The Shatzkin Files


Shocking news from the UK: Waterstones selling the Kindle


The announcement that Waterstones, the nearest UK equivalent to Barnes & Noble as a bookselling chain, will be selling the Kindle in their stores came as somewhat of a shock.

There had been rumors that B&N was closing in on a deal to partner with Waterstones on the Nook.

The difficulty in making deals around a reading device and supporting ecosystem is that the sales of content subsidize the sale of the devices. It’s all part of a total equation around the “lifetime value” of the customer. The device-supplier really requires the ebook sales to make the device sale profitable.

So when Kobo did their deal with WH Smith in the UK (and FNAC in France) last Fall, it made sense to me why they’d do it rather than Waterstones. At that time, Waterstones was saying they’d deliver their own device.

Knowing what B&N has had to spend in development to make the Nook work across a store and revenue base several times as large as Waterstones, that always seemed like a very heavy lift. It wasn’t a surprise when Waterstones kept missing delivery dates for its device nor when the rumors shifted to them doing a device deal with somebody else. Since Kobo already was working with their biggest competitor, the logic said it had to be Nook.

I don’t know anybody who predicted it would be Kindle.

Michael Cader in Publishers Lunch reads the press releases the same way I do and we both get the message that the only ebooks Waterstones will share revenue on are those that are purchased over Waterstones’ in-store wifi network. (That network doesn’t exist yet; it’s being built now which is why they won’t start selling Kindles for a few months yet.)

Cader quotes Tim Hely Hutchinson of Hachette as being “fully supportive” of the deal. Since his two biggest customers have just joined forces, I can imagine that his private thoughts might be a bit more troubled than his public pronouncements. (When presented with lemons, make lemonade.) But I wouldn’t pick a public fight with my biggest sources of revenue, either.

How will Waterstone’s benefit from this deal? Well, they’ll make some margin on the Kindles they sell. They won’t make much selling ebooks if the only ones they’re paid for are the ones transacted in their stores. I’ve seen some speculation on an email list that they’ll use the Amazon connection to get more promotional money from publishers, but since they’ve already kicked up discounts considerably, I’m not sure how much blood is left in that stone.

It would be bad practice to criticize a deal when one has no idea about the details. And it could be that Amazon made Waterstones an offer that it would have been crazy for Barnes & Noble to try to match or for Waterstones to turn down.

But it is hard to escape the conclusion that this arrangement will accelerate the British public’s move to ebook reading and, at the same time, strengthen what is already the strongest book retailing platform. Amazon’s commanding share of the online print market and their share of ebooks can only rise from the commanding levels (often referred to as 90%, but I don’t know if that’s accurate) they now hold.

Waterstones’ claims that they will both be growing their online print business and delivering their own ebook store might indeed be sincere, but they are almost impossible to take seriously.

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  • http://twitter.com/emmittc emmittc

    shocking indeed, esp considering Daunt’s public comments regarding Amazon over the past year…evokes Borders and Amazon partnership in a way. (similar ending?) …. amazon marches on…. discombobulating…..

    • /blog Mike Shatzkin

      Yes, I left out the public comments part but Cader linked to some stuff he said last December that Amazon must have had to ignore to enter into a partnership with him.

      Mike

      • Andrew

        Amazon accounts for 70-80% of digital revenues at BIG 4 in UK. Apple has >15%. All others combined <10%

      • /blog Mike Shatzkin

        Thanks, Andrew. I take it the 90% figure might apply more to the online print side…

        Mike

      • http://twitter.com/philipdsjones Philip Jones

        Just on Matteo’s point “In a Kindle only market (UK) DRM free becomes a necessity to enable diversity without which there will be none.” That was true before this deal. I doubt many british publishers were waiting on Waterstones to provide the diversity that the absence of DRM might otherwise provide. The hope is that an ebookseller, such as Anobii, will crack a way of sending e-books to the Kindle in a user friendly way so as to make a dent, and then publishers will surely be convinced that removing DRM will make a real difference. As it is most customers who use the Kindle will continue to use Amazon as the platform unaware that DRM has even been applied. Chicken and egg to be sure, but at the moment the chicken hasn’t been hatched and the egg hasn’t been laid.
        BTW I’m not as gloomy about this as Mike. Waterstones becomes the first non Amazon bookseller to get between the Kindle customer and the Kindle store — if Daunt’s promise of a Waterstones browser is true. While the skepticism is very valid is rather reminds me of the talk about Pottermore before it actually launched, and then we all said ‘wow, that’s clever’. Might something happen here too? Seem unlikely based on all the evidence presented so far, but never say never.

