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Amazon CEO Jeff Bezos  (Source: Getty Images)
Amazon insists it's still all about the customer; unruly publisher bucked Amazon's model, tried to charge more

Amazon.com, Inc. (AMZN) sent a clear warning to others that might push too hard on its e-book monopoly.  In a series of moves widely viewed as harming both authors and customers, Amazon held firm, demanding more favorable terms from Hatchette, a giant of the publishing industry.
 
How did Amazon acquire such a fearsome monopoly, and where does it stand at present?  The answers lie in the past.
 
I. Electronic Dreams
 
The e-book (also spelled "eBook") stands for "electronic book" and is a blanket term for today's diverse collection of digital books.  The medium was perhaps first predicted (or suggested) by prolific pulp fiction author Robert Carlton Brown in his book "The Readies".  At the time publishing revenue was taking a hit amidst the growing popularity of film cinema.  Brown writes:
 
The written word hasn’t kept up with the age.  The movies have outmaneuvered it. We have the talkies, but as yet no Readies... 
 
To continue reading at today’s speed, I must have a machine.  A simple reading machine which I can carry or move around, attach to any old electric light plug and read hundred-thousand-word novels in 10 minutes if I want to, and I want to.
 
Writing on, he laid out one possible e-book vision in the technology of his time.
 
It would only be a few decades before modern technology would start to catch up with that avant-garde vision.  Spain's Ángela Ruiz Robles -- a schoolteacher and tinkerer -- was perhaps the first to try with a mechanical book reader that included many features found in today's e-readers.

Ruiz Robles
Spain's Ángela Ruiz Robles came up with a pre-digital book reader.
[Image Source: The family of Ángela Ruiz Robles]

In 1949, she came up with a scroll style reader that used compressed air to roll through pages of a book.  Her prototype included a magnifier to zoom on specific text.  She also reportedly had plans to add sound and a calculator to the device, plus a reading light.  She filed for a patent on the design, but was told it was not novel enough.  She was never granted one, and her petitions to venture capitalists fell on deaf ears.  She died in 1975, but by then her dream had already taken root elsewhere.
 
In the early 1960s, Professor Doug Engelbart at Stanford Research Institute (SRI) began to work on file formats for storing book text digitally.  In the latter half of the decade he was joined in the field by Brown University Professor Andries van Dam who worked on digitizing books as part of his work on hypertext -- a technology which would eventually give rise to the internet as we know it.  
 
Professor van Dam might have come second, but he ultimately had the bigger impact, as he reportedly was the first in the field known to use the phrase "electronic book" and also the first to create a successful e-book commercial venture.  International Business Machines, Inc. (IBM) sold the technology (which it funded and thus owned the rights to), to the Apollo program, where it was used to create some of the world's first digital manuals.
 
In 1971 a University of Illinois researcher, Michael Stern Hart launched "Project Gutenberg", the first major book digitization project. 

Michael S. Hart
Project Gutenberg founder Michael Hart typed in hundreds of books by hand in the 1970s and 1980s. [Image Source: Brewster Kahle]

His first digital archive was a digital copy of The Declaration of Independence.  By 1987 he had archived 313 books, which he had input by hand, a feat that has led some to call him the "father" or "inventor" of the e-book.
 
II. The E-Book Cometh
 
With the advent of home personal computers in the 1980s and early 1990s, software copies (some of which had interactive features as described by Mr. Brown) had become popular for important historic works, religious texts, and classic literature.  The late 1990s and early 2000 brought a new format for obtaining these digital copies for free -- the internet.  But e-books on the computer remained a relative novelty used by only a few and seldom paid for.
 
In 1992 Sony Corp. (TYO:6758) made perhaps the first crack at a multi-functional e-reader with its Data Discman, which could read e-books stored on CDs.  The device was marketed as an "electronic book player"; the first known instance of such dedicated marketing.  Enthusiasts also often used defunct PDA maker Palm’s digital devices as e-book readers.

Data Discman
The Sony Data Discman, an "Electronic Book Player" [Image Source: Wikimedia Commons]

Despite the Data Discman's weak sales, others were inspired to launch more advanced electronic book readers, commonly referred to as "e-readers".  
 
In 1998, startup Softbook Press, Inc. launched its titular SoftBook, which it christened "The Intelligent Reading System."  The SoftBook incorporated numerous advances including an internet connection to an electronic book store (backed by most of the big publishers at the time), a rechargeable battery, and the ability to take notes or highlight text.

Softbook eReader
The SoftBook eReader

It sold for a whopping $700 USD unsubsidized, but had a price break down to $300 USD if you subscribed to its $20 USD a month content delivery service.
 
Another device also launched that year was the Rocket eReader by NuvoMedia.  It included a rechargeable battery as well, plus some innovations of its own -- two font sizes and a button to switch orientation from landscape to portrait mode.  What made it particularly attractive is that it was backed by Barnes & Noble, Inc. (BKS), one of America's largest brick and mortar booksellers.

