Is Amazon destroying competition? Depends on your POV.


The publishing industry finds itself in the throws of monumental change, perhaps equal to or greater than the invention of the Gutenberg Press.  This ins’t hyperbole.  The greatest agent of change, the hero or the villain depending on your point of view, is Amazon.  I’m not an Amazon fanboy, though I might be considered a Kindle enthusiast.  I had a Kindle in my hand the day after Bezos announced it, where previously I had been contemplating the Sony Reader.  I’ve been following Amazon since the high flying ’90s as well as the publishing industry of late – and I think Amazon employs some pretty nasty tactics at times and gets away with being a bully.  That being said, it’s also subject to the same market forces that drive companies to success or failure every day in free and open markets.

Much has been made of Amazon’s hard tacks methods for squeezing suppliers, that is to say the publishers.  Recently the Author’s Guild blogger Victoria Strauss wrote an article called, The Authors Guilde on Amazon: Publishing’s Ecosystem on the Brink.  In the article Strauss primarily discusses two other articles, beginning with a piece in Businessweek about Amazon’s new chief for its own imprint, Larry Kirshbaum, and Amazon’s attempts to strong arm the publishers.  Strauss then holds up Barnes & Noble, once lambasted for destroying the local book store, as the last bastion of competition among the new world of book sellers (NYT article and Authors Guild article).  Both source articles focus on ebooks and ereaders, not physical books and local book stores.  Much is also made of the monopoly of Amazon in business-to-business transitions around books, much like a chicken distributor who is the only buyer of chickens in a local region.

So, there are a few key questions being raised:
  1. Is Amazon employing predatory tactics to wrest market share from competitors?
  2. Is Barnes & Noble the only thing standing between the publishers and oblivion?
  3. Is Amazon becoming a monopoly?
  4. What will the affect be on authors?
  5. What will the affect be on consumers?
  6. How can the publishing ecosystem (authors through book stores) do to react?

1. Is Amazon employing predatory tactics?
In a word, yes.  Are they doing it just to be mean and drive the publishers out of business?  No.  Do those action violate anti-trust laws? No.  In fact, the publishers and Apple may be the ones violating anti-trust laws by colluding to keep ebook prices low.  The EU is already investigating this issue and the US Department of Justice is considering the matter.  Both sides are looking at the long-term outcome.  Amazon wants to lose money selling each ebook in order to get more people using Kindles and used to reading books that way in addition to showing the publishers how it can be done while still making a profit.  The publishers rather make less money on each sale in the shor-term in order to keep the anchor price of books high in the mids of consumers.  To do so they employ the so-called agency model where they set the price and give Amazon a cut, which leads to them making less money per sale than they made in the wholesale model where they sold books to Amazon and then Amazon sold them to the public at whatever price it wanted.  This is similar to Walmart running a deal on books (or any other product) to get customers to use them and maybe buy other things while they’re at it.  When the iPad came out Apple wanted the publishers on board in a big way and agreed to the agency model.

Wielding Power
As the piece in Businessweek describes, Amazon played hard ball with the publishers in order to avoid the agency model.  They refused to sell Macmillian’s books in any format when Macmillian insisted on the agency model.  Here’s the deal, though: after a week Macmillian’s books were back on sale and using the agency model.  Amazon’s tactics didn’t work in getting what they most wanted: to set the price themselves.  4 of the other Big 6 publishers soon followed suit, Random House sticking with the wholesale model until last year, which meant their books weren’t available directly through Apple’s iBook store.  For all their spit and bile and negotiating position, Amazon’s power only went so far.
Today, new ebooks typically cost $12-$14 instead of the $10 Amazon wants to charge.  The publishers make about $9/book instead of the $12 they had been making.  The consumer and the publisher are both worse off (at least in the short-term, so the thinking goes) – but guess who gets the difference?  Due to the actions of the publishers Amazon now has more cash with which to experiment with their own imprint and other ventures.  The publishers have begun to experiment with prices across all the major ebook distribution platforms, determining the slope of the demand curve and the price elasticity for ebooks.  For giving up that cash they gain more control over their prices and to ability to experiment with pricing in order to learn about their customers.  Previously this information was known only to Amazon just like how other retailers like Kroger and Walmart know a lot more about their customers than the manufactures know.  Still, consumers are paying more and look to be paying more for the foreseeable future.  This also has the advantage, as the publishers see it, of preventing Amazon from competing on price with B&N and other brick-and-mortar book stores.

Pricing
Pricing below cost to win market share is a tried and true practice in American free markets.  Price wars between gas stations, software makers, clothing retailers, car dealers, and many other types of retailers occur all the time.  Typically they make the decision to give up cash in the short-term in order to establish themselves or get the consumer using and liking their brand.  In Amazon’s case they were not only taking market share from competitors but getting consumers used to a new method of content consumption – namely ebooks.  The case has then been made that these prices are predatory in nature, specifically meaning that they will drive the competitors out of business completely leaving Amazon a monopoly to then squeeze the consumer unrestrained by competition.  Can Amazon’s prices drive competitors out of business?  I believe that answer is honestly, yes – and they’ve already played a part, along with Barnes & Noble, in driving smaller shops out of business.  Consumers win, but a shop owner loses.  Her customers didn’t value her advice, immediate satisfaction, and selection of material for browsing over the money they saved and convenience they gained using Amazon or B&N.  I’ll address more on Amazon as a monopoly in part 3.
One issue Amazon is now facing is the issue of state sales tax, causing it to pull out warehouses in certain states and affiliate programs in others.  Amazon, itself, backs the idea of all (or most) online retailers collecting sales tax.  For an individual retailer to track each municipality’s tax rate and charge consumer that rate and then send it to that municipality is an incredible burden – the zip code isn’t enough, the city name isn’t enough, and tax jurisdictions can change based solely on the street number as well as from year to year.  Amazon might even be able to shoulder such an administrative cost, but smaller e-retailers couldn’t.  A mom & pop store today can sell across state borders without difficulty.  If they had to track sales tax it would be nearly impossible for them to do so.  As it is, e-commerce sites typically pay sales tax as if the transaction happened at their office rather than where the customer lives.  Yet, this ability to not charge sales tax automatically gives online retailers a small, but crucial, price advantage.  To force only Amazon to charge sales tax unfairly targets them.  To force all e-retailers to do so would put most out of business.  There is a solution to this problem in part 6.

