Amazon: A Cheetah Hunting Gazelles (Publishers)

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AmazonKindle logo - 38ensoEchoing a haunting analogy from his book about the world’s biggest e-tailer, The Everything Store, Brad Stone reminded the publishers sitting in the audience at Digital Book World 2014 that Amazon views publishers as “sickly” gazelles and itself as a cheetah.

In seeking to sign more favorable deals with publishers in the past decade, Amazon’s book retail team was ordered to go after publishers like they were meat to be killed, tearing away margins and concessions, often using highly aggressive tactics to do so. For instance, Amazon has been known to take publishers’ and authors’ titles out of its recommendation engine, waiting for sales to drop, which would be followed quickly by the “gazelle” dropping to its knees, too.

Many publishers will be familiar with these tactics, including some of the largest publishers, like Macmillan, which saw Amazon remove the “buy” buttons from all of its books during a tense standoff in 2010.

With the pace of growth of ebook sales abating, Amazon’s New York publishing business not taking off the way the company may have hoped, the “gazelles” may think it’s a good time to rest, said Stone. But Amazon, the Cheetah, doesn’t have the same point of view.

“Jeff Bezos and his colleagues do not believe that the pace of change in any media business is stagnating,” said Stone. “If ebook sales are flattening, Amazon will find a way to spark them.”

Stone speculated that Amazon might do so in books by further lowering ebook prices or bundling ebooks creatively with other products. Amazon, and other tech companies like Google, will also experiment with physical locations to entice yet more customers to buy its products, like the line of Kindle e-readers and tablets, said Stone.

Further elucidating what Amazon might do next, Stone outlined the companies “horizontal” strategy, to surround each of its categories, books being a principal one, with related goods and services that combine the companies advantages in unique ways. Kindle Direct Publishing, Amazon’s self-publishing service, is one way, but there are dozens of others in just the book publishing industry.

To give publishers an example of just how creative and experimental Amazon might get, Stone speculated that Amazon could launch a “self-publishing” service for less-established fashion designers struggling to get their designs into stores. Amazon is currently embarked on building its apparel retail business. The company is also currently constructing a 44,000-square-foot facility in Brooklyn, NY to produce photo and video content for its fashion category.

Publishers should expect the innovations to keep coming and at an ever increasing pace. Amazon CEO Jeff Bezos is no longer the sole source of innovation at the company. Amazon has created a “culture of innovation” and comes out with new features every day, said Stone.

While, per MacKenzie Bezos’s famous one-star review on Amazon of Stone’s book about the company, The Everything Store, Stone doesn’t know what Bezos is thinking, he may be the world’s foremost “Bezos-ologist.” When Stone told Bezos, during his last meeting with the CEO, that he intended to lead that field, “a look of concern passed over his face,” Stone said.

Still, nobody knows the future of the company, even Bezos himself. As for a positive outlook for firms interested in seeing Amazon slow its breakneck pace of growth, Stone had few thoughts.

“What slows Amazon down? I’m not sure. It might be antitrust scrutiny at some point,” he said.

Related: Ten Bold Predictions for Book Publishing in 2014

 

 

Real Competition From Barnes & Noble? 

Industry consultant Joseph Esposito has also been studying Amazon and its competitors and shared the Digital Book World stage with Brad Stone. In talking about Amazon’s competition, calling the Yonkers, NY branch of Barnes & Noble a “disgrace.”

For those publishers worried that continued poor results at the nation’s largest bricks-and-mortar book retailer might mean its demise, Esposito speculated a way out.

“I fully expect Wal-Mart to buy Barnes & Noble,” he said.

He reasoned that companies like Wal-Mart, H-P and others that Amazon is increasingly competing with will not forever tolerate the e-tailer’s encroaching on to their territory and will fight back. In this case, Wal-Mart would be fighting back by acquiring a major Amazon competitor and propping it up.

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28 thoughts on “Amazon: A Cheetah Hunting Gazelles (Publishers)

  1. Pingback: Publishing Opinions | Amazon: A Cheetah Hunting Gazelles (Publishers)

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  3. There are several things that ebook publishers could do that’d be far better than running like frightened gazelles:

