ATG Newschannel Original: Jeff Bezos & Amazon Part 1: Put The Customer First. Invent. And Be Patient.

by Nancy K. Herther

Just as Steve Wozniak and Steve Jobs left their mark on history with the early Apple Computer, Jobs redefined communication with the iPhone, and Bill Gates was able to define the very language of computing with DOS and later Windows; Amazon’s Jeff Bezos has had the single, most profound impact to-date on consumer ecommerce.  The company began with books in 1995, setting up Amazon.com as an online bookstore.

It wasn’t the only bookstore on the web. Kmart bought Borders’ chain of 21 book Midwest/Northeast superstores in 1995, later acquiring the Midwest and Northeast. Over the next fifteen years, the chain passed from one owner to another and tried a variety of efforts to challenge Amazon. In 2010, Borders opened an ebook store but the company was already too late and too weak to make a significant transition to the web. In 1984, Kmart bought Waldenbooks. Two years later they added Waldenbooks to their portfolio; however the company clearly had little interest or ability to operate bookstores let alone move into the web and spun off the combined book retailers in an IPO in 1995. Barnes & Noble (BN) debuted in 1886 with a single brick-and-mortar store in New York City, adding a website in 1997 and today, with over 600 stores in all 50 states, it is the only national bookstore chain in the United States. BN has never approached the success of Amazon – in pricing or customer interaction let alone profits and market share. In this, Amazon still stands alone. Perhaps Alibaba or another global powerhouse will someday approach or challenge Amazon’s dominance, but not today. Whether online or brick-and-mortar, Amazon stands alone.

Few would refer to Bezos as some type of Renaissance man, instead he is seen more as a man with ideas yet a strong focus on details and business processes. Recently Warren Buffett called Bezos “the most remarkable business person of our age. I’ve never seen a guy succeed in two businesses almost simultaneously that are really quite divergent in terms of customers and all the operations.”  In this Buffet was considering Amazon’s success in both cloud computing and online sales – and Bezos seems to just go from strength to strength in both areas

From ebook readers to book publishing to continuing to attract more authors, publishers and buyers than anyone else…ever.  Amazon began with books and this has remained a major market strength for the company, continuing to build its customer base, catalog of publishers and moving into such areas as publishing commercial titles on demand and self-publishing. The company quickly was able to focus on continuous (even incremental) change and a focus on business process and data analysis.

Early Amazon employee, James Marcus, in his memoir Amazonia (New Press, 2005) noted that Bezos once talked about the Internet’s “bottomless capacity for data collection, it would allow you to sort through entire populations with a fine-tooth comb. Affinity would call out to affinity: your likes and dislikes—from Beethoven to barbecue sauce, shampoo to shoe polish to Laverne & Shirley—were as distinctive as your DNA, and would make it a snap to match you up with your 9,999 cousins.” (p. 89)

As with Google, Amazon learned early on that the data they were able to assemble on the visitors at their site was Internet gold. As Marcus noted, “only a few months into the game, and our expertise was worth coveting!” (p. 81) Amazon, Marcus came to see, “had come to the rescue. All the publishers needed to do was list their books on the site – a free service that later morphed into a paid one – and suddenly they had direct access to millions of customers. The middleman, the genius of capitalism, was being engineered out of the picture. (p. 91) Amazon was able to cut percentage deals with a previously unheard of catalog of publishers, undercut all other bookselling options and use existing mail services to provide delivery options.

THE MAKING OF A SUPERPOWER

Amazon’s rise as a superpower has gone well beyond traditional bookselling.  Their original programming – movies and serials are garnering Oscars and Emmys.  The company is investing in more brick-and-mortar stores as well as a growing distribution system across the country. Bezos is leading a company that, despite modest profits, Amazon’s share price continues to rise and Bezos himself is quickly nearing Bill Gates’ first place status as the world’s richest person.

As Adam Lachinsky noted in a Fortune article: “Amazon figured out early on how to create software that scours the web for price information from the competition and to automatically match the lowest available price. For years it avoided collecting sales taxes, deploying preposterous legal denials of its physical presence in multiple states in order to justify its actions, which resulted in customers paying lower prices. (Bezos said his company didn’t benefit from local services in states where he didn’t want to collect sales tax — as if the roads leading into his warehouses appeared magically and didn’t benefit Amazon.) It routinely disregarded retail-industry conventions on minimum pricing, provoking games of cat and mouse with manufacturers who loved access to Amazon’s customer base but hated Amazon.”

With the company’s push into cloud computing, advertising and original shows, there are more reasons than ever for investors to take notice of Amazon.

STARTING WITH BOOKS – THE EMPIRE BEGINS

A recent Wired article provides an excellent explanation for what is being called Amazon’s ‘teflon’ coating: “Amazon doesn’t create algorithmically generated newsfeeds read by billions of people. It doesn’t try to offer “one true answer” to people’s burning questions on its search results pages. By keeping its platform free of current events, it’s managed to largely avoid the fake news fracas that erupted after the 2016 election. Also, though it sells ads on its product pages, advertising is a relatively small source of Amazon’s revenue. So while Facebook and Google have to balance the needs of users, content creators, and advertisers, Amazon can focus primarily on its customers.”

