A Trojan horse?
Steve Johnson
‘There is no physical analogue for what Amazon is becoming.’ Jeff Bezos, 2o02
published in The Author, summer 2011
When Amazon Inc. bought Simon Murdoch’s online bookshop
Bookpages in 1998, it was already claiming to be ‘The World’s
Largest Bookstore’. Thirteen years on, despite its remarkable
growth, it seems that the UK’s book industry retains the notion
that Amazon is just a bookseller; a benign partner in the struggle
to sell books. Google, by contrast, has been cast as the
publishers’ nemesis, with a seemingly cavalier approach to the
contents of books. Amazon escapes such judgement; escapes
thus far. But now, in 2011, Amazon is no partner. Amazon is a
technology monster ready to eat the book industry’s lunch.
It took Amazon four years from its foundation in 1994 to arrive
in the UK. That felt somewhat tardy at the time; it was the same
year that crusty old WH Smith bought the Internet Bookshop.
Nevertheless, Amazon quickly grew its position, not only by
acquiring an established business, but by creative marketing of
its compelling proposition. The convenience of ordering from a
vast catalogue of books from the comfort of your keyboard was a
significant innovation at the time, despite the fact that it was the
same vast catalogue any self-respecting bookseller would have
spinning on CD-ROM behind his counter.
Amazon’s focus from the very beginning was on customer
acquisition and retention, not profit. Famously the business
didn’t turn its first profit until 2001, after the dot.com bubble had
burst. Its pursuit of customers led to a number of key retailing
innovations, a total focus on service and a radical view on its role
in the supply chain. To understand its dominance today, keep
telling yourself that Amazon is a technology business, not a
bookseller. You need this single-mindedness to appreciate fully
how Amazon is now in a position to change the nature of this
industry.
Technology companies look to automation to make processes
as efficient as they possibly can be. In Amazon’s case, this means
that the minute you venture onto the web looking for something
Amazon sells, its systems are trying to point you at its website,
trying to help you find what you want, trying to make your life
easier when placing orders, trying to tempt you with more
relevant products, and trying to turn your smallest impulse into a
purchase decision. Not just when you venture onto its website,
but when you venture onto the web.
Amazon’s focus on systems is not unique to e-commerce, but
it is unique to booksellers. Amazon brought technology to
bookselling, not the other way around. Amazon’s competitors,
by contrast, are bookselling corporations trying to bring
bookselling to technology. Such competitors are naturally trying
to make money selling books but their technology investments
are designed to improve existing operations, not to innovate in a
new channel to market. Consequently, their efforts were largely
ineffective when it mattered most – when Amazon was building
market share. They are still streets behind and are unlikely, ever,
to catch up.
So what’s so special about Amazon’s technology systems?
Most of its customer-facing technology innovations were
designed to improve the conversion of browsing to sales.
Without the benefit of an experienced bookseller guiding a
purchase, Amazon introduced recommendation systems that
used the large-scale behavioural patterns of visits and purchases
on its site to suggest additional and alternative products to the
ones viewed. These recommendations are blunt and sometimes a
bit odd – being made with no consideration of the material in the
books themselves – but are also effective, responsible for over
15% of all Amazon’s sales. Then Amazon started working with
publishers to support a ‘Search Inside’ system that provided a
digital view of selected contents from books. The growth of this
combination of recommendations and content browsing sank
nail after nail into the coffin of offline book buying.
Alongside automatic product recommendation and browsing,
Amazon created systems that allowed visitors to publish reviews
on the book’s web page. Reviews have become a critical element
of Amazon’s sales story, as products with reviews have a much
higher sales-to-visit ratio than those without. Pushing the sales
rate even harder, Amazon invented the One-Click button. After a
successful purchase on the Amazon site – and with your consent
– Amazon will store your credit card details so it can offer you a
‘buy now with One-Click’ button on future visits; one click and
the purchase really is complete. In 2007 Amazon broke our
resistance to remote shopping even further: undermining the
psychological resistance to mail order postal charges, it bundled
a year’s worth of postage costs into a single £49 ‘Prime’ payment,
regardless of the number of orders placed. A Prime customer
subscribing to One-Click finds many purchase impulses
irresistible.
Customer-facing innovations have been instrumental in
Amazon’s growth and adoption by consumers, but there is also a
raft of activities going on behind the scenes that drives its
retailing effectiveness further. One of the most notable is its
approach to testing the effectiveness of its web page design using
the hundreds of millions of monthly visits to Amazon’s sites all
over the world. No one awards Amazon design prizes, but there is
no arguing with the quantitative analysis of users’ preferences.
Amazon’s site looks like it does because it works better that way.
Amazon’s retention of customers has been supported from the
beginning with a high level of customer service. In the early days,
consumer resistance to ordering online was understandable, but
Amazon invested heavily in its response to help requests and to
problems encountered by customers. This coupled with the high
levels of reliability they pursued in the delivery of orders, drove
loyalty at a time when many other online retailers were struggling
with fulfilment. Amazon’s generous policies about returns and
its responsiveness to customer service queries are the silent
background support that has kept customers loyal.
So far, so good; we have an innovative retailer building
processes and systems that improve effectiveness, with a focus
on customer satisfaction that is second to none; enough, you’d
think to grow a business successfully. Yes, but maybe not enough
to dominate this market. What else has Amazon done that makes
the difference?
