The Shatzkin Files


The expected changes in the book business favor Amazon’s share growth


This post is the second that is contemplating two big questions facing the publishing industry:

When will the growth in Amazon’s share of the consumer book business stop?

Who will be left standing when it does?

Amazon applies pressure and generates angst among publishers from two directions. As they grow to be 30% or more of many publishers’ business, they are in a position to push to improve their margins at publishers’ expense. And they do, indeed, push.

At the same time, they are both offering authors attractive opportunities to self-publish and wielding a checkbook to build their own publishing program. Both threaten to constrict publishers’ access to the ultimate source of all their revenue, the output of authors looking for a path to readers. And even when Amazon doesn’t sign a book they go after, they could well be pushing up the price a publisher has to pay to get it.

This pincer maneuver is really unprecedented in its power, even though elements of it have existed before.

Joint ownership of publishing and book retailing is definitely not new; it has been a part of the industry for my entire 50 years in it. My first book publishing job was on the sales floor of Brentano’s Bookstore on 5th Avenue in 1962. My dad was a publisher. He was a vice-president of a company then called Crowell-Collier, which bought the first Macmillan in the early 1960s, eventually changed the corporate name to Macmillan, and was then purchased by Simon & Schuster in 1994. None of these entities have anything to do with the company now called Macmillan, which took its name from the British company the owning Holtzbrinck family had also acquired.

Anyhow, when Crowell-Collier bought Brentano’s, Leonard Shatzkin became the responsible corporate executive. He had gone to Crowell-Collier from Doubleday, which also owned bookstores. Across the street from Brentano’s was the Scribner Bookstore, owned by Charles Scribner’s Sons. They were the publishers of Hemingway and Fitzgerald, among others. (Scribners exists today as an imprint of Simon & Schuster.)

And, of course, it has only been about 10 years since book retailing giant Barnes & Noble expanded its proprietary publishing program by purchasing independent niche publisher Sterling. That doesn’t appear to have worked out particularly well for them; they are apparently having trouble selling Sterling today, even at a fraction of the price they paid for it.

And, in fact, Amazon’s publishing efforts haven’t been particularly disruptive to publishers so far. Their big “gets” to date are Tim Ferriss and Deepak Chopra, two big authors who are unusual because their pattern has been to write for different publishers rather than having a lengthy run at one particular house. The very biggest names, which would be fiction authors, have not yet been enticed to make the jump, although Jackie Collins created a stir last week with some self-publishing plans that don’t have entirely to do with Amazon. It has been nearly a year since Amazon signed former Time Warner Books head Larry Kirshbaum to lead their attempt to woo big trade authors. That was very concerning to the big houses but, so far, the sky has definitely not fallen.

Whether we will really see profound changes that justify the questions that head this series of pieces or whether this turns out to be a totally baseless bout of nervousness by the established players depends on what happens in the overall marketplace in the next few years.

The percentage of a publisher’s business that Amazon represents is largely channel-dependent. If ebook sales go up overall, then Amazon’s share will probably go up. If purchasing shifts from brick stores to online, then Amazon’s share will certainly go up. If print sales in brick stores hold their ground, then Amazon’s sales won’t rise.

I think you’d have to look hard to find a credible voice making the case that print sales in stores will hold their ground. To the extent there is a debate, it revolves around how fast those sales will decline.

AAP says we’ve seen double-digit declines of print sales in 2011 over what they were in 2010. They say print revenue was down 17.5% in adult hardcover and 15.6% in adult paperback.

Forrester’s survey of publishing executives finds few expecting such a big decline in the coming year, but then, few expected such a steep decline last year. Forrester’s own prediction is for sudden drops. I would agree that sales will tend to decline in “step-increments”, as players exit the game. Borders may be responsible for a lot of the loss we saw in 2011. There wouldn’t seem to be any shelf space loss that great on the immediate horizon, but we do see B&N reducing both the number of stores and the percentage of shelf space within them devoted to books and there are many predicting that books might lose their appeal to the mass merchants as well. They are fully capable of substituting other merchandise for books and making that switch very quickly whenever they decide it should happen.

My own expectation is that over the next five years we’ll see the share of sales that are ebooks more than double. (This should be seen as a startlingly conservative prediction, since that number has doubled annually for the past five years!) That would put ebook unit sales at about 65% for commercial immersive reading. (I’m grossing up the 20% of revenue number the big houses are reporting because ebooks produce less revenue than print hardcovers and because many titles in the print revenue base aren’t in the ebook revenue base.)

