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Amazon and the Big Six – Part One
June 8, 2012
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You knew this was coming so don’t act surprised.

There can’t be a traditional or indie author out there that isn’t following the drama going on between these two. The blogs are full of every opinion and prediction one could possibly think of. Most of them I would classify as speculation, others as fiction, some of them are even science fiction, but a few have a ring to them suggesting the author has a bit of knowledge about business, and those are the ones I pay closer attention to.

Notice I said business, not publishing.

The way the publishers have operated over the past few decades bares little resemblance to any business model you would find anywhere else.

Simply put, a business has a product that someone creates, a company that distributes that product to the retailers that sell it, and the customer who buys said product for their consumption/entertainment.

So how does that apply to publishing? Like this;

Authors: Content creators, they make the product.

Distributors: The publishing companies, they package the product and distribute it to the retailers.

Retailers: People who sell books.

Customers: People who buy books.

Sounds simple, and if you paint in broad enough strokes, it is. So why are we having all this drama?

The main reason is the changing nature of the product. What was once considered hardware (print books) has now become software (e-books). The other is the shrinking amount of leverage held by the Distributors. The traditional system in place now is a business model that gave all the advantages to the Distributors, and little, if any, to the three other parties involved.

But that’s all changing now isn’t it? Primarily through two things; the internet, and a little company started in 1994 called Amazon.

But I already know this Randall, tell me something new.

Actually, I feel I need to tell you something old first because I haven’t seen it come up on any of the popular blogs yet. And it’s important in understanding this whole mess.

When it comes to Amazon, the Publishers did it to themselves.

It was no accident that Amazons founder, Jeff Bezos, started his new company by getting into the retail book business.

“I chose books for lots of different reasons, but one primary reason, and that there are more items in the book space than there are items in any other category, by far.” –Jeff Bezos, Lake ForestCollege, 1998.

Publishers don’t sell directly to the public themselves; they have always used retailers to get the product to the consumer. The simple reason; they just didn’t want to.

Retail is a tough business; it requires a massive amount of attention, time, and flexibility. Publishers take an average of a year and a half to publish a book, so obviously they are not retail type people. So the publishers were content to give the retailers a small cut in exchange for something they didn’t wish to take on, and since they had all the leverage, the publishers could basically dictate the terms they wanted.

There was nothing to upset this applecart, so they grew into the giant corporations they are today. Little has changed in the last few decades. It was this entrenchment and lack of a disrupting influence that made them such a great target. All it took was someone to come along with the right tool, coupled with the vision to use it properly, and the traditional publishing business was suddenly in trouble.

That tool is the internet, specifically internet retailing, and the man using it was Jeff Bezos.

A little about Mr. Bezos before I go on; this is a guy who graduated from Princeton in 1986 where he studied electrical engineering and computer science. He’s worked on Wall Street doing computer science and networking for Fitel, a company that deals in international trade. He then worked for Bankers Trust, eventually becoming their vice-president. Before leaving to start Amazon he worked for D.E. Shaw & Co. as a hedge fund manager.

So when you add it all up he has a background in computer science, international trade networking, hedge fund management, and banking. Its as if he had a vision of Amazon back when he was two years old, and tailored his job choices in preparation for it.

So what did he start his new company with?

 Books.

Forging a business relationship with the Big Six was a win-win at the time, and Amazon grew steadily with Bezos at the helm. By 1999 the company was already huge and Bezos was Time magazines Man of the Year. Everything was great. Amazon soon had a dominant presence in the on-line retail sector and showed no signs of slowing down.

Here’s a quote from a Wired magazine article published in December 2011;

“We are culturally pioneers. We like to disrupt even our own business. Other companies have different cultures and sometimes don’t like to do that. Our job is to bring those industries along.”

Remember this quote while you read the rest of this, it’ll explain itself.

Where was I? 1999? Let’s skip ahead a few years.

