Holt Uncensored

Holt Uncensored

 

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  #239
by Pat Holt

Friday, May 25, 2001

 





SO MANY LETTERS WE'VE MADE THEM INTO A COLUMN!

1) ABOUT THAT AMAZON MODEL: A BOL.COM EXECUTIVE COMMENTS
2) FOREWORD MAGAZINE'S BIG IDEA
3) MORE LETTERS

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ABOUT THAT AMAZON MODEL: A BOL.COM EXECUTIVE COMMENTS

Thanks to the many readers who commented on Tuesday's column about Amazon.com's show-offy (my term) "march toward profitability" in front of a New York Times reporter whom Jeff Bezos had invited to Seattle to observe three days of seemingly turbulent meetings.

Martin Brooks of Bertelsmann's European- and Asian-based Internet retailer, BOL.com, wrote in eloquent detail about his reaction and parallels to his own company, and I found myself asking questions that have been simmering for years. Our communication got so extensive that I decided to make it the first feature in an already lengthy column of letters. Here's how it went:

Dear Holt Uncensored:

I disagree in part with your assessment of the New York Times article about Amazon. While I have no doubt that the meetings attended by the NY Times correspondent were "controlled" (who behaves normally when there is a "guest" in the room?), the strategies supposedly discussed are exactly what online retailers deal with and debate every single day.

Amazon's approach was to build a very capital-intensive infrastructure to support full inventory with the aim of providing the highest level of customer service -- being able to ship most titles same day. However, since distributors such as Ingram and Baker & Taylor guarantee to fulfill drop ship orders the same day if received before mid-day and ship everything else in stock by the following day, this approach never made sense to me, especially considering the deep inventory levels the major U.S. distributors carry.

The issue for e-commerce retailers like Amazon is how much business would be lost by having to change the stated availability from 24 hours to 48 hours for products it would no longer inventory, which is exactly what they were discussing. I suspect [the answer is] not very much, except in the cases where like Barnes & Noble (or the sites of independent booksellers) can state a shorter availability time.

While buying direct from a publisher saves about 6%, this difference is completely eroded by the costs of warehousing and fulfillment. If an e-commerce site is both purchasing on a customer order basis from a distributor and fulfilling themselves, not only is there additional cost, there is additional delay in getting the book to the customer because in the time it takes the distributor to ship the title to the retailer's warehouse, it could have been shipped directly to the customer.

Although BOL.com operates only in Europe and Asia, we have wrestled with exactly the same issues over the past three years and, depending upon particular circumstances in each of our operating countries and the ever-changing environment, sometimes operate in drop-ship mode and sometimes in warehouse inventory mode. And we have had to constantly balance these approaches with the impact on the delivery cycle and service to our customers.

Those independent booksellers (and others) who pray for the demise of sites like Amazon should hope that Amazon doesn't elect to use distributors such as Ingram for drop-shipment. In my opinion, it's a much smarter way to operate, especially for obscure and low-selling titles. But independent booksellers already know that.

Martin Brooks
Director, FE Development & Operations
Bol.com

Holt responds: I wonder if you would comment on another question about another theme in the NYT article and in Amazon's "march to profitability": This is the "single box" theory, which (as you I'm sure know more than most) is the attempt to collect and send orders of diverse products in one shipment, instead of bearing the costs of many different shipments. This was why Amazon created those hugely expensive distribution centers in the first place. So my question is, if the move to drop-shipping by distributors is pursued, doesn't that make the distribution centers obsolete? And doesn't that reverse the entire premise Amazon.com has tried to convey, that you can get everything you need very quickly from that one place because it (Amazon) has got it all?

Martin Brooks replies: I think Amazon created those distribution centers for two reasons: both the "single box" theory and also, as per the NY Times article and my response, to insure the quickest delivery time to the customer.

When BOL.com was originally going to launch in the U.S., our plan was to use a mix of drop-shippers, industry services such as Pubnet and our own warehouses. I think this is the best of both worlds because it would have enabled us to ship bestsellers quickly and ship mixed product types in a single box, but keep the warehouse operations (and related capital costs) small by using drop shippers where it made sense. 

