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.