Recently my friend Mike Shatzkin asked me to participate in a panel on Amazon at Digital Book World. I am not going to recap my presentation here, as Kitchen readers have already seen its primary argument, but Mike asked all the panelists a question that I want to attempt to answer at greater length than I was able to at the conference. The question was in two parts: first, how much more market share can Amazon amass before it slows down or is stopped? Second, who can put together a meaningful merchandising service that could take share from Amazon?
Before I respond to these points, let’s spend a minute on context. DBW is primarily directed to a trade audience, and Amazon is for trade publishers by far the most dominant company. The view of Amazon among trade publishers has changed quite a bit over the last 3-4 years, from benign opportunity for growth to a powerful player in the distribution chain that takes pleasure in throwing its weight around. Some publishers (young ones, mostly) think Amazon is the most aggressive company ever to operate in the publishing industry, but older hands know that with market dominance comes brutal trading practices. I remember making a sale calls at Barnes & Noble where the meeting began with the senior B&N executive smiling and saying that he planned to throw all of our books out of his stores. Librarians who complain about Elsevier and John Wiley should see how things look on the other end when you have to do business with the likes of Wal-Mart or Amazon. Welcome to the free market!
However dominant Amazon is for the trade, the fact is that it plays an even bigger role in scholarly book publishing. It has become a significant distributor to libraries and is by far the leading retailer for academic publishers that sell books outside of libraries. I heard a publisher call Amazon the 800-pound gorilla, to which another publisher immediately responded by calling it a 10,000-pound gorilla. I don’t know how big gorillas can get, but you get the idea. In any event, Amazon plays a bigger role in academic book publishing than any other organization. There is no way to think about scholarly books without taking Amazon into account. Interestingly, in my many conversations with people involved with the oversight (as distinct from the management) of university presses, I never once heard anyone even mention Amazon. This is like talking about the Kentucky Derby without any reference to the horse. Perhaps that is one of the reasons that so many presses are under financial pressure right now.
When talking about market share for books, the secondary question is whether the books are print or electronic. That’s counterintuitive; you would think that would be the primary question, but in fact the primary question is where books are purchased: at physical stores or online. Amazon is the leading online bookseller for print books and without question the dominant seller of ebooks, which are also purchased online. Combine the 2 formats and Amazon may have a market share for some categories of books over 50%. And that market share will continue to grow as more and more books are sold in electronic form, since Amazon’s market share for ebooks is even greater than for print. So we should not be surprised to wake up one day to find that Amazon is responsible for the sale of as much as two-thirds of all the books sold outside of libraries in the U.S. (Note to DOJ: I said “wake up” for a reason.)
A rival to Amazon will be hard to come by. No one really believes that B&N has a chance any more in becoming a potent competitor, and even a combined effort by other retailers is not likely to amount to much. It seems possible to me, though, that pressure on Amazon could come from 3 different directions:
- From within the publishing industry
- From other large retailers
- From the tech industry
Within the publishing industry there is really only one candidate, since B&N is out of the picture. Penguin RandomHouse (PRH), a product of a recent merger, controls about half of the huge bestsellers, which drive consumer publishing. The new entity is bigger than the next 4 trade publishers combined. PRH may be in a position to create its own online bookstore and they may even invite other publishers to put their books on the site as well. This would be a huge direct marketing company, which could indeed chip away at a few points of Amazon’s enormous market share.
By other large retailers I mean the likes of Wal-Mart and Target. Now why would they get into books, which is hardly a highly profitable category? The primary reason would be to attack Amazon on its signature category. It would be interesting to see how Amazon would react if Wal-Mart bought B&N, which would create a huge network of physical bookstores as well as a compelling online presence.
And here we should note the concept of the “technological moat.” This is a Silicon Valley marketing meme in which a company not only markets its own products aggressively but also makes it almost impossible for anyone else to compete directly with them. Amazon has dug such a moat around its service by working with little or no margin, and that means that any new entrant would have to struggle to make money. The moat of low pricing means that Amazon pretty much operates without new competitors challenging it, so that in turn enables Amazon’s revenues to grow and grow.
