Amazon: company overview and business model

¶ … independent book stores are not suffering at this point, and are seeing a small upswing in business. Big book stores are struggling and becoming a relic of the 1990s, but smaller independent bookstores appear to be carving out a niche away from Amazon. However, among the major sellers, Barnes & Noble has taken a more aggressive stance in its competition with Amazon. It is refusing to sell books published by Amazon at its outlets. The truth is that this is a minor decision, not worth a lot of money, and Amazon couldn't care less, but it made for good headlines about the competition between these two companies -- note the hyperbole of the Business Week writer (Haq, 2012).

I think for Amazon to get into publishing was wise. There's a few reasons for this. First, backwards integration is something Amazon has done well. They are generally the price-setter in their relationships, so they can ensure that they do this profitably. Second, the self-publishing business before Amazon was basically broken. Companies charged wanna-be writers an arm and a leg for publishing, but provided no real service for their fees. Amazon's model is not great, but it represents an improvement over the prior models in the industry. Beyond that, Amazon is able to offer different levels of publishing, some that bridge the gap between self-publishing and professional publishing, creating what is essentially a new tier for the publishing industry. That might just work. Third, there is synergy between the e-book format -- Amazon sells tens of thousands of Kindles and millions of e-books -- and the publishing business. With this move, Amazon controls the content, its distribution and the retail side. That allows Amazon to be cost competitive while taking a slimmer margin on all aspects of the business. There is not much downside to Amazon entering the publishing business. Some analysts feel that B&N holds the upper hand here because general interest titles benefit from book store exposure (Worstall, 2013), but Amazon likely feels it can work around this problem -- it's solved every other problem it has faced.

If I was a successful publisher, I would not seek my new deal with Amazon. There are a few reasons for this. The first is that Amazon has a lot of bargaining power -- they control all aspects of the distribution, giving them more bargaining power than my existing publisher. That's if I was a fairly no-name writer. As a big name writer, that might be different, because my name might help sell Amazon to other writers. That would give me some bargaining power to get the deal I wanted. Amazon could even just be used as leverage in my negotiations with my current publisher at that point. So the power of my own brand name would affect whether I was interested in negotiating with Amazon. On a personal level, my mom has a Nook so I wouldn't want to be exclusive to Amazon because then she wouldn't be able to read my book. But seriously, I would definitely have to receive some sort of compensation in the deal to account for any sales I would lose by not being available through all channels. I can still sell on Amazon through my existing publisher, so if going exclusive with them was going to cost me sales, I would definitely build that value into the negotiations.

If I was working on my first book, I would want to take a look at what Amazon had to offer. A first-time writer has very little bargaining power -- it is a highly competitive business and without past books you are completely undifferentiated. If Amazon is your foot in the door, you take it. But it is not without its challenges -- depending on the level of support you get in your deal with Amazon -- and you have to understand that at the lower-end levels that are more like self-publishing your product might suffer. Either way, a first-time writer going with Amazon is a price-taker and will need to sell a lot of books at a low price in order to actually earn anything.

I really do not see either company changing its strategic decisions as reported in this article. Amazon in particular has no incentive. They got into the publishing game because there are margins to earn, and some good synergies to being a vertically integrated publisher-retailer. The company gains pricing power from this level of control. It does not matter to Amazon what Barnes & Noble does in response to this. Amazon's strategy is about its own approach to bookselling.