd find a way to link to a network of independent booksellers so that if I wanted to buy someone else's book I could click on the "indie" logo on their website and be told the name of the nearest independent bookseller who carries the book. I think it's in our interests to help independent bookstores, who maintain a position analogous to ours as freelancers -- struggling to make it on their own.

Reply by Susan K. Perry, author of "Writing in Flow":

I'm the person Pat McNees is referring to who mentioned on this list that I chose to remove my amazon.com associate link from my website. I did it at first because my publisher (Writer's Digest) wouldn't publicize my website (on its own site, for instance) if it was connected to amazon.com (or any single bookstore) due to that possibly (probably) irritating and antagonizing the independents who are so responsible, so often, for handselling our books and keeping them out there when the chains have already returned them.

Plus, I only made about $50 in four or five months of being an amazon.com associate - even though my book became a bestseller here in Southern California - and I figure that's way too little to sell my soul, sell out the indies, and possibly mix "art" and commerce in a way I can't quite justify. It's all much purer this way. Let the booksellers make the commissions. (It's all really small potatoes for most of us anyway, though the $2 commission per sale WAS tempting.)

I notice from the posts of others that some writers have had a whole other kind of experience, making in the "low 4 digits" by linking to amazon.com -- that's terrific. Some books and some sites may be more likely to achieve this kind of success, with lots of promotional efforts to publicize the site. Nevertheless, I'm kind of glad I made so little -- as it made my decision to unlink so much easier, and NOT linking to amazon.com, in spite of all they do for writers, feels to me more in congruence with my own value system.

One of these days there will be a way to link up with Book Sense, the online effort of a whole bunch of independents, but meanwhile there are a lot of fine independents who have sites and take orders.

Susan Perry
http://www.bunnyape.com

Holt responds: What a great idea! It will soon be possible (end of February, I hear) for authors to link to a newly revived Booksense.com where readers can click on to a list of all independents who have joined the Book Sense campaign of the American Booksellers Association. Within two months, a refinement will be available in which Booksense.com can provide the author with a few lines of code to allow consumers to search (by zip code) for a Book Sense store on the author's website, then click right to it.