Due Diligence
I think with one more post on Amazon and Macmillan I can drive away the blog’s very last reader, leaving me more free time for crystal meth and masturbation.
I’m comfortable with “who gets the windfall?” as the essential question in the ebook price wars. (See previous post.) But I’m still trying to get a better handle on Macmillan’s perspective. Where the analysis stands as of the last post is, “Macmillan wants a good chunk of the windfall because why wouldn’t they?”
I’m wondering if I’m missing something because my analysis has been too P&L-focused, while scanting the balance-sheet side. As one of my accounting mentors was fond of saying, “Beat up the balance sheet, and the P&L must be right!”
Happily for Loyal Readers, I can’t and won’t attempt a lengthy publishing-house balance-sheet analysis. Instead, I’ll ponder a few possible clues in the previously linked Cheerful Skeptic column.
Part of a company’s book value is the liquidation value of its physical assets – how much could you get selling bits off for scrap? On the balance sheet, the warehouse and the inventory show a value. Cheerful Skeptic cautions us that that value is often illusory. But until the auditors come along to insist on write-downs, there it is on the books.
From a P&L perspective, ebooks mean (eventually) a huge savings in incremental expense on inventory and warehousing. It may be – I don’t know – that the balance-sheet hit from the loss of inventory and warehousing is big enough to scare the executives. In that case, they’ll be needing a better income model to compensate.
Or, maybe not.
UPDATE: In the end, it was all about control over pricing.
Comment by Thoreau —
January 31, 2010 @ 1:56 pm
I think with one more post on Amazon and Macmillan I can drive away the blog’s very last reader, leaving me more free time for crystal meth and masturbation.
Dude, I’m out. Have fun!
Comment by Sherri —
January 31, 2010 @ 5:19 pm
Thanks for all the sane posts on the Amazon/Macmillan power struggle. There’s obviously a lot of passion about which company is evil, but I see it as two corporations fighting over what the new world will look like.
One thing I don’t understand about the 10% production cost figure: that’s the figure for publishers in their current configurations. How much time/money can be saved all along the chain if the entire process is just bits knowing the end result will be just bits? The cost of producing both music and movies has declined dramatically as more and more of it has become digital; where are the likely equivalents in book production?
Another thing I don’t understand is all the people who seem to believe that Amazon is concerned most of all with Kindle sales. I don’t think Amazon cares about how many Kindles it sells. I think Amazon cares a lot about how many ebooks it sells. If they cared about the number of Kindles sold, why would they make free readers for Kindle books available on the iPod, PC, Mac, Blackberry, etc.?
Something I didn’t quite realize until I moved up here near Amazon is that Amazon is not a tech company, it’s a Retail company with a capital R. They’re willing to live with much lower profit margins than tech companies would ever consider.
Comment by Mike Kozlowski —
January 31, 2010 @ 8:24 pm
If they cared about the number of Kindles sold, why would they make free readers for Kindle books available on the iPod, PC, Mac, Blackberry, etc.?
I actually agree with you entirely that they care about e-books and not necessarily e-devices; but it could well be that they believe they’ll sell more Kindles if they can get the content out there on other devices. That, e.g., someone might not want to drop $300 on a Kindle, but might think it’s worth $10 to get The Lost Symbol on their iPhone to read — and then after reading it for a bit, they’ll be sold on e-books but want a dedicated reader, and hey, Kindle’s already compatible with the books they’ve bought…
Comment by Rafe —
January 31, 2010 @ 10:00 pm
I think the battle is as much about who gets to call the shots on pricing in general as it is about how this pie is split up.
Comment by Jim Henley —
January 31, 2010 @ 10:06 pm
Rafe, yeah. When I finally tumbled to that I added it as a long update to the previous post.
Meanwhile, Amazon caved as of this evening.
Comment by Jim Henley —
January 31, 2010 @ 10:07 pm
Oh. Which I learned from YOUR BLOG, I now realize.
Comment by Jim Henley —
January 31, 2010 @ 10:32 pm
Hi Sherri: I don’t know the full savings publishers and etailers can realize with ebooks. I’m sure the warehousing infrastructure is substantial, but I have no idea what the incremental costs of getting the inventory from one place to the other are. I don’t think it can be more than a buck a book, but that’s an absolute stab in the dark.
It’s an interesting question about the Kindle apps. I suspect the answer is that, despite what Charlie Stross tells us, Amazon is NOT a monopoly, and they figure they have to be open to different platforms for the Kindle format to stay relevant.
Comment by Sherri —
February 1, 2010 @ 6:25 pm
I think too many people are trying to draw parallels between Apple/iPod/iTunes and Amazone/Kindle. Apple is a computer company. Apple wants to sell computers. They don’t care so much about selling music, except as it gets people to buy their iPods. So they really don’t want music bought from iTunes to play on any other device. Sure, it has to on your computer, because they had to have something to sync the iPod with, but nothing else. You won’t see an iTunes player on a Blackberry.
Amazon is a retail company. They want to sell books. Ebooks are great to sell, because they don’t have to stock inventory. They didn’t like the devices available at the time, so they bought a small company in Silicon Valley to produce their own device. They aggressively worked to create a market for ebooks, losing money on bestsellers, not so much to sell more Kindles, but to increase the popularity of ebooks. They made their ebooks readable on other devices, because what they really want to sell are ebooks, and lots of them. Sure, they want to sell their ebooks, just like Sony wants to sell theirs, and Apple wants to sell theirs, but the only people who don’t want DRM on ebooks are consumers, not sellers, and certainly not publishers.
So, here’s where I think the motivations are: Publishers want to sell hardbacks, because the margins are higher, and ebooks will force a radically different structure on them. Amazon wants to sell ebooks. Apple wants to sell iPads. Barnes and Noble doesn’t want Amazon to wipe them out. As for Sony, it’s not been clear for some time what Sony wants in any area…