Of the remaining 35% allocated to print, I’d expect half of the sales, at least, to be online. If those numbers are right, then 17.5% of immersive book sales would be in brick stores.

If Amazon remains about 60% of ebook sales and 90% of print books sold online, that would put their share of immersive reading sales at about 50%. And were a book available in Kindle that people knew about and wanted to read and not available in other formats, Amazon could pick up a lot of the ebook sales they would otherwise miss. (Remember, anybody using a Nook or Kobo app as opposed to a Nook or Kobo device could just switch to the Kindle app to read that particular book.) All that is really hard for them to capture is the 17.5% allocated here for print sold in stores. And even the loss of that share wouldn’t be total, since, for any really big book, in-store buyers would buy online if they had to. So they’d be in a position to reach well more than 70%, perhaps even more than 80%, of the market for all books that are principally text. (And those are the books that lead the industry.)

Imagine what that will do for Kirshbaum’s ability to go get big authors. Today an author considering an Amazon publishing deal must figure that half or more of the market is unreachable through that arrangement. No matter how much money Amazon is willing to pay, no matter how much they increase the ebook royalty over the publishers’ offers (which they have ample margin to do), it is a pretty tough sell to get an author to write off more than half the marketplace, particularly the half most visible to the public.

In other words, overall trends are moving things increasingly in Amazon’s direction. Even if nothing changes in the deals offered or resources available to the competitors for author attention in the next five years, Amazon’s position will have grown considerably more powerful. And, in fact, Amazon’s share of publisher sales just about assures that any changes in deals and resources in the meantime will favor Amazon as well.

Of course, there is more to successful publishing than just signing up a book and managing an online audience. Editing and presentation count. A marketing plan that goes beyond just reaching online bookstore customers counts. Rights sales count. And pricing to maximize a particular title’s revenue, not a bookseller’s overall share and customer loyalty, also counts. None of these are things that Amazon’s experience naturally leads them to do. All of them require investment and development of infrastructure and team skills. Will Amazon invest in and perform these functions?

And the more books a publisher does, the more challenging it becomes to manage all these things. Title growth might also challenge Amazon’s marketing resources, such as they are. There are only so many slots on the home page for a category of books to use to feature your own titles. (And there’s a risk of alienating your customers if they think your featuring and recommendations are just shilling for your own books.) There are only so many emails you can send pushing your own books before you lose people’s attention (and perhaps their permission). The special sales and vertical marketing functions that will be increasingly important for publishers are not natural fits at Amazon. Will they do these things?

Of course, we need to remember that while Amazon signs up titles directly, they pressure competitive retailers as well as publishers. There are two approaches Amazon can take in that circumstance and one can imagine them choosing which approach to apply by title.

Either they are a supplier of titles to the rest of the trade, which gives them a different kind of power. Or they withhold what they’ve got from the rest of the trade, which means the Amazon title selection is advantaged over the competition.

You have to excuse publishers if it makes them nervous to think about living in a world where the company through which they get 50% of their sales is also competing with them to sign up titles directly. This is a situation where it is accurate to say that any other player in the ecosystem who is not at least mildly panicked probably doesn’t fully understand what’s going on.

The challenges faced by Amazon as they try to grow as a publisher are not trivial, but neither is the strength they bring to address them. The world five years from now where Amazon is stronger because they can reach 80% of the market rather than somewhat less than 50% is also one where the big players with whom they’re competing for authors are also weaker. In fact, if the number following “Big” isn’t smaller than “6” by then, I’ll be one very surprised prognosticator.

It’s taken me two posts (here’s the first one) to lay out what I see as the dynamic forces tilting the trade book business toward Amazon. I have at least three more components of this story to consider: how these changes look from each spot in the value chain (author, agent, large and small publisher, retailer, reader); a discussion of the “cultural gap”, which can be traced as much to different objectives as to the lack of shared history, between Amazon and the legacy book business; and a discussion of the Amazon antidotes: what other players in the industry can do, within the constraints of the law and practicality, to slow down or reverse the Amazon share growth before it changes the nature of the industry, and its cast of characters, beyond recognition.

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  • Bob Mayer

    Interesting.  I just finished a draft of a blog post aimed at indie authors asking what they will do if KDP slashes its royalty rates.  The reality is, right now, indie authors have little leverage.  And Amazon’s profit margin there is very low.  Not that I’m advocating it.

