Amazon’s competitive advantages: will they extend to an ebook world?

Posted by Mike Shatzkin on February 26, 2009 at 5:58 am · Under General Trade Publishing, New Models, Publishing, Supply-Chain, Vertical, eBooks


Will Amazon’s 70% or 75% or more market share of physical book sales online, plus the currently market-leading ebook reader, the Kindle, lead to a similar dominance of the ebook market as it grows? Despite the early lead of the Kindle, and the lock-ins provided by DRM, no interoperability, the largest selection of current titles, and a seamless (if closed) purchasing experience, the view from here is that it won’t.

Amazon’s twin advantages in the physical book market are its huge customer base and its mastery of logistics. The near flawless, certainly industry-leading, logistical performance has been a key from the beginning. With an inital data offering that included books no longer in print, tied to the concept (did they invent it? ) of a “promse date” for delivery that was always met or exceeded, Amazon really solved big challenges for consumers. It is perhaps hard to recall now that, before Amazon (pre-1995), it was hard to find out anything about an obscure book. Even if the book were “in print”, there was no guarantee a bookstore would even order it for you. And if they ordered it, you wouldn’t know when you’d get it.

Amazon changed that very quickly, even though they didn’t even hold much — if any — inventory in the early years. But they they translated the actual availability of copies at wholesalers Ingram and Baker & Taylor into clear expectations for the consumer. That was one of the big factors that helped them build their enormous lead in loyal customers. And the loyal customers led to other advantages, including more reader reviews and more useful and relevant suggestions from the “recommendation engine” than other online retailers could produce.

In the past 12 months, Amazon has built a similar customer-base advantage with Kindle. But as the ebook market grows and matures, the view from here says they won’t have the same success trying to grow it. In fact, we are probably at or near the high-water mark for Amazon’s dominance of ebook sales.

Here’s what is going to happen in the ebook market in the next 24-36 months, and none of it is good for Amazon.

1. There will be more dedicated e-ink readers introduced.

2. There will be more readers introduced to be used on smartphones and smartphones will approach the ubiquity that cell phones have now.

3. There will be new app stores for iPhone competitors: Android and RIM, for sure, but perhaps also verticals by device manufacturer and/or telephone service provider.

4. There will be increasing recognition that “retailing” (having, selling, collecting, fulfilling) the file doesn’t entitle a vendor to nearly the same margin that “retailing” a physical product does. The days of retailers getting a pbook-like discount for ebook transactions are not going to last much longer.

5. The ebook wholesalers will make it easier and easier for every site to sell ebooks in their vertical. They won’t have the same need that affiliates have had to link back to Amazon or BN.com to do this (because the need was driven by the difficulties of managing pbook logistics.)

In short, the ebook market is going to fragment and the advantages of a capital-intensive infrastructure to support logistics don’t extend into the market for digital downloads.

Amazon’s dominance in selling things physical may last for a very long time. But it will not translate into a similar hegemony selling econtent, even with the springboard they already have.


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  • Ade
    Guys,

    do you have Amazon's flow or diagram ? from purchaser - amazon - publisher - logistic - purchaser

    Tks
  • Not formally.
  • It is astonishing that this article, and the discussion thus far, has not once mentioned the huge tidal wave that is going to hit the e-book world. It's called Google Books. If you look at the settlement, you will see that they have an initial pricing scheme that undercuts Amazon on about 70% of the e-books that they plan to offer. Their current base is 7,000,000 titles and they are shooting for 15M! Hello?
  • Google has a ways to go to compete with Amazon and others in the ebook market. First of all, Google's offering is "tethered". You have to have a live internet connection to use it, except for a very small amount cached in your computer. Second, it is not at all clear how many current titles will be available as ebook downloads through Google. That's an "opt in" for publishers, AND they get to set their own prices. Google's pricing matrix is a starting point they hope will become a default, but it isn't likely to be widely accepted for new books (in my opinion), at least in the beginning. The tidal wave you refer to HAS hit; present and past tense, not future. And I don't think there's much commercial impact yet.
  • Mike,

    I think you've underestimated the role that DRM will have in shaping the marketplace for digital content. DRM creates friction in a number of ways. Amazon has done a tremendous job of minimizing that friction by making Kindle DRM mostly transparent to users. The best any competitor can hope to do is to match the user experience Amazon has created. As we've seen in the marketplace for other forms of digital content (notably music) user experience is one area that's easy to get wrong. There's a reason Apple won.

    Also, I would add that Amazon will very likely be developing Kindle apps for other mobile devices. So, while it's true that Kindle will have plenty of competition, it's likely that Amazon will be able to leverage the lead they're building now as they extend to other devices.

