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May 29 2012

Amazon, ebooks and advertising

This post originally appeared on Joe Wikert's Publishing 2020 Blog ("Why Advertising Could Become Amazon's Knockout Punch"). This version has been lightly edited.

Your Ad Here by KarenLizzie, on FlickrIt all started harmlessly enough with Amazon's Kindle with Special Offers. That's the cheaper Kindle that displays ads when the device is in sleep mode or at the bottom of the screen when paging through the owner's catalog of books. It is very unobtrusive and, since it lowered the price of the device, has made that Kindle an extremely popular device.

Now there are rumors that Amazon is selling ad space on the Kindle Fire's welcome screen. That sounds pretty reasonable, too, as it's a simple way for Amazon to drive a bit of additional income that's pure profit for them.

Given that Amazon's goal is to offer customers the lowest prices on everything, what's the next logical step? How about even lower prices on ebooks where Amazon starts making money on in-book ads? Think Google AdWords, built right into the book. Of course, Amazon won't want to use Google's platform. They'll use their own so they keep 100% of the revenue.

The changes the DOJ is requiring for the agency model means a retailer can't sell ebooks at a loss, but they can still sell them for no profit, or break even. In other words, the 30% the retailer would keep on an agency ebook sale can be passed along to the customer as a 30% discount on the list price, but that's as deep a discount as that retailer can offer.

The rules are different with the wholesale model. Amazon already loses money on sales of many wholesale-model ebooks. Let's talk about a hypothetical wholesale model title with a digital list price of $25. Amazon is required to pay the publisher roughly half that price, or about $12.50 for every copy sold, but that ebook might be one of the many that are listed at $9.99 for the Kindle. So every time Amazon sells a copy, they lose $2.51 ($12.50 minus $9.99). Amazon has deep enough pockets to continue doing this, though, so they're quite comfortable losing money and building market share.

So, what's preventing Amazon from taking an even bigger loss and selling that ebook for $4.99 or $0.99 instead? In the wholesale model world, the answer to that question is: "nothing is preventing them from doing that." And if selling ebooks at a loss for $9.99 makes sense, especially when it comes to building market share, why doesn't it also make sense to sell them at $4.99, $0.99 or even free for some period of time? It probably depends on how much pain Amazon wants to inflict on other retailers and how much attention they're willing to call to themselves for predatory pricing.

Make no mistake about the fact that Amazon would love to see ebook pricing approach zero. That's right. Zero. That might seem outlandish, but isn't that exactly what they're doing with their Kindle Owner's Lending Library program? Now you can read ebooks for free as part of your Prime membership. The cost of Prime didn't go up, so they've essentially made the consumer price of those ebooks zero.

Why wouldn't they take the same approach with in-book advertising?

At some point in the not-too-distant future, I believe we'll see ebooks on Amazon at fire-sale prices. I'm not just talking about self-published titles or books nobody wants. I'll bet this happens with some bestsellers and midlist titles. Amazon will make a big deal out of it and note how these cheaper prices are only available through Amazon's in-book advertising program. Maybe they'll still offer the ad-free editions at the higher prices, but you can bet they'll make the ad-subsidized editions irresistible.

Remember that they can only do this for books in the wholesale model. But quite a few publishers use the wholesale model, so the list opportunities are enormous. And as Amazon builds momentum with this, they'll also build a very strong advertising platform. One that could conceivably compete with Google AdWords outside of ebooks, too.

Publishers and authors won't suffer as long as Amazon still has to pay the full wholesale discount price. Other ebook retailers will, though. Imagine B&N trying to compete if a large portion of Amazon's ebook list drops from $9.99 to $4.99 or less. Even with Microsoft's cash injection, B&N simply doesn't have deep enough pockets to compete on losses like this, at least not for very long.

At the same time, Amazon will likely tell publishers the only way they can compete is by significantly lowering their ebook list prices. They'll have the data to show how sales went up dramatically when consumer prices dropped to $4.99 or less. I wouldn't be surprised if Amazon would give preferential treatment to publishers who agree to lower their list prices (e.g., more promotions, better visibility, etc.).

By the time all that happens, Amazon will probably have more than 90% of the ebook market and a nice chunk of their ebook list that no longer has to be sold at a loss. And oh, let's not forget about the wonderful in-book advertising platform they'll have built buy then. That's an advertising revenue stream that Amazon would not have to share with publishers or authors. That might be the most important point of all.

What do you think? Why wouldn't Amazon follow this strategy, especially since it helps eliminate competitors, leads to market dominance and fixes the loss-leader problem they currently have with many ebook sales?

