Somebody Saw This Day Coming

a guest post by an ex-AmazonianThis Vanity Fair article on Amazon has been making the rounds last week.It’s a little incoherent, largely because it has sort of bit off a whole bunch of things at once. I have a bunch of carping little things I could complain about, but I’m going to do what Keith Gessen did not do, and focus on Publishers, Discovery, Amazon and Negotiation. They are related in a way that rarely gets talked about.

First, the disclaimer that I increasingly feel is required when I write about stuff like this, because someone is going to really complain about it otherwise: I am long AMZN and I used to work for Amazon.com from 1996-8.

The subtitle of the article includes this: “How did Amazon—which was once seen as the book industry’s savior—end up as Literary Enemy Number One? And how much of this fight is even about money?”

Is it fair to say that Amazon was once seen as the book industry’s savior? Yes. Barnes & Noble and other chains had become big enough retailers of books that they were able to extract substantial concessions (price, terms, co-op dollars, etc.) from publishers. If you didn’t give the chains the books they wanted in the numbers they wanted, those books (and maybe everything else you published) didn’t move. Worse, the chains wanted to have a copy in every one of their stores of almost every book carried in almost every store. Which meant that they had hundreds of single (or a few) copies scattered around the country of a book that might sell super well in a handful of cities. The rest were all gonna be returned, which means, pulped if a paperback, or sold to a discount house if a hardcover. The bigger the chains got, the bigger the returns issue became, and it made life very difficult for publishers, pushing them towards bestsellers and regional niche products and basically killing the midlist. As Amazon grew in the latter half of the 1990s, there were articles about how Amazon was good for book culture because it was the primary force against bestsellerdom, the only thing keeping midlist authors afloat.

Why were Amazon’s returns so low? Well, they had this business model where they ordered from distributors (returns went back on the shelf, hypothetically) AND didn’t actually order anything at all unless they had a customer order in hand. That didn’t stay true (and, ironically, I think they may have gone back to that model for Hachette in the current dispute, but I digress.). They were stocking a lot of books ordered from publishers before I left in September of 1998, but by that time they were moving so much product they were really good at predicting what they were going to move (this is probably also how pre-order got started, but that happened after I left so I don’t really know). They had a tiny number of DCs versus the chains with their hundreds of retail outlets.

Then what happened?

Gessen says, “It has been said that Amazon got into the book business accidentally—that it might as well have been selling widgets. This isn’t quite right. Books were ideal as an early e-commerce product precisely because when people wanted particular books they knew already what they were getting into.” And then he gets sucked into the Look At All These Books in the Catalog! thing.

Gessen isn’t quite right. Here is the actual explanation:

There are a lot more books than CDs (what we would later term, longer tail). The book universe was at least 10X the CD universe.

There was and is less coverage of the book universe by book publishers than there was coverage of the CD universe by CD publishers (more of the long tail). That is, there were more books published by small and medium sized publishers than published by the top few publishers.

Book publishers in general are less well run as businesses than CD publishers.

Ergo, if Amazon gets big and starts to be kind of scary to the publishers, the publishers will lack bargaining power against Amazon (hard to cartelize because too many players and too much product outside the potential cartel). They will not notice this ahead of time. Also, they will love Amazon for a very long time, because Amazon will provide balance versus the chains. Further, by Amazon’s very nature, Amazon produces zero returns, which is the single biggest problem in book publishing.

These are NOT (hopefully obviously, because he’s much funnier and punchier than I am) actually Bezos’ words. But this is the gist of what I heard him say over and over and over again in 1996 and 1997. This was the business case for books vs. CDs.

Bezos knew that a day would come when publishers would no longer like him. He was careful to not make that day happen any sooner than necessary. For example, while I was still there, someone proposed selling Amazon-published out of copyright books (classics), which Barnes & Noble and other chains had experimented with. The reason he gave for not doing this at the time was to avoid pissing off the suppliers (publishers) by going into competition with them

When (much later) the publishers understood that they were in a position of diminishing negotiation power with Amazon, they -- well, they formed a cartel, price fixed, got busted for it, settled and moved on. Gessen describes this sequence a little differently. But that’s what their initial effort was to regain bargaining power. But remember: they are still up against this Big Universe of Books, of which they only publish a fraction of. Worse, they do not actually know the size of the total universe and their guess is probably low and getting more wrong over time.

Most of my time at Amazon was spent on the catalog, and a lot of that time was spent making it easier to get more items and eventually more types of items into the catalog, in turn making it easier for small publishers or self-publishers to be listed in the catalog. (Essentially: send us an ASCII text file, new line terminated, tab separated fields in the following order, etc.). Bezos had some fairly specific ideas about marketing that involved numbers of items, or numbers of discounted items or whatever in the catalog, so at least early on, Amazon wanted bragging rights on how much stuff they listed that BN.com did not (or discounted, that others did not) and didn’t really care if they ever sold a single copy of the item listed, much less made money on it.