Amazon’s biggest innovation was to ignore conventional retail
supply chain logic. Amazon surprises us every year with radical
additions to its approach, and they began when it decided to
encourage the rest of the web to sell its products for it by
inventing the Affiliate Scheme. Affiliates, or ‘Associates’ as
Amazon calls them, are invited to generate sales of Amazon’s
products from their own websites, enjoying a share of the
revenue for every sale. Over one million Amazon affiliates around
the world now generate an alleged 40% of Amazon’s sales, while
the clever way the links between the affiliates’ websites and
Amazon’s website is handled technically helps extend Amazon’s
reach all the way to the top of Google’s search results for many of
the products it sells.
The affiliation of websites has been followed by other key
initiatives, such as the Amazon Marketplace. Astonishingly, the
Marketplace is a place where other retailers can compete with
Amazon, selling the same products Amazon sells but, again,
Amazon will take a cut from every sale. So easy is setting up a
shop in the Marketplace that Amazon actively encourages
customers to resell their previous purchases through one. This
embrace of a second-hand market for books, culminating in its
acquisition of AbeBooks in 2008 and enabling Amazon to sell any
book ever published and thereby differentiating it further from
traditional booksellers – was a moment of pure genius that has
cemented Amazon as the dedicated book-buyers’ retailer of
choice.
Amazon’s acquisitions show some other interesting examples
of its view of its supply chain. When purchasing websites such as
the Internet Movie Database (IMDB.org) and Digital Photography
Review (dpreview.com), Amazon recognised that these
businesses needed to maintain independent, excellent content in
order to retain their loyal customers. Which is why both these
websites appear much as they did before Amazon acquired them,
adopting none of Amazon’s branding, while now being
supported by Amazon’s systems to sell products.
Since the early noughties, Amazon has also been exploiting the
scale of its technology systems and its warehousing and
operational excellence in the support of other retailers; Amazon
runs the e-commerce operations for a number of very large UK
brands, such as Marks & Spencer and Mothercare. Such is the
scale of these systems that Amazon also makes hundreds of
millions of dollars in revenue every year simply by renting out
spare technical capacity to other businesses (some of which was
in the news in April when it failed for two days and brought down
a few popular websites like Reddit.com and Quora.com).
Amazon is a technology business, remember.
As a technology business Amazon was naturally very interested
in the future, technology-enabled delivery of its foundation
product: the book. In 2005 Amazon acquired a print-on-demand
company and a DVD-on-demand distributor; combined, they
now represent Amazon’s self-publishing, on-demand arm,
CreateSpace. But in 2007 Amazon took its biggest punt on the
future of the book by building on its 2005 acquisition of an ebook
software company and by inventing an electronic book reader
called the Kindle.
Media sales – books, video and music – account for 40% of
Amazon’s total fourth quarter 2010 sales (50% in the UK), and
there are some interesting things happening within those sales
figures when it comes to the ‘book’ and Amazon’s punt on its
future. The story from Amazon is that ‘millions’ of Kindles are
now in readers’ hands and that for every 100 paperbacks Amazon
sells, it now sells 115 ebooks. If you weren’t already awake to
ebooks, this is your call.
With Amazon’s huge market share, remarkable technology
and operational systems, unprecedented consumer awareness
and customer loyalty, and highly regarded new technology
vehicle for the delivery of the ‘book’, who needs the publishing
industry? The evidence that Amazon doesn’t think it does any
more is plain to see in its recent (failed) attempt to secure the
exclusive ebook rights to Amanda Hocking’s paranormal
romance titles. Reports are that it was only Amazon’s insistence
on exclusivity that saw them lose the deal. Other reports of
authors and their agents, such as Ian McEwan, Steven Covey (of
the 7 Habits series) and Sonia Land (on behalf of Catherine
Cookson), seeking different rights arrangements for ebook
versions suggest things are changing, to the cost of the
traditional publisher. Covey has said that Amazon’s plans to
heavily promote his ebook versions were a large factor in his
decision to move the rights away from Simon & Schuster. At
present, most of these decisions seem predicated on traditional
publishers offering much poorer shares of ebook revenues, but
there are seeds of opportunity in them for Amazon that are very
hard to ignore.
Amazon’s interest in radicalising the supply chain of ebooks is
no less intense than it was for the delivery of printed books.
Traditional publishers have much to protect, but like the
traditional booksellers 15 years ago, they are now hopelessly out
of their depth as technology innovation is defining the future of
their industry. The skills that help produce great words for us to
read are a very small part of the job of a traditional publishing
business; with no physical object to manufacture and deliver, that
small expert part may well migrate to the likes of Amazon. There
is no reason a technology company cannot employ editorial
commissioning and acquisition expertise. When Amazon’s
nascent publishing empire emerges from behind the Kindle, as it
is starting to do, very few of the people making it happen will be
from traditional publishing businesses.
If you are in any doubt about this, just stop for a moment to
consider what the combined impact of Amazon’s Kindle,
Google’s ebookstore and Apple’s iBooks already is – and will
look like in a few years’ time. Particularly when you realise that
Apple and Google have already delivered millions of ebook
compatible devices into users’ hands; devices that can also run
Amazon’s Kindle software.
Voltaire said ‘What we find in books is like the fire in our
hearths. We fetch it from our neighbours, we kindle it at home,
we communicate it to others, and it becomes the property of all.’
It seems unlikely that the notion of starting a fire which burns
down the traditional publishing industry was lost on Amazon’s
CEO Jeff Bezos, when he named the Kindle.
Steve Johnston is the author of 50 Ways to Make Google Love Your
Website. He started as a bookseller, and has since been a
consultant to retailers building their e-commerce stores and
consumer businesses seeking to acquire customers through
search-engine optimisation. In 2005 he was at the London Book
Fair promoting a recommendation engine for fiction called
StoryCode – which subsequently earned him a spot on Dragons’
Den in 2006.