To publishing people Amazon is a huge online bookstore, but Amazon is much more than that–”The Everything Store,” to quote the title of Brad Stone’s excellent recent book. What has caught my attention is Amazon’s move into Cloud hosting services, known as AWS. Imagine your local little bookshop and then think how that bookshop would someday go on to provide essential infrastructure to online-based companies everywhere, from start-ups to established companies and even government agencies. Takes a bit of imagination, doesn’t it? Imagination is what Amazon has in surfeit.
The competitve question is whether Amazon is now playing in the sandbox of players that are not as easy to push around as your local bookstore. Among Amazon’s new competitors for Cloud hosting services are Rackspace, Google, Microsoft, Hewlett Packard, Oracle, and IBM. That list goes on and includes quite a few companies with enormous resources, companies that are likely to view Amazon as an interloper. Of course, Amazon is good at what they do (I recently joined the Board of an STM company that is hosted by AWS), so they will not be a pushover. But speaking for myself, I would not want to find out that HP and IBM are gunning for me.
One way the competition from the tech sector could play out is to choose to torture Amazon in its signature category of bookselling. It’s one thing for a couple of kids in Brooklyn to set up an online bookstore, another thing entirely if an HP or a Xerox decided to use such a service as a showcase for their technologies. And a lot of the pieces are not hard to find. The tools for ecommerce, once very hard to create, are now widely available; print distribution can be handled with agreements with Ingram and Baker & Taylor; devices can be licensed and white-labelled from Korean consumer electronics manufacturers (e.g., LG); ereading apps are available from a number of outfits (e.g., BlueFire). So this raises the question of whether Amazon’s sheer arrogance is now inciting competition.
It’s important for publishers to realize that with the exception of the example of Penguin Random House above, all of these hypothetical challenges to Amazon would be by organizations whose heart really is not in books. This is what is known as platform wars, where the desire to create a dominant platform turns other products, including books, into fodder for market position. Publishers may not like the fact that Amazon sells books below cost (I just purchased Eleanor Catton’s “The Luminaries” from Amazon for $8; Amazon probably paid around $13 for it), but that suits Amazon’s purposes well, as it augments its market share and “creates” new customers for its basket of other products and services. Oracle may not give a hoot for books, but it may wish to establish itself as the king of Cloud hosting, and taking down Amazon would be part of the marketing plan.
So when a university press or any other academic publisher is wrestling with Amazon over terms of sale, it’s important to recognize that the two sides are not fighting over the same thing. The press wants to sell books at a profit, but Amazon wants to create new customers, increase its market share, and add more data to its warehouse of consumer information. (Why doesn’t the NSA save us all lots of money and simply license the surveillance data from Amazon?) That asymmetric situation is going to persist for some time, and it is a bigger strategic issue than the pressure on library budgets, declining support from university parents, or reduced enrollments in the humanities. Amazon is an empire, and one of its colonies is scholarly communications.
Discussion
30 Thoughts on "Who Can Rival Amazon?"
The prospects of Penguin Random House setting up an online order operation (one that other publishers large and small can participate in) is intriguing…
I haven’t done the research in terms of sales and margin to test it out but I Amazon’s marketing strategy has been brilliant. They embraced and exploited their primary advantage–convenience. Convenience in today’s market often trumps price point for commodities. They coupled that with a many-to-many business model that made partners of competitors. I buy used books from Better World Books through Amazon because of the convenience.
Some company will some day topple Amazon but it will be difficult to find the scale and the market advantage to overcome those two factors. The platform issues are why I continue to buy professional books in print and music on CD. As an individual I’m fed up with buying the same content on successive platforms but today’s students don’t have that same repugnance.
Another of Amazon’s advantages is our insane patent system that allowed them patent the concept of one-click. The ability to patent a concept–another example of how the intellectual property law in the US works against competition and innovation.
