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Keeping an Eye on Amazon: Amazon as a Disruptive Force / Amazon’s Dominance and DRM

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“I’m usually the one wearing the target on my chest.”

The speaker was an Amazon executive. The setting was a meeting of publishers and booksellers confronting troublesome issues. The time was some years ago. But it’s easy to imagine the same scene playing out today as people throughout the book business express anger at Amazon and issue warnings about its enormous power and about how it is wielding that power.

Of course, there have been, and are, other 8,000-pound gorillas that throw their weight around in our industry, stimulating fear, resentment, and, sometimes, effective opposition. But Amazon seems to be the company causing the greatest concern today. The two articles that follow analyze aspects—and consequences—of this giant’s current M.O.

—Judith Appelbaum

Amazon as a Disruptive Force

by Mike Shatzkin

Amazon has three pretty powerful things going for it, and two are entirely its own doing.

1. Amazon is, by far, the most book-industry-focused company that is active in endeavors much larger than the book business. Barnes & Noble and Ingram are just as focused on the book industry, but they really don’t go beyond the book business. Google and Apple are, like Amazon, leveraging their book activities into other areas and vice-versa, but they have nowhere near the presence in the book business that Amazon does. (Kobo, which is focused on the book business but has just been bought by a much larger Internet retailer, is still a bit of a wild card in this regard.)

2. Amazon executes. Its hardware and software and platforms and content delivery all work just about perfectly. It seems odd to me that, at this relatively late date in the e-book switchover, Amazon is still the only place I can shop for e-books and see my choices arrayed by (highly granular) subject with the most recently published books on top. (Note to all competitive retailers: please let me know the minute your shopping experience can offer the same thing!)

3. Amazon is the runaway market leader in the only two segments of the book business that are growing—e-books and the online purchasing of print—and it is cleverly leveraging the leadership position it has to make challenging it even more difficult in the future.

Amazon’s willingness to take losses—on some transactions to grow share, on Kindle devices to lock customers into its ecosystem, and on e-books when it can emphasize it is the low-cost provider—is enabled by the wide array of products, in media and far outside, on which it doesn’t need to sacrifice margin for competitive advantage.

Amazon’s industry focus is natural, since it started with books (even though books are now a fraction of its business). Its history gives it the presence and the knowledge to be highly disruptive.

Amazon knows how to go after authors directly (apparently even more effectively than Barnes & Noble, which has been signing up content on a proprietary basis for well over a decade and has owned a publishing company for some time).

Amazon uses price as a weapon to sell books, disadvantage competitive retailers online and in stores, and lock in customer loyalty for print (with its Prime program) and for e-books (with its proprietary Kindle platform).

Amazon’s execution has been a keystone of its success from the very beginning, from its invention (or at least early use) of a database for “discovery” even larger than its supply capabilities (it wanted customers to know when a book they were looking for was no longer available, so they could choose something else). Amazon’s promised dates for delivery were almost always met; customer service aggressively solved every problem; and intuitive navigation and execution did for online retailing what Apple did with hardware and operating software.

And when Amazon decided to do hardware, it might not have made anybody forget Steve Jobs, but it apparently made his company address the Kindle Fire by considering pricing response on the iPad late last year.

Heads-Up on Two More Traits

All three of these realities cause concern in the publishing ecosystem—among publishers, retailers, and agents—because everything in publishing seems to be flowing downhill toward a future where the vast majority of what people read as books is both found and purchased (and often consumed) online.

And two additional components to Amazon’s success are also important in this context:

1. Amazon’s brilliance at acquiring companies that might have provided platforms to cause it trouble. There have probably been many such acquisitions, but here are three worth attention:

• The acquisition of Mobi 10 years ago took the one format that could have united the e-book market (then divided between the Palm and Microsoft formats) out of circulation before some other retailer (specifically: Barnes & Noble) could serve the entire marketplace and might have accelerated e-book growth many years before the Kindle.

• The acquisition of Lexcycle in 2009 gave Amazon Stanza, an e-book platform that was extremely consumer-friendly and cross-platform, and that could have constituted a threat to Kindle’s development when that Amazon format was in its infancy.

