Thursday, June 8, 2017

Books: Amazon's Big Mac

Profit? That's for other products. Amazon gets more important benefits from selling books.

Inside an Amazon Books store: Kindles, Fires, backpacks,
headphones -- oh, hey, there's a couple of books, too.




Despite its dominance of the book business, Amazon probably derives little, if any, direct profit from selling books. But, as demonstrated by its new brick-and-mortar stores, Amazon derives plenty of value from books.

You can’t understand Amazon the book seller – and how to work with or compete against it – by thinking only about books.

For Amazon, books have always been a springboard to bigger and better things. The company was at best a breakeven venture in its early years as a books-only and then books-mostly retailer, and today it still doesn’t have to earn a cent of profit from books to be a successful bookseller.

Amazon.com, mid-1997. From Geeking with Greg.
Even when Amazon.com started up 22 years ago as an online bookstore, Jeff Bezos’ vision went far beyond books. Or profits: He reportedly didn’t plan to earn a profit for at least four years.

The focus was on growth – acquiring new customers, retaining them with an unmatched shopping experience, and then leveraging that customer base to expand into new types of products.

Books were the perfect way for Amazon to cuts its teeth as an online store. Perhaps no other consumer product offers more SKUs per dollar of sales. Even the largest physical bookstore in the world couldn’t possibly stock anywhere close to all of the books in print.

That left an opening for Amazon that the fledgling company could exploit only by mastering the art and science of marketing, selling, storing, and shipping hundreds of thousands of titles. The resulting lessons it learned and innovations it developed became the foundation for its rapid expansion into other types of merchandise.

Selling books shaped Amazon as much as Amazon reshaped how books are sold.

A gift from book publishers

Amazon recognized early on that each unique snowflake of a book came with a gift from its publisher: book metadata. That’s the information about each title (such as genre, author, description, unique ID number, and reviews) that traditionally enabled bookstores and libraries to decide what to buy and where to shelve it.

A 2006 Amazon promotion
Amazon took the radical (in the mid-1990s) step of putting all that metadata online, enabling it to dominate book-related searches.

Without Amazon having to spend a cent on marketing, consumers soon learned via the likes of Yahoo! and later Google where to find a title not stocked by their local bookstore. And they learned Amazon would show them similar books, using a recommendation engine fueled by book metadata and other customers' purchase history.

I’m told it took well over a decade for the traditional book-publishing industry to grasp that book metadata should be written for algorithms and consumers, not just for professional book buyers. By then, Amazon had long since leveraged what it learned about the data-based selling of printed books to dominate the e-book business – and to power its moves into selling everything from toasters to groceries.

A gateway drug

To make books a true gateway drug to the Amazon experience, it wasn’t enough just to stock every book publishers had to offer. Too much of the demand was for books that were no longer in print.

From Amazon's Japanese-language site
Amazon had to lure those used books out of myriad basements and offline stores by creating a marketplace that even non-techies could use to sell their wares. That was the beginning of what became a major competitive advantage for Amazon – its third-party sellers, which generate nearly half of the site’s sales.

Books were also the launching pad for Amazon’s entry into the gadget business nearly 10 years ago with the release of its first Kindle. That venture has traveled light-years from those humble, monochromatic beginnings to a new Alexa-enabled world filled with Fires and Echoes.

Revolution, then civil war

“Kindle” itself morphed from a device to an entire ebook-publishing ecosystem that brought both revolution and civil war to the book industry. The Kindle Revolution popularized the struggling ebook category and democratized publishing by enabling authors to bypass the traditional world of publishers and middlemen.

To those in the traditional book-publishing business, Amazon is the Evil Empire, hell-bent on destroying both book publishing companies and competing book sellers. On the other side of the civil war are myriad author-entrepreneurs hailing Amazon as the white knight who valiantly liberated publishing from snobby, self-appointed gatekeepers so that anyone can publish a book.

Neither side seems to understand Amazon, because they envision Amazon as being fundamentally a seller of books. It’s not. A 2014 New Yorker article indicated that Amazon gets at most 7% of its annual revenue from books.

Where’s Chapter 11?

