What’s ailing the Internet giants

As both a reader and a writer, this headline in The New York Times caught my eye over the weekend: “Plot Thickens as 900 Writers Battle Amazon.”

Michelle Graff michelle.graff@nationaljeweler.com

The article details the latest development in the ongoing row between New York-based book publisher Hachette and Amazon. Amazon and Hachette can’t agree on e-book pricing and, as a result, Amazon has been refusing pre-orders on books from the publisher and slowing deliveries when they finally are ordered.

Caught in the middle are hundreds of Hachette authors who are losing money. Because of this, more than 900 authors (most of whom are not even published by Hachette) banded together, drafting this letter to Amazon CEO Jeff Bezos that ran as a full-page advertisement in Sunday’s Times.

In a follow-up story, the Times reports that Amazon is locked in a similar struggle with another supplier, this one even bigger than Hachette: Disney.

Underlying this push-pull between Amazon and its suppliers is this basic fact: the Internet behemoth is bleeding. In the second quarter, its losses totaled $126 million, compared with $7 million a year ago.

It has cut its margins too thin with its rock-bottom prices and ubiquitous free shipping, and it feels brick-and-mortar retailers nipping at its once-untouchable heels, as noted by L2 in a recent study. Now it’s trying to put the squeeze on suppliers to correct its errors.

It’s really the only action that Amazon can take. After all, a company whose main attraction is having the lowest price on absolutely everything from books to diamond rings can’t raise them too much. What would set it apart then? It doesn’t offer any kind of physical experience--in other words, you can’t (yet) go into an Amazon store to see, touch and feel product before you buy--and it’s hardly the only retailer selling goods online with fast delivery these days.

All that ails Amazon is very similar to what Blue Nile is experiencing right now.

The Seattle-based online diamond seller, which made its name by undercutting traditional brick-and-mortar jewelers on engagement ring prices, recently had to lower its prices after passing higher diamond prices on to consumers put a dent in second quarter sales. (U.S. engagement ring sales fell 5 percent during the period.) The company will be certain that its pricing strategy is one element of the business that is “absolutely clear to the consumer,” CEO Harvey Kanter stressed.

While Blue Nile has had to adjust its pricing many times in the past in response to fluctuations in the diamond market, this most recent announcement

Banner will be right here …

raised an interesting question: How is Blue Nile going to set itself apart going forward?

Having covered this company for several years now, it is my impression that Blue Nile’s customers are quite price sensitive. They are shopping on Blue Nile because it’s, first and foremost, cheaper and more convenient.

But that’s not necessarily enough anymore. Brick-and-mortar retailers have become more competitive with their pricing and many are online now as well. So, how do companies like Blue Nile and Amazon continue to compete?

Ironically, the answer seems to be by mimicking the brick-and-mortar retailers they’ve pained for so long.

Blue Nile is displaying (not selling) its rings in two Nordstrom stores. When asked last week by an analyst about these displays, Kanter said: “It is a test. It continues to be a test. We are learning a lot of things … we are in a learning mode and we don’t really have a view of what will happen as we move forward. It is a test and continues to be just that.”

It is a test, but not just a test. It is an indicator that online retailers will have to offer more to keep up in this ever-evolving market.

Michelle Graffis the editor-in-chief at National Jeweler, directing the publication’s coverage both online and in print.