The Shatzkin Files


Book publishing may not remain a stand-alone industry and book retailing will demonstrate that first


You are missing some good fun if you don’t know those AT&T commercials where the grown-up sits around a table with a bunch of really little kids and asks them questions like “what’s better: faster or slower?” There always seems to be an obvious “correct” answer. Those kids could answer some important questions about ebook retailing in the future like these:

“What’s better? Selling just ebooks or selling ebooks and print books?”

“What’s better? Selling in just one country or in all countries?”

“What’s better? Selling just books or selling books and lots of other things too?”

“What’s better? Having one way to get revenue, like selling books with or without other stuff, or having lots of ways to get revenue so that books are only a part of the opportunity?”

And the answers to those simple questions, so obvious that a 5-year old would get them right, explain a lot about the evolving ebook marketplace and, ultimately, about the entire world of book publishing.

Book retailing on the Internet, let alone an offer that is ebooks only, hardly cuts it as a stand-alone business anymore. The three companies most likely to be in the game and selling ebooks ten years from now are Amazon, Apple, and Google. The ebook business will not be material to any of them — it is only really close to material for Amazon now — which is why we can be sure they will see no need to abandon it. It is a strategic component of a larger ecosystem, not dependent on the margin or profit it itself produces. And the rest of their substantial businesses assure they’ll still be around as a company to run that ebook business.

Kobo is owned by Rakuten, a large Japanese online retailer. They started a global  expansion in 2005, buying up ecommerce companies in different key markets, including Buy.com in the US. They also have invested in Pinterest. I don’t know what it is, but I have to believe that deep in Rakuten’s strategic consciousness there is a larger reason for them to have Kobo, probably based in the opportunities inherent in having a consumer’s email address and credit card information and knowledge of what s/he reads. So they also have a base bigger than the ebook business.

Barnes & Noble demonstrates the principle that books alone and one market alone just aren’t enough. They were able to use their US store presence to jump-start the Nook, but after they grabbed the low-hanging fruit among their store customers for digital reading, they quickly ran out of steam. Without a global presence and without a strong online store (BN.com has been deficient, and an albatross, for years), they just don’t have the ballast to be competitive. And that’s a shame, because B&N is the player that could make the most powerful consumer offer in the book space. They have online and offline, print and digital, but it really hurts them that the execution of offline print isn’t up to competing with Amazon and the overall coordination that would maximize the power of all these capabilities is not in evidence.

This is a totally conceptual theory being posited here, not one with any data to support it. And it is not based on the value of the consumer proposition, although it does seem to me that the “right answers” to the questions in the lead can be formulated strictly from the consumer perspective. The thinking is that book retailing, and particularly ebook retailing, is doomed to being a low-margin business. As such, it is much easier to sustain and support if there is benefit to be gained that goes beyond the margin that can be captured from those sales.

This has really been Amazon’s secret sauce from the beginning. The book publishing industry scratched its collective head for years as Jeff Bezos and his crew grew a giant online bookseller without keeping much margin and had Wall Street shovel money at them to grow and invest. The widespread wisdom in publishing in the late 1990s was that Amazon was performing some kind of parlor trick that would shortly come to an end. Instead, they built on their customer base, their tech, and their reputation for service to expand way beyond book retailing. And today they can afford to run a profit-less book retailing and publishing operation (if they want to; I have no evidence that they don’t make profits and don’t claim to know), taking the margin out of the game in a way that would squeeze any competitor trying to make a profit from book retailing.

Google and Apple are similarly situated in that way and profits (or losses) from ebook retailing don’t even rise to the level of a rounding error for them. Their ebook retailing operations exist in service to larger initiatives: search and Nexus 7 and the whole Google Play content offering in Google’s case; making devices more useful and complementing the iTunes and apps offerings in Apple’s. Their ecosystems are much larger than their ebook businesses and they benefit just from the ebook business being there.

And they’re global. As is Kobo, and Rakuten presumably has an ecosystem play in mind, although it isn’t evident yet.

This is a paradigm that leaves Barnes & Noble out in the cold. Their business, on which they must make money, is selling books. They are trying to diversify their merchandise selection a bit in their stores, but that’s a strategy that is both difficult to execute and has nowhere near the upside that Amazon, Google, and Apple have with their other businesses. This is an unfair fight where B&N is dependent on margins from their ebook (and book) sales while their competitors, if perhaps not totally content to break even on that business, aren’t materially affected if they do, or even if they lose a bit of money on that aspect of their business.

All of this is good for publishers, who benefit from having lots of retailers.

But publishers are bound to face the same problem due to atomization. As the share of the book market — print or digital — reached by online retailers grows (and it is perhaps past 50 percent for fiction already), it makes it easier and easier to put book content into the marketplace and have it reach a substantial percentage of its potential audience. Ambitious self-publishing authors have been reaping the benefits of this reality in growing numbers for the past several years; now entities ranging from newspapers and magazines to ad agencies and colleges and manufacturers are discovering the same opportunity.