    1. File a class-action, deceptive business practices lawsuit against Amazon’s grossly inflated ebook download fee. The use of the term ‘fee’ implies that Amazon is being compensated for services rendered. That’s not remotely what’s taking place. That $0.15 per megabyte fee is five times or more what companies such as Verizon charge for cell phone downloads–about the priciest way to send data. Even more telling, it is THOUSANDS of times more that Amazon itself charges for downloads from its S3 data storage service. As some geeks have noted. Amazon is probably using those same S3 server farms for ebook downloads, making their ebook download charges immensely profitable. Keep some things in mind:

    a. Because it involves deception, repayment could be made retroactive, extending back several years. That’d drive the settlement into huge figures. The amount of the fee depends on the ebook file size and price, but a rough estimate would be that it’s roughly 5-10% of what Amazon has grossed in ebook sales in recent years. With a U.S. ebook market share ranging from 70% to 90%, that’s a huge sum, more than enough to attract a horde of aggressive, first-class legal talent.

    b. Keep in mind the actual math behind corporate profit making. That 5-10% more that Amazon earns for a typical ebook sales isn’t 5-10% more profit. Even if you tilt the numbers very heavily in Amazon’s favor, it probably means that Amazon is making at some 50% more profit per sale (at the same price) than Apple or B&N. You get those numbers by assuming that Amazon is grossing 30% of the retail price and, after a 20% cost of doing business, its profit per sale would be a 10%, similar to that at Apple. But add the additional 10% that Amazon makes on that dubious download fee, and Amazon’s profit margin becomes double that of Apple or B&N. Double the profit of your competitors is a huge advantage. It enables Amazon to heavily subsidize Kindle sales, disadvantaging iPads and Nooks.

    c. Keep in mind that every penny extracted from those outlandish download fees comes out of the pockets of publisher and authors, few of whom are getting rich, so Amazon really is being a greedy SOB. This is what Amazon means when it talks about devouring authors and publishers like helpless nibblers of grass. And the more it takes from them, the less able they are to fight back, the more they have to do what Amazon says.

    2. Ebook retailers such as Apple pay 70% royalties on all ebooks priced from $0.99 to $200. Amazon’s rates vary for no rational business reason. With Amazon, only ebooks priced from $2.99 to$9.99 get that 70%. The rest get a miserly 35%. Do the math for authors and publishers selling books over a wide range of price and market conditions, and the result is:

    a. Higher prices as those publishing speciality books have to recoup lost income from those low royalties. A specialized professional guide for nurses might only have a market of 1000 and a cost to create of $15. There’s no way those cost can be recouped selling it at $9.99. And yet as soon as the price rises over $9.99, Amazon grabs 65% of retail rather than 30%. That means that the publisher must raise the price to over $27, simply to get the same return as at $9.99 and then raise the price $1 for each $0.35 in added income, with Amazon, which is doing nothing more than process a financial transaction, pocketing $0.65.

    b. The result of Amazon bizarre but highly profitable royalty scheme is to drive up prices both at the low end (under $2.99) and high end (over $9.99). That’s using wholesale royalties to fix prices in ways that profit Amazon and not one else.

    c. The best way to deal with Amazon’s price-fixing royalty scheme would be a DOJ lawsuit. It wouldn’t be anti-trust since Amazon’s greed is totally internal. It’d hinge more on Amazon’s 70% market share giving it an undue advantage in forcing author/publisher signup despite payments that are often less than half the market rates. But alas, that’ll have to wait until we can toss the Chicago-machine Democrats out of the White House/DOJ and get some, hopefully honest, Republicans in their place. But it is something to keep in mind for 2017.

    3. The last measure will need a legislative solution, but the arguments for it are impeccable. Digital sales are almost unique in that the suppliers (authors and publishers) aren’t supplying something physical. That means they have no way of knowing how many copies of their ebooks or songs that Amazon or any other retailer is selling. Amazon could sell 1000 copies in a given month, but pay the author/publisher/musician for only 500 copies. If an author/publisher/musician becomes suspicious, getting inside that retailer’s finances would require an enormously costly lawsuit. Most authors/publishers/musicians can’t afford that. But there is an easily implemented fix:

    a. Require the retailers of digital products, including ebooks and music, to provide, at least monthly, an individualized sales statement that would include: what was sold, the price, the exact date and time of the sale, and the city, state and zip code of the purchaser. It would not include the purchaser’s name or address.

    b. That would enable an author/publisher/musician or whoever to detect fraud. He’d only need to get a friend, relative, or fraud-checking service to make several purchases. If all appear in the retailer’s statement, it’s unlike that any theft is going on.

    c. If one of those sales does not appear, that would trigger a legally mandated audit of the retailers internal books done by an outside company and paid for by the retailer. Cheating would become very difficult (ten-fold damages) and costly.

    d. Is Amazon or any other ebook retailer cheating? I don’t know, but following the ‘trust but verify’ principles, retailers need to be held accountable by requiring detailed reporting.

    e. Requiring this level of reporting would also help authors/publishers/musicians tailor their marketing almost as if they were selling the ebooks themselves. If an author speaks on radio in a city and, immediately afterward, sales go up by 100 copies, that’s useful to know. Sales by actual date and location can be very handy.

    f. This is an area where the larger publishers need to apply their lobbying resources to get Congress to act.