By the mid 2000’s some attempts at e-book readers had been made by a few electronic companies, but none of them really caught on. By 2008 e-books have become a sliver of the overall market at less than 1%, and the publishers gave them little consideration. Keep in mind that the Big Six are just subsidiaries of huge entertainment corporations. They’re into TV, movies, music, newspapers, and magazines, plus a million other forms of media.

Unable to see the future, the publishers met the growth of the e-book market by trying to safeguard it with Digital Rights Management, or DRM for short. (Evidently the music department doesn’t talk much with the publishing department.)

DRM is nothing more than software attached to a form of electronic media. It requires the purchaser to have a code to unlock it before it can be used. The idea was that it would prevent piracy. Armed with DRM, the publishers did something incredibly stupid.

They required Amazon to use DRM on all of their products that Amazon sold.

I wish I had video of that meeting. If Jeff Bezo’s jaw did not hit the floor I give him great credit. He’s probably an awesome poker player. The Big Six were not only asking him to shoot them, they were providing the gun as well, and they had no idea they were doing it.

This is comparable to when Bill Gates was negotiating the deal with IBM for his operating system. He agreed to sell it to them on their terms as long as he retained the right to sell it to other companies. IBM agreed to the provision without thinking it through. IBM thought the hardware was the product. Bill Gates knew better. He knew the software was the product; the hardware was just a delivery device. You know how the rest of that story played out.

So here’s the Big Six telling Bezos that despite the fact that he has the dominant delivery device, and the dominant retail platform to move product onto it, they’re scared of piracy and want DRM. Not only that, they aren’t software engineering companies, so they want Amazon to install it for them!

(Did you notice that when you publish on Amazon you make the choice of whether or not to have DRM on your book at Amazon? You don’t put DRM on and then submit to Amazon, no, Amazon does it for you if you click on a little box.)

So what did this do? It chained every book to the device that it was downloaded to. If the reader buys a Kindle and fills it up with books, they’re basically committing themselves to Amazon. Because of DRM, they aren’t able to move their e-books anywhere else. They’re locked in. They’re choice now is to buy their entire library from Amazon, or switch to another device and loose all the books they’ve already bought. Throwing away money is something most people are very reluctant to do.

The Kindle had about 80% of that >1% total market share that e-books made up in 2008. The Big Six thought it was too small to worry about, and that DRM would take care of everything anyway. They didn’t realize that their product had become software.

By 2009 e-books made up 20% of the overall market.

This year it’s estimated to jump to around 40% and keep climbing, taking a big move every year around the holidays as people buy e-readers as gifts. The majority of them are Kindles. Why? Amazon sells Kindles at a loss and provides the best access to the product. Amazon figures they will make up the difference and more when people load them up with books. Once they do, they’re locked in, customers for life, or at a minimum, the life of the device.

What the Big Six didn’t understand was that Amazon wasn’t selling books. It wasn’t selling e-readers. It was selling access to its giant catalog of goods. They still thought books were hardware. Bezo’s knew that books had become software, and he capitalized on the ignorance of the Big Six to put Amazon where it is today. By demanding DRM they were putting a lock on access to their product and giving Bezos the key. This is called leverage, and the Big Six voluntarily gave it away.

This is what I haven’t seen anybody point out in the self-publishing blogs that I read. The Big Six did it to themselves! They locked their own customers, and themselves, into the Amazon universe.

And they have only themselves to blame.

Did Bezos take advantage of the Big Six? There are some out there that would say yes, and I just have to say that I strongly disagree. He did what any good businessman would do; he secured a deal that was beneficial to his company and his customers. I would think less of him as a businessman if he hadn’t made the agreement he did. It was just plain good business sense. He saw the future that the Big Six didn’t, simple as that.

I work in medicine and there are times when I’m dealing with physicians on the phone. I can usually tell the age of the doctor by what medications he chooses or how he wants things done. Some doctors keep up with the latest drugs and procedures, some don’t, and it shows. They’re simply entrenched in the old way of doing things.

I’d put good money on this; the people in the room that represented the Big Six that day? I would bet that they all had grey hair. 

About author

Randall

Randall Wood is the author of the popular Jack Randall series of thrillers as well as several short stories surrounding the main characters.

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