Amazon’s report of quarterly earnings last Thursday was greeted widely as an indication that the company can’t generate sufficient margins with Kindle devices and content. That interpretation has been reasonably straightforward, with strong echoes of sentiments that characterized critics’ views of Amazon during its early pre-profitability years in late 1990s and into the 21st century:
Despite rapid growth in Kindle hardware and content sales [the thinking goes], the combination of competition and Amazon’s penchant for pursuing loss-leader strategies to capture market share have forced Kindle-associated margins so low that, as the Kindle portion of Amazon’s overall business grows, it will lead inevitably to erosion of profits.
Due in part to this interpretation, Amazon’s share price, which closed Thursday within 3 percent of its all-time trading high, dipped dramatically in after-hours trading that day and has gained back only a fraction of those losses since.
But the low-margins interpretation misses another, much more dramatic story:
The big story is that in just three years Amazon has positioned itself to triple its overall share of the U.S. book business for all formats. Before the end of 2012, Amazon could own more than half of the U.S. book business across all formats.
How stunning a development would that be? Prior to the launch of the Kindle in 2007, Amazon was widely considered to account, at most, for somewhere around 15 percent of all U.S. book sales in all formats by all retailers.
Amazon has not reached 50 per cent yet, and is still far from that range where all titles are concerned. But one of the most reliable crystal balls for determining future bookselling trends is to examine and parse developments as they play out with individual bestsellers in the overall book marketplace, when numbers are available.
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| Room author Emma Donoghue |
Last week both Amazon and one of its most consistent publishing business critics, paid subscription site Publishers’ Marketplace, shined their respective spotlights on sale trends that have been playing out with a single bestselling novel, Emma Donoghue’s Room. (Room was published September 13, 2010 and became a breakthrough bestseller for the Dublin-born Canadian transplant Donoghue. Room currently stands at #26 among ebooks in the Kindle Store despite its agency-model price of $11.99. The hardcover, discounted by Amazon to $14.41 (20 percent higher than the Kindle edition), is #43 in the main Amazon store. It is #13 among far fewer available bestsellers listed in the iBooks store, and #35 on the Nook. Importantly for these discussions, the book has also been on the IndieBound bestseller list for independent brick-and-mortar booksellers for the past 20 weeks, and currently stands at #4.)
Helpfully, it turns out that we know a lot about Room sales, thanks to Amazon and Publisher’s Marketplace.
Russ Grandinetti, Amazon’s vice-president for Kindle Content,told a Digital Book World conference last week that, for Room, “total Kindle sales are equal to 85 percent of Nielsen BookScan’s print sales number.” Publisher’s Marketplace then performed some very helpful extrapolations and further calculations arriving here:
If the BookScan number is 80 percent of the print sales total, then Kindle sales here would 68 percent of all print. More importantly, though, to calculate what percentage of the book’s total sale was on Kindle, you need to add Kindle + BookScan + that other 20 percent together and look at Kindle as a percentage of that sum. So it’s 68 over 168, meaning that Kindle sales were 40 percent of the total sale in all formats for ROOM.
But it doesn’t end there. Grandinetti and other Amazon spokespersons said repeatedly last week that Kindle editions were currently outselling Amazon sales of their hardcover counterparts by a 3-to-1 margin, which means that Amazon hardcovers equal about 25 per cent of combined sales for these titles. Even if hardcover sales of Room fell short of this and constituted only 20 percent of Amazon’s combined, this would mean that total Amazon sales of Room constitutes about 50 percent of the total sale in all formats for ROOM.
It’s just one title, but what we’ve been seeing quite often with Amazon and the Kindle over the past few years is that what happens first with one title happens subsequently with more titles and then, ultimately, with most titles. It was a big deal in 2009 when Kindle sales of The Lost Symbol
outstripped Amazon’s hardcover sales right from the drop, and a little over a year later Amazon announced that all Kindle editions were outselling hardcover units for the same titles, across the board.
outstripped Amazon’s hardcover sales right from the drop, and a little over a year later Amazon announced that all Kindle editions were outselling hardcover units for the same titles, across the board.But there are other forces at play, and I’m not just talking about the fact thatRoom is one of the strongest sellers over the past five months for indie booksellers. Back on January 5 when USA Today reported that 19 of the top 50 titles on its bestseller list had sold more ebook than print copies for the previous week, publishing industry insiders blamed Santa Claus and downplayed the significance.
“What’s most interesting is what happens next week or over the next month. About 3 million to 5 million e-readers were activated last week. Will the people who got them keep downloading e-books, and at what rate?” asked Publisher’s Marketplace founder Michael Cader. Bowker’s Kelly Gallagher, too often a cheerleader for the status quo in publishing, was quoted saying that the surge in e-book sales “is not a sustainable trend.”
Right. Well, that was January 5. Now it’s February 2, and that trend, far from declining, has actually become stronger. On USA Today’s most recent bestseller list, for the week ended January 23, the number of titles with greater ebook sales than print sales had grown from the 18-19 range for the first three weeks after Christmas to 23 of the top 50.
There is a wide range of factors that are likely to push the velocity of change even faster for ebook sales specifically and Amazon’s share of the overall bookselling market in general, but the fact that brick and mortar bookstores are closing at a faster rate than ever, from local indies to chains, is bound to contribute to a snowballing effect. The imminent bankruptcy of the Borders chain is this week’s headline, but it’s just the headline. And despite the recent fuss about the new partnership for ebook sales between Google and the American Booksellers Association, it is inevitable that as ebook sales rise, brick-and-mortar stores will decline and publishers will gradually lessen their investment both in the bookstore-based physical distribution network and in print editions.
