Microsoft Decides

Last November, I speculated as to which, if any, eBook format Microsoft would support in Windows 8 tablets.

[Mistakenly, I also ranked Windows Media Center as “more central” to Microsoft’s media consumption story. What? It’s just one piece of the puzzle. Anyway. Always willing to admit mistakes.]

And now it looks like we have our answer. A $1.7 billion answer, by the way. Call it the Nook. From Barnes & Noble.

Microsoft agreed to invest hundreds of millions of dollars in Barnes & Noble’s Nook division on Monday, giving the bookstore chain stronger footing in the hotly contested electronic book market and creating an alliance that could intensify the fight over the future of digital reading.

ePub is now the official winner in the eBook format wars. Why do I say that? It’s the eBook format supported by nearly everyone. Apple. Sony. Adobe. Kobo Reader. Blackberry Playbook. Everyone except Amazon, which uses a proprietary variant of the Mobi format; to be kind, they also support a command-line ePub converter called KindleGen. Woo woo.

Oh wait… I’m missing something… Amazon owns 60% of the eBook market. And the U.S. Department of Justice apparently wants to help them get back to 90%. Winner: Mobi.

At any rate, here’s what Microsoft has decided:

  • On the eBook format side, Microsoft chooses ePub by investing in the Nook Division. It’s the primary eBook format for the Nook Color and that’s the future. Winner: ePub.
  • On the device side, the news release says the Nook Division will create a Nook Reader for Windows 8. That reader will likely read multiple format types (the Android-based Nook already does), with ePub prominent among them. Winner: ePub.

eBook Prices & Monopoly

The classic construction has it that monopolies enforce higher prices. And in the current suit by the U.S. Department of Justice, accusing book publishers of price collusion on eBooks, the bad guys are the ones raising prices. By that definition, Amazon could not be a monopolist. They want lower prices. Way lower prices.

The reality is a little more complex. But, for the sake of argument, let’s assume that Amazon is not a monopoly. Where does that lead us?

The business literature is filled with examples of how firms use lower prices to gain market share or competitive advantage. In the Amazon case, we have the example of “penetration pricing,” or price discrimination. That’s exactly what they’re doing:

Setting lower, rather than higher prices in order to achieve a large, if not dominant market share.

The question, of course, is whether any of this can lead to an eBook monopoly for Amazon. This much we know:

  • When any firm gains competitive advantage, it can begin to dictate terms to its suppliers. Take Wal-Mart, for example. Or Apple’s iPhone/iPad supply chain.
  • Before Apple and agency pricing, Amazon had 90% market share. They had the eBook market to themselves and were pricing aggressively to gain competitive advantage. The adoption of agency pricing, to my mind, proves they were on their way.
  • With the advent of agency pricing, Amazon’s eBook market share fell to 60%. Barnes & Noble gained 25%, Apple gained 15%.
  • Almost as soon as the U.S. DoJ announced a settlement with three of the six parties on the collusion allegations, Amazon announced it would again lower eBook prices.
  • As it must. Under the settlement, the publishers are required to “to grant retailers – such as Amazon and Barnes & Noble – the freedom to reduce the prices of their ebook titles.”

REPLAY: Amazon gains 90% share of the eBook market?

The sad thing here is how many apologists (sorry, I lack a more elegant term) contend that there is “spin” involved when making the argument that Amazon is lowering prices to gain competitive advantage. In the most egregious example, Peter Scheer makes the specious claim that Amazon cannot be simultaneously selling eBooks AND Kindles at a loss.

Now, both of these statements can’t be true. It’s not possible for Amazon to both (1) sell e-books at a loss in order to reap big profits on Kindle devices, and (2) sell Kindles at a loss to reap big profits on e-books. It may be doing 1 or it may be doing 2, but it can’t be doing both at the same time.

Of course, Peter Scheer is correct. Unfortunately, he’s casting the question in such a way that the only logical answer is the one he wants. Getting to first causes, let’s pose the question differently:

To gain a dominant market share in eBooks, Amazon is willing to sell eBooks AND Kindle Readers at a loss. Because, really, you can’t have one without the other.

Still sound “impossible?”

Again, think Wal-Mart. They sell lots of things, make money on many of them and can afford a few losses elsewhere. Same for Amazon. The idea of using those few losses to gain a dominant position in one corner of a business has to be… Ummm… Appealing. And, up to a certain point, it is perfectly acceptable business behavior. There are other examples… Take Dell. Or Nokia, just for starters.