Basically (and simplified) the logic worked like this:

We checked our own inventory first, the idea being that we would stock large bestsellers.

If not, if our preferred distributor "A" had the products in stock and could ship the entire order, they drop shipped it.

Or, if our secondary distributor "B" had the products in stock and could ship the entire order, they drop shipped it.

Else, if a mix of "A" and "B" could complete the order, we had them ship to our warehouse and we collated the order.

If neither could, the algorithms were going to try Pubnet, direct to publisher, etc. Obviously, all of those sources would ship to our warehouse.

There were other algorithms that took into account such factors as location of either the distributor's or our warehouses, shipping time to the customer, shipping cost, etc.

While we still needed warehouses for this scenario, they could be relatively small in size. The issue is what percentage of orders will contain mixed product types.

In Europe and Asia, the circumstances vary by country. Among the factors that had to be considered were that in Europe, margins are much smaller, in spite of the fact that retailers cannot discount books in most countries. Drop ship charges are much higher. In spite of that, we still thought it best to use drop shippers in some countries and our warehouses in others. You should also be pleased to note that in some countries, for some books, we actually source from local booksellers.

So, to answer your question, yes, moving to drop shippers does imply that Amazon is moving away from their original model, but I happen to think it's the only model that makes sense. It doesn't necessarily mean that a customer will get products any later because Ingram (or Baker & Taylor) will ship orders received by 1 p.m. or so on the same day. In the case where Amazon has to order the product anyway from Ingram (or B&T), because it's not already in inventory, the customer could actually get the product faster because it would take at least one day to get the product into Amazon's warehouse in the first place.

For mixed orders, there are three choices: Send the products to an Amazon warehouse for collation into a single shipment; ship separately and charge the customer; or ship separately and don't charge the customer. But I have a feeling that the costs saved by the potential to shutter some Amazon warehouses and reducing staff will more than make up for the extra shipping costs if Amazon decides to absorb the costs on multiple shipments. At its peak, Amazon is reputed to have had close to 8000 employees and a very large portion of these (although many are hourly workers) are in the warehouse operations.

Frankly, I think Amazon's original strategy to build those warehouses was based on a lack of understanding of the U.S. book business combined with the idea that cash was unlimited due to the early stock price, as well as egos that wanted to control the entire process.

Holt: I wonder if Amazon.com will try to unload those distribution centers one day, or if they'll be considered white elephants? The question on everyone's mind is whether the company can "march to profitability" before running out of cash.

Brooks: Frankly, I'm not sure that any large site selling products such as books and music online can ever be profitable The infrastructure and software licensing costs erode all margin. A typical e-commerce site must include a large variety of editorial, database, commerce, search engine, personalization and server tools and associated licenses. Most licenses are based either on the number of customers served or on the number of processors needed. The more you need to scale, the higher the license fees.

As just one small example, I recently got a call from a search engine company who claimed that their product would increase conversion rates. Obviously, I was very interested and pleasantly surprised that an IT company would be speaking in such terms rather than simply describing the functions and search operators of the product. The cost? Over $200,000 per processor. In just one of our smaller countries, we use 6 processors for search functionality. So even if we could operate at a 20% net margin, we would have to sell over $6 million worth of product just to pay for the search engine. And that doesn't include any of the other licenses, infrastructure or development costs.

I think one of the only models that has worked so far is e-Bay. Although they still have the scaling and much of the same infrastructure costs as a traditional e-commerce site, they don't have to handle or ship any physical products and their customers supply all of the content. And for those customers who elect to pay via Billpoint, they also collect credit card fees.

Another e-commerce model that could work is one that addresses a small, but highly specialized audience (like a sci-tech bookstore) where the conversion rate would be extremely high. The relatively small audience assures that the site doesn't have to scale, but the high conversion rate would assure a practical sales level. If e-commerce vendors produce lower cost, off-the-shelf web development and database tools, a smaller site that addresses a particular audience or locale actually has a better chance of being profitable than a larger one.

