August 11, 2014 5:49 pm

Bridges to span Amazon’s dominance

authors

What happens if your biggest customer is also your worst nightmare? That is the dilemma facing book publishers dealing with Amazon. Jeff Bezos’s company accounts for about a third of US book sales, publishers estimate, and the ecommerce titan has brought books into the digital age without significant piracy problems.

But Amazon is now exacting a huge price. Its success is bankrupting some of the publishers’ other customers, bookshops, it is deterring online entrants by keeping its margins low or negative, and it is pushing publishers to cut ebook prices. “Publishers are not terribly profitable,” James Patterson, the bestselling Hachette writer, said recently. “If those profits are further diminished, publishers will produce less serious literature.”

Publishers’ main fightback so far – a new ebook pricing model with Apple – was ruled by the US and European Commission to violate antitrust laws by extracting more money from consumers. Apple and five publishers – Hachette, HarperCollins, Holtzbrinck, Simon & Schuster and Penguin (the latter at the time wholly owned by Pearson, which also owns the Financial Times) – have abandoned those pricing agreements. So what would better strategies be?

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Threaten Amazon’s USP

Mr Bezos always wanted his creation to be the world’s largest bookstore. That ambition has helped make Amazon great; it has also left it vulnerable. If individual publishers withhold books from Amazon, one of the site’s unique selling points will be undermined. “Everyone expects Amazon to be comprehensive,” says Ben Edelman, an associate professor at Harvard Business School, who has highlighted this vulnerability in Harvard Business Review.

Publishers would no doubt be wary of cutting off so much of their sales. And in the past Amazon has managed to source products from third parties. But publishers may struggle in negotiations with Amazon unless they can risk saying no. Doing so might drive consumers to Amazon’s incipient rivals, such as Google Shopping’s trial of same-day book delivery with Barnes & Noble in some cities.

Muscle up

The problem with threatening Amazon is that most publishers are too small to make a difference. Some consolidation has recently occurred. Penguin and Random House merged to create a single publishing group with about a quarter of the market for US trade book sales. (Pearson holds a 47 per cent stake in the enlarged group). News Corp’s HarperCollins and Hachette, owned by Lagardère, have made sizeable acquisitions.

However, more tie-ups – such as a rumoured deal between HarperCollins and CBS’s Simon & Schuster – have not materialised, and last week Hachette’s bid to buy independent publisher Perseus collapsed.

Scale would not just help publishers negotiate with Amazon. It would also allow bigger investments in new online platforms, brands and
multimedia spin-offs, such as games.

On the downside, bigger companies can be less sensitive to developing authors, says Angus Phillips, an academic at Oxford Brookes University.

Sell direct to consumers

“In the online context, one can absolutely imagine one day publishers will provide books directly to consumers,” says Prof Edelman. Doing so could undermine Amazon’s market share and its buying power.

Some publishers agree. “We have to have a relationship with the consumer,” says Stephen Page, chief executive of British publisher Faber & Faber. “At London Book Fair this year, all the talk was about data.”

Understanding consumers’ habits could help publishers better decide what titles to acquire and how to market them. But there are obstacles. Even selling direct, publishers are unlikely to match Amazon’s prices. Individual houses also lack Amazon’s brand and range. “It’s very, very hard to create a destination site because we don’t represent the entirety of the market,” says Chantal Restivo-Alessi, chief digital officer at HarperCollins, which started selling books direct to US consumers last month.

Discovery, discovery, discovery

Why would a rival site to Amazon work? Mr Bezos’s company is ideal for finding the book you know you want. But it is not ideal for finding the book that you don’t yet know you want.

In the online context, one can absolutely imagine one day publishers will provide books directly to consumers

- Ben Edelman, Harvard Business School

“A large part of the profit in the industry comes from the mid-list – the stuff that’s at the back of the bookshop and sells reliably for years, and this risks being invisible on Amazon,” says Benedict Evans, a partner at venture capital firm Andreessen Horowitz. “The concern is that as physical [bookselling] goes away, more and more sales get concentrated in best-sellers, both for print and ebooks.”

That leaves an opportunity to publishers who want to “recreate the serendipity of browsing a bookstore”, as Andrew Rhomberg, founder of ebook discovery site Jellybooks, puts it.

Dedicated discovery sites are yet to become potential rivals to Amazon. Last month Apple acquired, and shut down, one such site, BookLamp; Amazon bought another, Goodreads, last year. Los Angeles-based start-up Small Demons, which carried books from Random House UK, shut down last year after failing to find a buyer.

Mr Rhomberg says one difficulty is that the plethora of social networks and messaging apps means “the majority of people discover books by other means than browsing a dedicated website”.

But publishers, which have set up consumer insight divisions, should see discovery as fertile ground for rivals to Amazon.

Learn some law

While publishers fell foul of antitrust rules with their earlier attempt at a new ebook pricing model, that does not mean Amazon will always have the legal upper hand. For instance, Amazon’s ability to strong-arm publishers in pricing talks could come under the scrutiny of competition authorities. “The bigger you get, the more of a target you become,” says Alan Bates, a barrister at London’s Monckton Chambers. “It’s almost inevitable that in the coming years they do things that attract adverse attention.”

Germany’s Federal Cartel Office is investigating a complaint from booksellers about Amazon’s negotiating tactics, following a dispute about delays to physical book sales during talks over rights to ebooks. The EU Commission says it is “trying to understand the issues involved” in that case.

Other disputes could emerge. Competition law often looks in unlikely places: no one expected Microsoft to be investigated for bundling Internet Explorer. In Amazon’s case, its Kindle ereaders give preference to its Kindle ebooks. Therefore one area of future scrutiny could be whether the retailer is using its dominance in one market – ereaders – to boost its dominance in another – ebooks.

Further reading: In a new twist, authors write themselves into the fray

Publishers are not the only ones pushing back against Amazon. A full-page advertisement in Sunday’s The New York Times carried the signatures of Stephen King, Donna Tartt and more than 900 other authors calling on their readers to lobby Jeff Bezos to resolve Amazon’s pricing feud with Hachette, writes Shannon Bond.

Amazon wants publishers to reduce US ebook prices to $9.99 or less, except for “a small number of specialised titles”. When Hachette refused, the battle spilled out into the open as Amazon retaliated by charging more for some books, taking longer to ship and removing pre-order buttons from some forthcoming titles.

“Without taking sides on the contractual dispute between Hachette and Amazon, we encourage Amazon in the strongest possible terms to stop harming the livelihood of the authors on whom it has built its business,” the authors wrote.

The advert, which cost $104,000, was the most public move by Authors United, a campaign against the ecommerce giant spearheaded by Douglas Preston, the Hachette thriller writer. Amazon has shot back that Mr Preston is “rich and already successful” and accused Hachette of using its authors as “human shields”.

Amazon appealed to its own readers at the weekend on its Readers United website, urging them to email Hachette’s chief and tell him: “We have noted your illegal collusion. Please stop working so hard to overcharge for ebooks.”

Amazon has its own defenders among writers, however, including Hugh Howey, whose self-published books have become bestsellers. Mr Howey has been vocal about the profits publishers make from ebooks and has put his name to a petition backing Amazon. “Boycotting Amazon is unavoidably a call for higher ebook prices,” the petition says.

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