Amazon Entering Publishing
If the publishers won’t play the way Amazon wants them to play, Amazon will just publish on its own.  That’s the effort Larry Kirshbaum has been tapped to lead.  Amazon entering publishing not only angers the publishers, but scares them like nothing before.  Not only is Amazon their biggest and toughest customer, but now they could be their biggest direct competitor.  Like Apple, when Amazon enters a new market its considered to already be winning, unless its going up against Apple and the iPad.  The industry has closed ranks, with even smaller book stores refusing to sell Amazon’s books, not to mention Barnes & Noble.  The competition in this case isn’t for consumers but authors.  The traditional publishers apparently can’t offer the kinds of advances they used to, but Amazon can.  Thanks to the publishers, Amazon is flush with cash.  Like all of its experiments, Amazon is prepared to lose money up front to see if something is viable.  The tactic isn’t predatory, its a reaction.  It’s business.  It’s not unlike a grocery store selling its private label brands alongside the brand name products, and cheaper too.
Will this result in Amazon being the sole publisher of books?  No.  Such an experiment will not run long enough or buy up every author out there trying to get published.  In fact, Amazon’s own self-publishing program has shown that the available supply of authors and book for publishers to buy far outstretches the demand those publishers have for new authors and new books.  Even if Amazon got into a position where all the top authors wanted to sign with Amazon, there would still be plenty of room for other publishers.  There’s just too many (good) authors.  I elaborate on what I think I publishers need to do about it in part 6.

Amazon and Content Creators
Kindle Direct Publishing Select (a.k.a. KDP Select) is the program through which independent authors can offer their self-published books for borrowing in the Kindle Owner’s Lending Library.  If you’re unfamiliar with this program it is another experiment – this time, into books as a subscription.  My favorite book subscription service is actually Safari Books Online, but there are others.  In Amazon’s case, users pay $79/year for free two-day shipping plus other benefits – including the Lending Library, if they own a Kindle or Kindle Fire.  It’s only one book per month, but it’s nice.  My wife and I used it to read the Hunger Games trilogy – one book at a time.  That freed up the $5 – $7 per book for spending on other books (we tend to buy indie authors too, so this actually results in two or three other sales).  The publishers and authors get paid as if we bought the book.  Amazon eats the cost.  For now.  They describe the service as a way to sell Kindles, and that may be true to a certain extent.  However, I imagine once the experiment shows that it either works or doesn’t they’ll change the program in some meaningful way (and likely separate from a Prime membership).  Independent authors who choose to put their books into KDP Select only get paid from a set pool of funds every month, getting a share of the pool corresponding to their share of borrowings.  The result is that they get paid a bit less than they would had they made a paid sale.  More controversially they have to agree to a 90-day exclusivity period.  During this period they cannot offer their book for sale, even for free, on any other site in digital format (physical is okay).  This means no B&N, no Smashwords, no iTunes, no selling it on your own blog or posting it for for free on your own blog.  This has some people telling all indie authors to avoid KDP Select.  The exclusivity is a burden, but it’s not predatory.  I’ll explain why in part 4.  Right now, I’ll point out that Android app developers using Amazon’s app store have been feeling ripped off quite a bit when their app is listed as the Free App of the Day.  Certainly, content creators need to weigh the costs and benefits of agreeing to anything with Amazon, or any other distributor.  Being free leads to a high sales rank, but does that result in higher paid sales later?  Your results may vary – and they may be astonishing.

The Product Advertising API
Amazon used to provide a great deal of information to affiliate web sites through its Product Advertising API (application programming interface).  For sure, the API is still there but each new update brings about more restrictions and less usefulness to the API.  This recently led Goodreads to abandon use of the API for pulling information about books.  Amazon’s actions not only hurt the affiliates, but hurt Amazon as well – particularly books only available on Amazon.  Some affiliates also have resorted to returning to the bad old days of screen scraping (parsing the HTML sent to web browsers) to gain the kind of information they used to obtain more efficiently (for them and Amazon) from the API.  Amazon’s stated reason is that the API is supposed to increase traffic to the Amazon.com site itself and they felt like affiliates were taking advantage of their data feed.  Seems like a baby with the bath water kind of situation to me.  This isn’t a predatory practice, or even really a bullying tactic per se – but it is annoying and does harm the community of book web sites on the Internet.  In some ways, this actually helps their competitors like B&N, though entirely inadvertently.


