I’ve gotten in the habit over the last few years of answering some questions about ebooks and related matters on Quora. Looking back over some of the answers I’ve posted, it occurred to me that this is one of my better ones.
The question was:
Why did publishers not create their own Amazon-like service to sell their books and instead let Amazon create a monopoly-like situation?
And my answer:
They had no idea they needed to.
Understand that the major publishers evolved in a certain way, and adopted a certain specialized function. They’re a manufacturer, a wholesaler. They sell to distributors, who sell to retailers. Indeed, as publishing moved more and more to ownership by major corporate conglomerates, and big bookstores like Barnes & Noble came on the scene, the distribution chains by and large contracted.
Hard as it is to believe, there used to be hundreds or more of small distributors whose job was to keep the shelves on grocery stores, drugstores, and so on stocked. Some of the major publishers (Doubleday, Scribner) even used to own their own bookstore outlets, but that’s all gone too. Publishers sell to distributors, who sell to bookstores. That’s just how it works. It’s how they’ve always done things; why change?
Ebooks had a really long early adopter period. Apart from Project Gutenberg, nobody even wanted them at all until the Palm Pilot came along. Then you had ebook companies like Peanut Reader (later Palm Digital Media, then eReader), Fictionwise (which eventually bought eReader before itself being bought by Barnes & Noble), and Mobipocket (bought by Amazon) come on the scene. They were just another kind of bookstore as far as the publishers were concerned, so they distributed ebooks to them on the same wholesale terms.
The publishers didn’t really care about ebooks anyway. So few people wanted to bother with them that they only made up a fraction of a percent of trade sales. They couldn’t even be bothered to make sure ebook prices kept parity with the paper versions, so you could often find the ebook selling at hardcover price months or years after the print book had gone into its paperback edition. They didn’t care. They didn’t have to care. Print books were still selling, and that’s where they put all their attention.
(See Open letter to the Big Six publishers: Have you learned anything?)
There were exceptions, of course. Jim Baen of Baen Books was far-sighted enough to recognize that sooner or later ebooks might just take off—and in the meantime, since the marginal cost of cranking them out was so low, they could be used as cheap marketing material for Baen’s paper books. So he gave lots of them away on the Baen website, sold them cheaply in monthly subscription bundles, and even packaged them in CD-ROMs for binding into hardcover books with permission granted for free redistribution.
And Baen sold more paper books than ever because of that, because most people still didn’t want ebooks, but they’d pick up a freebie or even buy a cheap one to see if they liked it well enough to shell out for the paper version to actually read. But even Baen made no bones about the fact that it saw ebooks as merely a sideline, a way to market its printed books. After the Kindle came out, when people actually started buying ebooks for real, even Baen made significant changes to its program in order to get those books into the Kindle store where more people would buy them.
(See Baen inks deal with Amazon, makes major changes to Webscriptions and Free Library)
And so the publishers watched the small ebook stores piddle along, and watched one manufacturer after another try and fail to make an e-reader that would set the world on fire. The thing was that most consumers didn’t want to read their books off a tiny little smartphone screen. Even the new, more paper-like e-ink readers didn’t appeal. If huge manufacturers like Sony, inventor of the VCR, the Walkman, the PlayStation, and more, failed to catch consumers’ interest with their e-reader offerings, then who could? Amazon? Yeah, sure, right. In fact, both Amazon and B&N had tried selling ebooks (as PDFs and Microsoft Reader documents) in the early 2000s. Barnes & Noble had given it up as unfeasible, but Amazon continued to tinker with them even though there wasn’t that much demand.
(See Amazon ebooks: Born in a bubble from a bullet)
And then Amazon decided it wanted to try again. Bear in mind, in the days before the Kindle, publishers didn’t have anywhere near the hate on for Amazon that they do now. It was one of their biggest bookstores, it moved a lot of books, and it aggressively discounted, but it wasn’t a threat to the industry or anything. At least no more so than Borders or Barnes & Noble. And at the time, the publishers were all focused on Google’s plan to violate copyright extensively by scanning all their books into a search engine. So when Amazon said, “Hey guys, we want to try doing that ebook thing too,” the publishers were all, “Yeah, sure, whatever, kid. We’ve got standard wholesale rates and such. Sign on the dotted line, and be sure you put DRM on them. Now don’t joggle our arm while we sue Google.” Boy were they in for a surprise as the entire nature of publishing changed around them.
