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

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