The Amazon endgame

Posted on July 16, 2014

Over the weekend, the New York Times ran a very good article on the increasingly strained relationship between bookselling giant Amazon and book publishers:

Amazon offers a vast array of goods. It is easy to order from. It is inexpensive. Everything arrives promptly. Customers love it. To no one’s surprise, Amazon is now one of the 10 biggest retailers in the United States, edging out the 99-year-old Safeway grocery chain.

Things are cheap for a reason, however. Inspired by Walmart, Amazon takes a famously hard line toward the people who make the stuff it sells…

“Amazon is not evil, but it is ruthlessly, ruthlessly efficient,” said Andrew Rhomberg, founder of JellyBooks, an e-book discovery site. “As consumers, we love Amazon’s efficiency and low prices,” he said. “But as suppliers, it is a toad that is hard to swallow.”

The particular dispute between Amazon and publisher Hachette has garnered a lot of press, but the NYT piece covers one angle of it that I haven’t seen raised elsewhere: Amazon’s concerted campaign to win authors over to cutting their cord with traditional publishers and just having Amazon publish them instead.

It describes how well this approach is working for one author, Vincent Zandri:

Mr. Zandri, an author of mystery and suspense tales, is published by Thomas & Mercer, one of Amazon Publishing’s many book imprints. He is edited by Amazon editors and promoted by Amazon publicists to Amazon customers, nearly all of whom read his books in electronic form on Amazon’s e-readers, Amazon’s tablets and, soon, Amazon’s phones…

It is the 21st-century equivalent of living in a company town, but Mr. Zandri, 50, is far from a downtrodden worker.

A few years ago he was reduced to returning bottles and cans for grocery money. Now his Amazon earnings pay for lengthy stays in Italy and Paris, as well as expeditions to the real Amazon. “I go wherever I want, do whatever I want and live however I want,” he said recently at a bar in Mill Valley, Calif., a San Francisco suburb where he was relaxing after a jaunt to Nepal.

In an environment where many writers are increasingly struggling just to make ends meet, it’s encouraging to hear of Mr. Zandri’s success. But his story also illustrates some things about Amazon that make me wonder how long that success will last.

One thing I’ve always admired about Amazon is that they are one of the very few companies in the world that can actually be said to have a strategy. Unlike the vast majority of companies in the modern economy, Amazon isn’t just chasing whatever they need to do to bump their stock price next quarter. Like the Cylons in the reimagined version of Battlestar Galactica, they Have A Plan. Amazon thinks in the long term; they identify markets they want to be in, figure out how to break into those markets and then build on that foothold to establish a dominant position, and then ruthlessly execute.

Part of what elevates the way they do this to the level of strategy is that they know who they are trying to beat, and do what it takes to win over other players in that marketplace to their side of their dispute with that target. Playing other participants in the market against each other fragments their power and prevents them from concentrating that power against Amazon. It’s a classic strategy: divide and conquer. But that classic strategy only works for one reason: because none of the other players are capable of recognizing that it’s being used against them until their collective power has waned so much that even concentration could no longer save them. They don’t see the train coming until it’s too late to get out of the way.

(Indeed, this is why the dispute with Hachette has garnered so much attention — because, in a rare failure of execution, Amazon failed to lock authors in on their side before taking on publishers. The result has been that these groups have started pooling their market power, which makes them strong enough together to put up a spirited resistance.)

When I say Amazon plays a long game, understand this: today’s dispute with publishers is just one step in a campaign to execute on this strategy in the book market that they have been running now for twenty years. And as long as they have the money to do so, they will continue executing on it for twenty more years, or thirty, or forty, or however long it takes before they reach the strategy’s ultimate goal: a totally vertically integrated book marketplace, with every part of the process owned by Amazon.

“Um, so what?” you ask. “All I know is that the more power Amazon gets, the cheaper it gets for me to buy books. And that’s a good thing, right?”

Sure it is — right now. But to understand why it won’t be that way forever, you have to stop thinking like everybody else and start thinking the way Amazon does. You have to start thinking long-term.

The point of vertical integration, from the integrator’s perspective, has nothing to do with low prices for customers. What it’s about is maximizing profit by squeezing every dime out of every step of the business process. In a vertically integrated industry, money that used to be one participant’s profit now becomes an efficiency to be transferred up the chain. And it works, because the greater the degree to which the market is integrated, the fewer places there are for participants to go. If Andrew Carnegie controls all the nation’s steel mills, and you, Mister Iron Mine Owner, don’t like the prices Carnegie is willing to pay for iron ore, what are you supposed to do about it? You can do nothing, because there is only one customer in the market for your product. You take what that customer is willing to pay, or you get nothing. And eventually, when the customer’s demands become too great, you either sell your mines to them or go out of business and see them buy up your old assets — thus completing another step of the vertical integration process.

And what happens when all the competitors have been driven out of business or absorbed into the monolith? What remains as the last available source from which more dimes can be squeezed? What remains is the customer, and those last dimes are the ones being thrown away through those low prices you’ve been enjoying. So the prices go up — and, like all the players who fell before the monolith before, your only choice is to accept them or get out of the marketplace. You have no power in the transaction worthy of the name.

That is the Amazon endgame — a market where they hold all the cards. The low prices and famous customer service are just means to that end. Amazon doesn’t offer you all these bennies out of the goodness of their hearts. They offer them to you because, right now, they need you; because the only way they can take on the other participants in any market is to start by owning such a large portion of that market’s sales that they have significant leverage to apply against them. Nobody cares if they start getting threats from a company that accounts for 1% of their sales; but make that 25%, or 50%, or 75%, and the beads of sweat start to form. So they need your purchasing power at the moment, and they’re willing to treat you as well as it takes to get it, and to keep it.
But what happens when Amazon doesn’t need you anymore? I’ll tell you what happens: the nice treatment stops. You become just another revenue stream to be optimized.  This is how every story of vertical integration ends.

This is the warning I would give both authors like Mr. Zandri and everyday book customers like you and me. Living in Amazon’s gilded cage is attractive today, because Amazon goes to great lengths to make it so. They spare no expense. But they only do so because they need you in order to defeat someone else. And once that someone else is defeated, keeping the walls of your cage painted gold will no longer be a priority for them. All they will need to know is that you are in the cage, and they have the only key.