Friend or foe?
15.04.13 | Tim Godfray
The high street bookshops I represent are cultural and community beacons on the high street. They are full of enterprising and passionate booksellers, who run local events, innovate and—what’s more—are a key to the “discovery” of books for many book buyers.
However, there is no doubt they are facing tough times. Bookshops are closing and the majority of our members tell us that Amazon is the number one threat to their businesses. But I believe high street bookshops are only the tip of the iceberg. There is more to consider, and what is bad for bookshops now is also having an increasingly negative influence on the book trade as a whole. It is not only booksellers under the cosh, but publishers and agents too run the risk of being excluded due to Amazon’s wish to be a book retailer and publisher, and its aggressive plans to vertically integrate within the company’s structure.
Amazon has achieved its phenomenal growth and influence because consumers like what it does, but, in my view, if it continues to threaten large parts of the book trade, this will not only be bad for the industry, but also, in the long run, for the consumer too.
Amazon is H-U-G-E
Amazon.co.uk’s website was responsible in 2011 for £2.91bn turnover. Moreover, it is believed to be responsible for 95% of e-book purchases in the UK. Amazingly, 92% of the 1.3 million e-readers sold in the UK before Christmas were Kindles; this is more than double the EU monopoly threshold.
If that isn’t domination of the marketplace, I don’t know what is.
What’s more, Amazon is moving into the entire publishing chain; not just selling publishers’ books, but commissioning its own books, marketing them and selling them on its own proprietary devices. Amazon has more market value and disposable cash than Hachette, Macmillan, Simon & Schuster, Penguin, Random House and HarperCollins combined.
When we last looked at the company structure, there were 18 separate companies owned by Amazon that covered book printing and publishing, book marketplaces, audio and digital reading. There is not only Kindle Singles, but self-publishing companies Kindle Digital Text Platform (for e-books) and AmazonEncore; then Mortlake Romance, Thomas & Mercer (mysteries and thrillers), The Domino Project (Seth Godin imprint); AmazonCrossing (books in translation); Brilliance (audio); and CreateSpace (POD). Wow!
And within the last few days, Amazon has announced its decision to purchase the book recommendation website, Goodreads, at a rumoured purchase price of $150m.
So the writer goes straight to Amazon. Amazon publishes the author’s work and can then promote the book to targeted users—because Amazon has the ability from data mining its consumer data to know what its customers buy, when they buy it, what books they actually read on their Kindles and even which books are not read in full. Scary. With such a set up, they really do have the ability to destroy the book trade as we know it. Having such a dominant position enables Amazon to put huge pressure on individual publishers for higher trade discounts to be given, enabling it to sell books at much lower prices than competing booksellers. And if the publisher refuses, then, of course, there’s the possibility of delisting, as happened with the Independent Publishers Guild recently when Amazon pulled the sale of more than 4,000 e-books in the US after a fracas over terms.
If you go into the website of Amazon.co.uk, you think you are dealing with a UK company, but in fact, as the Public Accounts Committee found out, you are actually paying money to a Luxembourg company, even though the Amazon Luxembourg office has just over 500 employees and Amazon UK 15,000. Being based in Luxembourg rather than the UK has huge financial advantages, not least because e-books are charged at 3% VAT, rather than the 20% VAT that UK-based booksellers are required by law to impose.
Furthermore, Amazon’s ownership model is amazingly complex. This matters because such complex financial webs make it possible—should Amazon ever wish to do so—for transfer pricing structures to take place, whereby one company acquires the rights to do something and then charges another company in the group a fee. I am not sure whether such transfer pricing has actually taken place, but in Amazon’s 2011 accounts there is an intercompany charge of £151m, primarily for intellectual copyright licensed from Amazon Europe.
If you then are able to bring your profit down because of these transfers, hey, your corporation tax bill is reduced and once your cost base is reduced, you have the potential to offer lower prices to consumers.
What is undeniable is that Amazon, a Luxembourg company, pays a tiny amount of corporation tax to HM Treasury considering its enormous UK turnover. Whereas our members who pay their corporation tax to support UK PLC—and lack the means to work out sophisticated ways of reducing their tax charge—are put at a competitive disadvantage when compared to Amazon. No wonder many booksellers promoted these posters in their bookshop windows.
Amazon is using its market power to offer low prices to consumers and then to lock its customers into its own proprietary systems. Most Kindle customers—unless they are very tech savvy—end up buying their e-books from Amazon’s Kindle store. So we have a situation whereby Amazon seemingly can supply e-books to all UK & Irish booksellers’ customers, but our members cannot supply to Amazon’s Kindle customers.
EPUB3 has just been approved by the International Publishers Association as the new standard format for e-books. We believe that steps should be taken to ensure that in the future all e-book retailers—including Amazon—should support EPUB3, so that consumers can read any e-book on any device and are not locked in to any proprietary system.
So with all these competitive advantages that Amazon possess, it is no surprise that bookshops are struggling to compete. What’s more, the phenomenon of “showrooming” has emerged, where consumers are going into bookshops, looking at the books, and then ordering online.
If bookshops disappear
Indeed, despite its size and clout, Amazon clearly knows the power of a high street presence. The Christmas before last they ran a deal in the US which gave customers a 5% discount off Amazon.com if they used the retailer’s price check app while shopping in physical stores.
I hear some people asking, so what? If bookshops can’t compete then maybe they should go. Enders Analysis found that 48% of book purchasing decisions on Amazon were made before a customer visited the Amazon site. A recent report by Bowker Market Research found that a total of 45% of purchases—where the buyer hadn’t yet decided what to buy—were made through bricks and mortar bookshops.
Bookshops are the best source of discovery for books. Nothing compares with being able to touch and inspect before purchase. Actually, our bookshops are the only shop window that Amazon has! It needs us. If bookshops close, not only would local communities lose a cultural asset, but the demise of bricks and mortar bookshops would result in a loss of £450m in sales.
So if Amazon continues its relentless expansion, there will be—without question—fewer bookshops. And fewer publishers. And fewer agents. And after eliminating the competition—not only booksellers but publishers as well—Amazon would be in an extremely strong position to dictate terms. In such a dominant position, book prices could well go up, consumers would face less choice in supply, and communities would lose their local bookshops. In the long term, consumers will be harmed if we have a less diverse marketplace.
As Douglas McCabe from Enders Analysis said: “There is almost nothing that can be done to sustain the health of the network of bookshops that should be collectively considered too extravagant."
Tim Godfray will be speaking today (15yh April) at The Great Debate: Amazon—Friend or Foe, 11.30, Conference Centre 1 & 2.