Ebook Wars: Amazon vs Publishers
How did the launch of the Kindle change Amazon's relationship with publishing companies, and why did the Kindle succeed where previous e-book readers failed?
Introduction
“I firmly believe that at some point the vast majority of books will be in electronic form,” Jeff Bezos said in the 1997. However, two decades later, there was still no real platform for consumers to purchase and read books electronically. [1] Companies like NuvoMedia, SoftBook, Rocketbook had all tried and failed. Was there just no demand, or were these products missing the Bezos touch?
By 2004, facing the growing power and threat of a revived Apple, Jeff Bezos finally decided it was time to develop a digital strategy for Amazon in the media space. Soon thereafter he launched Lab126 which would later produce the first Kindle. [2]
Launch of the First Kindle
Amazon’s business model in the book-selling business is based on the virtuous cycle of lower prices and convenience attracting customers, which leads to higher sales volume, which results in lower fixed costs per book and greater negotiating leverage with publishers, which allows Amazon to demand even lower prices. Thus, the decision to go into e-books was a natural extension of Amazon’s desire to drive greater sales volume and increase publishers’ dependency.
However, Bezos knew that for the Kindle to succeed where previous e-readers had failed, there needs to be lots of e-books available. At that time, all the major publishers in the world had digitized less than 20,000 books in total. However, Bezos decided he needed to push them to hit 100,000 by 2007. [1]
Amazon already had a strained relationship with publishers at this point. Far from being the white knight alternative to Barnes & Noble, Amazon by 2004 had become the biggest and most aggressive customer that publishers had ever faced. The negotiations relating to e-books were no less tense. Publishers that did not cooperate were told their rankings in Amazon’s search results would tank or they would be completely removed from Amazon’s website. [3] After almost two years of arm twisting, cajoling, and threats, Amazon was finally ready to announce the Kindle in 2007.
Bezos knew that to attract consumers he needed a price for e-books that was lower than the price of physical books, but he also knew that the publishers would balk at that idea. Thus, unbeknownst to the publishers, Amazon had left the price at which Amazon would sell the e-books out of the negotiated contract, and only Amazon’s purchase price was negotiated. When Bezos finally announced that all e-books would be sold for $9.99, well below the retail price for almost any physical book (and in many cases lower than the wholesale price Amazon was paying the publishers) [4], publishers were stunned and left with a bad taste in their mouths. Only in the past few years, with the alternative of Apple iBooks, have publishers been able to push back on the low pricing and come to more of an “agency pricing” agreement where Amazon takes a percentage commission on any price publishers set. [1]
Conclusion and Next Steps
The Kindle and e-books represented a fundamental change in the operating model of Amazon’s books business. No longer would consumers have to go online, order a book, and wait for it to be shipped to their house. With e-books, consumers could buy a book on Amazon’s kindle device (or online) at a significantly lower price and begin reading immediately. In a sense, Amazon had disrupted their own business by completely disintermediating the massive logistics infrastructure that drives the vast majority of Amazon’s business.
However, while the Kindle has been far more successful than any other e-book device, it is still far from Bezos’s original vision. Kindle’s customer base continues to be largely focused on a smaller group of high-volume readers. I believe a few changes need to happen in order to increase the adoption of e-books and Kindle devices:
- Amazon should negotiate a deal with publishers where anyone who purchases a physical book gets a copy of the e-book for free. From the publisher’s perspective, if a customer has already bought the physical book, there’s almost no chance of him paying for the e-book version so it is not a net loss to sales. This would create more demand for the Kindle which would help drive greater e-book sales.
- Currently the Kindle only supports books in Amazon’s exclusive mobi format versus the more popular epub format, which makes it challenging for non-tech savvy consumers to read anything except Amazon’s books on the Kindle. Amazon should open the Kindle to all formats of ebooks. [5] By getting consumers to move all their ebooks to the Kindle, it would create increased switching costs and greater loyalty to the product.
- Amazon needs to spend significantly more capital on improving the Kindle. It’s currently a weak alternative to the iPad and has very limited technological features, which makes it hard for most consumers to justify the $300+ price tag.
