Amazon Gets Demanding with Print-on-Demand Publishers

We often hold up Amazon as an example of one of the original Web 2.0 companies. Their survival amid the tech meltdown was driven largely by the value of the data they’d acquired through thousands of reader reviews, recommendations, and "people who bought this bought that" collaborative filtering. Amazon was a system that grew more valuable with more users: a network-effect-driven data lock-in.

That kind of lock-in is implicit: publishers were free to sell their books elsewhere, and readers were free to buy them elsewhere. Such implicit lock-in is characteristic of other Web 2.0 success stories, like eBay and craigslist. These sites relied on the value of the unique data/marketplace they were building to implicitly raise enormous barriers of entry. Not much fun if you’re a newspaper, but a boon for buyers and sellers.

But today’s news from Amazon about Print-on-Demand is the latest move from Amazon revealing a trend toward much more aggressive explicit lock-in attempts. (Not that it’s an entirely new strategy from the folks that brought you the "one-click" patent). Amazon has effectively told publishers that if they wish to sell POD books on Amazon, they must use Amazon as the POD printer. Small/self publishers are unsurprisingly feeling bullied.

Let’s look at four levels of lock-in at play here:

1. Data-driven lock-in. This is the core "Web 2.0" piece. Reviews and recommendations (and now data on S3 and EC2 usage). Again, this implicit, and in general is good for consumers.
2. Format lock-in. Now things start to get explicit. Much like Apple/iTunes, the Kindle is built around a proprietary data format, and if you want to sell your title on the Kindle, it has to be in their format. This one is bad for consumers (who can’t read their Kindle books on another device — oh, the irony!), but isn’t immediately much of a problem for publishers — at least until it leads to …
3. Pricing power lock-in. Just as Apple reset the price of music (Wal-Mart just got the memo is throwing their own weight around on that front), Amazon is resetting the price of a book. For customers who feel they shouldn’t have to pay as much for something that never needed to be printed or shipped, this makes sense. It’s good for consumers, but bad for publishers. Then again, the reason it’s bad for publishers means it may wind up bad for consumers too. When there are only three major retail outlets for a computer book publisher like O’Reilly, our publishing decisions are heavily influenced by three very powerful industry buyers. If they don’t want it in retail, we can either pass on publishing it, or try just going direct — but the smaller volumes resulting from going direct mean the price must be higher; consumers will either have less choice (because we don’t publish titles that those three buyers don’t want) or higher prices for some titles (since we have to make up for the reduced volume). The upshot here is that lower prices in the short term can have expensive long-term consequences.
4. Channel lock-in. This one raises the stakes considerably. There are implicit ways of working this one, as Amazon has done with their Prime program: if you want that free 2-day shipping, you gotta buy it from Amazon. But today’s news means that for publishers (and I use that term loosely) who want to sell a Print-on-Demand book in Amazon, Amazon is demanding they be the ones that print it. This is very bad for publishers, particularly because it’s really a 1-2 punch of pricing-power lock in as well. When a book intended for POD has only one route to customers, the company controlling that route is free to add whatever tolls it would like. But it’s also bad for consumers, who will soon have fewer places to find POD-only titles, and less choice is rarely a good thing.

Lock-in per se is almost always good for businesses, at least initially, and that’s certainly the case here. But rather than building or improving a system that’s built to implicitly add another brick into the barriers of entry every time someone uses it, Amazon is taking the shortcut of using market dominance to dictate favorable terms. Of course, Amazon is not a charity, and if Jeff & Co. believe this is the best way to create a sustainable competitive advantage, that’s their choice — but publishers will defensively respond to this by treating Amazon more like an adversary than a partner (eBay has some experience on that front), which in the long run isn’t good for anybody.

More coverage from around the web:

• Publishers Weekly: "’I feel like the flea between two giant elephants,’ said the head of one pod publisher about the upcoming battle between Lightning Source and BookSurge/Amazon."
• PersonaNonData: "As a practical matter, it is becoming harder (and may be financially impossible for many small POD publishers) to maintain separate relationships with Amazon and all the rest of the publishing community."
• LibaryThing: "Amazon’s move should concern all publishers, and indeed readers. Amazon has always had a lot of leverage, but they haven’t used it. That’s clearly changing."
• TeleRead: "I’m not saying that Amazon can achieve as complete a control of e-books as Rockefeller did of oil, but if you go by WritersWeekly’s account of the BookSurge move, Amazon comes across as a bully who can be predatory with both E and P." 
• VirtualBookWorm: "This move would also force publishers to increase the retail price of books, since Booksurge/Amazon is going to charge for the printing of the book AND take 48% of the net (although some have been told 48% of the retail)!"
• Booksquare: "While the publishing industry worries about Google (and I am still convinced that working with search engines to optimize access to your content is in the best interest of everyone) and watches while Barnes & Noble moves further into traditional publisher territory, Amazon is amassing what is essentially a secret army."

Note:This post originally appeared on the O’Reilly Tools of Change for Publishing blog.