If you go out onto almost any street in the developed world, and many streets elsewhere, and ask people “What is Amazon?” they will tell you that it is an online bookshop (and that Kindle is its online ebook shop). And yet if one looks at Amazon’s own published financials, it becomes clear that consolidated media (books, ebooks, magazines, music, cds, and software etc – in other words, its bookshop activities) account for just 40% of total revenue and so clearly, Amazon is not just an online bookshop but is really something else.

One thing is for certain, Amazon is massive: 1^st quarter 2011 revenue was given as $9.86 billion and the expected 2011 figures will probably be in excess of $40 billion. But if only 40% of that revenue comes from its books, ebooks and associated activities, then Amazon is not a bookshop at all but a massive online retail catalogue that allows customers to see what is available, purchase and then have their order fulfilled.

As a catalogue retailer, Amazon does not need to bother with stock, although it carries its most productive lines as stock items, it only needs to make products available and then ensure that its suppliers fulfil the orders promptly. And for that, they, Amazon, will take a significant percentage of the sales value.

Unfortunately, Amazon has developed some rather worrying attitudes towards its suppliers that are reminiscent of the worst practices of the giant supermarkets: a tendency to tell its suppliers the price at which it will buy products, having pricing models that force the supplier to offer products at artificially low prices, discounting goods without advising the suppliers first, being exceptionally slow in paying and having a total inability to make an international bank transfer from the USA. They even insist that certain products are supplied in specific formats so as to support Amazon’s already aging technology.

Without a shadow of doubt, Amazon is a huge success and, as the first major online catalogue, it has massive first-to-market competitive advantage. But like many first-entrants, it is rapidly being challenged by other online retailers who have learned from Amazon’s failures and weaknesses and have come to the market with improved products, improved services, better pricing models and a more cooperative supplier/retailer relationship. The result is that Amazon is losing its competitive advantage in many areas.

Let’s take the ‘media’ section of their business – the part that can be basically taken as being books, ebooks and associated bits and pieces. There is a general assumption that Amazon dominates this market in the USA, and with the recent bankruptcy of Borders, their share was thought to have become stronger but the published figures show Amazon’s media sales as $1.885 bn where as Barnes & Noble (another bookseller that operates a clicks-and-mortar strategy with shops and an online business) had media sales of $1.37 bn – this leaves Amazon at the top but Barnes & Noble are not far behind. And between them, they probably sell around 90% (by value) of all books in the USA. This would give Amazon around 54% of the market by value and Barnes & Noble around 40%.

How does that translate in terms of volume of books sold (unit sales)? The Book Industry Study Group covering the period to the end of 2010 found that in the USA there were 2.57 billion books sold in total of which 80%, or 2.26 billion books were ‘trade publications’ and which excludes educational, professional, and scholarly. The BISG report suggests that 6.4% of all books, or 164 million, were ebooks. Given that the book buying population of the USA (those with discretionary income and thus assumed to be 18 years and above) is 218 million, this means that each person bought 10 books (in any format) in the ‘trade’ category in 2010 of which 0.75 books were ebooks.

Which ever way you look at it, the ebook market is very small at the moment – but it is the fastest growing – which is to be expected given the hype being applied to ebooks and the fact that to publish an ebook does not require a ‘traditional’ publisher and thus it attracts author/publishers (self-publishers). In this sector, Amazon’s first-entrant competitive advantage, derived from their massive marketing effort behind the Kindle, is still there, although it is being eroded strongly by Barnes & Noble. Some notoriously unsubstantiated data suggests that Amazon has around 60% share of the ebook market although Barnes & Noble are gaining ground and are now attributed 26% leaving the ‘other players’ with just 14% of the US market. Interestingly, neither Amazon nor Barnes & Noble choose to provide their ebook revenues separately from their overall ‘bookshop’ activities.

So, whether we take books in general or ebooks in particular, Amazon and Barnes & Noble are ‘the elephants in the room’ and they simply can’t be ignored! But if we go back to the question in the title: “if Amazon is not a bookshop, what is it?” the conclusion has to be that, although a massive player in the book selling market, Amazon is simply an online catalogue.

In the next blog, I will be looking at Amazon’s pricing model as it is applied particularly in the ebook market. (30-08-11)

What was interesting, though, was Amazon’s response to the launch of the Apple iPad (which all happened at about the same time) – after refusing to sell the Kindle outside the USA, they suddenly did a volte-face and announced, the week before the iPad launch, that the Kindle was to be immediately available in Europe. Then, showing their true colours, Amazon priced the Kindle in Europe at 200 USD more expensive than in the USA (499-899 USD – which, for the basic model, is a 60% uplift) – i.e. let’s rip off the Europeans – and then, bizarrely, they also announced that, instead of being between 2.99 USD and 9.99 USD per download, eBooks in Europe would be priced at between 4.99 USD and 13.99 USD for exactly the same version. Amazon cited ‘increased costs of distribution’ (really?) for the price increase. Clearly, Amazon thinks Europeans are stupid. They would have been wiser to claim that Europeans are less price sensitive than Americans (who seem to expect to get everything cheap).

