Amazon Share Grows and Big Publishers Make More Money

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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.