2. Is Barnes & Noble publishing’s only hope?
To this question, I say no – but their is pain involved.  Barnes & Noble is playing a game with Amazon, but one of defense and tit-for-tat.  The linked article compares their battle to a game of chess, but in chess if you’re only on the defensive you’ll lose every time.  B&N happens to be the next largest book retailer in the US, but it’s not the only player and its not that much smaller than Amazon.  For the 9 months ending on September 30, 2011 Amazon sold $5.3 billion of “media” in North America (books, music, and movies) and $1.9 billion in the 3 months leading up that date according to their latest 10-Q filing (about $60 million/month).  For the 6 months ending on October 30, 2011 B&N sold $3.3 billion total (online and off) and $917 million in the 3 months leading to that date according to their latest 10-Q (more like $50 million/month).  Both are big.  Both sell a lot more that just books, but you get the general idea.  The publishers like selling to multiple large retailers because it’s easier than selling to lots of little retailers or distributors (and they sure as heck don’t seem interested in selling directly to consumers very much, though many allow that).  Without B&N the publishers only way of pushing physical product is direct to consumers (who usually don’t know or care who publishers their favorite authors) or to other, smaller, sellers and distributors.  This would increase their administrative costs and drive margins lower.
Retailing is a hard business.  Customers want every new whiz-bang gadget, every new novel, every new fashion accessory, every new movie – and they don’t want to pay anything for it.  Some care about better customer service over price, but most don’t.  This isn’t a problem just for books.  Look at Blockbuster, losing ground to Netflix (until their unwise PR moves – a little different wording and a little different menu of offerings could have saved them a lot of grief).  Look at Best Buy, just about the last brick-and-mortar technology store standing, yet still in decline.  If customers aren’t getting served in your store with what they want, when they want it, at a competitive price – they’ll walk.  It’s that simple.  No matter how much they say they value having the local store, there’s only one real way to show how much that store is valued and that’s to choose to shop at that store – to pay the premium.  Starbuck’s doesn’t just sell coffee, they sell atmosphere.  B&N taps into that by putting Starbuck’s cafes in their stores.  There’s more they could do, however, to leverage their physical stores that they’re not doing.  Smaller stores too.  More on that in part 6.
However, when the industry talks about B&N as a savior, they’re talking about the Nook.  They’re also talking about the iPad and, to a smaller degree, about other ereader devices.  I’ll probably write about this later, but the shift to digital distribution of books is a part of this conversation and not be be avoided (since it’s digital – all or nothing – large swaths of the bits in a book on your ereader may be exactly as laid down on the author’s computer; ones and zeros uninterrupted between the hand of the writer and your eyes).  Consumers are adopting ebooks more and more, in large part due to Amazon’s success with the Kindle and B&N’s Nook.  The Nook, incidentally, is typically rated as a better device.  It just doesn’t have the same total benefit as the Kindle because of the mindset at B&N which doesn’t allow the Nook to fully thrive.  The Kindle, Nook, iPad, Kobo, Sony Reader, and various Android-based and Windows-based tablets can all view a myriad of file formats available from stores like Google’s ebookstore and Diesel.  Ebooks virtually guarantee that Amazon won’t be the only game in town.  Physical books take a warehouse plus staff to handle shipping, receiving, and managing the inventory.  Ebooks require space on a hard drive.  Amazon currently lists 1.2 million ebooks in the Kindle store, typically very small in size ( < 3 MB) – textbooks are larger.  All of the non-textbook ebooks available for sale on Amazon could fit on my laptop’s hard drive or even on my iPad.  That’s a low barrier to entry.  Low barriers to entry mean its easy for competitors to enter the market.  Do people only buy music from iTunes, even if they primarily use their iPhone or iPod to listen?  No, many people use other sellers or services.  Which leads to the next question….


3. Is Amazon becoming a monopoly?
By this point you can probably guess what I think about this question.  Amazon is no more in danger of becoming the only seller of books or the only publisher of books then Apple being the only seller of music or Netflix being the only way people watch movies at home.  Strauss agrees with Barry C. Lynn’s assessment in his Harper’s Magazine article that Amazon, already acting like a monopoly, kills competition (Killing the Competition: How the New Monopolies Are Destroying Open Markets).  In the chicken distributor analogy the chicken farmer only has one buyer for his chickens and has to take the price quoted rather than set his own price.  This analogy breaks down, however, because the publishing industry is, in fact, as if the transportation costs were virtually zero and the chicken farmer could sell his chickens to any distributor or grocery store in the country – not just his local one.  The local one might be the biggest, but it’s not the only one.  Consumers could go to the store or buy directly from the distributor.  Oh, and because he has “echickens”, he can sell an infinite amount to any distributor or grocery store.  I agree that a monopoly can destroy open markets.  The Harper’s article, however, seems to be more concerned with a cartel – a group of companies colluding to set prices and/or reduce competition (e.g. for rock star engineers in Silicon Valley).  Those situations should be dealt with swiftly by the Department of Justice.  Amazon, however, can’t join a cartel or become a monopoly and even if it did, it couldn’t maintain such a status.  Just suppose, Amazon did drive all book sellers out of business. monopoly In such a world Amazon would either leave money on the table or they would leave demand on the table.  Imagine a world where the only place to buy a book was at Amazon.com or from one of their retail outlets plus maybe a Walmart or something.  As I mentioned at the end of the last part, even if they didn’t already exist such a situation would cause other ebook online retailers to pop up.  It would even open the doors for new local book stores.  If Amazon charged more, had customer service like that of AT&T, or didn’t offer enough supply of physical books, then consumers would be clamoring for a choice, any choice.  The new scrappy start-up would enter the market ripe for change.

