Deconstructing What Amazon Is Doing

Thanks to Nathan Bransford for the shout out on his blog here.

As a result, I got several emails from writers and friends saying they didn't understand all this "stuff" I've been spouting about Amazon.com moving to integrate vertically.

So today I'm going to try to explain it more simply. Understand--this is my own opinion and worth what you're paying for it. I'm also speculating on what went on inside Amazon's strategy sessions. I have no insider knowledge. But I am a writer, and I have a great imagination {grin}.

Amazon has a publishing arm (BookSurge) that hasn't enjoyed a very good reputation in the industry. Also, Ingram--the world's largest book distributor--has its own publishing arm that I suspect has been kicking BookSurge's ass.

I'm speculating here that some bright bulb in the Amazon corporate lineup said, "Well, if we told the small presses that they had to use BookSurge or give us a bigger cut AND pay an annual fee, I'll bet most of them would switch. And who's going to care if they holler? They're the littlest guys in the industry."

So the corporate bean counters ran the various scenarios and came up with the following:

1) The small guy caves and goes with BookSurge. This has the effect of bringing in more revenue to BookSurge (aka Amazon) and, at the same time, taking revenue away from competitors. Of course, some small presses, wanting to use Ingram for distribution, will probably end up paying double setup and double printing fees, thus harming their business, but what does Amazon care?

2) The small guy refuses to go with BookSurge and instead moves into a position as a third party seller with Amazon, giving a higher cut of sales and paying an annual fee. Since this cuts into the small guy's already thin margin, he is forced to raise his prices. Amazon doesn't care. Their revenue goes up.

3) The small guy refuses and tries to sell online using another retailer. His clients scream because they all want to be on Amazon.com. His business shrinks, or he ends up going back to Amazon.

Deciding that the bright bulb was right, and there wasn't a lot of downside for Amazon, the company made the announcement: Use BookSurge or else. They started with the small POD firms and the vanity presses, counting on the fact that no one would care.

And early indications are that the company made the right decision. iUniverse and AuthorHouse (both vanity presses) folded like cheap suits because they have no other retail distribution options to offer customers. PublishAmerica appears to be made of stronger stuff. They're still holding out.

And I've been talking about little else for the last week.

Why?

Because I have a checkered past. Besides being a teacher and a social worker, I did nine years with Smith Barney. I was an institutional stockbroker, which taught me to look ahead.

Let's talk about what I see ahead for writers:

Amazon has been blunt. They not only intend to continue this policy of "Use BookSurge or else," they plan to expand it to other publishers.

Internet sales are growing every year. Publishers Weekly recently reported that, in 2008, Internet book sales are projected to be 30.5% of the whole market. The Wall Street Journal quoted an expert last week who said estimates are that Amazon already represents 15% of all book sales.

Publishers and writers want their books placed where they will sell so they're going to want to stay with Amazon. But the pie is only so big, guys. Margins are already tight. If Amazon takes a bigger piece of the pie, the only way for a publisher to make the equation work is by raising book prices.

If book prices go up, people either quit reading or buy more used books. One out of every eleven books sold is already a used book.

Does Amazon care if readers switch to used books? No, because they already sell used books right next to the new books on their website.

Should publishers and writers care? Damn straight. They don't earn a penny on a used book sale.

What if--instead of buying used books--the reader turns to
e-books? Does Amazon care? Nope. They already sell e-books on their website. And such a move would only drive more traffic to their new e-reader, The Kindle.

What about publishers and writers? Well, those who have concentrated mainly on print books are going to be scrambling to figure out how the e-book market operates.

Now do you see how being vertically integrated puts Amazon in a terrific place? They're positioned to make money no matter what the outcome. And they can hugely impact the market by shifting policy in just one of their business lines.

Start thinking about this stuff, people. It matters.