    I agree with you that most estimates about the growth of eBooks and market share continue to be off.  They’ve been too low from the beginning.  It’s a lot of wishful thinking.

    I’ve finally been talking to several people across Amazon and they say a lot of positive things an author wants to hear, primary among them (And something I never heard in 20 years in traditional publishing):  How can we work together to sell more books to readers?

    • /blog Mike Shatzkin

      Bob, you put your finger on a critical point. Amazon can and will change the rules as their leverage grows. The authors who are celebrating them as a “final answer” are engaging in fantasy thinking.

      You’re sure right that the people you are talking to at Amazon are asking the right questions! Of course, publishers were supposed to *know* the answer to that question in the legacy business. Maybe they should admit that *nobody* really knows those answers in our emerging digital world.
      Mike

      • Scott Nicholson

        Whatever happens, it was good to briefly hear that writers actually mattered in the book industry. History will record the Golden Age of digital literature aas the time when writers were more than just an inconvenient and annoying line item in the publisher’s overhead.

        But no doubt that time will come again. It is the writer’s natural lot to be inconvenient, annoying, exploited, and broke…

      • /blog Mike Shatzkin

        And despite the successes some writers have in any paradigm, most fit the description you provide. Unfortunately. But this is also true of budding centerfielders, rock singers, and matinee idols.

        Mike

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  • Hjackson0512

    An intriguing post.  Two little pieces I quibble about where the facts are a little off:  Ferriss published his first 3 books with the same publisher, Crown, before his 4th went to Amazon.  Chopra has had the vast majority of his titles published by the same house, also at Crown’s Harmony imprint.

    • /blog Mike Shatzkin

      Thanks for the corrections. In Ferriss’s case at least, I know that he went to Amazon without going to his publisher first (or so it was reported) because he just wanted to work with them directly. Still, thanks for straightening out the facts.

      Mike

  • Shevi Arnold

    Great article. I think you’ve done an excellent job covering the entire issue.

  • William Ockham

    You really do not understand how Amazon markets books. It is not primarily about mass marketing. Amazon excels in targeted marketing. There is no upper limit on targeted marketing. In fact, targeted marketing benefits greatly from network effects. That means that as more people shop at Amazon for more things, the more effective their marketing becomes.

    • /blog Mike Shatzkin

      Understanding exists on many levels, but I do understand that. There’s no question that the more a person shops at Amazon, the more targeted their suggestions can become. But there’s a part of that algorithm that also has to do with what they want to sell. As they have more and more titles competing for favored position there, they have choices to make about when they offer the consumer what the objective sales algorithm would suggest or what they’re trying to push. What you and everybody else see is a mix of the two. The more titles they own and want to push for other reasons, the more they give up their core proposition. I alluded to that in the post.
      Mike

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

    As always, a very interesting and thorough analysis, thanks Mike. I’d be interested if you’d add the evolution of markets outside the US into your equation. Depending on how big European players go about it (especially in Germany – Bertelsman…), that could change the future. What I’m trying to  say is that once the rest of the planet goes digital (and we’re not there yet), things could change for Amazon…I’d love to have your take on this.

    • /blog Mike Shatzkin

      It is *such* a complex question, Claude. Right now, Apple and Kobo are getting the jump on Amazon in some foreign markets. Local players are trying to seize control in others. It is a market-by-market battle.

      But I think the US leads here. If Amazon were to succeed in grabbing global exclusivity on some important books, which, in time, I think they will because of their US position, they could start stealing share abroad too. I actually think competitors will succeed to the extent that local pricing laws and VAT assessments prevent them from using their biggest weapon, discounting, to gain market share.

      Mike

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

        Thanks Mike, as always, your mind is like a beacon illuminating the night of the future! Nice image, hey? Yes, of course, pricing laws and VAT put a floor on ebook prices in Europe, but that could change too. Still, I think you’re right: Amazon is in this game first, and as time goes by, the barriers to entry for newcomers go only one way, up!

      • /blog Mike Shatzkin

        Aw, shucks…

        Mike

  • http://www.summertimepublications.com/ Summertime Publications

    How can bookstores work WITH Amazon–instead of being crushed by it? Is there a model? Ideas?

    • /blog Mike Shatzkin

      Yes, let’s just find the formula by which Macy’s worked with Gimbel’s. THAT should work!

      Mike

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  • Lynch Sylvia

    Nice and informative article regarding Amazon.

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