Monopoly pricing is a little strange around ebooks because the cost of the first copy is huge (between a few thousand and a few million) but the cost of each additional copy is almost zero – unlike physical product the marginal revenue never decreases and so the incentive is sell an infinite number. If Amazon charged enough to pay their employees, their rent, and their shareholders then that would leave some margin for a company with fewer employees, a smaller office, and one or two shareholders to enter the ebook market and make a profit.  With physical books you have to look at how monopoly pricing works.  The monopoly only sells an additional unit until the marginal cost starts to out pace the marginal revenue.  At that point their profit actually goes down if they sell more, so they stop.  This leaves customers wanting more product that the company is will to sell at that price.  Once again, the door is opened for a scrappier competitor with a different cost structure to enter the market and sell physical books at a lower price until marginal cost (wholesale cost + storage cost + sales cost + marketing cost + the opportunity cost of doing something else) equals marginal revenue.  In fact, this is basically what Amazon itself did when it faced off against Barnes & Noble back in the 1990′s.  Nobody but Jeff Bezos expected big things out of them.
No, back in the 1990′s we were convinced Microsoft was a monopoly and would ruin the software industry along with the Internet.  Nobody could compete with their desktop operating system, their productivity software, or their web browser.   Are you reading this with the free Internet Explorer that comes free with Windows? As of this writing 20% of browser hits come through Internet Explorer while Windows accounts for 84% of the underlying operating systems.  Back then we also wrote off Apple, whose desktops and laptops now account for 9% of Internet user operating systems.  Eastman Kodak once had a near monopoly on photographic film and other related technologies, inventing the digital camera.  Today, they’re on the verge of liquidation.  AT&T had a monopoly due to regulation.  When their industry was deregulated we had a boom of telecom companies.  There is still a danger in this area, however, due to the limit of spectrum imposed by physics and the FCC as well as the high capital costs involved in setting up cellular networks.  We also still have regional monopolies for cable companies.  Of course, today they compete with AT&T, Verizon, and satellite TV but they still don’t compete directly with each other.  Selling books isn’t like these capital intensive industries.  Before any one company gets too powerful in its industry to the point of forcing all others out, market forces spur change create openings for newcomers (what John Maynard Keynes called “animal spirits“).  Most monopolies that persist do so because they are either government run, like the state run liquor stores in certain states or nationalized industries, or they are government granted monopolies through regulation like patents or region licenses for cable companies.  If a company sells something that somebody else can sell (or buys something someone else can buy) then they’ll never be a monopoly without the other party’s permission.  Today’s ascendant company is tomorrow’s whatever-happened-to, like a product on the Gartner Hype Cycle.
A cartel, however, is a different matter.  A cartel conspires to keep prices at the monopoly equilibrium.  The most famous cartel is OPEC (Organization of Petroleum Exporting Countries) which conspires publicly to limit supply in order to keep oil prices high.  Even in OPEC, however, countries cheat – the price is too good and the excess capacity is right there, so supply is never limited as much as the countries agree too.  They also have a lot of new competitors like Canada, Brazil, and Russia.  The Big 6 publishers plus Apple may turn out to be another cartel – conspiring to keep ebook prices well above the price they would otherwise cost consumers right now.

Counter Example: Diamond Comic Distributors
I don’t follow this industry very closely – I only bought a few comics in paper format before I got my iPad, now I have several in digital format – but I buy them from Dark Horse, DC Comics, and Comixology.  I had never heard of Diamond Comic Distributors until I started researching this post.  In short: the comic industry, both publishers and retailers, have surrendered to Diamond and made exclusive agreements with them.  In doing so they sealed their own fate.  Diamond is a lot more like that regional chicken distributor.  Most comic books stores (an estimated 2700 nationwide) purchase from Diamond and if a new artist or publisher wants their work to make it to a store it has to go through Diamond.  Because Diamond has exclusive agreements it’s monopoly is protected.  Apparently, the DOJ looked into anti-trust charges against Diamond, but did not pursue them because they don’t have a monopoly on non-comic book distribution.  Shrug.  That seems like an odd way to look at the problem to me.  However, the DOJ has traditionally been less interested in anti-trust situations of business-to-business commerce rather than retail commerce.  How did it happen: Diamond bought up all its smaller competitors and signed exclusive arrangements with publishers.  The comic publishers decided to signed those exclusive arrangements and have themselves to blame for now having no choice left.  I’m sure it saved them money or guaranteed certain distribution – making sense at the time, but the long-term cost has been huge, particularly to the smaller outfits.  I believe, however, that this example does not set a precedent for the future of book retailers.  The primary difference is that Amazon is a consumer facing retail operation.  Even if Amazon followed Diamond’s example and bought, say Barnes & Noble and Books-a-Million, they would enjoy an exceptional command of the market only for a short time.  Such a company’s sheer size and inefficiencies would open the door for competitors.  Not to mention that, because these are consumer facing operations, I doubt the DOJ would allow such a merge to go through.


4. Affect on authors
Authors essentially want two things: to share their work and to be paid for it.  On one hand, because of Amazon, more authors are being read than ever before and established mid-list authors are making more money than ever before.  On the other hand, authors are increasingly finding a changed landscape and must adapt to it.