• The acquisition in 2011 of The Book Depository put in Amazon’s hands a global online retailer of print that had developed technology and logistics that would have made it a great foundation for competing with Amazon for global book sales. Amazon made this acquisition at the very time that three major publishers on each side of the Atlantic were investing in competitive retailing enterprises (Bookish in the United States and Anobii in the United Kingdom).

2. Amazon’s lack of involvement in the most capital-intensive elements of the legacy book business (press runs and returns as a publisher, brick stores as a retailer). Publishers have a valuable proposition to offer authors as long as Amazon is one of a diversified set of paths to the purchasing consumer. But it is becoming increasingly obvious that technology is enabling Amazon to persuade book customers not just to shop with it, but also to buy from it when they’ve shopped elsewhere.

In today’s world, where print is still 70 percent of the sales of most straight-text books and most of the print is still sold in stores, an author who has the opportunity to work with a regular publisher makes a real sacrifice of market exposure to work directly with Amazon. Even if Amazon were to eschew its Kindle-only insistence on e-books for titles it signs directly through its imprints (and we hear rumors from the deal-making world that they might on a selective basis), Amazon would still have a great challenge getting exposure for one of its titles through brick outlets.

And one important thing Amazon hasn’t learned from its experience is how to meter inventory into stores to maximize marketing exposure but keep returns manageable.

But the publishers’ advantage here has a shelf life. For online sales, individual authors are becoming persuaded that Amazon gets them more than the other outlets combined. Barry Eisler has expressed great satisfaction with his Amazon-only sales. Another author, Robert Niles, reports that Amazon far outsells all the other e-book retailers for his self-published work, and he thinks it is because Amazon promotes the self-published author more effectively.

When you read the thread on Amazon’s online forum in which authors discuss what happens when this retailer picks one of their books for a price promotion, you get a sense of the excitement Amazon generates through the sales it can create with tools that are uniquely at its disposal.

What that probably means is that more and more authors will be available exclusively through Kindle, some because an Amazon imprint signed them and others because they don’t bother to put their books up on other sites for paltry sales. If that happens, Amazon’s natural advantages just grow.

The Challenge of Competing

Although Anobii’s founding CEO, Matteo Berlucchi, tells an imaginative and persuasive story about converting the social aspect of books into a commercial proposition (which has been the effort of independent startup Copia for the past year), I think the challenge for Anobii and for Bookish, the U.S. version of a publisher-sponsored online book retailer, is steep.

The problem for them is the same as B&N’s: Amazon brings resources and ammunition to this competition that stem from a much bigger base than the book business alone, which means it can use books as loss-leaders to sell more movies or computers or groceries. (By the way, this is exactly what brick book retailers coped with in competing for bestseller business with mass merchants who could sacrifice margin on books that brought people into their stores because they could make it up on other items.)

There is really only one way publishers will be able to compete with Amazon for authors in the future, and that’s to find book customers Amazon doesn’t have, either by working through other retailers or by creating direct publisher-to-customer contact.

The percentage of sales that go to Amazon is the single most important barometer of a book publishing company’s future. Of course, every publisher wants to make its Amazon sales grow. Their challenge is to make other sales grow faster.

Mike Shatzkin, founder and CEO of The Idea Logical Company, has been an industry consultant for three decades. His blog, The Shatzkin Files (idealog.com/blog), is the source of this article, and a compendium of the first two years of blog posts is now The Shatzkin Files, Volume 1, available as an e-book and in a print edition. To reach him, email mike@idealog.com.

Amazon’s Dominance and DRM

by Joseph J. Esposito

I have been reading a blog post called “Cutting Their Own Throats” by Charles Stross, which makes the interesting point that publishers’ insistence on using digital rights management (DRM) software is helping make Amazon into an even more potent force.

Which is the bigger threat, copyright piracy, or an industry totally dominated by one company?

Before I get into the specifics of Stross’s argument, a word about Stross himself. He is an accomplished author of science fiction of a cerebral variety. I urge his Accelerando on everyone; it is Joycean in spirit, far-out in story.