Rocket e-Reader
The Rocket eReader

It retailed for $399 USD, plus $20 to $40 USD per month for content (it sold books on a per-book basis, not as an all-you-can-consume subscription model).
 
The pair saw some early success, but never became widely accepted by consumers.  NuvoMedia's parent bought SoftBook and merged the two together, in an attempt to right the struggling ship.  But in 2003, the merged company -- Gemstar -- closed, seemingly sounding a death knell for the fledgling e-book movement.
 
III. The Advent of E INK and the Rise of Amazon's Kindle
 
But the market was sustained by veteran eReader maker Sony, who in 2004 announced the Librié, which was the first major eReader to feature the E Ink system, a high contrast technology marketed by an MIT Media Lab spinoff.  Sony would take a couple years to bring the device to market, but it would eventually become the basis of the modestly successful line of eReaders under the "Portable Reader System" (PRS) brand.  These devices were boosted by a sales partnership with now defunct borders.
 
In 2007 Amazon.com -- already one of the top forces in the publishing business as the top online seller of physical books -- announced its first eReader, the Kindle.  The Kindle ignited the eBook market, thanks to its massive library of books and its focus on independent publishers.
Amazon Kindle
Amazon Kindle (2007)

The Kindle was much thinner, lighter, and more sophisticated than most of the other readers of its time, and its use of E INK made it further stand out over the inadequate LCD displays of the time.  Amazon's device went nearly unchallenged in sales until 2009 when Barnes & Nobles announced the Nook.  Sales of the Nook were modest.   Japanese conglomerate Rakuten, Inc.'s (TYO:4755) electronics wing, Kobo, soon announced an eReader which Borders picked up.
 
IV. Hegemony
 
In the years since Amazon has dominated the market, but in some ways has saved the publishing business as well.  With the collapse of Borders and waning of Barnes & Nobles, Amazon's eBook empire has played a growing role in the income of the world's top publishers.
 
Since 2010, Bloomberg says that physical book sales have dropped $6.5B USD (roughly a quarter), falling from $26B USD to $19.5B USD.  But at the same time e-book sales have soared from around $1B USD in 2010 to over $8.7B USD in 2014.  Behind that high-tech literary renaissance is Amazon, who owns 60 percent of the market for top titles, and as much as 85 percent of the market for self-published (aka "indie") books.
 
Amazon is not without rivals. In 2010 late Apple, Inc. (AAPL) CEO Steven P. Jobs disrupted the market one last time before succumbing to the ravages of cancer, releasing the iPad, a device that redefined and reinvigorated the LCD tablet market. Barnes & Noble has continued to see some success countering Amazon, thanks to its popular brick and mortar storefronts.
 
Still, if one of its rivals is destined to take it down, it likely won't be for some time now.  Just how dominant is Amazon?  It's hard to say, given the scarcity of official publication numbers from Amazon, Apple, or Barnes & Noble.  But most estimates suggest it has a 65-85 percent stake in the independent publishing market and a 55-70 percent stake in the broader market for eBooks from top publishers.


e-book market share
[Image Source: Reuters]

For some time publishers were hesitant to go to war with Amazon, even as the powerful retailer kept prices low.  But since Apple came on the scene Hatchette has been pushing the envelope with prices.  Hatchette, a subsidiary of Lagardère SCA (EPA:MMB) had the biggest price increase of any publisher between 2010 (when Apple's iPad launched) and 2012.

eBook pricing
Hatchette has had the highest ebook prices (see burnt orange/brownish top line).
[Image Source: Court Filing]

As you will see, that aggressive pricing has led to the conflicts with Amazon that have at last boiled over in ugly fashion this month.
 
V. Hatchette Job
 
With last year's eBooks antitrust lawsuit by the U.S. Department of Justice, publishers admitted they engaged in a collusive arrangement with Apple in order to try to pump up prices and break the grip of Amazon on the eBook market.  They all settled, except for Apple, which fought and was eventually found guilty.  The net result was a weakening of iTunes and iBooks' momentum in the eBooks industry and a consolidation of Amazon's hegemony.

[Image Source: CNET]

In other words, there was little doubt that what Apple and the top publishers did violated federal antitrust laws, but at the same time, punishing the second biggest player in the market was highly disruptive.  As they say, be careful what you wish for.

This month Amazon looked to display some of its power as it engaged in a heated contract dispute with Hatchette.  According to The New York Times:

Here’s the back story: In an effort to exert pressure on Hachette, Amazon began taking down preorder buttons for many Hachette titles. It has also suddenly raised prices on some Hachette books and has changed its page design to more prominently recommend other titles. These moves follow weeks of increasingly hardball tactics. Among other customer-punishing moves, Amazon has increased shipping times for Hachette titles from a few days to weeks.
...
Amazon is walking right into its detractors’ predictions. There are a couple obvious reasons this is a bad strategy. It’s bad public relations — if it doesn’t already, Amazon may soon control a monopolistic stake of the e-book market and its tactics are sure to invite not only scorn from the book industry but also increased regulatory oversight.