Self-Publishing
New authors like John Locke and got started solely through Amazon.  Already published authors like J K Jeter, Lee Goldberg,  David Gaughran, and J A Konrath have been finding new life for old books through self-publishing them and then by-passing the gatekeepers in traditional publishing by doing their new books themselves too.  To be sure, most self-published authors don’t make enough on their books to retire to a Caribbean island for the rest of their days.  The open market is a harsh mistress at times.  If a book’s not good or not being discovered, it won’t make sales and won’t get read.  Authors who don’t experiment with the promotion tools Amazon gives, don’t get reviews, and don’t have a stable of books which work to sell each other rarely prosper in this system.  For many, they didn’t write that one novel so they could quit their day job but rather just to get that idea they’ve had for years out in the open.  Others realize they’re making more money on their own than they ever would signing a book deal with a traditional publisher.  In an another article by Alexandra Alter of WSJ she highlights the career of Darcie Chan who realized she’d have to give up money (just in royalties on book sales) to sign.  Instead of signing with a publisher for her second book Ms. Chan told the publishers, “Go with God, we’ll sell the second book.”  Joe Konrath goes so far as to run some numbers and warn self-published authors not to sign with traditional publishers as the publishers get more desperate and start to see indie authors as their very own minor league.  Now Barnes & Noble has gotten on board with self-published authors through their pubit! service as well as Apple.  Before the Kindle authors had Amazon’s CreateSpace (founded as BookSurge in 2000) and other vanity presses.  But an author could never get wide distribution of their work using these services, though they could get some exposure through CreateSpace on Amazon.  In 2009 and 2010 the independent author movement took off like a rocket and never looked back.  If publishing companies have to compete for authors then they have to make the case that substantially their lower royalty rates and slow product release cycles are worth the benefits of curating (gatekeeping), editing, marketing, and printing books.  Authors get to decide for themselves and always will.  When comparing industry prevailing rates to Amazon’s rates a traditionally published author needs to sell 4.7 times as many books as the indie author.  It’s possible, but it may not be probable.  It depends on the book, the audience, and how effective the publisher’s marketing.
Authors also get to decide of they want to participate in KDP Select.  It’s another trade off the author needs to weigh.  Some authors sell quite a bit on other platforms – Amanda Hocking is a very successful self-published author who reported made 40% of her sales through B&N, prompting Dean Wesley Smith to ask why anybody would limit themselves to one market.  The reason is easy: most authors don’t sell jack through other online retailers, especially independent authors.  Giving up three months of selling one or two books through other ebook retailers is easy when it’s no more than a blip.  The reward for such a cost can be quite compelling as explained by David Kazzie in his article, How Amazon’s KDP Select Saved My Book or in Cheryl Kaye Tardif’s series on The KDP Select Experiment.  The borrowings count as sales and during this time the author can promote their book through giveaway.  In both cases, free pushes up their sales rank, landing them on best selling lists and the tops of their genre pages.  When their book returns to paid status or leaves KDP Select it makes a lot more paid sales than it did before (the previously linked article says 46 times more).  However, many authors are doing just fine selling through other channels in addition to Amazon and pulling out of those channels would cost them substantially.  For them, it’s likely a bad call.  I don’t know for sure, because I can still make the case depending on the actual numbers.  Authors tend to think more emotionally, however, and the analysis is left to their accountants, agents (which they no longer really need except in certain situations), or spouses.  That’s fine, though.  Maybe the cost, in terms of their desire not to be exclusive to Amazon, is greater than the financial reward.
Some people have also complained that KDP Select encourages authors to game the system, effectively creating spam books in order to make a quick buck.  They point to authors already putting up books which are nothing but plagiarized works or collections of other people’s blog posts or even just Wikipedia articles.  This is a very real nuisance in the indie publishing movement, but not a danger to or reason for avoiding KDP Select.  For users, paying their $79/year and only allowed to borrow one book per month, spending that chance on a spam book (thank you, samples) and even for a friend, is too costly.  It doesn’t make sense – there’s no incentive, therefore, it’s not worth worrying about.
BTW: For those Android app developers the case seems to weigh against agreeing to be the Free App of the Day, last I checked.  In the final analysis many developers found that subsequent paid sales just didn’t materialize.  This may be due to the smaller user base for the Amazon app store, but I’m not sure.  I don’t use it myself.

Traditionally Published Authors
These authors, who still make up the vast majority of authors and books sold each year, face a slightly different reality.  Some feel that most authors were never well served by the publishing industry, yet now this may be worsening.  Agents and publishers are being forced to focus on specific types of books more than ever.  They’re retreating somewhat and becoming even more selective, pushing more frustrated authors to seek their fortune on their own.  For most authors, the traditional route is still the only route for them.  Brent Weeks gives a good and reasonable rundown on the differences between traditional publishing and self-publishing and why using a publisher makes a lot of sense for him.   Looking around the industry, however, advances are lower because the publishers are settling for less and offering less.  In their agency model pricing they’re hurting authors as well by keeping prices well above what consumers want to pay in order to protect hardcover and paperback sales.  There’s two major problems with this: 1.) if the goal is to sell books, then the format doesn’t matter, and 2.) the high price further opens the door for independent authors and other books not sold by the publisher.  Publishers use hardback prices of ~$30 to capture the higher willingness to pay of readers who want the book as soon as it comes out.  That’s fine.  It’s quaint and likely unsustainable in the future, but if they can do it and make more money then good for them.  Months later, however, when the paperback comes out and the price for the ebook is above the price for the paperback then there’s a substantial problem.  There are too many good books at reasonable price points, both old and new.  Readers like me read 5 to 10 times more than we used to thanks to ereaders.  The ability of the sample to convince me to buy the book is inversely proportional (runs the opposite direction) to price.  I only spend $10 on a book if I really like the author and really enjoy the sample.  More than $10?  I typically don’t buy those even if I absolutely love both the author and the sample (but I still give them the chance, waiting for the price to drop).  If I’m merely intrigued, well – I have more than 200 samples on my Kindle to choose from and that author just lost a royalty.  Which, by the way, is typically only 15% to 20% on ebooks published by the Big 6 and their smaller rivals.  That’s pittance.  The equity almost entirely belongs to the publisher – for decades to come.  These authors need publishers who are hungry.  They need publishers to be scarred of losing quality authors; to be more agreeable in their contracts.  Where Amazon has hurt these authors is when the publishers realized how good ebook versions of old books were selling and stopped handed rights of out-of-print books back to the authors.  Now, those authors are stopped from self-publishing their back catalog as ebooks.
At the same time, authors want and deserve a book industry comprising of many retailers.  The more retailers, the more their book has a chance of being seen, so the thinking goes.  Unfortunately, the power to arrest Amazon’s rise doesn’t lie in the hands of the authors, but in the hands of the publishers themselves.