It was also desirable to get electronic listings directly from small publishers, rather than through other collectors of the information, such as distributors. The distributors’ databases were intended for employees of book shops, not end customers -- the employees could tolerate a pretty high rate of weirdness like truncated titles, misspelled author names, etc. Customers don’t like that. The publishers’ catalogs were better, and Amazon fielded a lot of author and customer complaints about errors, so there was a labor issue.

While the biggest traditional publishers knew what the 8 or 6 or 5 of themselves were doing, they weren’t that aware of what all the medium and smaller publishers were doing. But increasingly, Amazon _was_ aware of what those smaller companies were doing. The little guys were pretty unhappy about Amazon’s terms (and Amazon’s people were nerds and thus terrible at schmoozing, which presumably was a factor as well), but generally recognized they were moving a lot more product than they ever had before. That was a huge problem for smaller presses which weren't in it to make money; the more they sold, the bigger a hassle it was for them.

Amazon did a variety of things to collect information about books customers would buy if they were available -- OOP, not yet on the kindle, more by a particular author etc. -- that increased their knowledge of what customers really wanted versus what they settled upon when they couldn’t get what they really wanted.
Bezos also recognized very early the discovery problem that it has apparently taken lo 20 years for the big publishers to recognize. He made it easy for customers to post reviews and made sure negative reviews were allowed. He knew that “staff picks” in bookstores move books -- but he also knew that people would rather buy something that is the thing they like, and sometimes negative reviews not only steer you away from lemons, they steer you to exactly the kind of book you were looking for. Human staff at a bookstore looking down their nose at you for wanting the latest in some paranormal series may well stop you from buying, because you have to do the purchase through them. But negative reviews on Amazon do not slow you down from hitting the Buy Now button, if those negative reviews confirm this is exactly the kind of thing you were looking for. He hired I have no idea how many rounds of people to work on the recommendations engines, many of them with PhDs in computer science (turns out producing useful recommendations on a long tail is very, very difficult -- but they sure have gotten good at it). There was a steady stream of purchased reviews databases to incorporate into the user experience, from almost the very beginning.

Taking a step back from this list, what did Bezos do?

He picked an industry segment that had a product that was temperature and drop tolerant, could be shipped cheaply, and which customers did not need to physically touch to assess quality. He noticed that figuring out which of these book-widgets to buy was actually a very difficult problem, and he worked consistently and imaginatively to solve that problem (customer reviews, recommendations engines, See Inside This Book, better meta-data about books and authors, etc.). Bezos recognized and worked to solve the book discovery problem. He. Solved. That. Problem. This is a big deal. Do not lose sight of this. When traditional publishers complain about the discovery problem, it is because they recognize they can’t buy the kind of advantage at Amazon.com that they have grown accustomed to in bricks-and-mortar stores. “Chandler remembers being deeply impressed by a publishing executive’s telling him, in 2006, that the way to make a best-seller was to put a copy of the book on the front table of every bookstore in the country.” Customers are not having trouble discovering books. Publishers are learning that their books aren’t necessarily what the customers wanted, when they aren’t tripping over them on the way to the book they do want.

After almost accidentally making it possible for any size publisher to sell through Amazon, he started actively growing the self- and very small publisher segment, particularly post-kindle, but even before with POD. As long as the tail was when he arrived, he worked diligently to fill it out completely -- and to be the sole aggregator of many of those listings (exclusivity requirements on kindle unlimited and similar deals). Amazon knows the size of the market. In detail. And I doubt any other enterprise on the planet does.

I recognize that non-genre readers find the genre market confusing and opaque. But even if you don’t _like_ a particular product shouldn’t stop you from noticing that there are a certain number of people who are willing to purchase items in that category at a certain rate for a certain amount of money -- probably in strata, with some buying more volume and some being more price sensitive. Gessen and others like him seem perpetually skeptical that there’s really any money to be made there -- the books are so cheap! And also there is a sense that the trashy novel and the Quality Book are somehow incompatible. But I’m perfectly comfortable paying $1.99 for a trashy novel or $12.99 for a trashy novel with an established brand like JAK -- or $44.99 for a monograph from a university press on a topic that has caught my eye. People who can afford to drop $100/person for a group outing to a restaurant do actually also consume burgers or coffee from Dunkin’, at least on occasion. The cheapness of the burger or the coffee does not mean we then expect the Domaine Drouhin to cost the same as two buck chuck.

Gessen wishes this were a morality play.

“But doesn’t Amazon deserve something for building the device, for making it work?”

It is not a morality play. It is a negotiation. It is a business. The customers want something -- genre novels, enough of them to not run out of the kind they like, at a price they can afford to buy as much as they like. Someone can supply that something. If the publishers don’t want to supply that product (history says that it really makes them unhappy to do so) or at least not at that price (that’s the current sticking point -- the publishers got used to genre hardcovers in the 1990s, they’d just rather get over $20 a pop for it), and someone else does, then someone else will get the customers’ money and affection.

