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Will Amazon Kindle Vertical Integration?

Posted on Wednesday, Oct 1st 2008

I wrote a controversial Forbes column, How Amazon Could Change Publishing, in the spring. In this column, I submitted that Amazon could disintermediate traditional publishers and agents, and free up money that they could share with authors. My hypothesis was based on the fact that since Amazon has a technology-based merchandising system capable of figuring out which of its customers might like what other books, it could target those customers to bring to market other books within a particular genre.

Typically, in the book business, marketing is the bottleneck. Very few books get serious marketing support from publishers, and thus the onus of marketing always falls on authors. Most authors are not equipped to shoulder this burden.

As I researched my column, I spoke with a lot of industry people – authors, agents, publishers, publicists, print-on-demand services – and I could not help but learn a lot about the book business. I ended up writing a subsequent column, Web-savvy Authors Reap Fame, Fortune, showcasing author Elle Newmark’s success in using the web to recruit first an agent, then a publisher.

Amidst all this, my entrepreneurial instincts kept gnawing at me, and in June, I ended up striking a deal with Amazon’s BookSurge subsidiary to take a shot at disrupting the book publishing business.

I happen to be an author “with a platform”, the kind that agents and publishers salivate over. I have a popular blog, as well as various columns and syndicates, which means I have a readership already. Additionally, I also am an entrepreneur, a thoroughly web-savvy one, and my genre is technology.
So, in June, when Amazon’s BookSurge offered me a “special” deal to work with them to publish my book series, Entrepreneur Journeys, and in the process, help them customize an offering for other like-minded technology entrepreneurs and writers, I paused, rearranged my summer schedule, and cranked out volume one of the series.

The royalty rate that Amazon’s BookSurge offered me is nearly three times the normal 10-15% that authors make in traditional publishing arrangements. Instead of four parties splitting the pie, we are two. No agent. No publisher.

I wanted to get the books out quickly, with maximum control over the production process, and with the most attractive financial deal. My decision to go with BookSurge was influenced by the fact that my target audience of technology entrepreneurs are all online and are quite likely Amazon customers. I am also attracted by the technology- and algorithm-driven merchandising and co-branding capabilities that Amazon offers. I’m not sure if I would have focused my efforts on selling the book on Amazon if I were doing a book of short stories. I would probably follow Elle Newmark’s example, and use the web to recruit an agent, then a publisher. But for technology, Amazon may well be the perfect channel to bring Entrepreneur Journeys to market.

At any rate, BookSurge also gives me the option to switch to a traditional publisher at any time, and meanwhile, is contributing a whole host of services. I am only funding my own publicist, Maureen Kelly, who has worked with many best-selling business authors, from Jim Collins to Scott Adams.

What does this mean for the book publishing business? Are we about to see a degree of vertical integration, at least in certain non-fiction genres that have a large web presence? How big a role will Amazon play, as it morphs its various on-demand offerings to recruit authors who are also entrepreneurs, and web-savvy marketeers?

And what about Kindle? While there are no publicly announced numbers about how many Kindle readers have been sold, I know that many early-adopter techies have already standardized on Kindle. TechCrunch estimated the number of Kindles sold so far to be 240,000. Citigroup analyst Mark Mahaney is amongst the most bullish, calling Kindle Amazon’s iPod. In an August report, Mahaney estimated that Amazon will sell 378,000 units this year, and Kindle will be a $1.1 billion business that accounts for 4% of Amazon’s revenue in 2009. Pacific Crest’s Steven Weinstein believes Amazon can sell more than $2.5 billion in e-books for the Kindle by 2012.

All these are highly extravagant numbers, speculative, and possibly wildly off. Nonetheless, it is indicative of a wave of change that is washing over the shores of the book publishing business. What I have learned in my years as a technology entrepreneur is that opportunities abound when such change passes through an industry.

This particular one offers Amazon an opportunity to also tackle its margin expansion challenges, which I have discussed before. Every retailer knows that a standard tactic to increase margins is to include “house-brands” in their portfolio. For Amazon, this means bringing in “house-brand” authors with whom they launch successful higher margin titles in specific genres. If my hypothesis that Amazon is in a strong position to market books checks out, the implications of my experiment with BookSurge may turn out to be of monumental significance for the company.

[You can now order Entrepreneur Journeys (Volume One) on Amazon.]

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It does make sense to me that traditional publishers who want to remain competitive will have to integrate – besides…the business of running a press is becoming more and more costly if not because of the sharp rise in paper costs then the ridiculously high oil prices (that in turn affect just about any industry).

On an Amazon-specific note, I am still on the fence with the Kindle…people want to live more minimal lives, with less wires and fewer items to carry. Don’t get me wrong…the Kindle is a cool gadget…but I can almost see the Kindle losing to an application that will convert text to speech and deliver a podcast for each book chapter…or newspaper section.

Lateef Wednesday, October 1, 2008 at 8:13 AM PT

The challenge I see is the editing/making things good. What I have seen with the proliferation of personal publishing (like blogs for instance) is dramatically higher quantity with dramatically lower quality.

And if you think I have a conflict in saying this, I do not – I am an author and blogger and of course would want a bigger cut.

Jim Estill Wednesday, October 1, 2008 at 1:54 PM PT

Absolutely correct. You will see tiers of authors continue to emerge. The democratic nature of blogs, for example, still has evolved in a way that high quality blogs have readership, crappy ones don’t. Same will happen for other forms of content, books, music, film, etc.

I am not saying Amazon will “invest” in crappy stuff. They will still apply judgment to pick which ones to promote.

Perhaps the most apt analogy is to compare Amazon (and the online retail category in general) with physical retail. Look at Macy’s, for example. They sell house brand products. INC (International Concepts) is their housebrand. One of my clients is BestBuy. They also sell housebrand merchandise.

That’s my point, mainly.

Sramana Mitra Wednesday, October 1, 2008 at 1:58 PM PT

“the fact that since Amazon has a technology-based merchandising system capable of figuring out which of its customers might like what other books”

That’s very much debatable, a very significant portion of Amazon recommendations are way off-target. Their algos as can be interpreted from results are not all that sophisticated.

But the main problem here is your expectation, and perhaps hope, that Amazon can disintermediate the steps between the author and the reader. We heard that story when iTunes gained so much dominance in a similar (not identical) industry. It hasn’t happen, even when major labels and studios pulled their content from iTunes for leverage. Apple was wise enough to know what business they are in. Hopefully, Amazon learned from that.

Kontra Wednesday, October 1, 2008 at 6:12 PM PT

All I can say, my dear, is that I will keep you posted on my experience with this project. As you see above, it is an experiment. And if you know me at all, you’d know, I live a pretty experimental life.

Sramana Mitra Wednesday, October 1, 2008 at 6:24 PM PT

Oh, I don’t mean that *you* won’t be successful, I wish you the best of luck. I’m just skeptical that Amazon can disintermediate the book industry by itself, any more than Apple can the music industry.

Kontra Wednesday, October 1, 2008 at 6:39 PM PT

I don’t think Amazon will even try to disintermediate on a mass scale. I think, they will pick pockets / segments where they have particular leverage (e.g. technology) and build a portfolio of strong “house-brand” products using Booksurge.

Sramana Mitra Thursday, October 2, 2008 at 7:33 PM PT

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