At the time I retired as director of Penn State University Press in mid-2009, Amazon was accounting for about 30% of the Press’s sales. Most of these were to individual buyers; some went to academic libraries, which had begun using Amazon to round out their orders not included within their approval plans, which were still flowing mainly through vendors like Yankee Book Peddler. Amazon was not involved at all, as far as I know, in one major market: paperbacks for course use. College bookstores still accounted for the bulk of those sales, including companies like B&N and Follett’s that specialized in running college stores when colleges outsourced the business and did not operate the stores any longer themselves. Paperbacks made up about 40% of overall sales revenue at that time. So, unless things have changed drastically since, I don’t see how Amazon could be said to dominate the market for university press books, since Amazon neither handled approval plans for libraries nor was involved in ordering paperbacks for course use. Yes, it was a big player, but not quite the 10,000-pound gorilla that Joe’s account makes it out to be.
Sandy,
1) You should keep your eyes open for Amazon’s new strategy: textbook rentals. They are hiring aggressively in this area.
2) I worked at Amazon. Have things changed 2009 to 2014!!!? That is three full technology generations (18 months each). Things have changed drastically and will continue to change drastically every 18 months, or less. I think you are way off. They are indeed a 10,000lb gorilla. Every student today is going to check if the textbook is available on Amazon. I can tell you without violating any non-disclosure agreement that textbooks (in paperback or hardcover) are an extremely aggressive growth area for Amazon.
The article is talking about momentum and direction. In 2009 many were still pooh-poohing eBooks. So, yeah, a LOT has changed since 2009.
At the beginning of every semester, my daughter (now a college junior) and I sit down with our two laptops. From hers, she reads me the ISBNs of all the required books in her courses. I type each ISBN into Amazon’s search field, and we look for used copies. Usually we find them. Virtually all of her textbooks have been ordered via Amazon over the past three years. Are we a perfectly typical father-daughter team when it comes to buying textbooks? Probably not — but I think we’re becoming more so every semester.
The graph on the bottom of this DBW story seems to show that since 2012, Amazon sells more textbooks in the US than textbook stores.
http://www.digitalbookworld.com/2013/students-professors-still-not-yet-ready-for-digital-textbooks/
Just curious, Rick, are these “textbooks” in the normal sense of main course texts published by the major commercial textbook publishers (Pearson, Wiley, etc.), or do they also include paperbacks from university presses that may be assigned or recommended reading also?
I can’t speak for Rick, but when I was an undergrad (class of ’10), I was getting a number of scholarly paperbacks for my history courses, often used, through Amazon (as well as a few through half.com). I can only imagine there are even more doing that now.
Yes, these are textbooks as the term is generally understood — main course texts designed to follow a semester-long class.
The “technological moat” seems just a fad term for some good, old-fashioned barriers to entry. Amazon’s barriers to entry are interesting — tolerance for low margins, incredible scale, highly diversified business, and significant hidden infrastructure. In essence, scale. They have become one of the biggest retailers in the world by embracing these barriers to entry and operationalizing them.
Scale is its own barrier, it seems. No non-profit publisher, bound by mission and audience focus, can scale up the way Amazon could. Then we add tolerance for low margins. The big commercial publishers are trying, but they are hindered by their reliance on and history with high margin businesses. Together, low margins on a huge business is still millions and millions of dollars.
Long-term thinking can also be a barrier to entry, in a way. Amazon has embraced long-term thinking since its earliest days. Many other companies are geared to annual reports and lose their patience. Bezos has been the CEO the entire ride so far. Let’s not forget the barriers that consistency, vision, and long-term orientation can create. Not all moats are technological.
Amazon’s digital moat hosts more than the pirañas of pricing. A proprietary DRM scheme plus a non-standard (not ePub) eBook format tied to proprietary eReader hard/software and a very efficient and convenient but proprietary ecosystem serve to fend off competitors while gently locking-in customers. So the customer bridge over the moat is effectively a one-way turnstile. Converting those customers will be exceedingly difficult.