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Sources:
- Stone, Brad. “The Everything Store.” Bay Back Books. 2013
- Gessen, Geith. “The War of Words.” Vanity Fair. December 2014 <http://www.vanityfair.com/news/business/2014/12/amazon-hachette-ebook-publishing>
- Packer, George. “Cheap Words.” New Yorker. February 2014. <http://www.newyorker.com/magazine/2014/02/17/cheap-words>
- Vara, Vauhini. “Why the Amazon Hatchett Deal is Good for Publishers.” New Yorker. November 2014. http://www.newyorker.com/business/currency/amazon-hachette-conflict-resolved
- Johnson, Dennis. “Amazon Declares War On Book Industry.” Melville House. July 2013. <http://www.mhpbooks.com/breaking-news-amazon-declares-war-on-book-industry/>
- Greenfield, Jeremy. “Amazon’s Nuclear Option In Its Negotiations with Publishers.” Forbes. Jun 2014. <http://www.forbes.com/sites/jeremygreenfield/2014/06/04/amazons-nuclear-option-in-its-negotiations-with-publishers/#381da1553e67>
FFF,
I’ve been trying to think about a product faced with a similar challenge — how do you convince a user base that’s used to physical materials to transition to an all-digital experience. I think this can be best compared to the iPod revolution — everyone who made the switch from diskman to iPod loaded their current CD collection into iTunes. Your suggestion to have free electronic copies with every hardcopy book purchase aligns with this, but I think there has to be some kind of additional benefit and that additional benefit could be seamless use across devices. By that I mean consumers should be able to transition from listening to their book in the car via their phone, to reading their book in bed with the backlight, to reading it on the beach with no backlight. The ease of transition across devices could be incredibly valuable and facilitated through a kindle app on all devices, connecting computers and phones to kindles. I also think reading is a communal experience, so to the extent that a network effect of recommending or even sharing books can be created should help the Kindle succeed. I would add this in addition to your other suggestions, which seem so core to the success of Kindle that I’m shocked Amazon has not already done them!
FFF,
Interesting post on how Amazon effectively disrupted its own business model with the Kindle, and also puzzling to think about why it has not fully taken off. While I understand your suggestion to offer a free digital version of a physical book purchase to stimulate adoption, I am not sure it would reach the objective it sets out to achieve. If I just bought the physical version, than I will most likely also read that physical book and not the digital version. In fact, when students were presented with a choice to buy a physical book or get the digital version for free a large portion of students still bought the physical version [1]. I think it would also send the wrong signal effect, as it conditions people to believe the digital version is not very valuable and could lead the digital book industry to struggle in the same fashion as the online music industry to convince people to pay for digital copies. [2]
I agree that ensuring one file format for ebooks that can be used across all devices is key, to truly decrease any “barriers to adoption”. Curious how the future will look like for digital books!
[1] https://itconnect.uw.edu/wp-content/uploads/2013/10/UWeTextCampusReport.pdf
[2] http://www.forbes.com/sites/bobbyowsinski/2015/09/16/people-still-not-willing-to-pay-for-music-subscriptions-according-to-nielsens-music-360-report/#498f51f83b95
FFF, I like the idea of getting a free eBook with a print book purchase. Amazon has a similar program called MatchBook, where users who bought a print book (from Amazon) as far back at 1995 can get most eBooks for $2.99 or less (1). However, I do not know if this program is enough to entice users to buy more eBooks. Sale of eBooks from traditional publishers has actually declined some 14% although it is hard to tell if Amazons eBooks sales have similarly declined (2). This notion of “digital fatigue” where users are trying to limit their screen time might be a short-lived trend but I think that eBooks will need more distinguishing features from print in order to entice more buyers. Textbooks are a great place for innovation as publishers create more interactive content that is more eBook-friendly than print-friendly.
(1) https://www.amazon.com/gp/help/customer/display.html/?nodeId=201362970
(2) http://www.publishersweekly.com/pw/by-topic/digital/retailing/article/70696-as-e-book-sales-decline-digital-fatigue-grows.html
Greetings, FFF. An interesting recent development is that Amazon opened its first physical bookstore in Seattle in 2015, with hundreds of more physical stores to open across the country (http://www.vox.com/2015/11/5/9672394/amazon-books-physical-store). Jeff Bezos’ ambition may not be limited to “selling lion’s share of word’s digital contents”, but rather “selling ALL books, printed or digital, through Amazon.” Two more data points: (1) sales of digital books went flat and then started to fall as e-book revenues dropped 11 percent in 2015 alone, according to the Association of American Publishers, (2) sales in (physical) bookstores grew 2.5 percent in 2015, the first uptick since 2007, and the growth rate strengthened to 6.1 percent during the first half of 2016. The number of newly opened bookshops has also been on the rise (https://www.technologyreview.com/s/602780/amazons-next-big-move-take-over-the-mall/).
While we are witnessing much fanfare of Amazon’s dominance in e-publications and retailing, it is important to remember that profit margins of e-books are typically much thinner than their physical counterparts (as you have already pointed out, FFF) and that pure-play web retailing may not be sufficient for Amazon’s (or Jeff Bezos’?) vision of total dominance in the retail world.