Holt: Just to make sure, would you state exactly what you mean by "conversion rate?"

Brooks: Conversion rate is the percentage of people who come to the site who actually purchase something. Sites have to scale in order to handle all of the people who come to the site (even if they don't place anything in the shopping cart). My point is that a specialist site would attract fewer overall people to the site, but a higher conversion rate, which reduces overall costs.

Holt: When you say ---

If e-commerce vendors produce lower-cost, off-the-shelf web development and database tools, a smaller site that addresses a particular audience or locale actually has a better chance of being profitable than a larger one.

--do you think of independent booksellers (small and moderate sized, not Powell's), for example? Many are going online relatively inexpensively by sharing extensive databases through such companies as BookSense (part of ABA) and BookSite (independent), or through their own webmasters. Granted they're "clicks and bricks" and they see Internet sales first as a means to compete with Amazon et al, but do you think they qualify as the kind of "niche" retailers who one day can make the online component profitable?

Brooks: I'm not aware of the specific economics of BookSense, but in general, yes. If software vendors develop web development and server packages at relatively low cost, much like vendors did during the "desktop publishing" revolution, I believe that specialist independent booksellers can be profitable on the web - especially those that concentrate on a deep range of titles in specific areas (SciTech, Mysteries, etc.) and also do strategic marketing to their customers.

Making recommendations to the customer is a large part of any e-commerce web site, but independent booksellers have the advantage of their own expertise combined with data mining tools to market to the best effect. Up until now, low cost tools haven't been available to make this practical, but I think it's inevitable that we'll see such tools developed and marketed over the next few years.

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FOREWORD MAGAZINE'S BIG IDEA

As a former book review editor, I thought I was too close to the idea, lately advanced from ForeWord magazine, about "paid reviews." But the following exchange makes it clear that a forum about is needed. I'll be interviewing the ForeWord staff at BEA, and meanwhile qm grateful to these readers for introducing the pros and cons:


Dear Holt Uncensored:

I don't know if you've caught wind of this new scheme to charge publishers for book reviews. Grant Burns' writes about it in the new installment of his "Uncle Frank's Diary."

The staff at ForeWordreviews.com think that booksellers and librarians are screaming for MORE reviews to be available for the "thousands" of new books published each month. So ForeWord is going to charge publishers $295 for a "review" and the review will then be sold to Ingram, B&T, etc. The publisher can also use the "review" in their marketing efforts.

It just makes me want to pound my head against the desk to think about how many new, naive self-publishers will shell out $295 thinking that booksellers and librarians and readers will actually read, trust or use these paid-for-"reviews"...

Casey Hill

P.S. Uncle Frank's column is at:
www.newpages.com/Weblog/UncleFrank/UncleFranksDiaryNumber03.htm

Here are a few excerpts from Uncle Frank's Diary, Toasters and Books:

" 'Would you buy a toaster because of a glowing review of the appliance paid for by the toaster's maker? Not very damned likely, eh? Me, either. Be warned: There's a parallel plan afoot in the book reviewing world, and one wonders whether the plain good sense that most breakfast fans exhibit in buying a new toaster will hold in readers' book buying plans under this scheme...

"The ForeWord plan is a hair-raising departure from traditional book reviewing. What reader, what librarian, would concede a speck of credibility to a review service whose reviews have been paid for by the publishers and authors whose products are being reviewed? ...

"The vested self interest of ForeWordreviews.com in producing positive reviews of the books at issue will be so inescapable that no one thinking critically would trust those reviews. Reviewers who appear to take publishers' money to review books will surely find themselves objects of suspicion. Not only will their stature as honest book reviewers suffer; their trustworthiness as writers of anything will come into question...