There’s something I’m wondering about from a Shelf Awareness report about Joe’s DBW presentation. From the January 16th issue we read:
To find information about Amazon, Esposito polled university presses and libraries. He found that university presses had declining sales to traditional wholesalers such as Baker & Taylor and Ingram and increasing sales to Amazon, while librarians, especially those with severe budget restrictions, are turning to Amazon in greater numbers. Given that Amazon is also a customer of Baker & Taylor, the situation can be bizarre: Esposito brought up the case of a librarian who, needing a book on short notice, went to Amazon rather than Baker & Taylor, saying that B&T orders would take two weeks while Amazon orders would take two days. The rush Amazon orders, however, were drop-shipped by B&T. The implication here is that wholesalers provide higher levels of service to Amazon than to their direct customers.
This seemed to imply that libraries were replacing B&T purchases or, by extension, YBP purchases with purchases from Amazon. While I agree that’s happening, I’m not sure I agree with the implication that UP books are a significant part of that change. In discussing this issue with librarians here at Penn State, they do admit that the amount of spending at Amazon is increasing exponentially, but it has rarely, if ever, been to purchase UP books. Typically the spending is on non-text digital items like movies, TV shows, or music. Sometimes it’s to boost print holdings in materials on course reserve, but I have yet to find a librarian (outside of maybe Arizona, Colorado, or Utah) who is using Amazon for any significant collection development.
In some ways, the concern about libraries and Amazon seems to be a red herring. I am less concerned about libraries using Amazon for anything, than I am about a commitment from libraries to collection development. At Charleston this year I heard an excellent presentation by two Kent State librarians measuring usage between books acquired by approval and books acquired by firm orders (selectors/slips). If you’re curious, they found no statistical difference in usage. But what caught my ear was an off hand remark from one of the librarians about their budget, and their spending at Amazon. They also don’t use Amazon for collection development, but they too are watching an increasing amount of their budget going to Amazon, again for non-text digital media. I grew alarmed when that same librarian pointed out the huge growth in demand for that category, and then wondered where in the budget the funds would come from, and admitted that it was unlikely it would be serials, but instead was likely to be books. The spending doesn’t seem to be shifting from B&T to Amazon because of service, it’s shifting because of patron demand for non-book content, and unsustainable models like DDA/STL that create opportunities for budget reallocations. That’s my concern, and Amazon’s role in that problem is really tangential.
Tony, librarians tell me that they are buying books, including U. press books, from Amazon. No one really has the hard data, but I am writing a proposal now to research this through a large library survey. Some librarians at small schools buy ALL their books from Amazon. The collections librarian at a major research university pegged Amazon’s purchases at 3% of the total budget (a big number). A library consultant (who asked not to be named) told me that Amazon now comprises 10% of all library book purchases. I want to confirm or refute that number.
I’m very eager to see such research. Good luck on your proposal.
As for that 10% figure, is that both public and university libraries? I can easily see how a public library could leverage Amazon for their needs, what with their below cost bestsellers and quick turnaround to respond to sudden popularity, but I find it hard to see how Amazon could be leveraged for true collection development at an R1 in an economically feasible way.
That unconfirmed figured is across all library types. But let’s not assume that R1 libraries always get their purchases right the first time (which is likely to go through YBP). They overlook things–there are so many books! It seems that Amazon fills in the cracks, but in absolute numbers, those are big cracks. An interesting question is how PDA/DDA fits into all this.
Like when buying through Amazon, many people are doing PDA programs to fill in the cracks, and they are running these programs through traditional vendors like YBP. So, in those cases, PDA could limit purchases through Amazon. Now, some libraries that are taking a subject and moving it completely from plan to PDA, though they may not admit this in public, are doing so because they want to cut book purchases in that subject and figure PDA will ensure that what is purchased is actually used. If that extra budget then goes to non-text digital media instead of serials, then Amazon purchasing will probably increase.
