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.