Amazon's Third-Quarter Profit Down 73%, Stocks Drop
Amazon's Third-Quarter Profit Down 73%, Stocks Drop

Amazon picked last week -- July 3, to be exact -- to remind everyone that it is the low-price music retailer on the Internet, when it offered 20 current albums at 99 cents apiece.

Those 20 titles, which included Katy Perry's "Teenage Dream," Fun.'s "Some Nights," Regina Spektor's "What We Saw From The Cheap Seats," and Big K.R.I.T's "Live From The Underground," scanned a total of 519,000 units, an increase of 270% from the 140,000 they collectively sold in the prior week. Meanwhile, the digital version of those titles jumped 608% to 454,000 units from the prior week's combined total of 64,000.

The big winner during the week was the Katy Perry title, which jumped from 16,000 units to 80,000 units, of which 66,000 were from digital sales; it soared 21-2 on the Billboard 200.

Since it got into music, Amazon has been featuring a selective loss-leader pricing strategy to highlight its every-day low prices. But unlike big-box merchants that used to price the Top 10 at $9.99 at a time when they wholesaled for about $12.05, Amazon has a variety of deals, like the Daily Deals which features albums at $2.99, that continually driving their pricing message.

Record label and distribution executives see last week's pricing as Amazon reminding Google, its customers and music fans just who initiated pricing as a competitive differential tactic on the Internet. Sometimes it's the steady Daily Deal, and sometimes Amazon shocks the industry, like when it offered Lady Gaga's "Born This Way," for 99 cents on two different days during the title's debut week in May 2011.

Amazon Puts Lady Gaga's 'Born This Way' Again on Sale for 99 Cents Again

Amazon is using featured discount pricing in an attempt to lure customers away from iTunes. That strategy has been effective at least in helping to grow Amazon's MP3 market share, which in 2011 was 3.2% in overall U.S. market share, up one percentage point from the prior year's 2.2%. (Amazon's overall market share, including both CD and MP3 sales, is 7.93%.). But as much as it grows market share, it doesn't seem to be laying a glove on iTunes, whose market share grew to 38.23% in 2011, up from nearly 33% in 2010.

With that type of market share and growth, Apple doesn't have to resort to loss leaders.

But Amazon now has to worry about Google. Since its music store launched last November, the company engine has been dogging Amazon's discount pricing strategy, regularly featuring loss-leader pricing to drive traffic to its store. For example, in the second week after its launch, Google offered 13 frontline titles at $1.99. And then in March, it offered its "25-cent Play of The Day" deal on such titles as Lady Antebellum's "Own the Night," and Coldplay's "Mylo Xyloto."

Moreover the two merchants may be engaging in price matching each other, as some label executives report that Google featured the same albums as Amazon, while other sources insisted that didn't happen. On the other hand, when Google does a promotion, Amazon definitely does price-matching, but customers have to dig for those specific titles, as they aren't part of an overall promotion.

Google continues to feature loss-leader pricing as part of its overall strategy. For example, today, right at the top of the music store's home page, Google is running an ad touting top debut albums "from $3.99." Clicking on it will bring you to two pages of debut albums, including those by the Clash, Patti Smith, Boston, and Massive Attack, most priced at $6.99 with five priced at the advertised price. But if you don't click on that ad, right underneath it is a "best album deals" feature with 12 albums priced at $3.99 and $12 more at $6.99. That promotion consists of mostly hit catalog titles and one recent title, Mayer Hawthorne's "How Do You Do."

So Amazon's foray back into 99-cent territory is seen by label executives as a reminder that it too not only knows how to strategically discount, but also that it isn't giving up that pricing turf to Google -- at least not just yet.

"I don't think they would be doing this type of 99-cent stuff if Google wasn't constantly touting low prices," says the head of sales at one major label.

In what some see as a departure for Amazon, it immediately followed up the 99-cent sale with a July 5 e-mail to customers, through its AmazonLocal deal initiative, touting a $3 voucher off MP3 purchases in its store through today July 12. While Amazon spends a lot of effort trying to get shoppers at Amazon to visit its MP3 store, it rarely publicizes the overall store, let alone the music store, in mainstream media -- at least not the way it did when the Amazon site launched back in the mid-1990s with its radio spots about seeing whether enormous locations like the Houston Astrodome were big enough (it wasn't) to house its book inventory.

The closest Amazon ever got to tapping into widespread consumer awareness was with the Lady Gaga 99-cent deal, which in the end came off as a great publicity move.

How Many Millions Is Amazon Losing On Its 99 Cent Lady Gaga Sales?

As I pointed out on June 11 in Billboard.biz, for $3.3 million -- that is, $8.40 wholesale minus 99 cents retail times 443,000 scans during the two-day sale -- Amazon put itself on the map as a digital music merchant, in a way that the same amount of money spent on traditional advertising could never have accomplished.

Since then, Amazon has highlighted price discounts like its daily deal, and other daily offers like the ones it is featuring today, $3 CDs for $25 or country CD albums below $7; or the 25 country hit MP3 albums for $2.99.

But it's looking like the 99-cent promotions last week have generated collectively almost as much in sales -- if not in publicity -- as the Lady Gaga album did, although its hard to tell exactly what Amazon sold of those albums last week because Nielsen SoundScan doesn't break out sales of individual accounts like iTunes, Google and Amazon.

Still, it's safe to say a majority of the 454,00 units were sold by Amazon, since in the prior week download merchants only sold 64,000 units of those albums.

But also important to note is that Amazon is eating a loss on the promotion, although sources say it did get some price relief from the three majors that participated. According to sources, Amazon has put together a program for these pricing events that sees the labels selling them $9.99 list-price titles -- which usually carry a $7.00 wholesale cost -- for about $4.25 to $4.90, which means that Amazon is eating at least $3.25 for every unit sold. Amazon also has a higher wholesale cost of $5.60 for titles that have a higher than $9.99 list price.

(By the way, there were no titles from Sony Music Entertainment in the Amazon promotion probably because it is the only major to use the agency model in providing digital merchants with music. That means, among other things, that it controls the retail price. Even Google's $3.99 promotion has plenty of Sony titles -- but all of them were priced at $6.99, not $3.99, and since they were all catalog titles, Sony's low catalog pricing probably meant they didn't further discount the albums to Google.)

Usually, competitors tend to get upset when one merchant uses an outrageous pricing strategy like Amazon or Google are now occasionally known for. But a retailer once told Billboard about such Amazon pricing promotions: "I love it when they have a successful loss leader pricing deal. I can't stop laughing every time I think about how much money they must be losing."