Amazon/Kindle

In this first blog on the subject of Amazon, I am interested in seeing whether the company, which started life as a bookseller using a pure online model, can still be classified as a bookseller or whether it has changed and become something else. (Alasdair White, August 2011)

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: 1st 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)

The dispute between Amazon and Macmillan is interesting but oddly founded. The assumption in the trade is that Amazon is artificially subsidising the price of eBooks to offset the very high cost (299-699 USD) of their eBook reader, the Kindle, and that the publishers (Macmillan, in this case) are trying to keep the price of eBooks artificially high so as not to impact their print sales. Thus, both parties are in the ‘wrong’ as far as pricing is concerned (but not as far as their respective, very traditional, business models are concerned).

What was interesting, though, was Amazon’s response to the launch of the Apple iPad Read the rest of this entry »