Saturday, April 05, 2008

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.

10 comments:

Marti said...

I am one of Nathan's readers who followed the link over here. Really enjoy your blog. I read a lot of your archives and the book excerpt - very nice!

I also think your analysis of the Amazon situation is spot on. I don't appreciate Amazon's position, as I've read a lot of negatives about BookSurge, and having to send copies of my books to them to store (for $29.95 a year) is only going to force up the price of POD books, which by their nature are already more expensive.

I wish POD companies (like Lulu) had been more firm in standing up to Amazon. I realize this is a business and everyone is in it to make a profit, but when the product becomes overpriced and buyers flee, no one makes any money. What a mess. The only good thing to come of this is discovering your blog!

Maya Reynolds said...

Welcome, Marti:

I'm actually MORE surprised that PublishAmerica hasn't folded yet.

The thing about self-publishing presses is that--because most bookstores will not carry their books--Amazon is their primary distribution network.

They have no other recourse unless Barnes & Noble agrees to carry their books online.

Peter L. Winkler said...

"Start thinking about this stuff, people. It matters."

That's a huge overgeneralization.

It matters to self-published writers and the publishers using POD technology whose income stream depends on self-published writers looking for an outlet for their work. And they are a miniscule portion of the publishing business.

They are the only stakeholders here. Others' sense of fair play may be offended by Amazon's tactics, but will not be affected.

Because companies employing POD technology rely on Amazon as a sales outlet, this is an everything or nothing situation for them.

Amazon wouldn't dare try it with one of the major trade publishers, who still sell most of their books offline and whose withdrawal from Amazon would cost Amazon dearly in lost revenue.

Frankly, I really wonder why you're so agitated about this. Is it just a matter of your committment to social justice, or are you afraid that this will somehow metastasize and threaten trade publishers and their writers?

Maya Reynolds said...

Peter: One of the issues I frequently encounter when trying to respond to your comments both here and elsewhere is the condescending manner in which you voice those comments.

If no one has told you this before, it does nothing to promote discussion.

Therefore, I'm choosing to ignore you. {grin}

Peter L. Winkler said...

Your comment compelled me to look up the definition of condescend.

condescend

• verb 1 show that one feels superior. 2 do something despite regarding it as below one’s dignity: he condescended to see me at my hotel.

Now, I'm a pretty self-aware person, and try to monitor my reactions to people and try to maintain respect for their opinions when I comment on them.

I've been told I have a caustic personality, which to some extent I agree, but that's not the same as condescension.

Maybe you ignore my comments because you don't want to argue with a skeptic. Don't worry though, I won't waste any more time commenting on your blog. Evidently, you want sycophants, not intelligent dissenters. The last sentence was intended to be condescending.

Serena Joy said...

I've been reading a lot about this Amazon brouhaha on various sites, from different perspectives, and I appreciate your insightful analysis of it.

Regarding why PublishAmerica hasn't caved yet, I really think PublishAmerica sees this development as a coup. Having lost their Amazon presence, PublishAmerica authors will queue up to buy their own books in greater numbers than before. Even as they're commiserating with their authors out of one side of their mouth, I think they're grinning out the other side.

Maya Reynolds said...

Peter: If all I wanted were sycophants, I'd delete your comment.

Instead I'm going to leave it up as a testimony to your "self awareness."

Maya Reynolds said...

Serena: Interesting.

So you think PA authors will rally to support each other and the company?

Serena Joy said...

So you think PA authors will rally to support each other and the company?

Alas, I suspect that that's what's happening -- especially since right on the heels of Amazon's announcement, PA sent out one of its ubiquitous sales pitch letters to its authors.

Staff said...

Responding to Peter:

I don't think it is an overgeneralization of the situation. It's a case of "give them an inch and they will take a mile." First, POD, then what? If we let this pass and don't stand up and take notice, how long before they do issue the same ultimatums to traditional publishers? How long before they begin dictating content?

I would rather take my chances with PublishAmerica (which I have not heard great things about) or traditional self-publishing than to just fold under the bully's demands.

Maybe it is a tempest in a teapot, but there is an antitrust investigation starting regarding all of this, and I am interested to see what comes of it. In the meantime, I will not shop at Amazon for any reason, and I will choose my POD publisher based on their backbone in this situation.