As Numerical Gurus’ Laura Dawson explains to ATG, “the important thing to note is that Amazon’s primary purpose is to sell stuff. In our hypercapitalist environment, that’s regarded as fundamentally good. Additionally, Amazon’s ferocious focus on the customer experience (easy shopping, easy returns, fast/free delivery, discounts, Prime) make it a tricky target to go after.”

Amazon’s model with its trading partners is a race to the bottom,” Dawon continues, “the lowest prices get you the most customers, which they learned from Walmart. The additional convenience of being online and thereby universally ubiquitous means that Amazon doesn’t have to have much of a real estate footprint with stores. As time has gone by, customers are more comfortable entering credit card information (and storing it!); shipping times have dropped; Amazon has invested a great deal in warehouse technology and logistics, even following an Uber-style model of independently-contracted drivers to deliver goods to consumers. That, and a deal with USPS that allows postal deliveries exclusively for Amazon on Sundays, offsets some of the costs of working with UPS.”

THAD MCILROY ON AMAZON & THE FUTURE OF PUBLISHING

Thad McIlroy

“While Amazon controls small percentages of the retailing of certain products, for example hardware and drugs, as a reseller of books it’s moving from oligopoly toward monopoly,” The Future of Publishing’s Thad McIlroy explains. “The distinction is important in that it will eventually dictate the federal government’s response to Amazon’s dominance. As an oligopoly Amazon was a powerful force, the most powerful in online retail. As it moves towards monopoly position in book sales, it moves from important to essential (his emphasis).”

“A few years ago it was only a small cadre of self-published authors who felt they could afford to ignore Barnes & Noble, and sometimes Apple, as a reselling channel,” McIlroy explains. “These days I tell clients not to ‘ignore Barnes & Noble altogether’ but certainly not to lose any sleep if they don’t get around to it for a couple of weeks. Apple has lost significant market share as an ebook reseller, and Kobo has never broken the US market, so Amazon is now monopolistic its behavior — acting as if it owned hundred percent of the industry when the actual number is lower. But the trends toward sole player continues.”

“The numbers are high,” he continues. “There are estimates that Amazon controls 80% of the US ebook market and also controls roughly two-thirds of the entire print and ebook reselling marketplace. Amazon has already changed the bookselling business and hence the publishing (and arguably the writing) industry. How is behavior might change as its dominance becomes unassailable, anyone can guess.”

CAN AMAZON’S DOMINANCE BE SHAKEN?

“It’s easy to get down on Amazon; there are lots of reasons to do so,” McIlroy tells ATG. “But it’s just as important, if not more so, to appreciate the many things that Amazon does to make it the success that it is. True monopolies are able to so dominate a market that they can get sloppy on pricing and service. Amazon constantly amazes as it continues to act like a company that started up two weeks ago and was trying to get a foothold in a tough industry. Its relentless focus on low pricing combined with low-cost or free shipping combined with superb customer service: who can beat that?”

“On the other hand,” McIlroy cautions, “I think that hardline capitalists feel that as long as the customer is getting a lower price all other bets are off. But we have to, for example, consider how downward pressure on pricing impacts the larger ecosystem of publishers, self-publishers, and authors. Low pricing only helps producers if the sales increase is sufficient to offset the unit decrease. Based on essentially flat sales for members of the Association of American Publishers, it’s hard to argue that Amazon’s discounting has made publishing a more profitable industry.”

“Here too Amazon is worthy of enormous praise,” McIlroy believes. “It essentially invented the self-publishing industry and that has made a difference, even if not always financially, in the lives of hundreds of thousands of authors. I often ponder what the broader economic impact is of in Amazon’s KDP fund. It channels upwards of $200 million a year directly into the pockets of self-published authors (although any publisher can participate in KDE, it really is the terrain of the self-published). $200 million is also the amount of royalties paid out by traditional publishers to authors on sales of $1.3 billion worth of books (with a 15% royalty). How should we look at these numbers? Is Amazon adding into the market and increasing in income for the average author, or is most of this money going to a new cadre of authors who (a) would never have been published by a traditional publisher and (b) (then) might not even have bothered to write. It’s at least the basis for an argument, that at least for writers, Amazon has been a powerful force for good.”

Dawson notes that despite “all the disruption caused by ebooks, Amazon certainly didn’t invent the ebook experience. Back in the late 90s, I was working at Barnes & Noble.com – we had a partnership with Rocket E-Book. They had an exclusive with Stephen King – when that launched, our servers crashed, the demand was so heavy. But even with that heavy demand, the market just wasn’t ready – the devices were too heavy, the content just wasn’t there. Amazon’s Kindle launched in 2007, and by that time appetites had increased. Amazon also had the money to develop Kindle technology – Barnes & Noble prided (and still prides) itself as a book-centric company and always has struggled on the technology side a bit. The ebook war was Amazon’s to win.”  And win it they have, at least up to now.