In other words, publishing — like book retailing — is likely to become a subsidiary function pursued in strategic support of larger goals. Unlike in retailing, this will not be consolidated among a few players, but as widely scattered as the subjects about which books are produced. But the core challenge for the legacy publishing establishment, that they will increasingly face competition that doesn’t need the profits from that activity as much as they do, will be the same. Book publishing as a stand-alone industry with most of its significant players earning all their profits within it is in the process of morphing into something quite different, starting with the retailers.

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  • iliad1954

    In other words, Amazon foregoes a profit in its business of selling books from legacy publishers in order to support its profitable business of facilitating self-publishing–the legacy books creates the marketplace for self-publishers. The profitable side of Amazon is pretty much all on the service side–self-publishing, AWS, Amazon Marketplace, etc.

    • http://idealog.com/blog Mike Shatzkin

      That’s not what I said. It’s not what I know.

      Mike

      • iliad1954

        I guess I’m just having trouble seeing the core business that Amazon is serving by not making a profit in bookselling. Google’s core business is advertising; Apple’s core business is hardware; each of them can be profitless in bookselling to support that. Amazon seems to want to offer the lowest price on anything they sell, so profits are zero or thin on anything that they do not manufacture. This supports what core business then?

      • http://idealog.com/blog Mike Shatzkin

        Amazon profits from having customers. They can sell them lots of things besides books if they have an account, particularly if they signed up for PRIME.

        And I certainly never said they don’t make money on books. That might have been true while they were growing (and getting lots of investment capital thrown at them by Wall Street), but I really doubt it is true now.

        Mike

  • Ben

    I have to disagree. Going global is not the only way to stay in “retail” business and be competitive. I think the success and failure of Nook has become such a distraction for B&N, it leads everyone to think retail stores are doom. Where do you think people will go shopping when our internet network isn’t the strongest in the world nor most accessible? Where will our elders go buy books when the majority don’t even access nor understand internet? This is a big chunk of population to ignore don’t you think?

    I also think you are asking the wrong questions. It’s the quick changing nature of technology that is the issue here. No one would argue Google and Apple are tech companies and I will throw Amazon into that category too. Being tech companies at heart, they can adjust faster than B&N or any publisher or combine. These tech companies have more resources and talent to make faster adjustments that easily disrupts B&N and publishers. It’s these disruption that forces B&N and publishers into uncharted territories.

    Going international certainly helps bring in more revenue but it’s not a factor that will break a company or an industry.

    • http://idealog.com/blog Mike Shatzkin

      Ben, it’s the size of your base which matters underpinning my statement about international, which is particularly important if the margins in your core business are shrinking as I argued they will in bookselling. It takes a critical mass of business to keep a store open. For *every *store that closes there are disappointed customers. The fact that some people would have continued to shop there doesn’t keep the store open. The fact that you can name cohorts of people that would like to continue shopping in stores is not ipso facto an argument that any particular store, or any number of stores, will remain open.

      The tech-eptness of the tech companies is not the key differentiator in this *aspect *of the challenge to the publishing ecosystem. The fact that they don’t need to make a profit from ebooks or books or from the book market in the US puts much more of a squeeze on a company that does than their ability to deliver tech.

      Mike

      • Ben

        Mike,
        I usually agrees with your well argued posts, and again, I disagree with your assessment on the retail scene, books and/or consumer goods.

        Until Amazon’s drone delivery program becomes reality (unlikely anytime soon) and efficient enough, they are not going to destroy B&N or indie bookstore or any retailer for that matter. The weakest point with retailers is, they forget what they are good at doing, service.

        You also ignored many companies that successfully expanded onto the international level often does it via acquiring local business that are already well establish or on their way to be. IMHO, B&N took the wrong path on trying to grow internationally leaving them with half-baked UK effort. Could B&N have done better? I think so but they already lost the momentum early Nook gave them.

        Can you name a publisher or two that has a robust internal tech-division and fully develops their own apps and ebooks? Name one publisher that truly believe epub 3.0 is their digital savior and don’t outsource to Asia for ebook conversion? Name a tech company (other than Apple) whose tablet/ereader currently supports epub 3 with any success? Tell me again how tech companies dont have a strangle hold on publishers again because tech?

        The edge tech companies have isn’t because they can afford to not make money on ebooks. Truth is they can not afford to have weak appstore that doesn’t attract developers. Both Google and Apple showers their developers annually. Amazon don’t seem to care about developers and I think this is why their wall-garden appstore continues to be weak. Despite the fact, Kindle Fire HDX seems like a well developed tablet and has a good on-going publicity campaign, I don’t see Amazon making much dent on Apple or other Android tablets in market share. The only thing Amazon is doing, is drive Nook into the ground and I don’t even think they see Nook as a competitor.