You would expect that an author, especially a commercial one like Stross, would take a dim view of copyright piracy and be supportive of DRM. But Stross is also a member of the technogeek tribe and is thus passionately opposed to DRM. He makes his argument against DRM on the basis of what earns publishers and authors the most income. Geek or no geek, as Samuel Johnson said, “No man but a blockhead ever wrote, except for money.” Stross views publishers who insist on DRM as cutting their own throats.

The Real-World Amazon Edge

Let’s imagine the world of e-books as many people naïvely thought it would be and many people still believe it could be. In such a world, there are many e-book vendors, none with a dominant market share. The competition among these purveyors of e-books keeps them all honest. A publisher in this world creates a single type of digital file (this was part of the impetus behind the development of the EPUB format), and that file can then run on any of the many competing e-book devices.

In this scenario, publishers have an interest in DRM because it appears to prevent unauthorized use of their property.

The world we live in, however, does indeed have a dominant player, Amazon, with over 50 percent market share. The number two player, Barnes & Noble, has less than half the Amazon share, and the other e-book competitors (Kobo, Google, Apple, Sony, an assortment of others) do not pose any threat to Amazon.

Amazon has a proprietary platform, which includes Amazon’s own DRM. Indeed, Amazon would never have been able to get publishers to support the original Kindle device if the Kindle did not use DRM. Even scholarly publishers, whose books may sell as few as 300 copies over their lifetimes, fear having their books pirated. Heck, if you put an unprotected copy of Economic Policy of the Byzantine Empire: An Historical Approach into the marketplace, in no time at all you might see millions of pirated copies zipping around the Internet. Publishers, like authors, are dreamers.

Stross’s point is that Amazon’s dominant market position makes DRM undesirable for publishers because most customers prefer to trade with the largest vendor. In effect, Amazon’s DRM is locking customers out of other e-book formats. This in turn increases Amazon’s market share further, to publishers’ peril, as Amazon is no longer the warm and fuzzy business it seemed when it started out.

Creating a Competitor

Publishers could make their books available without DRM, which would mean that they could be viewed on any e-book device. Thus Amazon’s huge market share would have a very strong #2 competitor: the sum of all the other e-book companies.

So, publishers, choose: DRM and Amazon’s growing market dominance, or no DRM and a number of vendors able to compete on stronger terms with Amazon.

And, yes, foregoing DRM would probably increase piracy. What’s better, the pirates or Amazon?

It should be said that many people (I have no idea if this is true of Stross himself) are embracing Stross’s economic argument against DRM because they simply hate any restrictions on end-user options, and any charge that can be laid against DRM is thus welcome. But even a supporter of strong publisher control of the dissemination of content can understand Stross’s economic argument while dreaming of foolproof DRM.

I am in favor of DRM in principle, opposed to it in practice. I favor it because the producer of any work should be able to set the terms for its use; the marketplace is welcome to accept or reject those terms. But my practical nature notes that in the world we live in, producers have little say in how their works are used, and even the mere assertion that producers should have such a right is met with strident opposition.

Would I rather be right, or would I rather win? I view matters of copyright as some do the purchase of stock: You buy what you think is going up. When it comes to DRM, it’s time to sell short.

I have long wondered if publishers could create a new e-book ecosystem, with or without DRM, by supporting a new reading device. Let’s imagine a manufacturer that comes up with a low-cost clone of the Kindle Touch and Fire (the Touch being a dedicated e-reader and the Fire being a tablet, a poor person’s iPad).

The manufacturer could support an online bookstore for participating publishers, all of which would pay a fee (say, a couple dollars per ISBN per year) to the manufacturer to support the device, its related apps, and the virtual bookstore. All publishers would be welcome to join.

That online bookstore would not in any way prevent publishers from also selling their works to Apple or Google or any other customer. It would provide a new option in the retail environment.

This was the thinking behind a consolidated online catalog project that I proposed five years ago, and that I would like to propose again today. On the other hand, if publishers had had the foresight to create such a service, we would now have the beginnings of bona fide competition for Amazon’s dominance already in place.

Joseph J. Esposito is an independent management consultant, The Portable CEO, providing strategic advice, operating analysis, and interim management in the area of digital media to publishing and software companies in the for-profit and not-for-profit sectors. He writes extensively on digital media and has been awarded research grants from the Hewlett, MacArthur, and Mellon Foundations.



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