Cover Story: Amazon: The Elephant in the Room
In 1455 Johannes Gutenberg produced his famous "Bible"—the first book printed with moveable type—launching what would become in subsequent centuries the modern publishing industry. In 1995, Jeff Bezos sold the first book through Amazon.com, launching what would produce in less than 20 years the end of the modern publishing industry.
Hyperbole? Perhaps not, when the earth-shaking influence of the e‑commerce giant's recent moves in publishing are taken into account. Amazon's continuing refinement of the Kindle e‑book reader, its offer to authors for royalties of 70 percent of retail, its splashy launch of Amazon Publishing, its forceful pursuit of exclusives for its various publishing channels and its rumored plans for brick-and-mortar bookstores all add up to an impact that suggests Bezos' legacy may be as significant 500 years from now as Gutenberg's is today.
Whatever the future holds, in 2012 any moderately wide-ranging discussion of the book business must mention Amazon. The tenor of that touch ranges from terror to outrage, and includes calm acceptance as well as generally positive conclusions about the e‑commerce titan's impact.
(Representatives from Amazon, as well as several other book industry insiders, declined to comment for this story.)
"Amazon is certainly the most powerful single force for change in the industry. I think that's a safe statement," says Mike Shatzkin, founder and CEO, The Idea Logical Co. Inc., publishing consultant, industry observer and influential blogger. "And they've gotten that way primarily through great strategy and great execution. But having gotten to where they are, they constitute a threat in some way to every other player in the industry."
A similar note of alarm is sounded by Michael Norris, senior analyst with Simba Information, a market intelligence organization in media and publishing. "I've watched billions of dollars wiped out of the music industry, which is now controlled by only a few huge players," Norris says. "I don't see how the book industry will be healthy if there isn't a diverse number of retailers committed to the product."
Generally, however, Amazon gets mixed reviews. Joe Wikert, general manager and publisher at O'Reilly Media Inc., is a good example. "From day one, Amazon has been terrific at finding more efficient models for the industry, and I applaud that," Wikert says. "It's some of their more recent practices that have me concerned."
The Problem With Pricing
One of the most powerful forces for change in the industry has been the switch from wholesale book pricing, in which publishers sell to retailers at a discount from the list price and retailers set prices for consumers, to agency pricing, in which publishers set the prices retailers can charge. This change mostly happened in 2010, but it arguably was a response to Amazon's increasing e‑book clout, and industry fear of widespread consumer expectations for low-priced e‑books. Amazon's move to set prices at $9.99 and lower for e‑book versions of hardcovers that listed for around $25 intentionally pushed Kindle sales, at the expense of other e‑book sellers' margins. Agency was seen as a way for other e‑book sellers to compete.
Shatzkin sees the agency model as benefiting large publishers because it lets them control pricing much better with e‑books than they could with print books, and also change the way the supply chain allocates consumer dollars. Because the agency model was adopted by five of the six largest publishers, Amazon also can be seen as the impetus behind the summer 2011 filing of a class-action lawsuit against Apple and the five publishing heavyweights—excluding Random House, which delayed adopting the agency model until early 2011—alleging anti-consumer price fixing. That lawsuit, along with several copycat class-action filings, probably won't be resolved for months and possibly years. But whatever happens with it, book pricing won't ever be the same.
Shatzkin says pricing has irreversibly been affected by Amazon's strategy of pricing books to acquire customers, rather than to make a profit on book sales. Amazon, he says, sees e‑commerce book-buyers as potential buyers of the consumer electronics and other goods Amazon sells much more profitably. While loss-leaders have been around since retailing began, and discounters like Wal-Mart and Costco have long been thorns in bookstores' sides, the scope and depth of Amazon's influence and discounting make this a different game, he says.
To the extent that agency is a response to Amazon's cut-rate pricing, it's not necessarily a bad thing, in Norris' view. "It's clear that the industry needs to have better control of the price of their own product," he says.