Finally, there’s Amazon’s not-so-secret weapon for building retail market share for its Kindle and print content sales: direct publishing, Amazon exclusives, and indie authors. Recent developments in this area deserve a post all their own, but for now we’ll just note that 36 of the top 100 bestselling ebooks in the Kindle Store are published either by indie, direct-to-Kindle authors or by Amazon publishing subsidiary programs such as AmazonEncore, AmazonCrossing, or Kindle Singles. The vast majority of these titles are either not listed or not selling at any appreciable level on any other retail venue, and they are not yet included on any bestseller lists other than Amazon’s own, although their sales would in many cases justify such inclusion. But the sales are there, the profits are there, and once again Amazon has positioned itself to dominate the market share for this, the fastest growing sector of the fastest growing sector in bookselling.
Which brings us back to Amazon executive Grandinetti, and his summary point in last week’s discussions: “However fast you think this change is happening, its probably happening faster than you think.”
Whatever the rate of change, and whatever the velocity of change, most of the other players in the book business and many of Amazon’s market analysts and investors may be missing the point as to exactly where this change leads. AMZN is not a day-traders’ stock, but for investors who take a long view it may have just moved into a new and very positive category.
If Amazon has decided to accept single-digit margins during this Kindle “investment phase,” and the result is that the company has set itself up to own a 50 per cent market share of the entire U.S. book business by the end of 2012, there will be no shortage of happy investors — and devastated competitors — at that point in the relatively near future.
Via Steve Windwalker’s Kindle Nation
Thanks! That was a great article with solid data about the all-too-secretive Amazon. Your conclusions make sense. Amazon has a history of sacrificing present profits for future market share and profit. I don’t like agency pricing, but I also didn’t like seeing Amazon selling ebooks below cost to drive competitors out of business and acquire a bit too much control over publishers.
I also suspect Apple’s attempt to reign-in (or profit illegitimately) from the sales by others of ebooks for iDevices may be a measure of the desperation they’re feeling at the iPad being left in the dust, as an ebook reader, by the Kindle 3. The latter is a well-made product that’s probably being sold below cost to generate more ebook sales. I’m frugal and my Kindle 1 does all I need it to do, but I’m still tempted to pick up one.
Imagine if our TV sets were made like the Kindle and like Apple’s evolving vision for the iPad. We’d have our choice between an ABC television that only picked up ABC and an NBC television that only picked up NBC. That’s where we seem to be headed.
My frustration with how both Amazon and Apple are attempting to block a free and open market led me earlier today to a fantasy. Why can’t someone jailbreak the Kindle, giving it a new OS and opening it up to getting ebooks and other documents from any source we want? That might ease our woes until a healthy market exists, one in which maker of devices isn’t also the seller of ebooks.
Reply to Michael W. Perry:
– Kindle isn’t closed. You can connect it to PC via USB and load any book you wish. You might need to convert the book prior to doing this. Amazon will even handle the conversion for you if you wish. Just send yourself an email with a .doc file
– There is “jailbreak” for Kindle. Just search the net for Duokan or FBKindle. There are several competing systems available.
This is an article with very little actual data, and a lot of extrapolation from averages. A very unreliable basis on which to draw major assumptions.
Michael: You talk about selling below cost. There is no evidence whatsoever here that Amazon is selling eBooks below what it costs them despite the article using this language in one section. It is extremely doubtful if that is the case. What the financials indicate, according to the conclusions of the article, is simply that Amazon’s margins are in single digits, which are not high enough to support their normal historical profit margins. That is a very different thing. Indeed the article itself says “If Amazon has decided to accept single-digit margins during this Kindle “investment phase,” ”
Clearly the ones making money are the Publishers and Authors, while Amazon is indeed in an investment phase, something almost all companies entering a new market practice.
However despite that fact that I find the extrapolation methods used in this article very tenuous, what is clear is that the Publishing industry is enabling Amazon to take a dangerously high proportion of the market in eBooks and paper books, and it might well come back and bite them.
Thanks, @Michael, @Howard, and @Name(Required). Howard, you’re certainly correct about the risks of extrapolation, and my own conclusions about Amazon’s position can’t be taken as if they were written in black ink. I’ve been writing about Amazon’s business innovations and strategies for the past decade, and since early 2008 have been extrapolating pretty specifically, in print, about Kindle-associated market share. So there’s a record, because my assessment of the meaning of the few available data points and arcs is informed by decades in publishing and bookselling. We’ll probably know at some point in mid-2013 how close Amazon got to a 50 percent book biz market share by the end of 2012, and I hope you’ll check back in.
Cheers,
Steve
Thanks Steve – a fair point.
Could you comment on the ‘selling at a loss’ issue ? tks 🙂
Howard, my take is that, in spite of the considerable evils of the agency model price-fixing scheme from a consumer’s perspective, it did have the effect of greatly limiting what had been pretty rampant loss-leader pricing, i.e., selling ebooks at a loss, by Amazon prior to April 2010. Amazon is now making a 30 percent margin on the vast majority of its sales, although it certainly is doing some discounting below wholesale, for instance, with certain Random House titles (including, apparently, the $5 Larsson bestsellers.)
With respect to the Kindle hardware, I simply don’t know. I’d guess that the company is making a tiny profit on both Kindle 6″ models, but, would it shock me if it was taking a tiny loss? Not really.
But it is worth pointing out something that people miss or mischaracterize with respect to margins, in the past, on print editions. We hear a lot these days about Amazon and other retailers having made 50 per cent margins on hardcover bestsellers in the past, etc. Never happened. In fact, Amazon provided deep discounts of 34 to 46 percent on over 95 percent of its hardcover units sold in recent years. So, on a $25-list hardcover for which Amazon paid $12.50, the actual retail price was $13.50 to $16.50, which meant that Amazon’s gross margin was somewhere between 7 and 24 percent.
Steve