Wednesday, May 12, 2010

Taking a Look at the Big e-Tailers

In my blog for Tuesday, I talked about the upcoming launch this summer of Google Editions, the new browser-based e-book sales platform.

For the next few posts, I thought we might explore the strategies the biggest e-book retailers (Amazon, Apple, and Barnes & Noble) are currently employing.

A couple of notes: I'm going to address the three companies in alphabetical order and, at the end, I'll tackle the upcoming Google Editions, too.

Today we'll talk about Amazon.

Amazon: There's an interview online here on David Overfield's blog that Jeff Bezos, the founder of Amazon, gave back in January in which he describes "everything I know." Among the things Bezos says he knows is that "you need to obsess over customers ... When given the choice of obsessing over competitors or obsessing over customers, we always obsess over customers."

The second thing he knows is to "invent ... any time we have a problem ... we try to figure out a solution ... you can invent your way out of any box." He points to the Kindle as an example of Amazon's inventiveness.

Bezos goes on to say the third thing he knows is, "Think long term ... most of the initiatives we undertake may take five to seven years before they pay any dividends for the company ... if we think we're right, then we continue ... it's important ... never to buckle to sort of standard kind of pressures that ... force short-term thinking."

I think this interview is key to understanding Amazon's strategy.

About a year ago, on April 13th, I said the following:
Amazon has moved to position itself vertically in the publishing market. Vertical integration means owning pieces of all parts of the chain. Amazon started out as a retailer. Then it moved into wholesaling others' products. And finally into manufacturing (BookSurge). Not content to own a part of the manufacturing business, it is now using its clout to gain further advantages. This is a case where the sum of all parts is worth far more than the individual parts alone.

Amazon owns pieces of all parts of the chain leading to the consumer:

Manufacturer => Wholesaler => Retailer => Consumer

Vertical integration is about cost and control. Companies who vertically integrate are trying to assert greater control over their business. The obvious benefit is that they can capture the profit margins at each step along the chain. They can also make it harder for competitors if they can gain access to a scarce resource ...

Amazon owns a print-on-demand operation, a distributor, an online retail operation for both p-books and e-books, several important retail sites for used or rare books, two audio book operations, produces a wireless e-book reader, and operates several important social networking sites for books.
Amazon has driven the publishing industry crazy with its willingness to sell e-books at a loss. As an example, Bloomberg pointed out here that Amazon will pay a publisher $12 to $13 for a book on the New York Times best-seller list and then turn around and sell the e-book for $9.99 ... a loss of between $2.01 and $3.01 per book. The Big Six have been terrified that Amazon is habituating customers to an e-book price point of $9.99 when they believe the price should be $12.99 to $14.99. Of course, regular readers of this blog know that I believe the Big Six's preferred price is an artificial construct.

On the surface, Amazon's strategy of selling products at a loss makes no sense. But remember Jeff Bezos' comments about obsessing over customers and thinking long-term. Amazon's strategy is in line with those core principles.

Additionally, remember that Amazon is vertically integrated. They can take a hit in one part of the supply chain while benefiting another part of the chain.

(1) The strategy benefited sales of the Kindle, its proprietary e-reader. Serious readers have been willing to fork over $259 for an electronic reading device when they know they can buy books for it at $9.99 each. Buy enough books and the Kindle pays for itself.

(2) The strategy also made Amazon the largest e-book retailer in the United States.

In his interview, Bezos said that Amazon has made some mistakes, but that they are willing to admit when they are wrong and move to make corrections. Turning off Macmillan's "buy" button during contract negotiations back on January 29 was one such wrong move. It made Amazon look like the bad guy. I suspect Steve Jobs' announcement two days earlier about Apple's iPad had something to do with the misstep.

At any rate, ten days later, Amazon backed down and reinstated Macmillan's "buy" button.

Instead, consider Amazon's current move during the negotiations with Pearson (Penguin, Putnam and Viking among other imprints). Since Pearson is refusing to allow them to sell e-books because of the $9.99 pricing, Amazon turned around and started selling the hardcover books for $9.99. This time, instead of looking like the bad guy, Amazon appears to be true to their motto of taking care of the customer. If they can't sell the e-book, well, here's the hardcover.

Right now you can pre-order John Sanford's forthcoming book Storm Prey for $9.99 ... 64% off the cover price of $27.95.

Watch Amazon carefully over the next few months. The one-two punch of Apple entering the e-book market followed by Google doing the same thing will probably lead Amazon to take further action. I'm counting on some big gesture intended to attract attention ... and insure consumer loyalty to the Amazon brand.

Stay tuned ...


The Raven said...

If the Kindle is an original idea, then can I claim a patent on the wheel? I expect the portable eBook reader, like so many other inventions in usability, was first thought up at Xerox PARC.

Maya Reynolds said...

Probably what he was referring to was not the "invention" of the Kindle as much as the "inventiveness" of selling both the e-books and the e-reader. Of course, now B&N and Apple are following suit.