The Long Tail
I read Chris Anderson’s book, The Long Tail (dead tree version), years ago.  If you’re unfamiliar with the idea, the long tail refers to seldom bought items.  The “head” of the graph are the best sellers and blockbusters everybody wants to read.  The long tail is the classic reason for Amazon’s success, and B&N in some cases.  Amazon simply has magnitudes more “shelf space” than a physical book store can accommodate at a reasonable price.  Books, music, and movies which may only sell one or two units per month (or year) can be carried at little cost.  A physical store just can’t carry those items in an economically viable way.  In fact, a lot of books aren’t carried mere months after their initial release.  Those books, however, never leave the online stores.  The independent authors have found that the longer a book is out, the more money it makes - all their hits are “sleeper hits”.  This isn’t linear and it might take years to peak and level out – but it’s always there.  Mid-list authors and prolific authors are finding this to be particularly true – books of theirs that are no longer sold in a physical store, or even in a physical format, are making them enough money to live off their writing.  Even for traditionally published authors who may have a small audience, a company like Amazon helps them.  That pressure Amazon exerts affects B&N as well and encourages them to also maintain the long tail of inventory.


5. Affect on consumers
Thanks to Amazon consumers have more choice and lower prices.  Even those consumers who buy books from Barnes & Noble, Walmart, Books-a-Million, the local book store, or Ebay benefit from lower prices because Amazon exists.  This doesn’t mean Amazon deserves their loyalty.  Amazon has to encourage and earn that loyalty on every purchase.  As soon as Amazon becomes too costly (in terms of price, convenience, emotionally, the benefits of using a competitor, etc…) then it will lose market share.  Because I own a Kindle and because I value independently published books I find that buying ebooks from Barnes & Noble is too costly for me.  Amazon not only understands this, they engineered this.  But Nooks are cheap, so are Kobo’s and Sony Readers.  In fact, many people consider the Nook to be technically superior.  Of course, in the 1980′s people chose Pepsi and New Coke in blind taste tests, yet Coca-Cola Classic is still the dominant drink.  Likewise, the HP Touchpad was technically superior to the iPad, yet we know how that turned out.  All of these cases come down to the intangible experience and emotional benefit of brands as well as the very tangible network effect of using the same product as most other people.  In all cases, the end consumers are the people driving companies to success or into bankruptcy.  New Coke did not provide the same benefit as Coca-Cola.  The Touchpad didn’t have the ecosystem and techno-chic cache of the iPad (yet, they still charged a premium because they only thought in terms of features).  The Kindle, today, provides an emotional and ecosystem benefit over the Nook despite its inferior feature specs.  But it is we, the consumers, who decide.
As discussed in part 3, in a world where only Amazon dominated the retail sales of books prices would rise and supply (of physical books) would diminish.  For awhile this would undoubtedly harm consumers.  Yet, the door would be open for the kind of company Amazon was back in 1995-7.  A scrappy upstart, assuming the publishers weren’t stupid enough to sign exclusive agreements with Amazon, would arise to fill the gap and give consumers better prices.  Amazon could lower prices in a predatory manner in order to destroy this new competitor – and they might.  In doing so, however, consumers would gain a benefit from lower prices.  As soon as prices went back up, the upstarts would come back.  This is the power of the Internet.  A local store could get forced out of a town and might stay out, but the global marketplace is just too large.  In the end, consumers keep winning because of lower prices and increased choice.


6. What to do about it.
The most important rule for publishers, authors, and book sellers to survive in an industry dominated by Amazon: follow your customers, for crying out loud.  It’s taken the music industry a long time to realize this and the movie industry is still fighting this concept.  Technology in general, and the Internet specifically, is an agent for consumers being able to consume they media they want when they want it in the format they desire most.  As consumers embrace change, those that sell to them can either adapt and thrive or play rear-guard and slowly dwindle to irrelevance.