AMAZON & THE FUTURE OF BOOK SELLING

“And think about the fact that one of the Amazon “failures” was general trade publishing. But why did they fail? Because they couldn’t get those books onto the bookstore shelves, which then meant B&N, Borders, and independent stores, so the authors couldn’t take them seriously. But what if Amazon itself has a lot of stores? And Borders is already gone and B&N is contracting. If Amazon had a big share of the bookstore points of sale, might that change their competitive position for authors vis a vis publishers? I think so,” notes Idea Logical Company Founder & CEO Mike Shatzkin.

“One of the most recent problematic moves by Amazon is currently getting scant attention, but I think it has the potential to make big waves. Amazon has started selling its buy buttons to the lowest bidder,” explains Ohio State University Press director Tony Sanfilippo. “There are several reasons I find this highly problematic, particularly for university presses. First, it’s meant lower sales for smaller presses because as best I can tell it’s only happening to those, not the big five. It will mean lower sales because while the price is slightly lower, fewer books will qualify for Amazon Prime and free, quick shipping.”

“When I first heard from other university presses about their concerns over this it was over the impact that this new policy was having on backlist,” Sanfilippo continues. “We all experienced an extraordinary number of returns from Amazon last year, and we grew frustrated by the number of titles that were beginning to show up as out-of-stock, or which listed weeks or even months for delivery. And that inevitably led to lower backlist sales through Amazon this year, but I’m beginning to suspect that those returns were actually the first step in a larger strategy and that is to outsource the sales of smaller presses’ titles to third parties.”

“Those books didn’t come back by the thousands because Amazon had overstock,” Sanfilippo  explains, “they were returned so that Amazon could outsource their sales of lower profiting titles, likely part of a larger strategy to decrease the number of ISBNs that Amazon needs to keep in stock. But while that policy might save Amazon some money, it’s also killing the sales for those smaller publishers by making their books take longer to get to the customer. And they’re not doing it to just older backlist titles. It seems this is starting to affect frontlist too.”

“Here’s an example,” Sanfilippo continues. “We published this book a few months ago. It has since gotten nice reviews from the Los Angles Review of Books, the New York Review of Books, the San Francisco Enquirer, it’s been featured on podcasts and radio shows and has gotten the kind of publicity you’d like to see a book get when it’s first published. But all the great attention has induced Amazon to stock it, instead, they have sold the buy button to a seller by the name of SecondStoryBooks. SecondStoryBooks is selling it below the discounted price we offer to retail accounts, but they aren’t Amazon Prime compliant, and charge for any shipping. Their expedited takes a week and costs $7.99. Their standard shipping takes up to three weeks and costs $4.99. Clearly, this is going to impact reader’s buying decisions.”

“A couple of obvious pluses here for Amazon,” Sanfilippo concludes. “They don’t have to pay for shipping to one of their Prime members, and they don’t have to worry about the overhead costs on warehousing and fulfilling the order of the title. The downsides for small publishers are multiple. Lower sales because fewer buyers will want to both wait longer and pay for shipping. Crummier customer experience overall because it’s not provided by Amazon. Lower price for the book, but higher overall cost for the consumer because while they’re saving a couple of bucks on the book, they now have to pay between $5 and $9 for shipping. But my biggest concern is that now third-party sellers are allowed to determine what constitutes a “new” book. If it looks like it’s in pretty good condition, why not sell it as “new” and control that landing page button with a price below retailer’s cost? That has huge potential to cut revenues for university presses, particularly of the backlist.”

“There’s a lot of concern about Amazon’s own publishing imprints and how they occupy what could be seen as a disproportionately high percentage of the best-selling books on Amazon,” McIlroy believes. “But I don’t think Amazon fakes the data. I think Amazon has become a successful publisher because it has the inside track on how to maximize the Amazon channel.”

“So I’ve seen people fretting that Amazon’s dominance on its own site will allow it to become perhaps as dominant a publisher as they are a reseller,” McIlroy asserts. “I don’t see it. If, on the other hand, if Amazon was to try and purchase one of the big five it would be very interesting how government regulators would react. Although, on the face of it, during the Trump era Amazon’s monopolistic behavior is unlikely to be challenged.”

Laura Dawson

Dawson sees little in the near future to challenge Amazon’s leadership. “I think the only thing that can stop them or disrupt them in the next 5-10 years is legislation/regulation. And because they are so ruthlessly focused on customer service, there’s not a lot of appetite for that regulation – either politically or from consumers. The other thing to remember is that Amazon does two things very well: buys other companies, and recruits excellent talent. Any “disruptions” or perceived competition are quickly noticed and acquired. In that way, Amazon follows Steve Ballmer’s method at Microsoft: ‘Embrace and extend.’ Or, as the Borg put it in Star Trek, ‘You will be assimilated’.”

In Part Two of this look at Amazon, we further examine Amazon’s strategies on book sales and the future of publishing; as well as looking at Amazon’s moves into (paradoxically) brick-and-mortar bookstores, restaurants, cloud services, drones and more.  What else can we expect from this consumer giant?

Nancy K. Herther is librarian for Sociology & Anthropology at the University of Minnesota Libraries, Twin Cities campus. herther@umn.edu

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