    Beginning to carry out these three moves would reverse the roles. Amazon might still be a cheetah, but authors/publishers/musicians would become well-armed hunters riding in sturdy Land Rovers. The battle would become more even. Amazon would have to behave more responsibly or face some heavy and expensive consequences.

    I might add that, while I’ve never detected an excess of ethical thinking from Amazon, they do seem to respond quickly when faced with consequences in the legal arena, probably because the upper levels of Amazon’s management has quite a few lawyers.

    I know a lawsuit in a Maine federal court that Amazon would have lost led them to settle out of court and abandon moves to force POD publishers to print with CreateSpace or lose their Buy Now buttons. Losses or potential losses in other areas could domesticate Amazon so publishing in general benefits from their risk taking without being devoured by the company’s seeming inability to stay within limits. I lived in Seattle and saw what happened to Microsoft’s often useful aggressiveness when it lost in federal court. The spirit seemed to go out of the company. I wouldn’t want that to happen to its neighbor Amazon.

    • There are so many things wrong with this post that I don’t know where to start.

      1. “deceptive business practices lawsuit”

      I agree that Amazon is price gouging, but they are quite open about the delivery fee. Where is the deception?

      2. This is not just wrong but also stupid on a scale rarely seen outside of government agencies. There is no crime in offering different commissions based on price, so there is no ground for a DOJ lawsuit.

      3. Can you show that there is any cheating going on or is this simply another fragment of your overactive imagination?

  4. Barnes and Noble is failing because no one buys print books, end of story. They were very slow to jump on the ebook bandwagon, they are known for hiding self published (and especially free books), in favor of the New York Publisher. They look at Indie books as the red-headed stepchildren and many Indie writers know this and have lost respect for them. It wouldn’t matter if Bill Gates bought B&N, and there was no Amazon, it would still fail because B&N thrives on print books and print sales are fading fast. End of story. The fact is before it was Amazon vs. Barnes and Noble, it was Barnes and Noble vs. the small book store. B&N was the cheetah taking down small bookstores and upsetting readers. We need to stop vilifying Amazon when its a mere natural progression.

    And btw, I hate going to B&N because they try to browbeat me into signing up for their membership crap, which is annoying, and again, makes me want to buy online.

    • Hi Lori–

      Thanks for the comment, but what you say initially is simply not true. The vast majority of book sales in the U.S. are still in print. Ebooks account for between 20% and 30% of sales across categories. They account for a higher proportion when it comes to adult fiction and lower proportions in other categories like children’s books.

      The vast majority of the rest of sales are print books, some 70% to 80%. Some of it is audiobook sales, but a very small proportion.

      What is true is that the proportion of all books (print and ebooks) purchased online has increased and is now the dominant way people buy books. Amazon has the lion’s share of this market, but Barnes & Noble and many other retailers all sell both print books and ebooks online.

      Hope this helps!

      Best,
      Jeremy Greenfield
      Editorial Director, Digital Book World

      • Thanks for clearing it up. I was coming at it from a adult fiction viewpoint, which I should have stated! But I still think that although prints might dominate, that wont be the case in even a couple years. Look how quickly the book world has changed already, and I think its going to keep changing just as fast. And I still think B&N dug their own grave and are fading out in a natural way that you really can’t blame on Amazon. The only good thing, imo, to come out of B&N falling, is that this will probably help sales at those small book stores that everyone was so concerned about 10 years ago!

      • “The vast majority of book sales in the U.S. are still in print.”

        Can you support this claim with a citation that’s not based on incomplete data from Bowker/AAP/BISG, taking into account digital sales on the Kindle, Nook Press, iBookstore, and Kobo platforms that don’t require ISBNs for sale?

        • As you know, of course those are our only data sources. Amazon and the other platforms haven’t given us enough data about their digital sales for us to know, but let’s do some back-of-napkin math here:

          Kobo execs have told me that 10-12% of their sales worldwide are from self-published ebooks. Let’s assume that it’s the same at Amazon and the other platforms, for the sake of discussion. That would mean that we’re underestimating digital sales by about that much. If digital sales were $30 last year and print sales were $70, according to the data sources we do have, and we’re underestimating digital sales by 10%, that means digital sales are about $33, vs. $70 for print.

