April 01, 2008

Book Business Shakeups

by Alan Beatts

Thus far, 2008 has brought several things that may lead to some changes in the world of books - business moves that Amazon.com is making, the current financial trouble at Borders Books, and sharply increased interest in eBooks. I thought it would be interesting to talk about all three in this column. Over the next three months I'll talk about each one in depth but first I'm going to start with an overview of what's going on. Before I start, one warning -- much of what follows isn't very good news if you love traditional books and bookstores. I don't want to bring anyone down but I do think it's good to let people know what's going on. So, if you want cheerful and happy bunnies, you might want to give this column a miss for the next few months. On the upside, in the next three months I'm going to give some specific suggestions about what you can do if you don't like some of the changes I'm discussing here.

1) Amazon.com's Business Direction

What - At this point, Amazon owns MobiPocket (the most popular multi-platform eBook reader and eBook format), BookSurge (the second biggest print-on-demand (POD) publishing company in the US), and Audible.com (one of the largest sellers of downloadable audiobooks). Recently Amazon has informed all of its POD publishers that they must use BookSurge as their printer (instead of Lightning Source which is more popular and less expensive). This move has been met with great displeasure by authors and publishers on both sides of the Atlantic; (in the US, the Author's Guild is investigating the anti-trust implications and in the UK, YouWriteOn.com, the Arts Council initiative for new writers, has called for a boycott of Amazon). In addition, Amazon's EBook reader, the Kindle, uses a proprietary format and users have to follow several steps (as well as paying a fee) to convert documents from other formats. On the publisher side, Amazon has set an inflexible maximum price for ebooks available for the Kindle (one which happens to be, surprise, lower than usual for ebooks of new releases - $9.99).

Implications - Amazon is carving out a major place as a producer of merchandise as well as being a reseller. To help support this, they are working to tie both their customers and their suppliers to formats controlled by them. In combination with dictating price terms to their suppliers, it seems Amazon is setting up to exercise even greater control of the publishing field as well as vertically integrating to increase their advantage over both chain and independent bookstores.

Why Does It Matter - In the long run, this type of vertical integration (one entity becoming both the manufacturer and seller of an item), is bad for consumers since it allows a significant competitive advantage over other businesses, which leads to elimination of competition and thence to price-fixing (among other monopolistic practices). There is also the risk of censorship, either deliberate (in an attempt to forward an agenda or belief. For example; the Fundamental Christian agenda that guided Blockbuster Video's choice of films) or accidental (a result of simple shortsightedness that limits what is sold to only those items that are believed to be "marketable"). The short version - it's almost always bad news when any one company controls the majority of a retail market and it's worse when they also create the contents of that market.

2) Borders Books' Financial Woes

What - Borders Books has been having a hard time - sales have been dropping, they're trying to sell their overseas stores (with little success) and are busily closing all of their Walden Books stores. To continue operations they've borrowed $42.5 million from their largest shareholder, Pershing Square Capital Management. They have just restructured their deal with Pershing so that the terms are a bit more reasonable (i.e. the loan is now at 9.8% interest instead of the original, very high, 12.5%) but in exchange they've given Pershing another seat on their board of directors and will be allowing Pershing to buy all their overseas interests, valued at $200 million, for $135 million unless they can find another buyer. With this new deal in place Borders CEO George Jones has said that they will, "review their strategic alternatives". I don't speak fluent Corporate but I'm pretty sure that means, "We're going to try to figure out what the hell we're going to do now."

Implications - It's hard to say what's going to happen but if I were a betting man I'd say that Borders is going to try to downsize substantially and concentrate on their "new" store model, which is based on a more multi-media approach and offers lots of "digital lifestyle" goods and services like ebook downloads and readers (more on _that_ later), music and video sales, and a smaller number of books. If that doesn't work, they'll either have to declare bankruptcy or sell. If sold, it seems unlikely that they'll continue to operate in their current form. The most likely outcome of a sale would be the company being broken down and sold piecemeal. Either way, Borders as we know it would cease to exist. A secondary consequence of a Borders closure is the possibility of a huge financial hit for all their suppliers (which include virtually all US publishers) if the details of the closure mean that Borders will not be paying its outstanding debt. Since over 25% of the money owed major US publishers at any given time is owed by Borders, a loss like this would be a heavy blow. And in the aftermath, the lost sales when one of US publishing's two biggest customers vanishes would make quite a one-two punch (Chain bookstores represent 33% of all book sales). The big publishers should be able to handle this kind of abuse but some smaller, independent publishers might not be able to survive it. Even if Borders manages to downsize successfully, that will still represent a notable shrinkage in the overall wholesale market for books.

