Publishers could defeat Amazon — here’s how

 

Bloomberg News

Remarkably, for a time it seemed that the book publishing industry had managed to avoid the disruption that befell its peers in music, magazines and newspapers. From the beginning, publishers approached the Internet much more gingerly; unlike newspapers and magazines, they did not just throw their content online for free; and compared to music, books were not only more difficult for end users to digitize, but also harder to consume on a computer or portable device. It’s not that the idea of e-books was unknown — the first e-book reader launched in 1998 — but rather that publishers were terrified of a world in which books were accessible to anyone, at any time, for free.

Thus, it wasn’t until 2007, a full eight years after Napster first disrupted music, that the publishers finally made their catalogs broadly available digitally on a device created by their best customer, Amazon. Over the previous decade, Amazon had become the publishers’ most important distribution channel, and now Amazon was promising that the Kindle, with its proprietary digital rights management (DRM) would let publishers enjoy the benefits of digital distribution without endangering their underlying business model. Over time, the publishers would also launch their titles on other companies’ e-book readers, such as the Nook and iBooks, but always with DRM.

Fast forward to today, and Amazon is, at least from the publishers’ perspective, much more foe than friend. Over the last week details have emerged of bitter disputes Amazon has with Hachette in the United States and with Bonnier in Germany. While the specifics are unclear, it seems that Amazon is demanding more control and money when it comes to e-books; and to force the publishers to capitulate, Amazon is declining to keep many of their physical books in stock or to enable pre-orders.

To be sure, what Amazon is doing is of the brass-knuckle variety, and while I get that authors are upset, the reality is that it is publishers who have made a Faustian bargain: Unwilling to make their cost structures viable in a digital world predicated on much lower costs and much higher volume, and unable to build their own DRM and companion devices, publishers embraced the Kindle’s DRM, and thus gave Amazon complete power over the only means of enforcing the artificial scarcity that undergirded their old-fashioned business model.

The problem with DRM, as Nook owners now know all too well, is that it ties your books to a single company. If you start buying Kindle books, you will always buy Kindle books, because your books will only ever work on a Kindle app. The result is that anyone who has bought Kindle books is now more loyal to Amazon than they are to any of the publishers; more pertinently, DRM is why Amazon has no problem bullying Hachette and Bonnier.

Here’s the thing: Publishers could change this power imbalance immediately. A huge percentage of the population has at least one device (e.g. a smartphone or tablet) capable of reading e-books. Were publishers to start selling all of their books without DRM, they would be a much stronger position vis-à-vis Amazon. Can’t find the book you want? How about you simply visit the publisher’s site and buy it there. Or, as is more likely, visit the site of your favorite author.

To be sure, this digital future would require a new business model. Publishers would need to rework their businesses from speculative investment to publishing-as-a-service, with upside directly tied to a book’s success. Specifically:

• Authors would hire publishers from a competitive marketplace based on reputation, quality of service, and price.

• Price would likely be some sort of fixed fee upfront, with a percentage of revenues.

• Most books would be published without DRM and marketed primarily by the authors themselves.

Some sort of DRM remains an option in this new world (I myself have protected content on my website Stratechery), but it would have to be controlled by the author — or, if he chooses, his publisher — directly.

Of course, none of this is going to happen any time soon, as Amazon well knows. As George Packer recounted in his anti-Amazon article Cheap Words:

Amazon executives considered publishing people “antediluvian losers with rotary phones and inventory systems designed in 1968 and warehouses full of crap.” Publishers kept no data on customers, making their bets on books a matter of instinct rather than metrics. They were full of inefficiences, starting with overpriced Manhattan offices.

I’ve worked with publishers, and here’s the thing: Amazon is largely right. Publishers as currently constructed simply aren’t prepared to compete in world based on Internet economics. And so, expect Hachette and Bonnier eventually to cave, not because Amazon is right on the merits, but because Amazon’s DRM that is the only thing keeping them alive.

Ben Thompson is the founder of Stratechery.com, a member-supported blog focused on the business and strategy of technology.

© 2014, Bloomberg News

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