(See The Apple trial, agency pricing, and The Battle of $9.99)
All this is a pretty long-winded way of saying that they didn’t launch their own ebook stores because they didn’t care about ebooks. That’s not what publishers did in the ’90s and ’00s. They made books. Paper books. Someone else distributed the books. And someone else sold the books. Anyway ebook readers had flopped so many times, they couldn’t imagine any ebook store could ever pose a serious threat to their print business, which was what kept the bookstores in operation.
From their point of view, trying to do anything with ebooks would be a waste of money, and worse—if it succeeded, why it could threaten their print business, which would threaten the bookstores, which the publishers considered their most important way of exposing readers to their new books.
And that (in part) is why they’re so mad at Amazon. In dominating the ebook market, and indeed effectively creating the modern ebook market, Amazon poses a threat to print bookstores. Borders has already gone down the tubes, and Barnes & Noble is shaky. By the time they realized they should care about ebooks, and the Internet gave them the power to sell direct to consumers, it was already too late. Most consumers were already with Amazon.
(See Whither the Kindle Killer? and Dumping DRM is not a panacea)
Another issue that prevents publishers from selling ebooks (and, for that matter, paper books) direct to consumers is that they have some concern that their distributors and bookstores wouldn’t like the publisher to be in competition with them. (I suppose Baen got in under the radar by starting its sales so early.) It’s not clear just how serious a problem this actually is.
You’re still missing the point Chris.
For any publisher large enough to push their more popular print books into bookstores, ebooks are a bad idea. And that’s not even getting into the fact that, with downward pressures on ebook prices, the per-sale profit from them is likely to be less than for print. Remember, with books the digital v. print distinction isn’t that in automakers between compact and luxury. The book is its content and the content of digital and print is, for many books, identical. For customers, buying one is the equivalent of buying the other.
It’s the sheer size of the Kindle market that turns publishers off. Some 70% of the ebook sales with go though Amazon, with another 15% or so through Apple. Publishers rightly regard Amazon as a competitor for the best of all reasons. Amazon defines itself as their competition in its SEC filings. An ebook sale through the Kindle store is no different from putting money in the pockets of a publishing competitor. Indeed, its worse, since Amazon is THE competitor, one that makes clear it intends to weaken and exploit the as “gazelles”—Bezo’s term.
And for many of the better selling books from major publishers, a price over $9.99 means (I assume) a mere 35% income from retail. Add in royalities to the author and the cost of production, and they’re only earning about 15% of the retail price for each sale. In comparison, Amazon role in each sale costs it mere pennies, meaning that its profit margin per sale is close to 65%.
Put that into numbers. Assume a hot, 1000-page bestseller whose digital edition sells for $20. For each sale, the publisher gets $7.00 and after paying expenses, only $3. In contrast, for that same sale Amazon gets $13 less perhaps 25 cents in processing costs or $12.75.
Ponder that for a moment Chris. Take off that journalist hat that, like all journalist hats, makes you stupid, at look at what is happening. Do the numbers.
For this bestseller, the publisher—who did all the labor, sponsored all the advertising, and is taking all the risk, is earning about $3 per sale. On the other hand, Amazon, who has risked nothing on the book and whose promotional costs are virtually zero is earning $12.75. Do a simple division and Amazon’s profits on the book are over 400% those of it publisher. Can’t you see that there is something more than a little bit wrong with that situation?
Now consider Apple. The company is, from a publisher’s perspective a wash, sales through it neither hurt nor help their business model. The profit that Apple makes does not go to a competitor, indeed it takes money from THE competitor, Amazon. But on the other hand, the income that Apple makes do not shore up physical bookstores like print book sales do. It’s those non-Amazon bookstores that publishers want to keep healthy.
The end result is that the larger publishers have strong reasons not to stress ebook sales. Those sales, most of who go through Amazon, give a disproportionate share of the profits to Amazon, their ultimate competitor. Each sale also has the potential for one less print book sale through physical bookstores that offer the only real competition Amazon has.