        Every ebook or book app is a piece of software by itself. I think these tech companies understands that point very very well. I’m not convince publishers and B&N does. Until publishers can accept this as a core fact and have an actual digital strategy, they will have to rely on pricing for their “digital success”, which won’t last long.

      • http://idealog.com/blog Mike Shatzkin

        The outsourcing of tech to Asia is about buying commodity services with lots of suppliers to choose from. It is not something publishers should be doing.

        The inexorable movement of purchasing to online will squeeze the stores more and more, whether you call that Amazon doing it or not.

        And if you’re suggesting that publishers should be employing tech more robustly to make apps and enhanced ebooks, I couldn’t disagree with you more. So far, for publishers, that has been nothing but a cash and attention drain.

        Mike

  • John Andrews

    As everyone knows, pubs occupy an important place in British culture. But pubs were closing at the rate of 18/week last year and now they are closing at a rate of 26/week. This is because the big stores are using beer as a loss-leader. On a hot summer evening (OK, we do not have too many of them but those few are peak periods for beer sales), which would you prefer: £3.50 for a pint in dark pub or £1.20 for a pint from a store to drink on the grass? As I see it, books are now being sold like English beer – as loss leaders to attract customers to buy other items. So bookshops are doomed, except for those which cater to a small nostalgia market niche. Publishers, as Mike has often said, therefore need to find other ways of doing business – as the brewers have done.
    Note: UK alcohol consumption is also falling, a little, as people become more health-conscious. For men aged 16-24 it fell from 26 units a week in 1999 and 15 units a week in 2009. A pint of beer rates as 2 units so they are still knocking back 2 pints/day, often when watching soccer on TV.

    • http://idealog.com/blog Mike Shatzkin

      Wow. I didn’t realize that BEER was a leading indicator for the book business, but it appears from your evidence that it is!

      Mike

  • Ken J.

    The change you describe — book sales no longer being an existential matter for the leading book retailers — has already happened in recorded music. The transition happened through the 2000s: The leading music retailers are now Apple and Amazon online; Wal-Mart, Target and Best Buy in physical stores. The romantic, old-fashioned independent record store is (without checking) 5% or down of the market, and the chain record store business (the FYE brand and some regionals) isn’t doing much better.

    Its possible that some of the music-only streaming businesses such as Spotify will reverse this trend, but music biz press is constantly filled with complaints that the streaming companies do not yield much money to the creators. (And the big trend that Spotify represents is that growing numbers of customers no longer wish to make individual purchases — they want access to everything for a flat rate.)

    • http://idealog.com/blog Mike Shatzkin

      There are big differences between the book business and the music business which I wrote about five years ago when this blog was brand new.
      http://www.idealog.com/blog/the-book-business-aint-the-music-business/
      I don’t think the same compelling need for subscriptions is there. And I think the book in physical form has more value than music in physical form. But the parallels exist and the point about the disappearance of record stores (and video stores, for that matter) is worth taking on board.

      Mike

  • http://claudenougat.blogspot.com/ Claude Nougat

    An intriguing thought, book publishing as no longer a stand-alone industry, where publishers can be knocked off the market by people making money in areas other than books. So, as you say, the “whatever the industry is morphing into” starts with the retailers.

    I see that. But suppose the publishing industry produces behemoths that dictate to retailers where their books should go on the retailers’ shelves? I’m simplifying the process, but, overall, isn’t that what’s happening now? Amazon, one of the big 3 book retailers you mention, ought to realize that legacy publishers, especially the big ones, are still able to launch and make the most of their best sellers. Let’s face it, no indie, no matter how successful, can reach out to as many readers, both online and off line, or get into international prestigious competitions like the Pulitzer or Booker Prize, or again, make newspapers and Hollywood salivate about such and such of their titles etc In short, a savvy big publisher can still “make the news” with a (or several) best selling title(s).

    Surely this matters to Amazon? They know on which side their bread is buttered, don’t they? I guess, what I’m trying to say, is that the future of publishing is not all that bleak if the big publishers focus on what they’re good at, on what is called in economic jargon, their “comparative advantage”.

    • http://idealog.com/blog Mike Shatzkin

      Claude, you are quite right. I think that totally commercial publishing will still need a focused commercial publisher. That’s why I think the publishing choice for an author with a Big Book 5 or 10 years from now will be Amazon or Random House.

      I told that once to an Amazon executive who said to me, “I’d hope in that time frame that Random House would be our biggest supplier and we’d be their biggest customer.” And that will also be true.

      Mike

  • Suzanne Cowles

    What if Amazon buys B&N? Amazon wants brick n mortar stores. B&N needs diversification. A marriage made in heaven.

    • http://idealog.com/blog Mike Shatzkin

      I don’t think Amazon wants brick and mortar stores. That idea has been floated for 15 years and it has never seemed likely to me, and it seems less likely with each passing day.

      Mike