Tuesday, March 11, 2014

How Do We Compete With Amazon?

The questions over what the industry can do, or not do about Amazon’s dominance, were raised yet again last week. It was first sparked first by Barnes and Noble's declining interest and funding of its Nook venture, then we had Sony shutting up it US store and handing the keys to Kobo as it battles with many greater corporate issues, then came Kobo itself filing objections to a Competition Bureau agreement impelling four of the biggest publishers operating in Canada to renegotiate their contracts with ebook retailers and finally by an article by Jane Friedman in which she raises the new Amazon policy to drop its escalating royalty rate of 50%-90% on ACX titles sold exclusively to a non-escalating 40% and audiobooks distributed non-exclusively to a non-escalating rate of 25%.

The Kobo filing claims that prior to the Canadian adoption of the agency model it had been ‘losing millions of dollars per year” under wholesale terms and also that when, ‘In the U.S., when Agency Lite was brought into existence, Kobo saw its net revenues steadily decline. Kobo has since stopped investing in marketing in the U.S., closed its office in Chicago and is focusing on other markets. Its market share and revenues are now negligible there.’

The result of these announcements was to further fuel the debate on Amazon and its dominance of the marketplace in both ebooks, audio and the huge US market. It would be wrong to believe that they can be beaten on discounts, as the only winner in a discount war is the consumer and the one with the strongest nerve and deepest pockets. Wishing for a white knight may have been feasible ten years ago, but today it isn’t going to happen and no start-up is going to suddenly change that. Apple is tied to its own Appleworld and will never venture out into Android land, Google, well they may have scanned everything that has been printed, but please be careful what you wish for. Amazon has effectively woven itself into the publishing DNA and is not just at the consumer end but right across the value chain.

We have harped on about books being different till the cows have come home, been milked and gone back to pasture. Yes, books are different, but interestingly ebooks aren’t that different and maybe that’s where we often loose the thread. We have now to accept that we don’t live in a book centric world and that the larger media and home entertainment umbrella has several component strands. Books is the baby among several stronger digital sectors and the networks today are the gorillas. 

We are fast becoming the one sector that still is DRM obsessed, sell through orientated and like King Cunute think we can stop the digital tide sweeping over us. Only last week it was widely reported that the majority of books on our shelves are unread and a recent US poll suggests that some 25% of US citizens didn't read a book in 2013. We continue to think ebooks are just books in a digital container and in doing so we kid ourselves, confuse many and potentially miss the opportunities.

Amazon watches, learns, then acts and changes consumer behaviour in ways that many in the book industry have failed to grasp. At a basic level they offer, used books, marketplace, KDP, Goodreads, Book Depository, publishing, audiobooks, self publishing, on-demand and that is without its other media and technology arms. Just think it was just a little old internet shop in 1995, which right up to the turn of the century many predicted it would not survive. This last week they started to roll out their fresh food delivery service in the US and it is widely predicted it will soon come to Europe and some are already trying to protect the giant supermarkets, who ironically, have been often demonised for their destruction of the High Street. 

The Amazon is a huge river that is fed by many large tributaries and supports many ecosystems and is very important to the ecology of the world. Amazon the business is now no different.  

We have to analyse and think differently just punching the biggest kid in the schoolyard is futile and you just get hurt. Amazon’s weakness and its strength maybe is that it acts as a lone wolf. Some would suggest that It often buys to take out the competitive threat, or like with its audio market purchases, sets out to quietly corner the market.

Yes publishers need to develop their own direct business,but apart from the few this isn’t going to be a major channel to market, is only aimed at the consumer end  and some would suggest is too little too late.  Niche players may carve out a healthy living but the minute they get on the radar they are themselves vulnerable.

So where is the answer? It is almost certainly not within the book market by itself. Amazon crosses other media sectors and is competing for a strong position in many but it is a lone wolf. It rarely hunts in packs. It may have a federal approach to those it owns, but it retains a tight strategy grip over them. Perhaps its strength is its weakness? Perhaps a joint ventures that cut across current boundaries and create something that is not easily replicated is the answer. Last week we wrote about Nubico and although that is not necessarily the answer it starts to point in the right direction. People belong to very large subscription bases who all face threats and an everchanging power struggle. Lining up the ducks may appear hard today but if they create something of real value then maybe, just maybe there is an alternative.


