Amazon's Long Reach

by Sandra Parshall

Wow.

I knew Amazon had its fingers in a lot of different pies, but I didn’t realize how long its reach is until I read the interview with Jeff Bezos in the December issue of Wired magazine. Amazon is not only the biggest bookseller in the U.S. and a media powerhouse; it is also the power behind a huge chunk of the internet. Even if you’ve never held an e-reader in your hands or ordered a print book from Amazon, the company has probably affected your life in some way.

What writers and publishers obsess about, of course, is Amazon’s hold on bookselling. Even with publishers resisting its steep discounts, the company has surged ahead of brick-and-mortar stores to become the number one source of books for American consumers. With a little piece of hardware called the Kindle, coupled with its offering of digital content, Amazon quickly accomplished what Sony and other companies had failed to do: it made e-books wildly popular. Now, through its Kindle Direct Publishing program, it’s making self-publishing respectable, as everyone from unknowns to bestselling authors rushes to make previously unpublished and out-of-print work available in digital format. 

Some people cling to the memory of what the book world was like before November 2007, when the Kindle first appeared, but those days are beginning to feel like ancient history.

Now Amazon is a publisher, and fully intends to shake up publishing the same way it has shaken up bookselling. Bezos believes $9.99 is “really the highest price that’s reasonable for customers to pay” for a book. He also believes writers should get a bigger chunk of the income from their work. He cautions the publishing industry that others – such as Amazon – will eagerly move into the vacuum if traditionalists continue “leaning backward” instead of adapting to the changing market.

Amazon is getting into the movie business too, working in partnership with Warner Bros. Pictures. Bezos describes this project as, what else, a “completely new” way of making movies. We’ll no doubt be hearing more about Amazon films before long.

These are the visible ventures, the Amazon activities everybody knows about. Behind the scenes, the company provides an internet base for a broad array of businesses and institutions, attracted by Amazon’s low fees and obsession with giving flawless service.

Here are some of Amazon’s web services customers, as listed in Wired: Foursquare (10 million users worldwide, three million check-ins a day); Harvard Medical School’s vast database for developing genome-analysis models; NASA’s processing of hi-res satellite images to guide its robots; Netflix, a video-streaming service that accounts for 25% of U.S. internet traffic; Newsweek/The Daily Beast (one million page views every hour of every day); PBS (more than one petabyte of streaming video per month); SmugMug’s storage for 70 million photos; the USDA’s geographic information system for food stamp recipients; Virgin Atlantic’s crowd-sourced travel review service; Yelp’s storage for 22 million-plus reviews.

Most of us know Amazon as a store that will sell us anything, including a lot of stuff we can’t find elsewhere. I’ve even used Amazon to locate a particular flavor of feline hairball remedy that nobody seemed to be selling anymore. If it exists, Amazon can find it for you. But beyond the mundane merchandising transactions, Amazon connects us to the rest of the world in many ways every day.

Oh, and did I mention that Bezos owns a company called Blue Origin? It’s a space exploration program. Bezos thinks access to space costs too much, and he’s going to use Blue Origin to bring down the price.

As I said: Wow.

Who makes money on Kindle books?

Sandra Parshall

The Amazon Kindle has broadened the market for books, and Kindle rights are making the same amount of money for publishers, and in many cases the authors, as the print editions. So why are publishers worried as they watch Amazon conquer the e-book market?

I’ve read a lot on this subject lately, but an article by Rachel Deahl in the May 11 Publishers Weekly did the best job of explaining the conundrum publishers face.

Amazon’s goal is to sell the hardware, the Kindle itself. To make it more attractive than the Kindle’s chief competition, the Sony Reader, Amazon has more than 265,000 titles available for download and is charging less for most of them than Sony’s e-books cost. In many cases, Amazon is taking a loss on the books themselves.

To understand what’s going on, you have to realize that few books are sold at the cover price, and booksellers buy books from publishers at a discount. Deahl reports in PW that Amazon pays publishers the same discounted amount, around 50% of cover price, for Kindle rights that it pays for printed books. Amazon sells printed books at just enough to make a profit on each copy. But they’re charging less for many e-book downloads than they pay for the rights.

For example, the cover price on Jim Butcher’s current bestseller, Turn Coat, is $25.95. If Amazon purchases each copy from the publisher at a 50% discount, they’re paying $12.97 for it. Amazon sells the print version for $17.13 – $4.16 more than they paid the publisher. But the Kindle download costs only $9.99 – $2.98 less than Amazon paid for it.

Right now, Amazon’s willingness to take a loss, or merely break even, on downloads in order to push Kindle sales and build its share of the e-book market is not affecting publisher profits. According to the Authors Guild, writers are also being paid – depending on how their contracts are structured, they receive either 15% of the book’s original list price or 25% of net receipts from e-book sales. According to PW, though, some agents are unhappy because publishers don’t have to spend any of their profits from e-books on manufacturing and shipping and are making a disproportionate profit on each sale, while the writer’s income remains the same.

It’s a vision of the future that’s giving publishers nightmares. What will happen when Amazon has driven its competition out of business or into a tiny and almost meaningless corner of the market? Publishers, Deahl reports, are afraid Amazon will exercise its power to demand much lower prices for digital rights that it pays for printed books. That effortless profit will vanish for publishers, unless they lower the author’s royalty on e-books. We all know how writers and agents would feel about that approach. As noted above, some grumbling is already being heard about a split of e-book profits that is perceived as favoring publishers and penalizing writers.

Amazon, with its worldwide marketing network that is visited by millions of users every day, is ideally positioned to push a product like the Kindle. According to Jeff Bezos, CEO of Amazon.com, 35% of all Amazon sales of titles available in print and digital formats are Kindle editions. Just a few months ago, that figure was 10%.

Amazon has just introduced the Kindle DX, a larger version of the reader designed to display newspapers and college textbooks. Amazon will soon launch a pilot program at six universities, but this effort faces significant obstacles in the education market. The DX is big, it’s clunky, it’s black and white only, and it costs $489. Students who already have access to full-color digital references through their schools, and are accustomed to using laptops and miniature netbooks to retrieve information, may not be enamored of Amazon’s latest version of the Kindle.

One thing seems certain, though: the original Kindle for popular books is here to stay. What it means for publishers and writers is an open question. Stay tuned, and if you’re a writer, you might want to have a talk with your agent about it.