When Wylie thinks he can take the books off the kindle, he clearly isn’t thinking in these terms.

““If the Kindle didn’t have any books on it, guess how many Kindles would be selling,” Wylie said, putting up his fingers to indicate zero Kindles. “They want the books, and they want the publishers’ profits, too? They should get nothing. Zero.””

We will see, in time, who is right.

reposted with permission

12 Comments on Somebody Saw This Day Coming

  1. Wow.
    Good one.

  2. Extremely illuminating and penetrating. Thanks!

  3. Rebecca Allen’s Amazon pieces are always worth the read.

    She touches on something at several spots in this one that seems so obvious, but few who defend publishers seems to acknowledge: Amazon measures everything about the retailing experience that customers have while they shop and two decades of data gives considerably more insight about what people actually want than what publishers are in a position to know.

    In the wake of Amazon’s ebook optimal pricing argument, I remember Scalzi saying he trusted his publisher to know best how to maximize revenue on his books. Fair enough. He’s by no means a dumb man. But I doubt his publisher has any idea about how many people drop his books into their shopping cart and then remove them in favor of another title (or abandon the cart altogether) while making purchasing decisions. Nor would his publisher necessarily know how many people browsed to the product pages of his ebooks, downloaded the samples, how far they read and/or whether any of those led to a sale. You can bet Amazon does, though. While I agree Amazon’s used price elasticity as a hamhanded PR point, it wasn’t as if they were just spitballing some numbers. I’m confident they had the data to support it, as any smart retailer would.

  4. AltheGreatandPowerful // 9 November, 2014 at 5:26 pm // Reply

    Seriously, Drive-by Deb? Sales data is the whole POINT of selling books, after all. Do you even read what you post?

    I don’t doubt the publishers know a lot of things about taking authors output and passing it on to readers after a huge markup they think they deserve, but there’s nothing better to explain sales than data about sales.

  5. I don’t understand this: “That was a huge problem for smaller presses which weren’t in it to make money; the more they sold, the bigger a hassle it was for them.“. What is their real business then?

  6. This is an excellent article. It also starts from a premise that is fundamentally incorrect.

    Barnes & Noble and other chains had become big enough retailers of books that they were able to extract substantial concessions (price, terms, co-op dollars, etc.) from publishers. If you didn’t give the chains the books they wanted in the numbers they wanted, those books (and maybe everything else you published) didn’t move. Worse, the chains wanted to have a copy in every one of their stores of almost every book carried in almost every store. Which meant that they had hundreds of single (or a few) copies scattered around the country of a book that might sell super well in a handful of cities. The rest were all gonna be returned, which means, pulped if a paperback, or sold to a discount house if a hardcover. The bigger the chains got, the bigger the returns issue became, and it made life very difficult for publishers, pushing them towards bestsellers and regional niche products and basically killing the midlist.

    This is the story that the big publishers tell. That story is, to put it politely, complete bullshit. If the publishers had been at the mercy of the big chains, they had an invincible shield against those tactics. All they had to do was say “Robinson-Patman” and they would have had the big chains over a barrel. Instead, that whole parade of horribles was, in reality, an illegal scheme by the big publishers and the big chains to put indie bookstores out of business and simplify the business environment for the publishers. Killing the midlist was a goal, not an unfortunate side effect of this strategy.

    • http://www.stevenpressfield.com/2011/10/leveling-the-playing-field/

      “Publishers favored chains because they are capable of ordering a thousand copies of an individual title for every single copy an independent can order. This favoritism allowed the chains to out-price the independents. The chains took the extra discounts and credits from publishers and passed them on to consumers with big displays that trumpeted 20% off! Because of the volume of sales, it could pass on a discount and still maintain a healthy profit margin. In fact, Barnes & Noble began discounting New York Times Bestsellers 40%. Unless an independent store was having a “going out of business sale,” you could pretty much count on paying full retail price for a book at Mom and Pop. That’s a big disadvantage.

      The superstore discounts of the 90’s drove readers to chains instead of Mom and Pop’s stores. Buying there was cheaper. Over time, the independents started closing up shop. Estimates put their numbers at about 1,400 today. But in 1991, they numbered 5,400.

      The side deals between publishers and chains were wink-wink, nod-nod arrangements, and they helped the publisher as well the chains. In many instances for the extra discount along with a publisher’s commitment to pay for “cooperative” advertising (front of store placement), the chain would increase its order. Instead of ordering 2,000 copies of a big book that a publisher was desperate to get onto the bestseller list, it would take 10,000.

      The higher order would decrease the production costs for the publisher (the more you print the cheaper the per unit charge). The chain would often stack up the massive unit orders alongside escalators, front of store etc., which would give consumers the impression that “Hey, everyone must want to read that book because the bookstore has so many of them to sell…”

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