Inkling said...

One of Amazon's strengths (that's also a weakness) is its royalty payment scheme. Amazon pays less, often significantly less, that other ebook retailers. Those underpayments are enough that rough calculations suggest that, once costs are covered Amazon is using its market share to make about twice as much profit per sale as anyone else. It's all in their mislabeled download fees and complex variable royalties.

Consider these common possibilities:

1. 99 cent ebook. Amazon pays about 35 cents. Apple pays 70 cents.

2. $2.99 ebook. Depending on the number of illustrations. Amazon might pay about $1.60 after that download fee. Apple pays $2.10.

3. $19.99 textbook. Amazon pays $7. Apple pays $14.

Note too that Amazon can send their lawyers after authors who set an ebook price for Amazon that gives them same royalties as that book gets on Apple.

I know, it's hopeless to expect anything honest out of our current DOJ. But you would think that some enterprising lawyer, perhaps even a state AG would go after Amazon for this, particularly given its near monopoly position in ebooks. It'd be a slam dunk and might help open the ebook market to businesses in their home state.

And you'd think that Apple might pull the same trick Amazon pulled with the DOJ lawsuit against it and encourage a talented and aggressive legal firm to go after Amazon on this one.

The combination of a 70+% market share--over twice that of all it's competitors combined-- along with a 'most favored' restriction on pricing, and a royalty payment scheme that often half that of the rest of the market, should make for a powerful case.

We also shouldn't forget that authors are being more than a little foolish here. Since Amazon sells more ebooks than its competitors, that Amazon check is going to be larger than any of the others. But it's not the check size that matter. It's the per-sale payment.

And while they're waiting for the lawyers, authors could, at the very least, encourage fans to buy from other ebook retailers.

Stanislav Kasl Fritz said...

Unfortunately, I agree with most of your analysis (and have blogged about it from a small publisher perspective on http://newlibripress.blogspot.com/).

As a former Amazonian myself, I have a respect and fairly good understanding of them. Yet, as a tiny publisher I rail against them.

My thoughts in the past have been around the "spin the flywheel" concept that Amazon utilizes, but to jump on your Amazon the river analogy, the river is mighty, but perhaps more fragile than someone at the end of the river delta might assume. Amazon's success is in part due to all the tributaries (in the flywheel metaphor they all add to the momentum of the flywheel). But the weakness (IF there is one) is the razor thin margins they operate on. The stock market/investors have been remarkably sanguine on Amazon and patient beyond belief. That too is a weakness. A series of stumbles MAY cause some rethinking on that.

Still, just like the Amazon rainforest and the river system, it can take significant abuse and bounce back. But, it is not immune. As various tributaries are damaged, the entire system suffers.

The white knight will be various NON-PUBLISHING tributaries getting hurt. Walmart is still larger (and more profitable) than Amazon and they have not given up on online yet. Netflix is still fighting for video (and the cable companies are not completely asleep) and various companies are partnering with Google. But, as you point out. Careful what you wish for!

Just as authors (and I do that also) "wished" for easier access to the marketplace and the ability to simply compete--then many (and you simply do not hear too much from the "silent majority") realized that competing against hundreds of thousands in the market place itself is not necessarily easier than competing to get INTO the market place. A whole new set of skills is then needed.

Long winded way of saying, good blog post.

Karen Wolfer said...

Interesting post. Yes, how does a small publisher deal with the heavy and controlling presence of Amazon? It is a bit scary that they can not only set percentages at will, but also set the selling price of audio books at will.
It will be interesting to see how this plays out with regard to narrators, as well as independent authors, who may not get anything back for all their work.
Perhaps an indie supporter such as Smashwords is for the written word, will come along for the audio book world. One can hope, or the current cycle of plentiful audio books will take a nosedive soon.