Ebooks & The Exclusivity Factor
How Amazon May Have Stolen Yet Another March On Publishers, And Possibly Made A Strategic Error.
Exclusivity in the world of ebooks has been on my mind for a while now, especially as I witness the creeping march of it on Amazon’s Kindle Direct Publishing platform, the tool self-publishers and some smaller publishers use to access the massive audience of readers who use Kindle as their ereading ecosystem of choice.
Amazon has been increasing the attractiveness of making books available exclusively on Amazon via its KDP Select program. Or one might, if they were so minded, say that it was increasing the penalties for those who did not choose the exclusive option.
Originally the only barriers to a 70% royalty were price*. Amazon wanted to see prices within a tight range, $2.99-$9.99 (and similar ranges in other currencies) and rewarded publishers who kept their pricing in that window. If you strayed over or below, 35% was your reward.
The deal served Amazon’s purposes well. It gave the company a powerful marketing tool, price. The lure of the $9.99 ebook was reinforced and the fierce competition ebooks created in the self-publishing space ensured lower prices for many independently published books was a certainty.
It also seemed like a very fair offer for smaller publishers and self-publishers relative to other retail channels. So the deal worked. It made the self-publishers and small publishers into a veritable army of unpaid marketers for the Kindle platform encouraging readers to buy devices and download ebooks for free or at reduced prices.
The negative side of the deal was that to even come close to the return from a $9.99 priced ebook on the 35% royalty option, a self-publisher or publisher would need to price their book at $20 or so.
As KDP has opened up new markets and with the arrival of the KDP Select program however, some new barriers have arrived. To get 70% in Japan, Brazil or India those using KDP must enroll in the KDP Select program which ties a title to Amazon exclusively for 90 days at a time. Otherwise the 35% royalty option is default.
Titles enrolled in the program can be downloaded and read for free by Amazon Prime (Amazon’s subscription delivery and digital services offering) members. When a title is downloaded, Amazon shares with the publisher a small cut of the monthly KDP Global Fund ($1,000,000 in June 2013). The cut is determined by the overall number of downloads. The program also offers publishers the opportunity to offer their titles for free to Kindle readers five days per month, encouraging experimentation and driving sales (or so it is hoped).
From Amazon’s perspective KDP Select is a clever program. It gives the company a chance to see how self-published material performs before anyone else or at least during the period while it is exclusive to Amazon. Such data is surely valuable in determining whether an author might be a profitable acquisition for Amazon Publishing and what genres perform best among readers.
Maybe more important than that though is the power of the exclusive content the program generates to drive new readers to the Kindle ecosystem (after all, readers can only buy those titles enrolled in KDP Select from Amazon) or in convincing new members to sign up for Amazon Prime or indeed in convincing existing members of Prime to stay on the package, reducing churn as the industry puts it.
The importance of this factor was brought home to me by two excellent articles on Netflix’s efforts to build exclusive content. The first, by Matthew Ball, talked about the importance of reducing existing customer churn:
The company often touts how it is using customer analytics to pick its programming decisions, yet their new programming is not about filling content gaps in the minds of non-users, it’s about catering to the specific interests of current subscribers.
Matthew Ball - Arrested Economics: Assessing Netflix’s Original Content Business | Ivey Business Review
The second, in response by Felix Salmon, focuses on the long term value of building up an exclusive content bank:
Netflix is playing a very, very long game here — not one measured in months or quarters, and certainly not one where original content pays for itself within a year. Netflix doesn’t particularly want or need the content it produces in-house to make a profit on a short-term basis. Instead, it wants “to become HBO faster than HBO can become Netflix,” in the words of its chief content officer Ted Sarandos.
Felix Salmon - Why Netflix Is Producing Original Content | Reuters
You can probably see the benefit for Amazon then of expanding KDP Select, exclusive content without really needing to pay for it, rather a nice deal.
If, as some observers like Mike Shatzkin believe, subscription offers become a larger part of the publishing landscape, then Amazon will already have a huge marketing advantage over publishers built in and the chance to tie up more of the self-published content produced simply by increasing the penalties on self-publishers who chose to stay outside the KDP Select program.
No publisher will be able to rival that (not even the merging giants Penguin & Random House) without considerable sacrifice on their part, no matter how large their bestseller list might be. The only way a publisher would have of gaining exclusive content would be to withhold bestsellers and new releases from Amazon and other retailers. Such a move would be unlikely even if it were sensible, which it is not.
Crucially, even for the self-publishers and smaller publishers though I think the issue of exclusivity is less attractive than Amazon believes and it is here, I believe that Amazon has misstepped. The offer Amazon makes would be a decent one if Amazon still controlled 80-90% of the ebook market but when you know that Amazon controls less than 60% in some markets and even in the US, its dominance is not what it used to be, allowing the company exclusivity sounds like a recipe for smaller sales and reduced exposure.
So the penalties are serious news for small publishers and self-publishers. They may well prompt some of them to migrate away from direct engagement with Amazon’s KDP and towards using aggregators like Smashwords or ePubDirect (though some of those are interested only in what might be termed traditional publishers and not self-publishers.)
If it does, Amazon is endangering a keystone in its ereading ecosystem. What’s more it is doing so at a point when its rivals are increasing their efforts with regard to self-publishers (Kobo’s Writing Life product is really an easy platform to use and B&N has belatedly re-branded its Pubit offering as Nook Press though, strangely, not yet extended access to self-publishers beyond the US). Amazon has on the one hand marched ahead of one wing of its rival, the publishers, but is exposing its flank to another set of rivals, booksellers & ebook retailers who can work with self-publishers.
Big deal you say, sure what can self-publishers really be worth? Well Bowker put it at 12% of the ebook market and 20% in genre fiction, so it’s not insignificant!
It may be that I am reading too much into Amazon’s moves on KDP, but given its preference for the long game and its demonstrated capacity to outthink its rivals, I think I’m on the money, or close to it. The key questions are whether the impact of subscriptions on ebooks will be large and whether, in fact, the company’s rivals can exploit this misstep and peel off some of the self-publishing business that Amazon dominates.
*Though to be fair there have always been some odd technical issues, for instance a book sold through Amazon.com but in a territory outside of the USA might only attract a 35% Royalty, something that hurt Irish publishers and self-publishers using KDP. Their main readership had to use Amazon.com until recently but the roaylty paid on those sales was only 35%.