Journalists and book publishers have been assuming for years that Amazon wanted to drive Barnes and Noble out of business. I don’t buy it. Why create a firestorm of legal entanglements and public-relations backlash for the entire company just to boost profits in a relatively slow-growth 7% of your business?

Amazon Books in Tigard, Oregon. By Steve Morgan
If Amazon really wanted to drive large bookstores out of business, don’t you think B&N would be in bankruptcy reorganization by now? And wouldn’t Amazon’s new brick-and-mortar stores at least match the 20,000-title selection of a small B&N instead of offering only 5,000 titles?

Besides, I don’t think book selling for Amazon is about profits. It’s about data and branding. As I wrote in Magazines in the Amazon, a recent Publishing Executive article, Amazon is “a master at using customers’ purchase and search data to determine what other products to pitch to them – and, increasingly, to sell ads to third parties.”

Fifty Shades of Data

More than almost any other purchases, the books someone buys and browses, whether print or ebook, provide Amazon valuable insights into what other products she might buy and which ads she might click. (Magazine purchases can be even more revealing, which I think is why Amazon is selling single-copy magazines in its new brick-and-mortar stores even though it doesn’t market them on its web site.)

In the ecommerce and programmatic advertising worlds, such information about people’s interests and purchase intent is gold.

Some book purchases are more revealing than others. I assume that people interested in travel guides are relatively likely to click on luggage ads, that buyers of how-to guides often need tools or other equipment as well, and that Fifty Shades of Grey readers have a fondness for certain adult toys.

And I’m sure that Amazon’s algorithms have found many other valuable correlations -- correlations that would never occur to the human brain -- between what people read and what else they’ll click or buy.

In other words, for Amazon, some books are more valuable than others. That may explain why Amazon seems to discount select books to seemingly unprofitable levels, allows third-party sellers to charge as little as 1 cent for used books, and encourages self-publishers to offer 99-cent and even free ebook editions.

When there are such strong incentives to know what books people are searching for and especially what they’re buying, profit on book sales naturally takes a back seat.

Big McAmazon

Obvious question: If Amazon makes little or no profit from selling books, why is it opening a chain of brick-and-mortar bookstores?

Answer: It’s not. Amazon Books is probably a bookstore in the same sense that McDonald’s is a hamburger restaurant. Burgers are of course the featured attraction at Mickey D’s, yet almost all the profits come from side items. But who’s going to eat at a fries-and-soft-drinks joint?

Early reports indicate that about half of the new Amazon Books stores are actually devoted to books. The rest of the space offers appliances, Amazon-branded gadgets, magazines, and other non-book merchandise and displays.

Amazon wants you to think of these places as bookstores – as places where interesting, curious people go to browse. The real money may be in getting those browsers to check out the Fires, Echoes, and Cuisinarts. But if people wanted to hang out at appliance stores the way they do at bookstores, Best Buy would be a major tourist attraction.

The hipsters' Walmart

In many ways, Amazon is the Sam Walton model translated to the digital age – massive selection, with low prices made possible by both scale and an incessant drive for efficiency. There’s significant overlap in the products offered by Amazon and Walmart. Yet why has Amazon escaped the downscale, hope-my-friends-don’t-find-out-I-shop-there image that plagues Walmart?

Books. Plenty of people buy from both Amazon and Walmart, but the public’s perception of the two brands are vastly different. Amazon’s beginnings as an online bookseller meant its clientele was – and still is -- assumed to be hip and educated. Because of Walmart’s start in small-town USA, it’s still the butt of many a comedian’s quip about the denizens of double-wides.

In marketing, perception is reality. That’s why Amazon still wants people to think of it as a bookseller and to ignore that 7% statistic.

If Amazon’s vision to be The Everything Store continues to mean a 20+% annual growth rate, books will constitute an ever-shrinking proportion of its sales. Nevertheless, books are likely to remain Amazon’s Big Mac – not very profitable but still central to its brand identity and its strategy.

Other Dead Tree articles about Amazon include:
 

Thursday, June 1, 2017

Mailers' Groups Blast NALC Deal

Three mailers' organizations blasted a labor deal with the National Association of Letter Carriers today as proof that the “spendthrift monopolist” U.S. Postal Service “cannot be counted on to control its costs or prices.”