We grant that this strategy doesn’t always work, or doesn’t work forever. But it’s always nice to have powerful friends helping you out along the way.

Scott Turow on the DOJ

I am not really a fan of Scott Turow’s books. Potboilers, mostly. But hey, I still like crime mysteries, so… There you go. Maybe it’s just a case of professional jealousy…

But count me among those who agree with his stance as Authors Guild President that the DOJ, in its investigation into price collusion between Apple and major publishers, “may be on the verge of killing real competition in order to save the appearance of competition.”

One set of numbers tells the tale:

  • Before Apple entered the eBook market, Amazon accounted for an estimated 90% of eBook sales.
  • After Apple entered the market, that figure dropped to an estimated 60%.

Yeah, I know he’s been criticized… Called a turncoat… It’s the same rhetoric over and over… In the three-legged stool represented by publishers, authors and consumers… The consumer is king. Yeah, we all like cheap. And while we’re at it, let’s kill the goose.

The End of Print?

Long-term there’s no future in printed books. They’ll be like vinyl: pricey and for collectors only. 95% of people will read digitally. Everybody in publishing knows this but most are in denial about it because moving to becoming a digital company means laying off like 40% of our staffs. And the barriers to entry fall, too. We simply don’t want to think about it.

The above quote is from an anonymous publisher, who unburdened herself to writer Sarah Lacey. Sobering words. And at the heart of it is the observation that, unlike traditional print publishers, Amazon does think about the digital transition. A lot.

We’ve written about it before. Skirmishes over publication rights as they relate to Amazon’s eBook lending library. Legal battles over eBook pricing. Accusations of collusion between Apple and the Big Six publishers. In all of this, Amazon is either in the middle of it or standing close by.

As our anonymous publisher notes, the battle lines are primarily being drawn at eBook pricing — and author advances.

When ebooks started, we were pricing ebooks at the same price as the print book, and Amazon was selling them all for $9.99. So they were losing like $3-$4 per book. And they weren’t doing it simply to move Kindles, since they don’t actually make any money on the Kindle unit sales… I think they actually intend to keep print books at their current prices, and they want ebooks to be even cheaper. What they’re actually targeting is the publishers’ margin.

As many authors realize, it’s a select few celebrity writers who keep the lights on. They are the publishers’ margin, since they rake in big bucks and essentially subsidize everyone else. According to anonymous, Amazon is targeting these authors; we’ve said that ourselves. As tribute to how serious they are, they’ve signed Larry Kirshbaum to run their publishing arm. “He’s a savvy vet with 30+ years of publishing experience–and they have some editors, too. And they’ve been paying a ton of money for books.”

Well, not for all books. Let’s stay with the celebrity writer here. Amazon is paying lots of money for those books. Prices that few publishers can afford. Millions instead of six figures. Anonymous: “We can’t pay $1 million for books anymore. Amazon could probably afford to lose $20 million/year in their publishing arm just to put the other publishers out of business.”

I’m with Sarah Lacey when she says she doesn’t feel sorry for the publishing industry. But I am not fond of living in a one-company town either. Some commentators, notably John Gruber, are looking at Apple as the savior on a white horse.

Says Gruber: Apple’s opportunity with books is that there’s already a dominant money-winning bully at the table: Amazon.

The problem with that horse is it is now saddled with lots of legal baggage. Specifically, the U.S. DoJ, the European Commission and a host of states are all investigating possible collusion in eBook pricing. Apple is at the center of that investigation, along with the Big Six publishers; some people in legal circles think they’re the bully.

What to do? Lacey suggests a new publishing model will arise out of the ashes of the old. I suspect that Apple will be part of that, as their iBooks Author and textbook initiatives suggest. Building a better toolset will make it stupid-easy for authors to get onto Apple’s iBookstore; on that front, Amazon is still in the dark ages.

But the onus is still on the Big Six. Or, more precisely, their disaffected executives. Oh wait. I’ve said that before, too. It bears repeating.

The best strategy at the moment is for publishers to get their own houses in order, so they can take advantage of emerging opportunities. That means aggressively embracing new technologies and alternative distribution mechanisms. And building alliances that spread, not concentrate, opportunity.