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Amazon Share Grows and Big Publishers Make More Money

1 March 2019

From veteran publishing consultant, Mike Shatzkin:

The financial reports of the major publishers have been following a pattern for some years now. Sales are about flat but profits have been steadily rising. One explanation for that fact is that the management of the major houses have been diligent about adapting their businesses to the new marketplace configurations or, as the saying goes, “squeezing costs out” of their operations.

But it could be more than that. In a piece published here well over two years ago, I said it was an “old joke” of mine that “Amazon is every publisher’s most profitable account” which, I observed, was not their objective! That has seemed apparent for well over a decade.

The explanation is simple. Amazon is the account that sells the most units with the least returns. Because Amazon has contractual relationships with the biggest publishers rather than purchasing from their published discount schedules, there is no way for an outsider to know exactly what the sales terms are. But the discounts and marketing fees to Amazon would really have to soar from the standard terms they began with to claw back more than the excess margin they deliver compared to other accounts.

So as the business shifts to Amazon, and it certainly looks from the outside like they are half or more of many publishers’ business, it shifts from lower-margin accounts and publishers make more money.

And because the big publishers have the lion’s share of the high-profile books, they are effectively insulated from being cut off in a trading dispute. It is likely that there is a growing gap between what the larger publishers get as a percentage of the retail price of their books and what smaller publishers can get from Amazon. That drives another component of current publisher economics: the growing consolidation of distribution under the major houses and Ingram.

As the business moves to Amazon, the publishers need more of the “normal” print volume to maintain their sales-and-distribution structures, to pay for the sales reps and warehouses. But gently declining print units mean per-unit costs will rise unless they are augmented by other people’s books in distribution. So far, for the most part, they have been because the smaller publishers are also seeing the same trend and find it harder and harder to support their own sales and distribution structures.

. . . .

Even with their economic advantages and great internal marketing capabilities, Amazon is really not a threat to take the biggest authors away, either through their own publishing operations or through self-publishing. Big authors are already rich and publishers are willing to pay them advances that effectively amount to royalties much higher than the contractual standards. What the big authors are mostly interested in, beyond the money, is maximum exposure. They want to be on sale in the largest possible number of places and reach the biggest number of readers. That is the key to making more money through dramatic sales to Netflix or Amazon or, particularly in the case of non-fiction, doing even more lucrative speaking tours employing the celebrity their books deliver them.

. . . .

In addition to the margin growth that comes from business shifting from scattered retail locations with relatively higher returns to Amazon, publishers are seeing growth in export sales, backlist sales, and, perhaps most dramatically, in digital audio sales.

. . . .

And easier-to-make backlist sales are another source of extra margin for publishers. In the pre-Amazon, pre-digital age, only the books that were actually in stores had much of a chance to sell. Even for the most capable publishers, most of the backlist simply wasn’t ubiquitously available a few months past publication date. Now, with more than half the sales made online, that’s no longer an issue. If the book is in print, it can be purchased. Publishers are increasingly awake to the modern reality that any book can get hot at any time, and sales efforts don’t have to wait for books to be positioned at retail locations to be effective.

. . . .

So the bad news for publishers — a dramatically shrinking store network with its last big chain, Barnes & Noble, in a steady decline that shows no signs of stopping — has, so far, been more than compensated for (in profit margin if not in unit volume) by growth. Sales shifts to Amazon have improved margins and reduced costs. Growth in backlist sales and export sales and audiobook sales have, so far, compensated for the loss of print book units that previously would have sold through the bookstore network.

Link to the rest at The Shatzkin Files

PG was going to look for a prior post in which he opined that Amazon was the best thing to happen to large publishers in a long while, but he’s short on time.

He has long regarded the hostile attitude of major publishers toward Amazon to be one of the more prominent examples of what business mediocrities are in control of those publishers. Why anybody would not have almost immediately preferred doing business with Amazon to dealing Barnes & Noble is beyond comprehension.

Amazon has effectively dragged major publishers into the twenty-first century by forcing them to evolve the way they do business into a much more profitable model – selling bits instead of dead trees, not paying to ship boxes of books back and forth to physical retailers, selling to readers across the nation and around the world, instead of only those within a short distance from a physical bookstore.

