Steve Jobs

Amazon has three pretty powerful things going for them, and two are entirely their own doing.

Number one: Amazon is, by far, the most book-industry-focused company that is actually active in endeavors much larger than the book business. Barnes & Noble and Ingram are just as focused, but they really don’t go beyond the book business. Google and Apple are, like Amazon, leveraging their book activities into other areas and vice-versa, but they have nowhere near the presence in the book business that Amazon does. (Kobo, which is focused on the book business but has just been bought by a much larger Internet retailer, is still a bit of a wild card in this regard.)

Number two: Amazon executes. Their hardware and software and platforms and content delivery all work just about perfectly. It seems odd to me that, at this relatively late date in the ebook switchover, Amazon is still the only place I can shop for ebooks and see my choices arrayed by (highly granular) subject with the most recently published books on top. (Note to all competitive retailers: please let me know the minute your shopping experience can offer the same thing!)

Number three: Amazon is the runaway market leader in the only two segments of the book business that are growing — ebooks and the online purchasing of print — and they are cleverly leveraging the leadership position they have to make challenging them even more difficult in the future. Their willingness to take losses on some transactions to grow share, on Kindle devices to lock customers into their ecosystem and on eboooks when they can to emphasize they are the low-cost provider, is supported by the wide array of products, in media and far outside, on which they don’t need to sacrifice margin for competitive advantage.

Amazon’s industry focus is natural, since books is where they started (even though books are now a fraction of their business). Their history gives them the presence and the knowledge to be highly disruptive. They know how to go after authors directly (apparently even more effectively than Barnes & Noble, which has been signing up content on a proprietary basis for well over a decade and actually owns a publishing company). They use price as a weapon to sell books, disadvantage competitive retailers online and in stores, and to lock in customer loyalty for print (with their Prime program) and ebooks (with their proprietary Kindle platform).

Amazon’s execution has been a keystone of their success from the very beginning, from their invention (or at least early use) of a database for “discovery” even larger than their supply capabilities (they wanted the customer to know when a book they wanted was no longer available, so they could choose something else), promise dates for delivery that were almost always met, customer service that aggressively solved every problem, and intuitive navigation and execution that did for online retailing what Apple did with hardware and operating software. And when Amazon decided to do hardware, they might not have made anybody forget Steve Jobs, but they have apparently made his company address the Kindle Fire with a pricing response on their iPad.

But none of this would worry the rest of the publishing ecosystem — publishers, retailers, and agents — if it weren’t for the fact that everything in publishing seems to be flowing downhill toward a future where the vast majority of what people read as books is both found and purchased (and often consumed) online.

Actually, there are two more important components to Amazon’s success: their lack of involvement in the most capital-intensive elements of the legacy book business (press runs and returns as a publisher, brick stores as a retailer) and their brilliance at acquiring companies that might have provided platforms to cause them trouble. There have probably been many of those (and they are very graphically represented here) but I can immediately point to three:

* the acqusition of Mobi ten years ago took the one format that could have united the ebook market, then divided between the Palm and Microsoft formats, out of circulation before some other retailer (specifically: Barnes & Noble) could have served the entire marketplace and perhaps made ebooks accelerate many years before the Kindle;

* the acquisition of Lexcycle which gave them Stanza, an ebook platform that was extremely consumer-friendly and cross-platform, which could have constituted a threat to Kindle’s development when the Amazon format was in its infancy;

* the acquisition of The Book Depository, an global onliner retailer of print that had developed technology and logistics that would have made it a great foundation for competing with Amazon for global book sales, which was done at the very time that three major publishers on each side of the Atlantic were investing in competitive retailing enterprises (Bookish in the US and Anobii in the UK).

The Book Depository acquisition was very well timed, coming as it did just as there are signs that the British public would really prefer to buy its books online, that the French (like the rest of Europe, we’re sure) are beginning to seriously enter the digital book future, and that the Swiss are starting to worry about the decline of their brick book business.