I think the question as to whether there could be “a rival” to Amazon is maybe the wrong way to frame the challenge facing publishers, retailers, tech start-ups. I think the question is how can they re-orient their business or (in the case of start-ups) develop their business models to NOT rival or compete with Amazon. The answer to this question is going to be case specific, based on the individual characteristics of the publisher, retailer, or tech start-up.
Someone much wiser than myself said, “the only two constants in the publishing value chain are authors and readers. Authors create, readers consume. Everyone else in the middle serves merely to make that exchange as efficient, scaled, and pleasurable as it can be.”
So, what “value” can you offer authors and/or readers that Amazon doesn’t–or preferably, can’t–provide? The answer, even if the answer is “not much,” likes in a close look at those two relationships.
Well, pretty obviously, if we are talking about scholarly publishing, validation is something Amazon cannot offer in the way that university presses can. Amazon’s “brand” means nothing to promotion and tenure committees.
I’m sure you’re right, Sandy. A deep, unbiased dive into a press’ “value proposition” for its authors and readers are sure to yeild other distinct advantages. They need to be identified and amplified.
Peter Turner posted: Someone much wiser than myself said, “the only two constants in the publishing value chain are authors and readers. Authors create, readers consume. Everyone else in the middle serves merely to make that exchange as efficient, scaled, and pleasurable as it can be.”
Several years ago I expressed the same thought: “Only authors can create content for readers to consume. The meddlers in the middle are sucking off the revenue flow and inflating the price without doing a damn thing to justify the higher retail price.”
Since my retirement as VP of Author Services in 2011 from a mid-size digital publisher, I’ve been writing and publishing ebooks through Amazon’s KDP program. Amazon provides an excellent platform for direct sales to consumers. They pay 70% in royalties monthly which is very author-friendly for ebooks priced in the consumer-friendly price span. They don’t meddle and there’s great value in the open marketplace Amazon maintains for authors with a vast selection of content for consumers. With all things considered, from an author’s and consumer’s perspective they have a superior business model for publishing and distributing ebooks.
The Digital Age has done more to change the publishing industry than Gutenberg did when he perfected printing books using movable type in the middle of the 15th century. Amazon has perfected digital publishing to benefit authors and consumers.
Enjoy often… John
Since this article concerns scholarly publishing, your comment here does not apply. Amazon does not serve scholarly authors as a publisher in any meaningful way that benefits them. No scholar hoping to advance in his or her career would ever think of publishing through KDP.
One of the interesting things that Tim O’Reilly mentioned at the SSP annual meeting last year, was that Amazon ranked 3rd in distribution behind both their own platform (1st) and Safari Books Online (2nd). That stuck with me. Clearly if you want to and you can build a brand and other compelling reasons, Amazon can be just ‘someone to do business with’ rather than the Gorilla. Now not everybody is in that position of course, but I also recall another Keynote by Brewster Kahle who posited the idea of an open platform for publishers to place their wares into so to compete on the content. There’s a similar conceptual platform in the computer game platform, Steam – built originally by a game manufacturer to solve some issues with distribution and piracy for their own products, then opened up to others – their direct competition for gaming cash.
For whatever it’s worth, it wouldn’t occur to me to NOT buy an O’Reilly book from them directly.
Amazon encourages one stop shopping by also providing books from thousands of independent sellers, sometimes new books that are priced well below the Amazon price. The strategy is to make Amazon the one place to go if you want a book, CD, DVD, game, and lots of other things. (I bought my vacuum cleaner from Amazon.) Presses, including university presses, are competing against used books that are often as good as new or cheap enough to lure buyers to consider a marginal copy that is still readable. These sales often occur while the book remains in print. Sometimes, copies are available even before the book has been officially published. I know of one scientific publisher that started selling its books on Amazon because independent dealers were charging more than the list price on Amazon because Amazon wasn’t stocking these titles.