But the more basic problem here is that Amazon is violating its own code. To win a corporate battle, Amazon is ruining its customer experience.

Among the books caught in the cross-fire is Harry Potter author J.K. Rowling's new book The Silkworm, written under the pseudonym "Robert Galbraith".

JK Rowling's The Silkworm

In a short notice Amazon acknowledges it is playing rough wth its business partner, defending the action by writing:

Negotiating for acceptable terms is an essential business practice that is critical to keeping service and value high for customers in the medium and long term.

Hatchette Livre
[Image Source: Scholastic]

Arnaud Nourry, the CEO of Hatchette Livre -- the top company in the international Hatchette chain -- told Bloomberg:

All our energy is dedicated to finding a solution with Amazon as with any other retailer.  [We will] spare no effort to resume normal business relations with Amazon.

But as of Thursday no deal had yet been reached

VI. Amazon Speaks

Perhaps realizing the ill will that its actions are causing, Amazon has extend a small olive branch offering to fund half of a money pool with Hatchette, which would divvy up money to compensate top authors like J.K. Rowling who suffered from the pre-order takedown.  Mr. Nourry, based in Paris, France, voiced praise for that idea.  The payments could be paid to authors immediately after a contract is reached.

Amazon's full statement reads:

We are currently buying less (print) inventory and "safety stock" on titles from the publisher, Hachette, than we ordinarily do, and are no longer taking pre-orders on titles whose publication dates are in the future. Instead, customers can order new titles when their publication date arrives. For titles with no stock on hand, customers can still place an order at which time we order the inventory from Hachette -- availability on those titles is dependent on how long it takes Hachette to fill the orders we place. Once the inventory arrives, we ship it to the customer promptly. These changes are related to the contract and terms between Hachette and Amazon.

At Amazon, we do business with more than 70,000 suppliers, including thousands of publishers. One of our important suppliers is Hachette, which is part of a $10 billion media conglomerate. Unfortunately, despite much work from both sides, we have been unable to reach mutually-acceptable agreement on terms. Hachette has operated in good faith and we admire the company and its executives. Nevertheless, the two companies have so far failed to find a solution. Even more unfortunate, though we remain hopeful and are working hard to come to a resolution as soon as possible, we are not optimistic that this will be resolved soon.

Negotiating with suppliers for equitable terms and making stocking and assortment decisions based on those terms is one of a bookseller's, or any retailer's, most important jobs. Suppliers get to decide the terms under which they are willing to sell to a retailer. It's reciprocally the right of a retailer to determine whether the terms on offer are acceptable and to stock items accordingly. A retailer can feature a supplier's items in its advertising and promotional circulars, "stack it high" in the front of the store, keep small quantities on hand in the back aisle, or not carry the item at all, and bookstores and other retailers do these every day. When we negotiate with suppliers, we are doing so on behalf of customers. Negotiating for acceptable terms is an essential business practice that is critical to keeping service and value high for customers in the medium and long term.

A word about proportion: this business interruption affects a small percentage of Amazon's demand-weighted units. If you order 1,000 items from Amazon, 989 will be unaffected by this interruption. If you do need one of the affected titles quickly, we regret the inconvenience and encourage you to purchase a new or used version from one of our third-party sellers or from one of our competitors.

We also take seriously the impact it has when, however infrequently, such a business interruption affects authors. We've offered to Hachette to fund 50% of an author pool - to be allocated by Hachette - to mitigate the impact of this dispute on author royalties, if Hachette funds the other 50%. We did this with the publisher Macmillan some years ago. We hope Hachette takes us up on it.

This topic has generated a variety of coverage, presumably in part because the negotiation is with a book publisher instead of a supplier of a different type of product. Some of the coverage has expressed a relatively narrow point of view. Here is one post that offers a wider perspective. 

http://www.thecockeyedpessimist.blogspot.com/2014/05/whos-afraid-of-amazoncom.html" rel="nofollow

Thank you.

Amazon's Kindle family of Fire OS and E INK readers remain one of the best selling lines of tablets/eReaders on the market.  But part of why Amazon has been so dominant is that recent market research has indicated that it is also the top eBooks marketplace on the iPad and Android, displacing its rivals' first party offerings.


Kindle Fire HDX family

Ultimately the dispute appears to be on its way to being resolved.  But it's impossible to ignore that Amazon is acting much like any corporate monopoly would.  And while it’s using its dominant position for its own gains and market consolidation, we are also seeing the inevitable attrition of such efforts -- harm to the consumer.

Sources: Amazon, The New York Times, Bloomberg





"Google fired a shot heard 'round the world, and now a second American company has answered the call to defend the rights of the Chinese people." -- Rep. Christopher H. Smith (R-N.J.)






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