Amazon Sales And New Economies Of Scale In Publishing

Based on the quarter Amazon just reported, bringing North American media sales to $5.350 billion for the 2008 calendar year, and given Barnes&Noble's guidance of a sales decrease for the last quarter of 2008, I think my prediction that Amazon would become the largest book retailer in the US in 2008 is looking pretty good. They certainly sold more media in North America during 2008 than Barnes&Noble, the only question is whether Amazon is selling a much larger proportion of DVD's and other non-book media than Barnes&Noble. It would need to be a much larger proportion since I'm estimating Amazon's North American media sales will come in about 18% higher than Barnes&Noble's overall media sales in 2008. Keep in mind that Amazon also sells more new titles at a discount, and a large number of new and used and third party books for which they only receive transaction fees, which makes the number of units sold much higher than the dollar revenue suggests. I'd be surprised if Amazon's total number of physical books sold isn't already appreciably higher than Barnes&Noble's. It's also worth noting that Amazon's international media sales exceeded their North American media sales for the first time in 2008, and did so by nearly $400 million.

I've written in the past that small publishers shouldn't try to run their businesses like large publishers because the big trade model just can't be scaled down to a hundred or a dozen titles, much less one or two. The same is true for independent bookstores vs bookstore chains. But in recent months, the hunters are rapidly becoming the hunted, with Borders chain fighting for survival and large publishers cutting staff and frontlist plans. Let's take the problem facing the Barnes&Noble, Borders and Books-a-Million first. Large retail chains are built to function as large retail chains. They can't decide tomorrow to focus on the 20% or 30% of their stores with the best sales and close the rest, the lease agreements or mortgage payments for stores alone make that impossible without bankruptcy filing and protection. They have hundreds of millions of dollars locked up in inventory, and need lots of cash flow to pay creditors, employees, etc. The big bookstore chains will live or die as big bookstore chains.

Large trade publishers face a more complicated future because they appear to have more options than the retailers, but some of those options are illusions. Many publishers are currently seeking salvation in ebooks, approaching the business like Internet start-ups in the Dot Com era - eyeballs first, worry about profit later. Everybody likes talking about the number of titles they have available for Kindle, but I haven't seen much bragging about the bottom line. I seriously doubt that any of the large publishers talking about deriving half of their sales from ebooks in the near future could remain in business if that boast became a reality. A small nonfiction publisher can sell ebooks through content based website and add 20% or more to the bottom line of a the business, but the large publishers are depending on retailers (primarily Amazon) to sell their (primarily) fiction ebooks. Publishers currently treat ebook sales of backlist books as pure profit, since the acquisition and development costs were amortized years ago on the offset runs, but good luck financing their business models going forward if they have to depend on ebook profits to pay all their costs.

Publishers continue to obsess about book returns as the problem without realizing that any form of non-returnable books are the displacement technology that renders their core business model obsolete. The expertise at large publishers is in managing the large offset run returnable book model, without those they're on the same playing field with Tom, Dick and Harriet. Expect to see terminal consolidation of the large trade publishers, with the value of the publishers being measured by their backlists rather than superstar authors or name editors. When the 90% of popular backlist titles protected by copyright are held by two or three companies, we'll see whether the remaining retailers or the publishers hold the most power. The smaller publishers without expensive Manhattan offices and warehouse space leased for fifteen years are probably the safer bet for the next few years if you're new to the business and looking for a job. But somewhere down the road, when there are only two big retailers and two big publishers left standing, the economies of scale may tilt again against the small guys.


Gary Roberts said...


I think the Kindle gadget and it's kind will eventually go the way of the Dodo bird. Unless there is a successful version that is lightweight, readable in sunlight, fairly sturdy and can even double as a net-ready communicator. I simply don't see the numbers in sales of either the machinery or the products to support the manufacturing cost of the readers.

There are some on the horizon that might do the trick, but costs have to brought within reason. The current economy may very well be the death-knell of the whole experiment.

As for publishing eBooks, I forsee a move to files intended for laptops. Particularly as laptops become lighter, smaller and batteries increase in life. The newer net-centric machines could very well be the next step in portable computing. Why not have a decent eBook to read on your mini-laptop... something complete with bookmarks, active links, decent text, images, etc?

Oh, wait... we call those PDF files, don't we?

Enjoy the weekend

Morris Rosenthal said...


I'v never seen a Kindle in person (they didn't send me one:-) but I'd heard that they were good in sunlight.

The cheap netbooks that are coming out probably pose a bigger challenge to Microsoft than anyone else at the moment, will be interesting to see how it plays out. But my own ebook business is purely PDF's for the time being, and I'm in no hurry to change.


Thomas Huynh said...

Bravo Morris. This is the type of realistic, clear-eyed perspective booksellers need to have if they hope to survive. They need to ask the tough questions like what you did. People are still reading -- look at the Harry Potter books -- but the question is where will they buy them. If bigbox bookstore execs or publishers think Ebooks will be their savior, I wonder how many of them actually read one lately, Kindle or the like? I bet no more than 20% of them.

Morris Rosenthal said...


Apparently ebook readers are gaining popularity with the "in crowd" in trade publishing, but I suspect a lotof that has to do with folks wanting to prove that they are hip to what's going on. The real question for all of them isn't whether or not ebook readers or ebook will see growing market share, but whether they, as publishers, can make money providing ebook content. For most of them, I doubt it.


Anonymous said...

Great post.
I'm curious as to whether you ever followed up on your 10.17.06 post on "Buying a Book Publisher."

Morris Rosenthal said...


I never stopped looking and people write me on a regular basis, but there's a major disconnect between investment and value. Publishers who are giving up and moving on tend to value their business by how much they invested, some even assign a value to their time! In reality, a business is only worth the profit it generates, which you can multiply or divide depending on how hard it will be to keep the profit coming. Most of the businesses that contact me don't have real profits.

The publishers I was hoping to hear from were those who had moderate profits (a real business), but who didn't want to be in the business, like heirs, especially if it wouldn't pay for a full time employee. As near as I can tell, those publishers simply wind down operations and dissapear instead, if they ever think of selling out, they probably ask around locally and give up.