It is natural that any player who has made the bet that brick-and-mortar bookstores have a future would be hostile to Amazon. It is becoming increasingly obvious that technology is enabling Amazon not just to persuade book customers to shop with them, but also to buy from them when they’ve shopped elsewhere.

I am entirely sympathetic with Tim O’Reilly’s admonition that we should “buy where we shop”. Note that Tim made this point almost a decade ago, when the suggestion being made by me (among others) that bookstores were seriously threatened by digital change was dismissed by most people in the industry.

But it being right doesn’t make it so.

Publishers have a valuable proposition to offer authors as long as Amazon is one of a diversified set of paths to the purchasing consumer. In today’s world, where print is still 70% of the sales of even most straight text books and most of the print is still sold in stores, an author who has the opportunity to work with a regular publisher makes real a sacrifice of market exposure to work directly with Amazon. Even if Amazon were to eschew its Kindle-only insistence on ebooks for titles it signs directly through its imprints (and we hear rumors from the deal-making world that they might on a selective basis), Amazon would still have a great challenge getting exposure for one of its titles through brick outlets. (Some research by Laura Hazard Owen documents the difficulty they’ve had with that so far.) And one important thing Amazon hasn’t learned from its experience is how to meter inventory into stores to maximize marketing exposure but keep returns manageable.

But the publishers’ advantage here has a shelf life. For online sales, individual authors are becoming persuaded that Amazon gets them more than the other outlets combined. Barry Eisler has expressed great satisfaction with his Amazon-only sales. Another author, Robert Niles, reports that Amazon far outsells all the other ebook retailers for his self-published work and thinks it is because Amazon promotes the self-published author more effectively.

When you read through this thread from Amazon’s online forum among authors discussing what happens when the retailer picks one of their books for a price promotion, you get a sense of the excitement they generate through the sales they can create with tools which are uniquely at their disposal.

What that probably means is that more and more authors will be available exclusively through Kindle, some because an Amazon imprint signed them and others because they don’t bother to put their books up on other sites for paltry sales. If that happens, Amazon’s natural advantages just grow.

Although Anobii’s founding CEO, Matteo Berlucchi, tells an imaginative and persuasive story about converting the social aspect of books into a commercial proposition (which has been the effort of independent start-up Copia for the past year), I think the challenge for them and for Bookish, the US version of a publisher-sponsored online book retailer, is steep. The problem for them is the same as B&N’s; Amazon brings resources and ammunition to this competition that stem from a much bigger base than the book business alone. They can use books as loss-leaders to sell more movies or computers or groceries. (By the way, this is exactly what brick book retailers coped with competing for bestseller business with mass merchants who could sacrifice margin on books that brought people into their store because they could make it up on other items.)

There is really only one way for publishers to compete with Amazon for authors in the future and that’s to find book customers Amazon doesn’t have, either by working through other retailers or by creating direct publisher-to-customer contact. The percentage of sales which go to Amazon is the single most important barometer of a book publishing company’s future. Of course, every publisher wants to make their Amazon sales grow. Their challenge is to make other sales grow faster.

Of course, the retailers are a critical focus for us at Digital Book World at the Sheraton in New York, January 23-25. We’ll have presentations from Amazon, B&N, Kobo, Google, Bookish, Anobii, Copia, and from some independent booksellers. We’ll have a panel of players talking about creating new markets, globally and locally. And we’ll have publishers talking about creating communities in genres and in topics, building their capabilities to talk directly to their customers without an intermediary’s help. 

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A simple and perfectly sensible suggestion emerged on the Brantley email list yesterday but the conversation around it showed that some stark realities about the book world have not yet been taken on board, even in very sophisticated circles (which this list is.)

The list discussed a suggestion from librarian Josh Greenberg  that publishers take note of the “rental” model built into the iTunes store as an alternative way to collect money from readers for ebooks.