There are other factors, including the complexity that ebook sales introduce into calculating their print runs. It’s hard enough to guess how many books well sell. It is far more harder when that complexity is made worse by the difficulty of breaking those sales down into print and digital. A digital sale that, thanks to Amazon, earns them little, may also mean that a hardback has to be remained, losing them money.
There’s yet another factor that publishers and bookstore owners understand. That’s that a supplier-competitor relationship is fraught with problems if either intrudes into the turf of others. When I worked for Boeing, I was told that the company could save quite a bit of money running it’s own in-house package and employee shuttle between its different cities scattered around the country. It does not do that because doing so would be putting itself in competition with UPS, FedEx and the other companies to which it wants to sell planes.
The Name that Cannot Be Named at Amazon doesn’t understand the necessity of cooperation like that. He lives in the nastiest of kill-or-be-killed Social Darwinism. For now that’s doing well for him, but in the end it will bite like a viper. When Amazon heads downward, it will find that it has few friends and quite a few who’ll enjoy twisted the dagger a few extra times.
I’ll be blunt Chris. There’s a reason you’re not the CEO at Random House or one of the other publishing giants. Those who reach such positions have run a decision-making gauntlet. If they fail to understand the complex and changing dynamics of the publishing industry, they’d have dropped out of the running for CEO.
So you might try acquring a little humility. You might ask yourself if you really know as much as you think you do. You might consider the possibility that someone who heads a $400 million publishing company might know more about publishing than you do. You might lay of the lecturing.
I’m really not sure why you’re lecturing me about how much money Amazon makes from ebooks. For the period of time I’m talking about, Amazon wasn’t even a factor.
Amazon didn’t start doing ebooks until a good ten years after the first ebooks were sold. That’s time in which publishers could very well have taken the initiative to develop their own ebook solutions. But, as I have explained, they didn’t want to and had no idea they even needed to.
I read Mr. Perry’s response to the article and I really cannot see where Mr. Perry is coming from apart from being an Amazon hater. No matter what the article regarding Amazon is about, Mr. Perry just goes on a rant about the huge profits they make or the lack of profits they make.
Chris’s article clearly explains that publishers made a huge mistake by underestimating the potential of ebooks. As the ebook market has grown, a few companies have tried to compete on ebooks. Amazon is the biggest seller right now. Kobo is doing OK internationally and Apple is also doing OK. B&N is a joke and their share is dwindling. The publishers however, were too focused on books and new releases. It took a long time before backlist titles were available as ebooks, and still some of them which have been released are ridiculously priced. The publishers just wanted to sell new hardbacks.
What is really hurting publishers now is the self publishing industry. In the good old days. the traditional publishers could control the output of books into the marketplace, but now, with all the self publishing tools available to anybody, the floodgates have opened and the consumer has access to a seemingly limitless supply of reading material and the smart self published authors have their material available in formats that are accessible to all readers.
As a business person myself who sells some of my products through companies such as Amazon and Apple, I know that these companies make easy money from my business and that is how business is done. I also try to sell my products directly to my customers and this is very successful as I have a loyal clientele base. Publishers could have done this but they did not. It is not Amazon’s or Apple’s fault that they have such a large share in the ebook market, it is the publisher’s fault.
Another factor that prevents publishers being pro-active in the selling of e-books is that their printed books are priced to recover costs + the profit margin. The e-book is a by-product, the costs of which are negligible by comparison, because all the costs are recovered by printed book sales and the small additional costs of, say, converting existing files to EPUB3 (or whatever) hardly justify the prices they want to charge for e-books. Everybody realises this – although few mention it – and the result is what we have seen, a drop in the sales of e-books from the AAP group of publishers. The sensible thing to have done would be to hold off publishing the e-version until the paperback version was published and publish the e-book at the paperback price. After all, many people wait for the paperback version, so what’s the problem in waiting the same length of time for the e-book?
Some publishers tried windowing their e-books earlier, but it didn’t work out so well. The people who bought early e-readers were the same folks who bought tons of books. E-book fans hated waiting, and annoying your best customers isn’t good for business. Also, pirate scanned versions hit the dark corners of the net long before the official release. No one can really say how many sales this cost, but probably some.