“Rather than bringing compensation more in line with the private sector – as required by postal law – the tentative agreement with NALC worsens the problem,” said a joint statement from Postcom—The Association for Postal Commerce, MPA—The Association of Magazine Media, and the Alliance of Nonprofit Mailers.

In defending the current inflation-based price cap on most postal rates, the statement said, the coalition has presented expert testimony showing "that postal workers are paid nearly twice what the private sector pays for similar work."

“The NALC contract confirms that the Postal Service cannot be trusted to make the tough decisions needed to control its own costs.”

The collective bargaining agreement released May 12 would give career letter carriers three pay raises totaling 4.7% over the 40-month life of the contract in addition to seven cost-of-living adjustments. The three mailers groups indicated that the Postal Service didn’t get anything in return for the generous pay package, such as the ability to save money by filling openings with more low-paid non-career employees.

Keeping the cap on CCAs
“Instead of continuing a shift to lower-cost employees, the agreement converts many City Carrier Assistants (“CCAs”) to career status and preserves existing narrow limits on the total number of CCAs that the Postal Service may employ,” the statement said.

“The NALC deal is only one of a recent series of collective bargaining agreements that widen the postal employee compensation premium rather than narrowing it.” The NALC says the contract would cover 213,000 active employees if the union’s members ratify it.

“It is commendable that USPS provides stable, middle-class employment for a large number of employees, but substantially over-compensating them, and paying for this with above-inflation rate increases for mailers, is inappropriate and jeopardizes the whole enterprise. There are proven ways to rein in excess labor costs without disrupting the lives of existing employees,” the coalition's statement said.

Postal officials are seeking legislative relief from the 10-year-old law that keeps rate increases proportional to changes in the Consumer Price Index. But the coalition, along with other mailers, argues that the cap has forced more financial discipline on the USPS and prevented it from imposing large rate increases that would hurt both mailers and the Postal Service itself.

Related articles:


Thursday, April 13, 2017

Why the Flats Sequencing System Should Be Scrapped

A 2011 presentation explained how FSS would
streamline the handling of flat mail. Oops!



What many have long suspected has now been confirmed: The U.S. Postal Service’s Flats Sequencing System is a disastrous failure that cannot be fixed.

The FSS is adding so much to the costs of handling magazines, catalogs, and other flat mail that no amount of machinery tweaks, Lean Six Sigma projects, or "Tiger Teams" can ever make it right.

“When all processing and delivery costs are included, an average Periodicals flat addressed to an FSS zone costs over 10.5 cents more than if addressed to a non-FSS zone,” postal expert Halstein Stralberg wrote recently. Assuming the same 40% cost differential applies as well to flat-shaped Standard Mail, such as catalogs and retailer flyers, Stralberg’s analysis indicates that FSS is adding several hundred million dollars annually to the Postal Service’s costs.

And that doesn’t even count the $1.3 billion spent on purchasing the huge machines or the additional investments in building modifications, training, and other start-up costs.

“Because of the large investment in the FSS and the great hopes that were attached to them, USPS managers appear still unwilling to admit that the program is a failure,” wrote Stralberg, a longtime consultant on postal costing and prices to Time Inc.
 
Another utopian vision from 2011
Based partly on Stralberg’s analysis, three mailer organizations recently called for the USPS to “(1) retire the FSS machines, (2) allow mailers of flat-shaped mail to prepare their mail for (and qualify for) Carrier Route and other discounts in all zones; and (3) make Carrier Route and other worksharing discounts for flats deep enough to cover 100 percent of the costs avoided by the worksharing.”

“These reforms alone should encourage enough co-mailing to enable Periodicals Mail and flat-shaped Marketing [aka Standard] Mail to cover all, or nearly all, of their attributable costs,” they told the Postal Regulatory Commission.

The three organizations are MPA-The Association of Magazine Media, the Association for Postal Commerce (aka PostCom), and the Alliance of Nonprofit Mailers.They submitted their comments and Stralberg’s analysis to the PRC to counter the USPS’s proposal to abolish the inflation-based cap on Periodicals postage rates, as explained in my recent Publishing Executive article, Postal Rate Fight Continues as Publishers Battle USPS "Stupidity Tax".