      • /blog Mike Shatzkin

        Sober and sensible thoughts.

        The idea that just stopping DRM will put much of a dent in Amazon has “wishful” as a big component of it.

        But it does make sense that, without it, the task of competing with them is even harder.

        Mike

      • Andrew

        James Daunt: ‘Amazon are a ruthless, money-making devil, the consumer’s enemy’ http://www.independent.co.uk/news/people/profiles/james-daunt-amazon-are-a-ruthless-moneymaking-devil-the-consumers-enemy-6272351.html

      • /blog Mike Shatzkin

        Ah, from my ever-alert and -helpful readers, James Daunt has no escape!
        Mike

    • Wayne McDonald

      Perhaps Borders would still exist if they hadn’t helped build Amazon up, then cancelled the deal, and tried to launch their own competing website.

      You feed the little monster you find, you let it grow nice and big, between the two of you your doing well but its getting bigger than you. Do you accept your now the junior partner and the fact that your health is slowly getting worse and cut back slowly or do you take a stand while you can?

      Borders took their stand, in retrospect, far too late. And made a number of mistakes that Amazon had nothing to do with.

      • /blog Mike Shatzkin

        Borders probably didn’t have a lot of choice. At the time they allowed Amazon to become their ecommerce site, they probably didn’t have the resources to build a decent one themselves. In fact, BN.com never really managed to be competitive with Amazon.com in the print book space. Their search engine wasn’t as good so their user experience wasn’t as good. BN has done much better with the Nook against the Kindle than they ever did selling online against Amazon.

        But, that said, there were a million other mistakes made by Borders. As you suggest.

        Mike

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  • Matteo Berlucchi

    Mike, this is it, the proverbial nail in the coffin. DRM is now officially dead (at least in the UK). Enjoy the spectacle of it crumbling away in the next few months. Game on.

    • /blog Mike Shatzkin

      Are you saying that because of this move, the publishers will shed the DRM? Is that the point?

      Mike

      • Matteo Berlucchi

        Yep. In a Kindle only market (UK) DRM free becomes a necessity to enable diversity without which there will be none.

      • /blog Mike Shatzkin

        Thanks to you, Matteo, people will read that news first right here. I haven’t seen anybody else say it yet!

        Mike

      • http://about.me/PeterTurner Peter Turner

        Waterstone/Kindle deal would then be the best thing to happen to publishers in a long while. Wonder what Kindle’s counter to DRM-free would be?

  • gous

    There have been several alliances by B&M retailers with Amazon through the years – Borders, Target, Waterstones itself. Cannot think of a single one that did not in the end regret their involvement with Bezos.

    Afraid to say that Mr Daunt appears completely out of his depth in the digital arena.
    Waterstones can now be written off as the Books-A-Million of Britain, a declining force of the past that will play little role in the digital future.

    That said some of the tweets on l’affaire did show a nice touch of gallows humour:

    Waterstones: We are excited to partner with the fire that is engulfing our home and look forward to benefiting from the warmth it provides.

    TOMORROW: Sainsbury’s announce they’ve invited Tesco to set up stores within their branches inc web terminals linked to Teco.com

    Colleague just compared Waterstones teaming up with Amazon as being like the RAF leasing the V2 rocket….

    Once upon a time a consumer wandered into Waterstones, browsed the books, checked Amazon price on in-store Wifi, bought eBook. The end.

    • /blog Mike Shatzkin

      There is no doubt that if this works out well for Waterstones and Mr Daunt that he will have surprised a lot of us.