I read that many Amazon staffers argued vehemently against Bezos when he started allowing other vendors to sell on Amazon. I believe that he made the right decision. I sometimes ask people at parties where they would go first to buy a book. Amazon is almost the answer but might not have been if it didn’t have the depth of stock from allowing competitors to compete with its own offers. I might add that Amazon charges these sellers a high commission and says in its promotional materials that it get 35% of its revenue from independent vendors.
This too has significantly changed the book landscape. Never before has the used book market been so consolidated and concentrated. This makes it exceedingly difficult for niche publishers especially to compete against their own used backlist, and ever more frequently, their used frontlist. My wife and I sell used books ourselves and my recent anec-data-l observation would infer that in the current mania over ebooks, and the attendant rush by some to liquidate both personal and public libraries because we don’t need those pulpy editions anymore, has hastened the commodification of the book, at least if measured by the used book prices and quantities on Amazon.
You mention scholarly, professional and reference works. Because of the cost of production, most of those must cost over $9.99, which means that Amazon’s published royalty rates drop from 70% to 35% for them. Is that true or does Amazon typically negotiate a higher royalties for at least the larger publishers and university presses?
I ask because I’ve been running some numbers on what Amazon is likely to earning on ebooks sales and they come suggesting that Amazon makes about twice the profit that Apple and the others make on the same ebook sold at the same price.
My calculations suggest that Amazon’s grossly inflated download fee (over five times what cell companies charge for data) and their paying only 35% royalty (versus the industry standard of 60-70%) for ebooks priced outside the narrow $2.99 to $9.99 range means they gross about 10-15% more from each sale than Apple and B&N. Since that’s likely to be the profit margin at their competitors, that means Amazon makes twice the profit they make.
That money can then be poured into cutting the price of books, ebooks, and ereaders to drive competitors out of the market. Nook is perhaps the first victim of that and, when the time is right, Amazon is likely to cut prices to drive Apple out of a ebook market it’s only half-hearted interested in. (Amazon will no doubt assisted by the Obama administration DOJ, but that’s another story.)
Keep in mind that:
1. That download fee is a gross ripoff. In the case of some of my recent titles, it lowers my real royalties from the stated 70% to about 55%. That means that Amazon gets 15% more than Apple for each sale. That sort of thing is happening with every ebook sale make by every author/publisher no matter how closely they conform to Amazon’s pricing regime.
2. Paying only 35% royalty on ebooks over $9.99 is extremely lucrative for Amazon. It means that if a school textbook sells for $50, Amazon is pocketing $32.50 for doing nothing more than process a credit card transaction, while the author and publisher are only getting $17.50. That allows Amazon to undercut any competitor’s price by a large margin and still make a profit. It also means that, to raise their income by 35 cents, author and publishers must raise the price by a dollar, ripping off consumers with prices inflated by Amazon’s royalty policies.
Finally, many people seem to be mistaking Amazon extremely low profit margin for tax purposes, with low profits in every category of sales. Anyone even slightly critical would realize that Amazon’s profit margins are too small to be indications of frugality. Not one can calculate income and costs that carefully.
Amazon is not cutting prices to the bone. They’re making lucrative profits in some areas, such as ebooks, because they already dominate those markets. And they’re deliberately losing money in others areas, such as the Kindle Fire, because they’re still trying to either crush a competitor (B&N’s Nook) or drive it away from a market, Apple’s iBookstore. Accountants simply use the loss areas to cancel out the profit areas.
And also keep in mind that, as this article hints, Amazon is using its market dominance to engage in what Apple had been accused of doing, price-fixing, but at the wholesale level. The smarter authors and publishers, the ones who have actually compared what Amazon is paying them to what Apple is paying them, know they’re getting ripped off.
In the end, Amazon is fueling its takeover of publishing out of the pockets of authors, many of whom–thanks to Jeff Bezos–can’t afford to take their kids out for a Happy Meal.