A 2003 Stralberg presentation correctly predicted
FSS mail would cost more than carrier-route flats.
Stralberg’s predictions in 2003 about why FSS would not reduce flats-processing costs have turned out to have nearly prophetic accuracy, except the program turned out even worse than he expected.

For example, he contradicted postal officials who claimed that their costs for FSS-sorted pieces would be lower than for pieces in carrier-route bundles. (Postal officials now acknowledge that carrier-route mail is cheaper to deliver than FSS mail.)

But Stralberg never predicted that the FSS cost per Periodicals piece would be nearly double that of carrier-route pieces, as his recent analysis shows.

Here’s the MPA/PostCom/ANM summary of why the Postal Service’s assumptions about FSS turned out to be so fatally flawed:

1) “The Postal Service’s planners greatly underestimated the extent to which mailers would sort flats to the carrier route level.” About half of flat-mail copies were in efficient carrier-route bundles when FSS was first conceived more than a decade ago. Because of co-mailing and similar mail-consolidation efforts by printers, the proportion is now higher than 70% in non-FSS zones. (When a system nearly doubles the cost of handling 70% of the mail, it cannot possibly save enough on the other 30% to reach breakeven.)

The view from 2010, before reality intruded.
2) “The Postal Service overstated the costs of manual sequencing of carrier route flats by carriers, and thereby overestimated the costs saved by diverting the sequencing work to the FSS.” Stralberg called out this flawed assumption in a 2003 presentation to mailers and postal officials.

3) “The Postal Service, erroneously assuming that practically all flats within an FSS zone would be placed in delivery sequence by the FSS, removed the vertical flats cases carriers had used for manual sequencing.” This triumph of optimism over reality adds to the amount of time carriers need to prepare flat mail for delivery. Barely half of the flats in FSS ZIP codes are presented to carriers in delivery sequence.

4) “The Postal Service’s planners incorrectly assumed that nearly all flats would be machinable on the FSS.” Stralberg warned in 2003 that flat mail unsuited for the Postal Service’s existing machines probably couldn’t be handled on the FSS, meaning that “non-machinable flats will cost more” under FSS.

5) “The Postal Service’s predictions that practical concerns about the FSS machines themselves, including their footprint, cost, and complexity, would be solved during the design and implementation of the system proved incorrect.” That’s nearly a direct quote from Michael Plunkett, a USPS pricing manager when FSS was being developed and now PostCom’s President and CEO. He also told the PRC, “From the outset of the FSS project there was significant skepticism that the proposed technology would achieve the intended results and concern that substantial capital was being invested in a system that would unnecessarily complicate a network that already needed to be rationalized.”

6) “Finally, because flats mail volume was lower than the Postal Service had expected, it added many outlying zones to the territory covered by each FSS machine, causing substantial service degradation.” Mailers warned postal officials more than a decade ago that digital disruption was reducing the volume of printed catalogs and magazines, but the Postal Service persisted with an FSS plan that assumed gradually increasing volumes. Flat mail peaked in 2005 and has dropped about 40% since then.

Related articles:

Wednesday, March 22, 2017

Print Geek Alert!: A 360-Degree Video of The New York Times Being Printed

The New York Times published a two-minute 360-degree video today of its own printing plant in action.

The video doesn't try to be comprehensive, instead focusing on arresting shots that show the scale and sophistication of the operation -- such as a robotic crane transporting a massive roll of newsprint from storage and a web of already-printed paper picking up color as it zips through the press.

Plus what looks like an amusement-park ride for newspapers, which transports the printed product from the pressroom, then automatically bundles, palletizes, shrink-wraps, and loads into on to a delivery truck.

"The presses print 300,000 to 800,000 papers daily," the video tells us. "Most nights, the presses start before 11 p.m. and finish printing all editions before 3 a.m."

I've been in a lot of pressrooms, and I've never seen as much automation as The Times has.

Nor have I seen working press operators who weren't sporting earmuff-style hearing protection. I don't think The Times employees were even wearing the little foam in-ear inserts.  Perhaps the press is unusually quiet, or perhaps The Times' occupational-safety rules are more lax than those of magazine printers.