      Mr Hely Hutchinson’s comments aside, I can’t imagine there’s much happiness inside UK publishing houses right now. And one has to assume that B&N didn’t want it to end up this way either.

      Mike

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  • http://www.eoinpurcellsblog.com Eoin Purcell

    Mike,
    I can’t help but wonder what they were ‘meant’ t do? A deal with B&N while superficially attractive makes no sense when B&N has no presence in the UK and now a deal with Microsoft to distract it. A deal with Kobo is ruled out by the WH Smith deal. Spending money themselves is a no-no given their belief in print. Apple? Meaning that if AMZ are gonna offer some goodies and they actually HAVE market share, a deal seems attractive!
    That said, I fear the conversion of dedicated Waterstones readers to digital readers and thus Amazon customers that will likely happen if Waterstones are any way good at selling Kindles! Otherwise, it seems a pretty good short play!
    Eoin
    PS: But only a short one!

    • /blog Mike Shatzkin

      I don’t agree that a deal with B&N generically doesn’t make sense. In fact, I think a deal with B&N would generically make *the most* sense. But deals aren’t generic, they’re specific. And, as you point out, Waterstone’s — having diddled around for the past year talking about their own device — had very limited options, probably just Kindle or Nook. Which is why I said what I did about what the offers might have been.

      Gee, Eoin. Were you *expecting* this deal? You must be the only person I know who did if you were.

      Mike

      • http://www.eoinpurcellsblog.com Eoin Purcell

        Mike,
        Can’t claim to have been expecting it :) , but now that it’s happened I think the logic is pretty strong. 

        My point about B&N is this:1) The brand isn’t that strong in the UK. Waterstones would have had to spend to promote it reducing the value.And costing them time, money and distracting from the store refurb.2) The platform is fighting not one, not two, not three but four fairly well set up rival platforms in the UK it’s growth potential is therefore uncertain )Amazon, Apple, Kobo, Google [and others])3) Even if they had taken the deal with B&N then they would be selling someone else’s device, and someone else’s store would probably be the chief beneficiary.4) Even if they had chosen B&N they’d still have the conversion of heavy print readers to digital reading on someone else’s platform.In short, a failure of epic proportions through taking a B&N deal was a not negligible possibility. When you think about that and say well is digital even our key market, the decision they’ve made seems sensible.Eoin

      • /blog Mike Shatzkin

        I still think B&N would have been better, but that’s in the abstract. The choice was not an abstract choice.

        Mike

  • marcellovena

    Hello Mike,

     

    Here a couple of
    thoughts I’d like to share:

     

    1. Well the news
    look surprising especially on the side on Waterstones, for all reason already
    mentioned. More interestingly is the deal on Amazon’s side, beyond the obvious
    opportunities to sell more Kindle in to high street bookstores. 
    We don’t
    certainly know the terms of the deal and how expensive (if at all) it was for
    Amazon. However with this
    move they send a strong signal to B&N. 
    Basically they are telling B&N is moving too slowly and
    there is no space for them in UK. Kobo and Amazon have already occupied the top
    two prominent retail spaces. Perhaps Tesco is still an option, but the fit with
    B&N seems weaker than a fit with Waterstones. So even if B&N had gotten
    the $300mln from MSFT to foster international expansion, basically the first
    and easier beachhead (UK) is gone… For a US centric  company like B&N it will be even harder to replicate the success they have
    gained at home. (AMZN is very much internationally minded).

     

    2. Do not forget international
    success is also key to reduce production costs of HW devices. If Amazon becomes
    successful at selling millions of Kindle readers in Europe it will be able to keep lowering its production cost over time and therefore lower overall Kindle prices both in
    US and globally. Moore’s law, learning and scale economies determine the
    productions costs. How well are positioned B&N, Kobo and the HW manufacturers against Amazon in the race to reduce manufacturing costs???

     

    3. I do agree with
    Matteo Berlucchi, DRM should be made very soon obsolete. And this AMZN’s move might
    accelerate the process in UK. Music industry has abandoned DRM 4-5 years ago already…

    This would
    certainly open up opportunities for other innovative booksellers (like Anobii) to
    sell to Kindle Owners.

