<COMMUNITY>
Post of the Day
February 23, 1999

From our
Amazon.com Folder

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.


Go To: Post | Folder

Subject: Re: A Publisher's Perspective
Author: ZumaWave

RJMason,

Your disbelief with the fact that traditional booksellers could often buy their books cheaper at Amazon's retail than they could through a wholesaler is understandable. It is also part of my bullish argument. The first thing that a publisher learns is that they have chosen the wrong place in the book business. Authors make the least, publishers make the next smallest amount, then booksellers. The lion's share of the profit goes to the distributors and the wholesalers. Yet, they are the most invisible of all the players.

Amazon.com is slowly capturing a greater portion of those wholesaler profits because it is willing to buy direct from the publisher where other booksellers are not. My own company is too small to even be considered for a direct purchase account at either Borders or B&N. Amazon, by contrast, has a program called "Amazon.com Advantage" that encourages small presses like mine to do business directly.

I did not claim that Amazon gets most of its books direct from publishers. As you point out, that's not the case. However, of the books that it does get direct from publishers, it achieves a better margin than most other booksellers. This includes Borders and B&N. I know this last part for a fact because my company has brokered huge orders from both chains and in both cases they insisted on buying from Ingram and Baker & Taylor at industry terms. This despite the fact that we are most eager and ready to ship directly to them. They would achieve a better margin and we would achieve a better margin by cutting out the wholesaler. But among the national bookselling brands, only Amazon.com is willing to work with this arrangement.

"If Amazon has so perfected the online retail model that it has convinced the biggest bookseller to take a supply stance in the online wars, then we should expect Amazon to leverage that with other product lines as we have already seen taking place."

First of all, the wholesaler is selling the book for $16? He's making a gross profit of $7 on the book, more than twice Amazon's gross profit; and his net profit will be fantastic, because his other costs (marketing, etc.) are lower than Amazon's. If this example is representative of reality, it seems we should all be putting our money into book wholesalers, not Amazon. I guess B&N did the right thing by buying Ingram!

You should only be putting your money into book wholesaling if you believe that it has the potential to outweigh the online retailing of a Wal*Mart size product catalog. History suggests that it has no such potential.

Your last sentence about B&N doing the right thing is an argument that I made myself in an earlier post. B&N absolutely did the right thing in buying Ingram. I believe that they have effectively thrown in the towel in dueling Amazon.com on the Internet. Rather than compete for sales volume, they simply bought their way into Amazon's momentum by taking over the main supply channel. This brilliant move on B&N's part is no indication of failure on Amazon's part. It shows that B&N has a better book distribution infrastructure and that Amazon has a better online bookselling presence.

I believe that presence is the main bulwark in the bull argument. If Amazon has so perfected the online retail model that it has convinced the biggest bookseller to take a supply stance in the online wars, then we should expect Amazon to leverage that with other product lines as we have already seen taking place.

The reason investors are willing to pay more for Amazon.com than they are for B&N has nothing to do with B&N's ability to earn more on every book sold through Amazon. First, that may be a short-term situation once Amazon improves its own distribution capabilities. But second, and more importantly, B&N has no aspirations beyond the relatively small industry of bookselling. Amazon does. Even if B&N makes more money in the book biz than any other competitor, it will never make as much as the company that ends up owning e-commerce overall.

"We have now taken this publisher's perspective to its ultimate conclusion: that Amazon.com is not only winning the online bookselling battle, but it is positioning itself for war with bigger retailers such as Wal*Mart. That, after all, is where the spoils are richest."

We see that currently in the real world retail stores. You may be surprised to know that Wal*Mart, Target, and Staples sell more volume of the book titles that they carry than does B&N. Wal*Mart is a much more successful retail operation than B&N. Still, B&N's overall book volume is higher than Wal*Mart's. In other words, B&N makes more money off books than any other seller of books. Nonetheless, Wal*Mart is the better company because of its far bigger product line. We are seeing similar developments in the Amazon vs. B&N saga. As Bezos predicts, there will soon be a day when people don't even see the two as competitors.

You are wise to note that Amazon is spending a great deal of money enhancing its own distribution capabilities. That will help it service more bookselling accounts directly and capture some of that fabulous B&N/Ingram margin. It will also help Amazon to expand its product line beyond books, music, and video.

We have now taken this publisher's perspective to its ultimate conclusion: that Amazon.com is not only winning the online bookselling battle, but it is positioning itself for war with bigger retailers such as Wal*Mart. That, after all, is where the spoils are richest.

ZumaWave


To read previous selections, Go To Post of the Day Archives

The Post of the Day may be edited for readability or length, but never for content. The opinions expressed in the Posts are those of their authors, and not necessarily The Motley Fool. We make no claim or warranty as to the veracity or accuracy of any post, and present this feature only as an example of what may be found on our message boards. Don't take the Post of the Day, or anything else here, as gospel and, as our seventh grade English teacher, Mrs. Peacock, used to say, do your own homework, and avoid run-on sentences.