          That all being true, print is still solidly the “vast majority.” Also, as we all know, self-published ebooks, especially the top-selling ones, are generally priced lower than other ebooks (not in all cases, but in general, across all of 2013, this can be said to be true). So, even when the $2.99 ebook hits No. 1 on the best-seller list (which happened two or three times on the DBW list last year), it’s not generating the same level of revenue as other ebooks.

          So, I think we’re erring on the side of overestimating these sales (and we still may come up short, but I don’t think we are). Given the lack of data, using our logic, I think we can still safely bet that print is the “vast majority.”

          I’m just thinking out loud here, so feel free to point out errors in my reasoning.

          • I don’t think that’s a safe assumption. In terms of share of market of digital, I’d predict Kobo as either third or fourth. Amazon is a sure number one. B&N used to be second, but they’ve floundered lately and I wouldn’t be surprised if Apple overtook them but their previous share of market kept them ahead of Kobo.

            That said, I’m not sure why “self-published” was brought into this. If I’m not mistaken–and obviously correct me if I am–Amazon announced that their digital sales had eclipsed their print sales back in 2011.

            http://www.nytimes.com/2011/05/20/technology/20amazon.html?_r=0

            That was in mid-2011–before the ebook market had grown by, what, at least 300% during one of those years? Amazon was selling 105 ebooks for every 100 ebooks in May 2011. It’s now January 2014, and the digital market has since exploded.

            We know that corporate publishers are starting digital only imprints. We know their digital revenues are almost universally up, and we know that print revenue is almost universally down–by those AAP numbers. That’s what the publishers are telling us. But corporate publishers are now actually a small part of the market–here’s where we can cite Bowker’s data that “self-publishing” has grown by triple digit percentage since 2011 alone, and that’s as tracked by ISBNs–which likely many and possibly the majority of independent titles don’t have.

            Print makes up the “vast majority” of the corporate market, but whether the corporate market is still the vast majority of the commercial market may be another matter entirely. I think you’re vastly underestimating the digital market.

            • There’s a lot of “ifs” there.

              I only bring up Kobo because its profile worldwide is similar to Amazon’s. Even assuming 50% of Amazon’s ebook revenues were going unreported by the AAP and similar surveys (i.e., mostly self-published), we’d still be living in a majority print world. (And consider that Apple’s percentages in terms of “unreported” or missing publishers/self-publishers is much smaller. A higher proportion of Apple’s sales come from what you’re calling “corporate” publishers than the other ebook retailers. And whether most people know it or not, Apple is likely the No. 2 ebook retailer in the U.S. right now, likely with somewhere between 15% and 20% market share — though this is literally impossible to know.)

              Also, you should look at the AAP methodology and see that it covers a very wide range of publishers.

              Lastly, the “big five” are responsible for somewhere in the neighborhood of $8 billion in revenue worldwide, the majority of it in the U.S. This isn’t even counting the huge book businesses at publishers like Scholastic (a billion dollar+ company), HMH and several others in that size range.

              The U.S. trade publishing market is in the $14 billion range.

              You can question these stats. That’s your right. It’s the best data we have and I’m inclined to go with that rather than my gut.

    • It’s not true that nobody buys print books anymore — most books sold today are still hard copies, not ebooks — but it is true that far fewer people buy print books at Barnes & Noble.

      Personally, I only use B&N as a showroom. I go and look around and if I find a book I want to buy, I write down the title and buy it from Amazon. With Amazon Prime, I get the book 2 days later for around 30-40% less than it would cost me to buy it at B&N.

      That probably makes me a terrible person, but I can live with that. I don’t, however, think B&N can live with it much longer; I really don’t see a viable path for them.

  5. I agree with Michael Perry’s assessment of what it would take to stop the cheetah. However, it is obvious that another way to deal with Amazon’s omnivorous habits is to choke off the supply. No content = no sales, and Amazon could never gain any advantage if it is deprived of food. I pulled my titles from Amazon last year, and have never looked back. I saw all the things Michael speaks of first hand, from nonexistent sales thanks to reclassification to increased pressure to make my ebooks free for the taking. In some cases, Amazon offered them free anyway without my permission. Like Nook Press’s laughable contract, Amazon claimed it could sell my content however it wished, or not at all. So it lost me as a supplier of content. When both Amazon and Barnes & Noble grow up I might reconsider listing with them, but until then I remain happily free to sell at a decent price, and with no DRM.

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