    Agreed on the fragmentation of the market, but I don't see that as a disadvantage for the Kindle. Many things that we used to recognize as books will soon become applications that won't be recognizable as books. It's pretty clear that Kindle isn't going for that market. Kindle is focused on digitized versions of things we recognize as books.

    In other words, I wouldn't expect a Kindle SDK any time soon. That's not necessarily a bad thing.
  • Whether Amazon's frictionless delivery, invisible DRM, and merchandising savvy will be replicated putting Kindle books on other devices remains to be seen. If they have to go through the App Store, they'll have a merchandising issue. If they go around the App Store, then they aren't as likely to be seamless.

    Your point that ebooks are a many-splendored thing and that Kindle goes only for a slice of that market (so far) is correct. I touch on that in my enhanced ebook series of posts, the first of which appeared today (Tuesday, 3/3.)

    Sorry for the delay approving and responding to your post. I've been a bit out of touch.
  • There's no question that if Amazon can leapfrog the various App stores to put their ebooks and readers onto the iPhone and myriad other devices, that will give them a huge advantage. But the carriers and device manufacturers do have a lot of inherent control of the delivery. That's why I think we're headed for a period of increased fragmentation. If Amazon can crack that nut, they'll have a big leg up. I agree that fragmentation would give additional leverage to any dominant player. Maybe it depends on how fast the market actually grows.

    Not sure about the "focus on books" or not part of your answer. No doubt Kindle is focused on optimizing the narrative reading experience, versus being able to deliver color, Flash, web, etc. And, in fact, they're better for narrative reading as a result. The whole "interoperability" argument would seem to accept the assumption (which I share) that we're moving to a many screens world (versus the competing paradigm of the single multi-function device). But I think that's a few years away, and in the meantime, I think we'll be living with a lot of fragmentation. Amazon (even at these prices) will dominate people whose book-reading screen was primarily purchased for book-reading. But will that be most of them? And will they be able to get the attention span from the user to peddle to the others? We'll see how much how fast...
  • Dear Mike,
    well done, I totally share your opinion. In addition you could say also that:
    a) the recommendation mechanism increasingly migrates to social networks because a recommendaton from a friend is more relevant that one from an amazon past purchase algorithm.
    b) the $9.99 price promise for ebooks will put a lot of pressure on publishers. This will eventually force publishers to reach out to their readers directly in order to satisfy their margin requirements. (you can call it vertigcal integration)
    c) the growth in mobile advertising will make it possible to link advertising directly to a purchase point. Why would a publisher who pays the ad would want to route a purchase request to amazon? (in a physical world there were obvious reasons as you correctly pointed out)
  • You're right that the $9.99 puts pressure on publishers. But the direct sell solution creates different problems for publishers. Amazon has take the position, which I find totally reasonable from the retailer's point of view, that the publisher's discounts should be based on the publisher's actual selling price. If the publisher sells for a price lower than the announced retail, then Amazon wants to buy at percent off that price. That would always allow Amazon to undersell the publisher without having to suffer a margin loss.

    Publishers DO have to sell direct, but not to enhance margin. They need to do it to build communities that where they own a stake of some kind, even if only as a brand. Publishers have time to convert content to bait to attract audiences they can "own." Over time, they'll lose that possibility because all power will go to the owner of the customer's attention. Amazon will have part of that; social networks will have part of that; niche communities will have part of that. Product-creators will have very little.
  • I agree with the premise, but point out that only the mainstream publishers are complaining about Amazon's ebook discount. Those of us who've been publishing ebooks for the last decade have always given 40-50% discounts to vendors, the latter usually because the vendor offered something in addition to just another sales avenue, like formatting.

    We have also always kept our prices low, because we knew from long experience that true ebook readers will NOT pay print prices. All the excuses that the production costs aren't any less (which I will say I consider specious, personally) aren't going to make a whit of difference. If the mainstream publishers want to take advantage of the TOTAL market for ebooks, they'll just have to accept that the best they can hope for is to offer their titles at mass-market prices. And the lower end of that.
  • What publishers need to do is experiment with pricing as much as they can. Price-sensitivity will be very niche-market specific. In highly substitutable commodity book markets like romance and mysteries, you are almost certainly right that price is a major factor in sales. O'Reilly just found that it was with an iPhone-specific book they were selling (and they found out by experimenting.) (Sorry: I'm in the airport on the run or I'd provide a link.) But a hot new book might command a price closer to the print price, at least for a while.
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