< What Amazon is Up To

Transcript

Friday, August 19, 2011

BROOKE GLADSTONE:

And now we’re going to talk about a collision of new technology and old, by which I mean Amazon and the rest of the book industry. The company’s maintained a publishing arm for the past two years, but it's really ramped up this summer.

This week the company announced that it had signed best-selling self help author Timothy Ferris to its Publishing Division. And now most industry watchers expect more big name authors to follow Ferris to Amazon.

We asked Michael Shatzkin who heads The Ideological Company, a publishing industry consulting firm, whether traditional publishers should fear the 900-pound gorilla that is entering their midst.

MICHAEL SHATZKIN:

The most important thing that publishers d - have done historically is going to be relegated to a place of much less importance. What we're seeing with Amazon is a sign of that.

BROOKE GLADSTONE:

So the folks at Random House should be shaking in their boots?

MICHAEL SHATZKIN:

I think the folks at Random House, Simon & Schuster, Macmillan HarperCollins, those publishers, I don’t know if they’re shaking in their boots, but they're certainly aware that the ground is shifting dramatically underneath them.

BROOKE GLADSTONE:

So talk about Amazon entering the publishing biz in this context. What’s it got goin’ for it? And does it have anything going against it?

MICHAEL SHATZKIN:

Yes, it does have some things going against it. What it has going for it is direct customer contact, to the millions and millions and millions of people that buy directly at Amazon.com.

What Amazon's weakness is, is they don't have the customers that Barnes and Noble has. And they don't have the ability to put books into stores and on shelves.

So, the good news for Amazon is that what they're weak at is getting smaller, and what they're strong at is getting bigger. But we're still in a time when selling books in stores is important.

BROOKE GLADSTONE:

Why can't an Amazon imprint right now send a salesperson to Barnes & Noble and get the books into stores?

MICHAEL SHATZKIN:

Well, the first problem is Barnes & Noble because Amazon's desire in signing up authors directly is to monopolize the e-books for the Kindle platform. And Barnes & Noble made very clear earlier this week that the only way that they would consider buying an Amazon book to put on their shelves would be if Amazon also made that book available for them to sell as an e-book through their Nook platform. Amazon has never made any Sherman statement about what they would or wouldn't do -

BROOKE GLADSTONE:
Did you say a Sherman statement?

MICHAEL SHATZKIN:

Yeah, that's when Sherman said in the 1880s –

[BROOKE LAUGHING]

- that he would absolutely not run for president.

BROOKE GLADSTONE:

[LAUGHS] Uh huh. [LAUGHING]

MICHAEL SHATZKIN:

Okay, I mean as a defining, clear, unambiguous statement.

[BROOKE LAUGHS]

They have not made a defining, clear, unambiguous statement that they will only sign up books for the Kindle platform and won't allow them outside. But I am not aware of any case in which Amazon’s done that.

So Barnes & Noble has said, you know, well, we might stock your books, but only if you're gonna make the books available through the Nook platform. And I don't think it's Amazon's intention to make the books available through the Nook platform. So scratch Barnes & Noble.

The independent stores who are also angry at Amazon - I mean, ‘cause among other things we have a battle going on about sales taxes and all the independent stores are paying sales taxes and Amazon avoid sales taxes.

Also, the independent stores are using Google E-Books. And, of course, Amazon, if they’re monopolizing for the Kindle, aren’t going to make their e-books available through Google E-Books. So the independent stores don’t want to stock anything from Amazon.

And that leaves you with the mass merchants - Wal-Mart, Target, K-mart, stores like that. They ain’t Amazon's best friend either. They’re competing with Amazon, as well. And those stores don't stock a lot of titles. So whether any particular Amazon title would make the cut would be an open question. Not all the Random House and Macmillan books make the cut.  

BROOKE GLADSTONE:

For this story we asked Amazon to furnish somebody to interview. They wouldn't do it. Why do you think they're holding their cards so close to the chest?

MICHAEL SHATZKIN:

I think it's really the software business mentality versus the book business mentality. Amazon and Apple, and I must say much less so, Google, but Amazon and Apple reveal what they want to reveal when they decide that it's time to reveal it. That is their corporate style. I don't think it's likely to change anytime soon.

And it certainly is frustrating for those of us who are in the publishing business and are really used to a lot of conversation about what we're doing from all sides of the value chain.

BROOKE GLADSTONE:

Speaking of Apple, there's this price fixing accusation floating around. Could you summarize what that is and how it fits into this question of publishing in the future?

MICHAEL SHATZKIN:

Well, it's not simple. The way books are sold is that the publisher actually sells the book to a store, the store has the right to return it. And then the store, having bought the book from the publisher, can set the price anywhere it wants to the consumer.

And that's the way the e-book business worked. So the publisher would say this e-book is 30 dollars, I’m gonna sell it to you for 15. It’s up to the store to decide what they want to charge.

Then Amazon decided, well, when they bought the book for 15, I think we'll charge 10. And the reason that they did that is they were trying to get people to buy Kindles, because once they bought Kindles they would be locked into buying their books from Amazon. Publishers had two problems with this. One is that they could see Amazon moving to a monopoly on e-books.

But the other one is that they were undercutting the value of the print book, right? The 30-dollar book was now being sold for ten dollars as an e-book. Publishers were upset with this because it made the migration from print to electronic, from store to online, move faster, which undercut their power.

So in January 2010 Apple came on the scene and said, we're gonna open a bookstore, but the way we want to work is what we call agency. You are not going to sell us the book. You’re gonna sell the customer the book.

And we’re just gonna broker the relationship between you and the customer. You’re gonna set the price.

But you've got set the same price everywhere. We can't have you setting a price for us and then have somebody else selling it for less. That was called agency.

Five of the six major publishers immediately signed up for agency. And Amazon, after making a brief attempt to stop agency and threatened to boycott those books, withdrew that idea, agreed to agency and agreed to a plan by which the prices was set by the publishers.

So the accusation, initially launched by a law firm in Seattle - I don't know if that's a coincidence or not –

[BROOKE LAUGHS]

- but a law firm IN Seattle sued Apple and those five publishers, saying, you're fixing prices and alleging collusion.

BROOKE GLADSTONE:

But Mike, correct me here, but if a bunch of publishers get together with a bunch of vendors and they agree to set a price floor that the vendors cannot adjust, that sounds to me like the definition of fixing a price.

MICHAEL SHATZKIN:

The person who’s selling the product fixes the price.

BROOKE GLADSTONE:

They can't fix the price for Barnes & Noble then.

MICHAEL SHATZKIN:

No. Barnes & Noble isn't selling the product; the publisher is. The publisher is accepting the sales tax liability. The publisher is accepting all the responsibilities of the end seller.

And, therefore, the publisher is setting the price for that book - not for anybody else's book, just for their own book. And they're saying that that price will be the same at all points of purchase and that retailers have to compete on something other than price.

I don't know the law. It may be price fixing.  But I know the commercial impact, and the commercial impact is that Amazon was on its way to a monopoly and because of the agency pricing scheme we now have a healthy Barnes & Noble e-book business, we have Google and Kobo and Apple.

We have a multi-retailer e-book business, and Amazon's e-book monopoly is nothing like what it looked like it was gonna be two or three years ago, which I – I think is good for the industry and ultimately good for the consumer.

BROOKE GLADSTONE:

Mike, thank you so much.

MICHAEL SHATZKIN:

You’re quite welcome.

BROOKE GLADSTONE:

Mike Shatzkin is the CEO of The Ideological Company.