Don’t Fear the Ebook
Ever watch Star Trek: The Next Generation?  Piccard was a pretty avid reader and loved hard bound books.  Did he have a 300 year old copy of a James Patterson or Tom Clancy book?  No, he had Moby Dick.  Maybe our pop culture books will be classics by then, but most won’t.  If he wanted to read popular books contemporary to him he did that on something that looks a lot like an iPad.  So did Jake Sisko, the son of Captain Sisko on Deep Space Nine and a budding author himself.  We’ve all assumed this is how we’d read books in the future, except for those special classics we hold on to (well, maybe not Ray Bradbury).  Publishers do not price ebooks to sell, fearing they’ll cannibalize dead tree book sales.  This is not only wrong-headed, but dangerous.  Ebooks offer new ways to present and link content.  Ebooks provide new efficiencies.  Ebooks provide a way to increase sales without increasing costs.  The point of a book is to deliver the ideas and story from the mind of the author to the mind of the reader.  Anything that gets in the way is a middleman and middlemen are always at danger of being outdated.  Most successful new businesses on the Internet are really ways of eliminating middlemen.  The physical book is a middleman.  It takes resources which could be used for something else (paper and wood, of course, have many many other uses) and uses it to transmit the idea or story.  Along the way, however, it requires resources to print it (labor, machines), resources to ship it (labor, fuel), and finally resources to sell it (marketing, transaction costs, more shipping).  The ebook only requires the resources to sell it and some very small storage costs.  They’re easier to carry – I carry a whole library with me when I travel, easier to read (my wife broke her arm but can still read her Kindle while nursing the baby), and easier to buy.  They cannot be sold, which I think is a problem, but publishers don’t.  Market forces may change that one day too.

Risky Business
In one sense, publishers already know all about risk.  They’re primary function is not unlike an insurance company – they take risk on a few authors and pay for their failures with their successes.  However, they’ve been getting more and more conservative and going for the “sure thing” like Hollywood goes after sequels and reboots, refusing to take risks and innovate, allowing themselves to be squeezed by Amazon in the process.  It’s often said in business that the risky thing you can do is to not take a risk.  Amazon, Apple, and Google all understand this.  They may have different strategies – Amazon tries small, controlled experimental products while Google throws everything at the wall to see what sticks – but the results are hard to argue with.  In opening up a physical store, Amazon shows that it continues to innovate and holds no red line sacred.  What ever works, works.  If the only way for Amazon to get the publishing terms it wants is to publish it themselves, then they’ll do that.  It might work.  It might not.  If it does, the publishers can blame themselves for that because it was in retaliation for their insistence on the agency model that led Amazon there.  Likewise, if physical stores don’t want to carry Amazon products, then they’ll try opening their own.  If it doesn’t work out, they’ll be able to figure out why and use that knowledge.  By starting in one location in their own backyard they can dip their toes into such an endeavor without a huge amount of sunk costs.
It’s time for the publishing companies and other book sellers to take some risk.  They need to do some soul searching and look at the core of what they do, and then how can they express that in a new, streamlined way.  This might mean getting rid of the printing presses.  This might mean putting aside their outdated model of expensive ebooks and pricing books to sell and encouraging a society of avid readers.  This might mean giving authors more favorable royalty rates.  This might mean embracing libraries where readers can fall in love with an author or series.  This will mean completely rethinking their entire business from the ground up and then comparing where they need to be with where they are.  They no longer have the luxury of minor adjustments or retrenchments in a vain attempt to hold on to market share and top line revenue.  That time has past.
No business has a right to exist beyond its usefulness to its customers.  Dean Wesley Smith has a good post on his blog about the costs of publishing (he’s been a traditional publisher as well as self-published author).  A particularly nice quote:
Let me put it this way as to costs. The price of the gas (for the 60 mile one way drive north to the binderies and back in 1990) for the van we used IS MORE than what WMG Publishing pays right now to put a collection of mine or Kris’s into electronic and trade paper edition.
Look at costs in new ways.  Can variable costs make more sense as fixed or step costs (fixed over a range of production) or vice versa? Why can small-time publishers get books printed for less than turning the lights on at the bigger outfits?  Publishers need to innovate their business model, they need to figure out a way to take more chances on more authors without simply putting out a “let us help you self-publish” shingle like Penguin did.  Outsourcing the risk to the author and then taking an equity stake in their book anyway is not the cost they should be cutting and a pathway to success.  Instead, consider a tiered system.  In such a system, the publisher still takes on the risk of editing and publishing the book but some books might only be distributed in ebook format.  Successful ebooks might get the full printed book treatment, particularly for collectors and luxury buyers.  They’ve been trying this now with self-published authors, but due to their less-than-generous royalty rates it takes a lot for a successful indie author to sign with a publisher (some do so just for the emotional benefit of seeing their books in stores and reaching a wider audience even though it means less money).  They could do what they’re doing with John Locke and allow the author to own their ebook rights while handling print books.  They might also invest in more advanced print-on-demand technologies and alliances which could lower the costs for smaller book stores.  They could look at direct sales and book subscription services.  They could think of a book as a partnership rather than a venture capital project as advocated by Robin Sullivan in her blog post, What’s wrong with traditional publishing and how to save it.  They could experiment.  Whatever they do, they need new thinkers who can look at the data and the landscape, who can get over old hangups, and who can make tough decisions.  People will lose their jobs, but that’s going to happen anyway.  It could be a relative few and create efficiencies or it could be everybody when the company goes out of business.