But control of pricing doesn't mean control of the future, at least when it comes to the retailers who put publishers' products into consumers' hands. "Amazon's pockets are deeper than all of their traditional book retailing competitors, so how long can those competitors keep up with this money-losing approach?" Wikert wonders.
Wikert notes that the e‑commerce behemoth is ratcheting up the pressure with marketing campaigns that go beyond price competition. Specifically, he references Amazon's December 2011 offer of 5-percent off for customers who checked prices on selected items using its Price Check mobile device shopping app while browsing at bricks-and-mortar retailers. "It felt like a mean-spirited attack at the brick-and-mortars who have become Amazon's showrooms," he said. "I'm guilty of showrooming and I'm not proud to say I've done it. But for Amazon to make such a big deal of it really turned me off."
Wikert also would like to see changes in the compensation model Amazon has described for its Kindle Owner Lending Library program, which lets Kindle owners borrow and read books for free while paying authors and publishers a portion of a fund capped at a set amount; for February 2012, for instance, it was $700,000. "They're paying most publishers a flat fee regardless of how popular their books are in the library," Wikert says. "That means both publisher and author income is capped. A much more equitable model would be where they pay for performance. That's how Safari Books Online and Books24x7 do it, for example."
Doing Digital Rights Wrong
Two issues that recur repeatedly are control of digital distribution and the need for more compelling products. Publishers erred when e‑books first started by failing to properly time the release of e‑books and print books, Norris says. They should have set up a system that provided a window during which shoppers only had access to print books before lower-priced e‑books became available, similar to the way paperback and hardcover releases are handled.
Perhaps even more important, in Wikert's opinion, is the technical-legal side represented by digital rights management (DRM). This could represent a way to counter Amazon's increasing dominance, if publishers can work together. "One of the biggest opportunities is for the industry to realize that Amazon is creating a lock-in strategy for their customers, and publishers have contributed to it by insisting on DRM," he says. In this view, the Kindle and its proprietary MOBI file format are analogous to Apple's closed iTunes system. "If publishers could break free of DRM, just like music labels have, Amazon's market dominance could be better challenged."
Soaring over legal, marketing, technical and pricing concerns may be the opportunity to come up with improved products that will render irrelevant, in readers' minds, who's selling it, and how. That, at least, is Norris' view. "It's up to the publishers to make their content valuable and package it in such a way that the consumer says they'll buy it no matter what the cost."
For authors who self-publish, Kindle Direct Publishing's (KDP) offer of 70-percent royalties is only one of several Amazon efforts to capture exclusive content for its e‑book platform. In addition, the company has directly sought to sign new authors and offer those who have previously self-published financial incentives for making Kindle their exclusive e‑book platform. Popular business author Seth Godin is one of the top names who has worked with KDP.
But Amazon's pursuit of e‑book authors stops short of being all things for all self-published writers, says Shatzkin. "Right now an author who is depending on Kindle Direct is giving up print in stores, and, depending on how deeply they get into Kindle Direct, they could be giving up e‑book sales through other channels," he says. "The trade-off is worth it to some people and not worth it to other people."
Some authors start as e‑book self-published writers and want to sign with conventional publishers, Shatzkin notes, while others establish themselves the old-fashioned way and then turn to e‑books, either directly with Amazon or through self-publishing, to increase their margins. And Barnes & Noble's Nook e‑book platform, while still well behind Kindle in market share, has to some extent been effectively countering the Amazon juggernaut by keeping Nook as a viable alternative.
A far more positive analysis comes from Wikert. "I think what Amazon is doing on the self-publishing side is terrific," he says. "Traditional publishers need to wake up to the self-publishing phenomenon and figure out how it fits in with their own models."
But Norris doesn't think Kindle Direct Publishing is all that big a deal. "Right now there's a lot of smoke, but I don't see much in the way of fire," he says. "The thing is, every time one of these 99-cent authors sounds off about how much money they're making, you have to realize that there are 10,000 or maybe more authors that can't get anyone beyond their immediate family to buy their books."