Photo: Your Ad Here by KarenLizzie, on Flickr

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January 25 2012

Coming soon to a location near you: The Amazon Store?

This post is part of the TOC podcast series. You can also subscribe to the free TOC podcast through iTunes.


Jason Calacanis (@jason), co-founder of Weblogs, Inc., and currently host of This Week in Startups is never afraid to voice his opinions. One of his recent articles entitled The Cult of Amazon Prime caught my eye because it paints such a vivid picture of Amazon's growing market dominance. I appreciate the leadership role Amazon has played over the years, but I'm also concerned about the dangers of one vendor controlling too much of the market. Calacanis agreed to discuss my concerns in this interview.

Key points from the full video interview (below) include:

  • Does Amazon Prime spell the end of the local mall? — It won't happen immediately, and there will always be some need for in-person shopping, but Amazon Prime is already having an impact on the local shopping experience. [Discussed at the 00:40 mark.]
  • Serendipity is overrated — Jason makes a good point about how what you discover at a brick-and-mortar store is often what the vendor or its supplier want you to discover, and this experience can easily be recreated with the "people who bought X also bought Y" model. [Discussed at 2:40.]
  • Coming soon to a location near you: The Amazon Store? — Rather than continuing to use BestBuy and other stores for showrooming, Jason talks about the possibility of Amazon creating their own specialty retail presence where you could touch and feel big-ticket items and have them shipped to you the next day. [Discussed at 4:01.]
  • The instant gratification problem won't exist forever — Amazon has already implemented same-day shipping in some locations, and it's possible a resolution to the state sales tax issue Amazon is currently in the midst of could lead to broader same-day delivery service. [Discussed at 6:01.]
  • AmazonBasics is a preview of what's to come — We're all familiar with private label goods at the local grocery store. AmazonBasics is a similar program. Today, it only offers gadget accessories, but it could easily lead to Amazon toothpaste or breakfast cereal down the road. [Discussed at 7:22.]
  • Don't fear the controlling, manipulative market leader — I'm skeptical of this, but Jason believes that technology and other efficiencies make barriers to entry so low that a market leader who exploits its position will get knocked off by a new startup. [Discussed at 14:24.]
  • Walmart vs. Amazon: Who will compete with Amazon to keep them honest? — Jason believes Walmart is the only serious threat. [Discussed at 18:34.]

You can view the entire interview in the following video.

TOC NY 2012 — O'Reilly's TOC Conference, being held Feb. 13-15, 2012, in New York City, is where the publishing and tech industries converge. Practitioners and executives from both camps will share what they've learned and join together to navigate publishing's ongoing transformation.

Register to attend TOC 2012

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November 04 2011

Publishing News: Early response to the Kindle Lending Library

Big personal publishing news: I started reading books on my iPad this week (staunch holdout on the ereader no more, I suppose) — it seemed the most honorable way to read Steve Jobs' biography.

On to a few of the bigger publishing stories that caught my eye ...

Amazon extends its Prime tentacles into lending

KindleLending.pngAmazon launched its Kindle Lending Library this week, with, according to the Wall Street Journal, a relatively small list of 5,000 titles to start. Amazon's release claims more than 100 NYT bestsellers are included, but the WSJ article notes that "none of the six largest publishers in the U.S. is participating." Mathew Ingram has a nice analysis of this particular Big Six point over at GigaOM: "Much like newspapers are doing with paywalls, book publishers seem to be trying desperately to maintain the control they used to have so they can prop up their traditional business model."

The publishers who are participating are being compensated under a couple different payment models. From the WSJ article:

Russell Grandinetti, vice president for Kindle content, said "the vast majority" of participating publishers were receiving a flat fee for their titles, while a more limited group is being paid the wholesale price for each title that is borrowed. "For those publishers, we're treating each book borrowed as a sale," he said.

Some publishers are looking at the lending program as an exposure opportunity. Arthur Klebanoff, chief executive of RosettaBooks LLC, said to the WSJ: "I'm attracted to the incremental promotion/visibility for participating titles ... All site promotion, especially of backlist titles, drives sales in the Kindle Store."

Other publishers see issues with the program. O'Reilly's Joe Wikert posted a piece here on Radar that questions the flat rate associated with the Kindle Lending Library:

So no matter how popular (or unpopular) the publisher's titles are, they get one flat fee for participation in the library. I strongly believe this type of program needs to compensate publishers and authors on a usage level, not a flat fee. The more a title is borrowed, the higher the fee to the publisher and author. Period.

