PUBLISHED JUNE 2015
by Mike Shatzkin, Founder & CEO, The Idea Logical Company
When I was invited to join a discussion entitled “Amazon: Friend or Foe” in connection with this year’s London Book Fair, I thought first about three ways Amazon has profoundly changed our industry.
Although just about every publisher has headaches dealing with Amazon, very few could deny that Amazon is their most profitable account if they take sales volume, returns, and the cost of servicing into consideration. This fact is almost never acknowledged and therefore qualifies as one of the industry’s dirty little secrets.
Because it has consolidated the book-buying audience online and delivers to it with extraordinary efficiency, Amazon must feel totally justified in clawing back margin. It wasn’t their idea to be every publisher’s most profitable account, but since it is effectively replacing so many other robust accounts, the profitability it adds comes at a big price in terms of the stability and reliability of a publisher’s business, which feels much more comfortable coming from a spread of accounts.
Publishers strongly resist Amazon’s demands for more margin partly because they don’t know where the demands will stop.
It is also true that Amazon just about singlehandedly created the e-book business. Yes, there had been one before Kindle was introduced in November 2007, but it was paltry. It took the combination that only Amazon could put together to make an e-book marketplace really exist.
Amazon made an e-reading device with built-in connectivity for direct downloading (which, in that pre-WiFi time, required taking the real risk that connection charges would be a margin-killer). It had the clout to persuade publishers to make more books, particularly new titles, available as e-books. And it had the attention and loyalty of a significant percentage of book readers to make the pitch for e-books.
With all those assets and the willingness to invest in a market that didn’t exist, Amazon created something out of nothing. Everything that has happened since with e-books—Nook and Apple and Google and Kobo— might not have worked at all without Amazon having blazed the trail. In fact, all those things might not even have been tried. Steve Jobs was openly dismissive of e-books as a business before Amazon demonstrated that a lot of people would pay for those downloads.
The third big change in the industry that is significant, and might not have been significant without Amazon, is the boom in self-publishing. The success of the Kindle spawned that boom by making it easy and cheap to reach a significant portion of the book-buying audience with low prices and high margins, and Amazon’s role included creating an easy-to-use interface and efficient self-service. Again, others have followed suit, including Smashwords. But almost all self-publishers who have achieved commercial success have Amazon primarily to thank.
So, of the three ways Amazon has significantly changed the industry—consolidating the bulk of online book buyers, creating the e-book business, and facilitating commercially viable self-publishing—the first two are much to publishers’ benefit (Amazon as friend) and the third is one that established houses could have done without (Amazon as foe).
The Huge Data Hole
Amazon’s data policies are also arguably in the foe column. The asymmetry between what Amazon knows about the industry and what the industry knows about Amazon is striking.
Data about the publishing industry is notoriously scattered and, because of the large number of audiences and commercial models in the “book business,” very hard to interpret intelligently. And Amazon has its own way of making things opaque, by not sharing information.
The first indication of this is that Amazon doesn’t employ the industry’s standard identifier, the ISBN. Instead, Amazon has its own identifier, called an ASIN. In the past, the industry had a total title count and counts by categories which were provided by ISBN agencies and which required some interpretation. Today, because of titles published exclusively by Amazon, there is a big black hole in our data. Nobody except Amazon knows how many titles are published each year because nobody knows how many ASIN-only titles there are or what categories they appear in.
Data about another piece of Amazon’s business—sales of used books—also has critical relevance to the rest of the industry and is also totally concealed. Possibly, the used-book marketplace that Amazon fosters actually helps publishers sell their new books at higher prices by giving consumers a way to get some of their money back. But almost certainly people are buying used copies of books they otherwise would have bought new, with Amazon offering them the cheaper used choice from about the first moment a book comes out.
It seems reasonable to assume that the effect becomes increasingly corrosive as a title ages and the supply of used copies keeps rising as the demand for the book is falling, inexorably bringing the price of the used books down. But none of us outside Amazon can know anything about this, including how large the market is.
By the same token, we have no idea how big Amazon’s proprietary book business is. Amazon has the data to inform its title acquisition and its merchandising, and to gauge the extent of its leverage in negotiations with publishers. But nobody outside Amazon knows how many titles it sells that it publishes exclusively. Nobody knows what categories those books are in. Nobody can take account of how the sales of Amazon-published titles might affect the prospects for titles under consideration.
Except for the possibility that some new book sales occur because the purchaser is confident of a resale, this is all foe.
Challenges Ahead for Amazon
In retrospect, Amazon’s big advantage is clear. Amazon always intended to use the book business as a springboard to a larger play; the company never saw it as a standalone.
Nobody inside the book business grasped this when it was happening, and no purely book business players imitated it. But it was the key to Amazon’s economics. Amazon didn’t need to make much margin on books; it was focused on “lifetime customer value” and it saw lots of ways to achieve that.
But it could well be that Amazon is approaching its limits in market share in the book business. What it did worked in the English-speaking world— for printed books two decades ago and for e-books almost a decade ago—because it was first and able to aggregate an enormous customer base before it got any serious challengers.
Amazon will not find it as easy to dominate new markets today, particularly those with rules that make price competition harder to employ. Language differences mean book markets will remain “local” for a long time, and strong local players will be hard for Amazon to dislodge.
Of course, Amazon has powerful tools to keep its customers locked in. PRIME is the most effective one; once customers have paid a substantial fee for free shipping, they’re disinclined to buy elsewhere. Kindle is another one. The devices and the apps have broad distribution and, because of self-publishing, Kindle remains the e-book retailer with the biggest selection.
And Amazon’s big edge is still having the biggest selection of printed and digital books in one place, which has been known for decades as the best magnet for attracting book buyers.
But the marketplace is changing. A lot of book reading is now done without the title-by-title shopping in a bookstore that it always used to require. We are at the beginning of an age of “distributed distribution.” Many different tech offerings—Aerbook, Bluefire, De Marque, Page Foundry, and Tizra among them—can make it easy for publishers to sell e-books directly (and Aerbook enables that and promotion in the social stream).
The subscription services Scribd, Oyster, 24Symbols, and Bookmate (as well as Amazon’s own Kindle Unlimited) are pulling customers away from à la carte e-book buying, and Finitiv and Impelsys make it easy for any entity to offer digital reading by subscription. All these sales except the ones through Kindle Unlimited come primarily out of Amazon’s hide, since it is the dominant online retailer for books.
Publishers generally see this dispersal of the market as a good thing for them, even though some black-hole issues arise and even though the big general subscription services constitute a new group of potentially disruptive intermediaries.
For the foreseeable future—years to come—Amazon will remain dominant in most of the world as the central location where people shop online for books à la carte because Amazon has the best service and the biggest selection, and it sells both print and digital books. But Amazon will be challenged by the next round of marketplace changes, as what it dominates becomes a smaller portion of the overall book business in the years to come.
Mike Shatzkin, founder and CEO of The Idea Logical Company, has been an industry consultant for nearly four decades. His blog, The Shatzkin Files (idealog.com/blog), is the source of this article.