    However DRM free
    ebooks alone won’t lead to a substantial reduction of AMZN’s power. There would
    certainly be a back response from them, since they own also the HW technology…

    Perhaps the already
    legendary Pottermore DRM free can shed some lights.. As a matter of facts the
    ebooks bought on Pottermore, are in the majority of  cases (meaning in all
    cases where a reader wants to get them natively into a Kindle without converting them from an ePub) NOT DRM free.

    How comes? Wasn’t
    it DRM free? No way. 
    Interestingly, the fulfillment of the ebook delivery is done by Amazon itself and the Harry Potter’s ebooks
    on the Kindle are WITH DRM. (try yourself)

    It’s the other
    ebook formats that are DRM Free (watermarked for be precise).  

    So one scenario (I’m
    not saying it will be the actual one) could be that whatever you buy from
    Amazon will be delivered to your Kindle  with a proprietary DRM of Amazon. They could do it, since they own the technology.  Or they might create a new proprietary format that it’s hard to export. If you own the HW you can set your own proprietary standards.… So DRM free won’t be the end of the story… 

     

    4. If you keep
    barriers to exit high, you will minimize/control the risk that your consumers
    flock to other device makers pnd possibly to other ebook retailers. Therefore
    removing DRM would only allow to put new content on the Kindle (maybe) but not necessarily
    the other way around. Kindle could easily be turned in “black-hole”
    machine… any content can get in… but nothing can get out..

    Unless HW
    manufacturer and Booksellers are kept separated (which is not the case now) it
    will be very hard to really break a dominant position of the incumbent that is at the
    same time: no. 1 HW manufacturer +  no.1 eBookseller and is becoming a  general Publisher too.

    It reminds me of
    MSFT owning the Operating System and managing to get  the IE at default web browers. Only two
    days ago, for the first time in 17 years IE was surpassed by a newer Web Browser
    (The Google Chrome, http://www.pcworld.com/article/255886/google_chrome_overtakes_internet_explorer.html).

    I doubt the
    Publishing industry has got 17 years left to hope and wait for an external rescuer…

    All the best

    Marcello

    • /blog Mike Shatzkin

      Marcello, as I understand it, Amazon (and B&N) loading their DRMd Potter ebooks onto their devices was an outcome of negotiation which only began because there was the threat that Pottermore could itself load those devices with DRM-free versions. That would mean that a very high-profile series of books would be promoted in the marketplace and the retailer wouldn’t have it, or any visibility associated with it, yet their customers could go buy it from Pottermore.

      Since Pottermore far prefers to have its books *promoted* by the biggest retailers, they worked out the referral fee payment and were willing to “concede” allowing the retailer to actually load the ebook. The story was they used DRM instead of watermarking because the retailers couldn’t do watermarking. Seems unlikely to me, but that’s what they said.

      In the US, there are a lot of Nooks and Kobo readers out there (although more Kindles, no doubt.) DRM free means anybody can load a Kindle, but it would also mean Amazon could load a Nook or Kobo reader. Not sure who would come out ahead on that…

      Mike

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  • David

    I suspect this was the least worst option for Waterstones, but it’s still pretty scary. Can’t see they’ll make much from the referral fee, and knowing Amazon, that fee won’t be shaved off their profit – it’ll be the publishers and authors who will no doubt be asked to accept less for their books.

    Once again Amazon have everyone dancing to their tune: governments give them financial inducements to set up warehouses (e.g. Scotland); Amazon respond by contributing nothing to the community and also by making sure all their profitable activity occurs offshore, so they pay no tax on their profits. Now they’ve found a High Street retailer – which IS part of the community, which IS subject to taxes and rates and other overheads – to act as their showroom.

    • /blog Mike Shatzkin

      I don’t make cases here for Amazon but I doubt they’ll take their payments to Waterstones out of the hide of publishers or authors. Except, perhaps, indirectly in the long run.

      And let’s all remember: they *execute*. Most of their advantage is hard-earned.

      Mike

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