Greenberg’s piece calls out a fact that many people in publishing have a great deal of difficulty with: that all ebook sales must be licensing deals. They can’t be anything else. Greenberg says:

“When we think about iTunes, we think about a basic fee-for-purchase model. We’ll just leave aside the fact that you never truly “own” a digital file, you’re just buying a particularly-structured license to use it…”

He’s right. When you deal in printed books, you have a tangible object. When you deal in ebooks, you only have “code”. The first sale doctrine says you can re-sell the book or lend it or share it. But copyright law says you can’t re-sell, lend, or share copyrighted “code.” Many digerati (and many librarians not named Josh Greenberg) refuse to acknowledge this distinction.

But that’s a legal point, one that can be debated until a court or a Congress makes a ruling (and then beyond, actually, since we continue to fight battles even after courts or Congress have rendered their conclusion.) The challenge to Greenberg’s idea of switching to a rental model is not so debatable. It’s practical.

Implementing new models for book sales requires herding cats. It can never be done fast and many business ideas relating to content have foundered because it couldn’t be done at all.

What should be clear to anybody who has been following developments since the days a decade or more ago whenRocketbook and Softbook and Sprout were trying to get publishers to give them rights for their content propositions is that it takes a very persuasive sales pitch to get publishers to do so. That sales pitch must be delivered publisher by publisher, and then the impressive ability of publishers to discuss a problem to death takes over, and the new proposition might itself die before its owner gets an answer. Or certainly before its owner gets enough answers to get the new idea off the ground.

What was further made clear by the participation of agents at Digital Book World, and particularly by the opinions expressed by superagent Robert Gottlieb on the ebook “timing” panel, is that the publishers don’t make this decision without consulting with their upstream gatekeepers. Gottlieb made clear that a) it takes a very small number of lost hardcover sales to make an author’s book slip notches on the New York Times Bestseller list, b) he and his authors believe that a much cheaper ebook, or perhaps any ebook at all not reported as a hardcover sale, can make that critical difference between being Number 1 or being much further down the list, and c) the difference in several places on that list is worth losing some sales over.

So just imagine how Gottlieb and his star clients (and all the other agents and star clients) would react to a rental model!

Let’s add one more point before the next great suggestion is made. The same thing will be true of an even better model than rental (which also has plenty of precedent in media even closer to publishers, audio books): subscription sales.

The switch that Apple has made to the “agency model” is not of equivalent complexity from a business perspective. There we’re still “selling the book” (although we’re really licensing access to a file) and the amount of money flowing to the publisher is comparable. But, even there, the switch will not be simple. Publishers have signed contracts governing almost all their ebook sales (which is a further demonstration that this is different from selling physical books, for which signed contracts between publishers and vendors is by far the exception, not the hard and fast rule) which one could imagine the purchasing party (Amazon, Ingram, Content Reserve, Barnes & Noble, Kobo) believes prevents the publisher from changing the rules in the middle of the game.

What Michael Cader reported last week which we expanded on in a blog post and a CNN interview is that publishers can use the new agency model to hold back books from channels where they can’t control the pricing. This very much underreported exchange between Steve Jobs and Walter Mossberg of the Wall Street Journal makes it very clear that Apple expects vendors who would undercut the pricing publishers set for them will be denied access to the content.

We can look forward to continued battles over pricing and over the terms of sale between publishers and the downstream players in the ebook supply chain. But I think it will be a while before real alternative distribution schemes to the public make any appearances. In fact, they’re likely to occur in vertical niches first, where the big agents are less involved and the number of publishers one needs to get on board is something less than “just about all of them.”

A quick thanks to everybody who attended Digital Book World (and there were a lot of you.) I am hoping that the fact that all I’ve heard is praise and enthusiasm for the two day event is not just a result of people being kind to the guy who put the program together. I think we really did generate discussion on some issues that had previously been neglected. But most of all I’m proud of the job we did selecting panelists; everyone I saw presenting was smart, well-prepared and entertaining. Some we had seen in front of audiences before; some we only knew through our interviews in person or on the phone. But picking them carefully and one by one certainly seemed to work and it is the same formula we’ll use putting together Digital Book World 2011. I hope we’ll see everybody again there next year.

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