Turning now to the other side of the argument – pricing from the publisher’s perspective. To produce an eBook version of a published book (very few publishers produce eBooks as the only version) the publisher simply takes the pdf files provided to the printer, re-sets the cover to show only the front, and then converts the files to the three eBook formats (mobipocket for the Kindle and some phone-type devices, EPUB for the rest of the eReaders, and webpdf for those who want to read on their computers). The cost of producing these three versions is based on the number of pages and for a 264-page book it is around 125 USD. Thus the extra cost of producing an eBook is very low and so, at 13.99 USD (the Amazon eBook price in Europe) the re-seller gets 8.39 (60%), the author gets 3.91 (assuming the 70% of publisher’s revenue to author suggested by the new aggressive Amazon policy for Amazon published eBooks) and the publisher gets 1.69 – and so they only need to sell 74 eBooks to cover all their costs and anything further is profit. And if Amazon is the publisher and re-seller, then they are raking it in, taking over 10 USD per book or 2.5 times what they pay their authors.

But the point being missed by everyone at the moment is that the cost of creation of a book – no matter whether it is to be printed or made into an eBook – is exactly the same up to the point of the final printer’s pdf. So using some back-of-the-envelop but reasonably accurate figures from a small publisher -

Editing and copy-editing – 3000 USD
Cover design and setting – 3000 USD
Miscellaneous – 500 USD (setting up for POD/printing/eBook)
ROI – say 20% -

Total 7800 USD

Now, with re-sellers like Amazon demanding 60% of the retail price and the author getting up to 40% of the publisher’s revenue (thus 16% of the retail price), the publisher is receiving just 24% of the retail price. So, with a 264-page book, for which the market will pay around 15 USD for a paperback and 9.99 USD for an eBook (Amazon pricing), the publisher receives 3.60 USD for a paperback or 2.40 for an eBook and thus has to sell 3250 eBook copies just to recover costs and make a 20% ROI.

Now factor in the actual printing, marketing and distribution costs, and the revenue from a printed copy is closer to 50 cents and thus the breakeven sales approximates to 15,600 copies – and given that new novels generally only sell around 2500-3500 copies, this is clearly unrealistic and such books will have to be subsidised by other titles. And this, I think, is why publishers are pushing up the price of eBooks: because they make 2.40+ per copy to help them offset the losses they will be incurring on the printed version and/or to bring down the overall breakeven sales point.

Amazon claim that they are acting in the best interests of the customer/reader and that the publishers are not – but this is disingenuous for, as we can see, it is Amazon who is grabbing the lions share of the revenue. The publishers, on the other hand, are saying that it is Amazon who is acting against the best interests of the customer and restricting competition because their pricing policy will restrict the number of books being published since publishers do not have inexhaustible supplies of cash with which to subsidise loss making titles – this is slightly closer to truth. If Amazon and their like accepted either a fixed price for their stock (which is what happens in most other retail sectors) or the trade discount was limited to 40%, then publishers could publish more books and the customer would be better served. This tiff has shown that we need to move away from the remnants of ‘recommended retail pricing’ and towards cost-based pricing.

An alternative is to position the product as an eBook and seek to recover the costs from that before launching a printed version. For this to work with the current cost model, the eBook needs to be positioned at 9.99 USD (3250 copies to breakeven) or 13.99 USD (2320 copies to breakeven) and it is still open to question as to whether this is viable.

Another model is to demand that the writer carries the cost of the editing, it is, after all, a cost associated with the creation of the manuscript, and the publisher would only proof-read/copy-edit. This would probably reduce the costs to 5400 USD. If this is combined with viral marketing and the deliberate non-use of Amazon and the like as the main distribution channels, then an eBook priced at 5 USD would return the publisher 3 USD giving a breakeven sales of 1800. But 5 USD is probably too low as a retail price and does not encourage the reader to value their purchase since it is less than a couple of cups of coffee or a BigMac – this is purchasing psychology – so pitching it at 12.25 USD (Amazon and the big publishers, none of whom are stupid, know that the real price at which eBook readers value their purchases is between 9.99 and 13.99 USD) and the revenue to the publisher would be 7.35 USD and the breakeven sales 735 and that is eminently doable. Variations on this could also work but only after some market testing of the psychologically important ‘perceived value’ pricing point to get it right.

So, if the book was positioned as an eBook first and as a printed version second, then the traditional publishing model will have been reworked and far more books would reach the market both as eBooks and as printed copies. However, I doubt that Amazon or the traditional publishers will want that to happen since it is so counter to their current business models – which, despite the presumption of being modern and of the internet age (especially Amazon), are actually no different to what has existed in the industry for the last 100 years.