Amazon attempts to stay king of the publishing jungle

Few traditional media outlets have enjoyed a smooth transition to digital. Amazon has ensured books have prospered. Yet attempts to capitalise on that success may end up hurting the industry more than they help

  • Tuesday, January 20th, 2015

The rise of self-publishing and the globe's 'Big Five' book publishers have challenged retailer Amazon, which rose to success largely through book sales

When it comes to retail, Amazon is king. Started out of a Seattle garage in 1994 by a ballsy Wall Street expat, the titanic firm has spent the last two decades buying and establishing more tributaries than the rambling river after which it was named. Amazon is a hardware manufacturer, a digital utility provider, an online video streaming service and a grocery store. It’s also a music provider and a production studio. CEO Jeff Bezos even owns a major US newspaper. But when Bezos founded Amazon 20 years ago, his original business plan revolved exclusively around books. The concept itself was quite simple: to create a reliable digital sales platform that could provide readers with a seemingly unlimited selection of books at close to production price. Not only did the concept catch on like wildfire, it also singlehandedly redefined a publishing industry in crisis.

Book publishers greeted the rise of Amazon with open arms as it did away with archaic industrial redundancies and created a new sales stream that required little-to-no investment from the old guard. It also began to cut into the bottom lines of traditional bricks-and-mortar book chains such as Borders and Barns & Noble in the same way Walmart has notoriously decimated independent retail stores. Yet publishers refused to speak up as overall sales went nowhere but up.

Even for its overwhelming level of market domination, Amazon hardly makes a penny off its book sales

Then Amazon tossed the publishing industry on its head again in 2007 with the launch of Kindle – the world’s first easy-interface e-reader. Before Kindle, ebooks were little more than a spotty, passing fancy. Today, users purchase 457 million ebooks per year. By 2017, those sales are anticipated to overtake hard copies of books. Amazon accounts for 67 percent of all those sales. Yet even for that overwhelming level of market domination, Amazon hardly makes a penny off its book sales. Jeff Bezos is trying to put a stop to that.

A new chapter
According to Bezos’ former deputy, Shel Kaphan, the decision to start an online bookstore didn’t stem from a love of reading. In truth, it was just an easy way to tap a fledgling digital marketplace. Books were easy to ship, hard to break and there were far too many to sell in any physical store. Yet even in Amazon’s early days, books weren’t being sold for a profit. Instead, they were being used as loss leaders to establish a far more crucial means of revenue: web users’ buying habits. By the time Amazon went public in 1997, sales had risen 837 percent, and Bezos announced his intention to start selling music on the site. He had ambitions for far more than maintaining an online bookstore: he wanted to oversee an online “everything store”.

But as more and more media were forced to transition into the digital realm at the turn of the 21st century, books surprisingly turned out to be the most resilient. From 1999 to 2009, the global music industry witnessed revenue declines of more than 50 percent: falling from $14.6bn to just $6.3bn. Newspaper and magazine publishers are scrambling to stay afloat as they attempt to translate web page views into profit. Thanks to the rise of ebooks, traditional publishers are faring comparatively well. Yet, unfortunately for authors, a high digital sales volume does not necessarily translate into increasing profits.

Digital self-publishing
Apart from Amazon’s trailblazing contributions to the now $1.5trn e-commerce market, one of its single most revolutionary contributions to the global media industry has been its role in the advent of self-publishing. No longer must would-be authors hire a literary agent or pay out of pocket for a costly print run of 500 books: they can instantly publish digital copies of their books online for next to nothing. Naturally, Amazon’s platform has made that process even easier.

Today, self-published authors account for nearly 40 percent of all ebook royalties on the Kindle store: across the entire web, they account for around 31 percent of all daily ebook sales. Last quarter, independent authors as a whole brought in more in royalties than the established authors of the globe’s ‘Big Five’ book publishers: Penguin Random House, Macmillan, HarperCollins, Hachette and Simon & Schuster. Under these established firms, the average author’s royalties have dropped by over a quarter in recent years, to just $11,000. So long as novice writers are willing to price their ebooks under $9.99, Amazon is willing to hand them up to 70 percent of sales profits. But the firm hasn’t been getting on quite as well with the publishing institution.

A shot in the foot
One problem Amazon has with ebooks being put out by Big Five publishers is their lack of user compatibility. The bulk of professional publishers employ Digital Rights Management (DRM) encryption software on their ebooks, which makes it nigh-impossible to move titles between devices. Amazon and the Authors’ Licensing and Collecting Society argue that hurts overall sales – and evidence suggests they’re right, as non-DRM books account for around two-thirds of all digital books sales.

But Amazon’s biggest gripe with traditional publishing houses boils down to a matter of cost. Since the start of 2014, Amazon has been trading uncharacteristically public blows with French company Hachette, the globe’s fourth biggest publisher, whose stable of authors include bread winners JK Rowling and Ian Rankin.

According to Amazon, old-school publishers such as Hachette are undermining an exploding ebook market by over-charging for their products. In the US, the typical digital book download comes in at around $14.99. Amazon would have that price cut by a third, and take a 30 percent commission on each sale on top of that. Were ebook prices brought down to a flat-rate of $9.99, the retailer claims, global book sales would nearly double. Bosses at Hachette beg to differ – and so, in order to help them see reason, Amazon raised eyebrows this year by removing pre-orders and slowing down delivery times for some of Hachette’s biggest authors.

Amazon is placing downward pressure on book prices – and while one can argue that lower book prices actively help to promote literacy, others say they are devaluing the product. The book market is already flooded and demand will eventually peak. After all, books are competing with film, TV, video games and a whole host of media that are arguably far better at capturing the public’s interest. By pushing for a lower, standard book price, some analysts argue the perceived value of books will fall with in line with it. Hachette and Amazon ended their dispute in November, with the online retailer offering what it described as “specific financial incentives for Hachette to deliver lower prices”.

Yet with Amazon commanding 67 percent of all ebook sales on the web, even the globe’s most established publishers may struggle to survive for long in the retailer’s bad books. After all, even as Amazon continues to expand into new markets such as postal delivery and mobile handsets, it appears Jeff Bezos and his team will always come back to the written word.

Last summer, Amazon unveiled its latest literary market innovation, Kindle Unlimited, which gives users unlimited access to as many books as their hearts desire (for a monthly fee). At present, that service shuns all books written by Big Five publishers. As always, Amazon is defining the boundaries of the publishing world’s digital existence and cutting-edge innovations such as Kindle Unlimited continue to ensure its survival. Yet there are still a few kinks to work out – and although Jeff Bezos is clearly keen to start improving the notoriously non-existent bottom line of his books division, the move may come at a cost. After all, if Amazon doesn’t make peace with publishers soon, the celebrated works of some of the globe’s most cherished authors might become that much more difficult to track down on the web. That’s bad for literacy, and it’s got to be bad for business.