A New Publisher In Town
Amazon showed its intention to go beyond e‑books and confront publishing on its home turf in fall 2011, when it announced plans to publish more than 100 books including titles by the likes of Timothy Ferriss and Penny Marshall in both e‑book and print formats. The industry reacted quickly, as retailers from Barnes & Noble (which also has a publishing arm) to Books-a-Million, to Canadian retailer Indigo declared they would not stock Amazon Publishing titles.
This retailer boycott of Amazon titles, in Shatzkin's view, will make some authors today think twice before going with Amazon Publishing, since it will limit their physical book distribution channels. But he sees this as a temporary drawback. "That will matter less each day going forward," he says. "The percentage of sales that will be controlled by Amazon is going to keep going up."
Generally, publishing industry observers grant Amazon the right to publish its own titles, and compete with other publishers for authors. They also note that while it may hurt retailers, publishers and agents, it's good for authors, because another buyer in the market increases competition and compensation for their services. But it may not be a game changer. "I remember 10 years ago, everybody was up in arms when Barnes & Noble decided to publish books," Norris notes. "They had some pretty lofty goals about how much of their revenues they wanted to be from their books." Today, of course, Barnes & Noble talks much less about publishing than it talks about the Nook—and in January, put Sterling, the publisher it bought in 2003, up for sale.
A Role For Regular Retail?
The most surprising recent development with regard to Amazon is a persistent—as of press time neither confirmed nor denied by the company—rumor that the e‑commerce giant is planning a move into bricks-and-mortar retailing. As described by those who claim to have to talked to Amazon insiders, the stores would have no inventory, but would allow shoppers to order for later delivery books they've seen samples of in the flesh—a showroom model much like the one many booksellers feel they've been relegated to today.
Some observers think it's not likely. Shatzkin says that Amazon stock is priced as if it were a high-flying e‑commerce company, not a pedestrian retailer tied to heavy capital investments in real estate and physical stores. Although a prospective Amazon store is likened to Apple's highly successful retail stores, Shatzkin points out that Apple is a manufacturer of high-margin, high-tech devices, not a middleman of mass-market consumer goods like Amazon is, with the exception of the Kindle.
But retailing may have more appeal than skeptics think. Amazon surprised many by distributing Kindle through Target and other mass merchandisers, signaling that it respects the unique advantages of a physical channel. And Barnes & Noble's surprising success with aggressively featuring the Nook in its stores shows how a physical display can overcome consumers' reluctance to buy things they can't see and touch. Finally, it's worth recalling that most analysts thought Apple was making a big mistake by opening retail stores.
The Amazon Future
Beyond question, no matter who is doing the critiquing, the biggest effect Amazon has had has been on the book-buying public, which can easily find and order almost any book, for rapid delivery and at an attractive price. The effect on the industry all spins off of that reality. And what happens next, and perhaps far into the future, depends on how Amazon continues to hold and refine its position as perhaps the best place, all things considered, to buy a book.
Shatzkin is betting that Amazon will be hard to dislodge. Five years from now, he says, any book that sells a lot of copies will sell 80 percent to 90 percent of them online, mostly in e‑book format. "That's a lot of change, and we're in the middle of it," he says. He sees little online competition for Amazon, and a continued decline in the significance of Barnes & Noble's position as the dominant physical bookseller.
Or not. There are still lots of other channels besides Amazon, Norris notes. They include Apple's iBooks, mass marketers like Wal-Mart and Costco, Barnes & Noble and a handful of other large booksellers, and thousands of independents. And many of those outlets did well in 2011. He doesn't think consumers are done with the physical channel, and foresees potential for innovations that combine e‑books and bookstore shopping, perhaps by using scannable codes on physical books.
"In some ways the industry's challenge is where it's always been," Norris says. "To filter and package content in such a way that consumers find it valuable. Because there are so many ways for the consumer to amuse himself, there has to be a lot of hand-holding and selling. It's about doing that one book at a time to one person at a time." BB
Mark Henricks has written about business, technology and other topics for The Wall Street Journal, The Washington Post and other leading publications. He lives in Austin, Texas, and can be reached via his website, thearticleauthority.com, or at firstname.lastname@example.org.