There's no question about the significant effect the Kindle has had on ereading and e-lending — the WSJ post points out that "[a]t the Seattle public-library system, e-book borrowing rose 32% in the month after Kindle books became available." The bigger picture here, though, speaks to Amazon's unrelenting journey to create an all-encompassing platform — the lending library only is available to owners of Kindle devices (driving device sales) and to members of Amazon Prime, a program Amazon has been increasingly pushing into all sectors of its business. As my editor points out, "[Amazon Prime] is not a 'pivot'; it's more like a tornado that's sucking up everything in its path." Indeed, I think Prime may be a key part of the support structure for Amazon's growing ecosystem.

For more on the lending library and how it works, there's a nice overview at PCWorld.


TOC NY 2012 — O'Reilly's TOC Conference, being held Feb 13-15, 2012 in New York City, is where the publishing and tech industries converge. Practitioners and executives from both camps will share what they've learned and join together to navigate publishing's ongoing transformation.



Register to attend TOC 2012


Publishing gets litigious on piracy

This week, the publishing industry joined an elite club that, according to TorrentFreak, had previously only included independent and adult film studios as members. Global academic publishing company John Wiley and Sons has filed suit against 27 BitTorrent users who allegedly downloaded illegal copies of several "For Dummies" titles on October 18 and 19 of this year. TorrentFreak quoted an attorney for the plaintiff:

"Defendants are contributing to a problem that threatens the profitability of Wiley. Although Wiley cannot determine at this time the precise amount of revenue that it has lost as a result of peer-to-peer file sharing of its copyrighted works though BitTorrent software, the amount of revenue that is lost is enormous," Wiley's attorney writes.

"Photoshop for Dummies" appears to be the central title. The suit states the book has been downloaded 74,000 times since the summer of 2010. Copyright expert Susan Kohlmann told PaidContent: "The problem affects book publishers as it affects all content owners, and with the growing popularity of ebooks, various strategies to address illegal file-sharing, including litigation, will necessarily grow as well." The piracy issue is controversial at best — and some say ill-informed — but how this case proceeds and whether it achieves its desired effect (or any effect) will make this an interesting test.

Let's put our heads together

The Books in Browsers conference wrapped up last Friday, and this week, the keynote videos started rolling out — you can peruse the playlist here. Brian O'Leary (@brianoleary) had a particularly inspirational talk that topped off the conference. He talked about content abundance and how it affects the publishing industry as a whole. O'Leary said he's increasingly come to think that "we all have to hang together, or, surely, we will hang separately."

O'Leary's presentation is available in the following video:

Related:


The problem with Amazon's Kindle Owners' Lending Library

Amazon Kindle logoIt's no secret that I'm a big Amazon fan. In fact, I recently took the Amazon side in a debate about platform superiority. (I won that debate, by the way ...) That's why a lot of people are surprised that I'm such an outspoken critic of Amazon's new Kindle Owners' Lending Library. The program is great for Amazon and maybe even for consumers, assuming they're willing to live with the many restrictions, but it's awful for publishers and authors.

Why? As Amazon stated in its press release, "For the vast majority of titles, Amazon has reached agreement with publishers to include titles for a fixed fee." So no matter how popular (or unpopular) the publisher's titles are, they get one flat fee for participation in the library. I strongly believe this type of program needs to compensate publishers and authors on a usage level, not a flat fee. The more a title is borrowed, the higher the fee to the publisher and author. Period.

Even if a flat fee made sense, how can a publisher try to estimate a fair amount? One key factor is the number of Amazon Prime subscribers. There are a variety of estimates on this figure, but those estimates only apply to this specific point in time. How can you possibly know the number of Prime subscribers Amazon will have in six months? In 12 months? Don't assume you can simply extrapolate this number from historical trends. When the Kindle Fire comes out later this month it will include a 30-day Prime trial, and I expect the Fire's availability and the upcoming holidays to create an enormous surge in Prime subscribers. When will Prime double today's levels? It's impossible to say, which means there's no way to estimate how many times a book might get loaned out. That also means it's impossible to come up with a reasonable estimate on a flat fee for a publisher's list.

I hope Amazon reconsiders and switches this program to a pay-for-performance model. That's the only way I'll ever support it as a publisher.

What's your take? Please weigh in through the comments.

TOC NY 2012 — O'Reilly's TOC Conference, being held Feb. 13-15, 2012 in New York City, is where the publishing and tech industries converge. Practitioners and executives from both camps will share what they've learned and join together to navigate publishing's ongoing transformation.

Register to attend TOC 2012

Related:

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