Book Stores
In some corners, physical book stores are doing a lot better this year over last.  Their plight might not have been so much due to Amazon and ebooks, but the 10% unemployment and general economic freak-out.   Marc Hogan does a really good job of asking if we still need the book store and how some are thriving in this environment on The Future of Publishing.   However, the tide will continue to turn over time and people’s habits will change.  It may be slower than we originally thought, but it might not – and it will happen.
Barnes & Noble and the other book sellers also need to start innovating and stop simply trying to blow raspberries in Amazon’s face.  That’s not working.  Sell Amazon’s books in the stores.  While you’re at it – make sure that the online experience is seamless integrated with the offline experience.  In this B&N already has done something right: customers can use the kiosks to search for books in the store.  This was one of the many things Borders got wrong.  I can look online at bn.com and see if a particular title is in stock at my local store.  Awesome.  Nook owners get free wifi, also nice.  You know what, though, most people own Kindles (perhaps 67% of the market compared with Nook’s 22%, according to this Bloomberg article).  Sell Mobi files to those Kindle users.  Make the Nook better than the Kindle, but don’t forsake us poor souls who own Kindles.  Sell to iPad owners, Kobo owners, and Sony Readers owners too.  You want to sell more books, right?  If I happen to own a Nook, and I’m in the store – give me an in-store discount on the ebook version of the paperback I see on the shelf.  Consider some of the issues raised in my post on an idea for a book store of the future, like offering indie author books in print with a print-on-demand machine.  For that matter, encourage indie authors to choose B&N first as advocated on The Passive Voice with programs that incentive and excite them.  Don’t worry about upsetting the publishers (including your own) because you’re now their savior, right?  If a self-published author is selling a lot through BN.com, even if it’s not as much as they sell through Amazon.com, it will be very hard for them to agree to 90 days of exclusivity.  Other authors too.  If they want to sell a certain product through Amazon exclusively, then sell the crap out of their other products and make them regret that decision.  Don’t block them entirely, because that makes it easier for them to agree to go completely exclusive to Amazon.  Don’t seal your own fate with stupid moves.
Stemming from the ideas presented in my previous post, smaller book stores need to look more closely at things like high quality print-on-demand and embracing ebooks sold through sites like Google Books on behalf of the local store as advocated for by Chris Walters - and some book stores and libraries are already there.  Book stores can no longer avoid innovation, people are getting rid of bookshelves.  Look at subscriptions and rentals or guaranteed buy-back values (given certain time frames).  Look at stores already publishing books themselves.  Ask your customers why they chose to come into your store.  Ask those that buy why they chose to purchase from you and not a competitor (online or off).  What’s your secret sauce?  You might not know.  You’re customers might not know, but it’s worth asking (in that case, consider conjoint analysis) Don’t fear showrooming, but seek to find ways of incentivizing those customers to actually buy from you.  There’s one area, however, that is completely out of control of the book stores and greatly reduces their competitiveness…

Sales Tax
Where I live, in a suburban community just south of Dallas-Fort Worth, the sales tax rate is 8.25%.  When I visit the local Half-Priced Books or Barnes & Nobel I pay the price on the sticker plus 8.25%.  For the most part, the cost of the actual books are the same or lower than what I find on Amazon, yet buying those local copies costs me 8.25% while buying from Amazon only costs me waiting a couple of days for the book to arrive.  On top of that, this same calculation is by everybody else in my state meaning a lot less sales tax revenue flowing into the Texas Comptroller’s office.  This past year that translated into cuts to school districts and other state subsidized programs.  However, as previously discussed – if online retailers were forced to collect sales tax it would be too burdensome and costly.  They simply wouldn’t be able to sell any products online.  If online retailers were to collect sales tax, which I actually think is fair, then they need to be provided with a service, funded by the states, which allows them to query for the tax rate based on the shipping address.  At the end of the quarter or the year the e-retailer would send a check to this central service which would then send it on the appropriate states.  Companies like Paypal and Google would throw in this service as part of their suite of services as well.  If the cost of collecting and paying sales tax were held too an acceptable level, then compliance would be high.  States wouldn’t lose out on the sales tax from online purchases (as well as mail order, which is effectively the same) and local book sellers wouldn’t be facing an automatic price increase just for being local.  Firms already exist to handle this service like ADP and Tax Data Systems.


5 Responses to “Is Amazon destroying competition? Depends on your POV.”

  1. DIRECT X TROUBLESHOOTING | COPIERNETEYE Says:

    [...] RANDOM SEED :: richard j. finn » Blog Archive » Is Amazon … [...]

  2. Jussi Keinonen Says:

    That was an excellent piece, found it from Konrath’s blog comments. I just recommended people there to come here to read it.

    I also sent to my Kindle your earlier piece about bookstores. I had a business plan a couple of years ago to solve the problem, will be interesting to see if there is something in common. Maybe not; I live in Finland so the business scenario is different in many ways.

  3. Richard Says:

    Thanks!

    I’m sure Finland offers some unique challenges to a physical book store. It’s my understanding, which may be incorrect, that a lot of Finlanders (Finlandians?) are fairly spread out. That would seem to make ebooks bought directly from Amazon a lot more appealing.

  4. Jussi Keinonen Says:

    Actually, we’re all “Finns”, but it’s never a last name like yours, which is likely of Irish decent. :) You’re absolutely right about the population density, but cities and towns have (or have had) bookstores so far, so very few people really don’t have any access. The challenge is small revenues and profitability.

  5. Richard Says:

    Believe it or not, I’m part Irish – but not descended from the O’Finns in Ireland, but rather German Finns. In the dictionary, the name Finn denotes a Finish immigrant or descendant thereof, so I figure I’ve got a bit of true Finn in me. Of course, I also have German, English (Anglo-Saxon – more German), and two tribes of Native American in addition to the Irish and Finish from way back. It might be fun to take a DNA test to see how true the family understanding is, though those only look at the X and Y chromosomes – capturing all your fathers and random other ancestors of your mother’s. I want something more comprehensive.