Why Does It Matter - Fewer bookstores, albeit chain stores, means fewer book sales and reduced availability. If you're a reader that means less access to books and greater reliance on Amazon and other internet sellers. If the total wholesale market for publishers shrinks, it's harder for a mid-list (i.e. non-bestseller) book to be profitable since the publisher needs to sell the same number of books as before but there's a smaller market for them. If you're an author, that means lower advances and a more restricted market for your work as publishers become more conservative in response to a smaller market. If you're a reader that may mean less titles on the shelves, at least for a short time. Long term the wholesale market may increase back to previous levels as the remaining chains and independent bookstores open in areas abandoned by Borders.

3) Expanding Interest in eBooks

What - Last Thanksgiving Amazon.com introduced the Kindle eBook Reader, which sold out almost immediately and has been available on a back-order basis since then. Excitement surrounding it has generated secondary interest in ebooks and associated devices in general which has increased sales of ebooks across the board (for example, so far this year, sales of books for Sony's competing ebook reader have doubled). What is really distinguishing the Kindle from other devices is its built-in nation-wide wireless connection that allows users to purchase and download titles from Amazon anytime and anywhere. To date Amazon has refused to supply figures on sales of either Kindles or titles for them but educated guesstimates have placed the sales of ebooks as high as five to nine thousand per _day_. eBook sales haven been growing every year at a rapid rate and last year they more than doubled, though they still are less than 1% of all book sales.

Implications - If Amazon demonstrates that ebooks can be profitable, other companies are likely to follow suit. However, with one exception, no one has a distribution system that even comes close to Amazon's seamless connection between the Kindle and their web site. The exception is Apple and the consequences of this could be major. If Apple chooses to market a competing ebook reader (perhaps something like an iPhone with a larger screen -- something that is rumored to in the works already) and combined it with the iTunes store, it would be a very capable competitor for Amazon.com and the Kindle. The iTunes store is a perfect outlet from which to sell ebooks and Apple has proven with the iPod and the iPhone that they are hard to beat when it comes to creating outstanding consumer devices that dominate the market.

Why Does It Matter - Despite the widely held belief that no gadget could replace a book, economic pressures created by a profitable ebook market might make physical books progressively less available to the average consumer. Consider this - the vast majority of bookstores, both chain and independent, could not survive a 25% reduction in sales, which means that only one book-buyer in four would have to switch to ebooks to put virtually all the new bookstores in the country out of business. Furthermore, many stores couldn't survive a 10% loss in sales (that's only one customer in ten switching to ebooks). As stores close, the market for printed books starts to dry up, which means fewer potential copies sold of each title. As I mentioned earlier, that means that a publisher needs to be confident of more sales from the limited outlets to make a book profitable which means that mid-list and special interest titles are less likely to be published. At the same time, the market for ebooks would be growing and the total sales required for profitability with an eBook are _much_ lower than their printed counterpart. So, more and more often, publishers might choose to release a title as "ebook only". And this choice on the part of publishers accelerates the process further. So, money drags the whole business down a road that no-one wants (not the publishers nor readers nor authors and, sure as hell, not booksellers) but no-one can escape.


Whew, that was quite a bit of information in a small space. As I said at the beginning, some interesting times (probably in the Chinese curse sort of way). For the sake of brevity I have not given any citations but, if you're curious, please drop me a line and I'll be happy to give you my sources. As always, comments are welcome. Next month we'll see what the news is from Borders, where they might be going and what it might mean to readers.

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