 

Amazon, Big Publishing

7 Comments to “Amazon Share Grows and Big Publishers Make More Money”

  1. Not to mention being able to sell any of their books to anyone who is not within driving distance of a wonderful smelling community bookstore (80 percent of the population) and 100 percent of the population when said bookstores are closed.

  2. Why anybody would not have almost immediately preferred doing business with Amazon to dealing Barnes & Noble is beyond comprehension.

    When the economics don’t explain behavior, there is some other reason. I suspect it was a notion that authors, publishers, books, and bookstores were inherently superior to engineers, manufacturers, products, retail stores.

    • That’s a point, T.

      As we’ve been recently reminded, the culture of Seattle is terra incognita to New York and vice versa.

  3. Terrence OBrien

    Why anybody would not have almost immediately preferred doing business with Amazon to dealing Barnes & Noble is beyond comprehension.

    When the economics don’t explain behavior, there is some other reason. I suspect it was a notion that authors, publishers, books, and bookstores were inherently superior to engineers, manufacturers, products, retail stores.

    We saw that on display as the book people scorned the independent authors who thought they could write. We also saw traditionals telling us normal economic pressures don’t apply to books because of their unique nature and voice. Douglas Preston even mounted the barricades with eight hundred of the world’s finest writers, announcing a showdown between culture and vulgar commerce.

    And Amazon? A wall Street guy in a garage who started selling all kinds of other junk. (Note the authors mocking Barnes & Noble’s sales of puzzles, models, trinkets and Yoda dolls.) That just wasn’t up to the standards of the stewards of culture.

  4. The qig5’s upset-ness has never been about Amazon selling ‘their’ books, but rather the fact that Amazon would sell other people’s books – even self-pub/indie books – and they’d sit on the same screen/shelf as those from the big boys.

    Control.

    That was what the qig5 feared, the loss of control over the public seeing books coming out, what type of prices a good book could be had for. Yes, there are other places to buy e/books, but Amazon is the biggest and had people going there and discovering that there was more than just trad-pub to pick from.

    Control.

    Apple didn’t like the idea of price wars, so they and the qig5 thought to regain a little control over how ebooks were sold. Which set them up for the DoJ to have a little work to do. Yes, the qig5 now play agency games with their ebook prices, but that didn’t help Apple at all – and is hurting qig5 sales as indie sales take up the slack.

    Control.

    Amazon is great for the qig5, but it’s also great for self-pub/indie – which let’s self-pub/indie publish and get paid without going through the qig5 and friends. Writers getting paid without the qig5 getting their cut – there’s the reason for their upset-y-ness …

    All due to a loss/lack of control …

  5. the discounts and marketing fees to Amazon would really have to soar from the standard terms they began with to claw back more than the excess margin they [Amazon] deliver compared to other accounts.

    So as the business shifts to Amazon […] it shifts from lower-margin accounts and publishers make more money.

    A somewhat convoluted way of saying that it is much more cost effective for a publisher to sell through Amazon than through any other bookseller, because Amazon is a much more efficient retailer.

    If, as Shatzkin seems to be saying here, publishers are starting to see the constant churn of ship and return as a drain on profits, that does not bode well for mid-size booksellers and B&N. Publishers will very well ask themselves, why SPEND money helping an “account” that isn’t making that much money FOR you?

    Does anyone know how much of Amazon’s backlist fulfillment is now POD?

    • I can’t tell you how much is POD, but I can tell you that my publisher, which may not be typical, uses Amazon for most of their printing, both in the US and globally. They don’t exactly do POD, but they print small runs– maybe 100 – 1000 copies– as needed and close to where the book will be sold to minimize shipping costs.

      My editor is in NYC, but my author’s copies are shipped from the bay area to my office in Washington State.

      I am guessing, but I think Amazon drop ships those runs to distributors like Ingram and Baker & Taylor for non-Amazon distribution. I am not guessing when I say that my publisher insists that all their books are designed and formatted so that they can use a wide range of printing outlets.

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