"As strongly as I urge reviewers to shun this lure, and encourage librarians to disdain reviews-for-hire, I question publishers willing to sink their promotion budgets into the pay-for-review regime. Yes, they'll fool some of the people a lot of the time, but they'll do it at the expense of their credibility, their integrity, and their public image among knowledgeable readers as upholders of certain valuable traditions in publishing."

"There is another excellent analysis of the ForeWord pay-for-'review' plan online at Mobylives at: www.mobylives.com/ForeWords_vanity.html."

Holt: I sent Casey Hill's letter to Eugene Schwartz, the magazine's editor-at-large, for comment. Here's his reply:

Our new program is really a separate partnership called ForeWordReviews.com. ForeWord Magazine will continue to provide the conventional no-charge reviews it has always done.

Inasmuch as we can only do fifty reviews an issue -- we - and the rest of the reviewing trade -- have not been able to afford to provide a medium for credible reviews of the increasing number of new WORTHY titles coming into the marketplace as a result of the expanded output made possible by electronic and print on demand distribution.

ForewordReviews.com is our way of overcoming the barrier of having to create a revenue stream in order to provide a service. Budgets for space advertising for targeted or limited run titles usually don't exist and won't cut it for publishers or reviewing publications. Every review that comes out of FWr will be a product of the same kind of quality control and constructive evaluation, as has been the case with the magazine and no one is buying a "good review."

Reviews, warts and all, will be signed by the reviewer and automatically posted to the major reviewing media.

I understand and respect the traditions and values reflected in your concerns and others. Our feeling was that we had to break out of the box they also place us in, and demonstrate that in the new era of increasing empowerment for independent voices, something needed to be done to give them a place at the reviewing table. The program has generated controversy - but we believe it will rest on the integrity of the process and the value to booksellers,librarians and consumers of a credible evaluation. We hope we'll have the opportunity to prove its value.

For immediate purposes you'll find more info on our web site, ForeWordReviews.com.

Eugene G. Schwartz
ForeWord Magazine

Holt: I asked Casey Hill if, given the shrinking book review pages in newspapers across the land, ForeWord's idea might at least open the door to something that would give books more critical exposure.

Casey Hill replies:

I agree with your note that book review pages are shrinking due to lack of ad support from publishers.

ForeWord Magazine is, however, trying to position itself alongside Publishers Weekly and Library Journal. They often place themselves in that company. I think they should have redoubled their efforts to get the ad support from indie publishers that they weren't getting, and in that way increased the space for more book reviews. They want to be a respected trade magazine. Just imagine if PW or LJ started such a sideline business as selling book "reviews."

They always use this line about "50 reviews a month is not enough"... Well, their guidelines explain that they take all the books that come in and choose those most worthy of a review. I'm not one to think that every book published should be reviewed. And certainly now saying that ANY book published can be reviewed if only the publisher will pay $295 per book is an incredible thought. Who will have the time to sift through thousands of reviews, many of books with only marginal potential readership? Yes, newspapers have cut back, but as Grant points out in Uncle Frank, librarians and booksellers have a plentiful supply of reviews as is.

I personally would like to see more indie review pubs like Rain Taxi, American Book Review and Counterpoise get read by more booksellers and librarians, but they do exist, they do review a lot of fine books from small presses, and the do NOT charge for a book review.

Maybe the main purpose of this business model is for the publisher to take that "review" and paste it into a press release or on the back of their book. Or for ForeWord to sell it to Ingram or Baker & Taylor for their database. How would you feel if a review by Pat Holt was printed along with a review that was paid for by the publisher -- and there would be NO distinction between a legitimate review such as yours and essentially a PR piece paid for by the publisher?

It will not be long before any blurb that is from ForeWord will be suspect. I'm quite sure that they editors will tarnish any reputation they've built with the magazine. Do you think booksellers and librarians will even think in the same breath: PW, LJ and FW?

Yes, of course, if they called it paid advertising or a paid-for press release or marketing material... ANYTHING but a book review. I have no problem with that idea.

I guess the real "acid test" for me would be to ask you if you would ever write a book review that was paid for? Or would you put any trust in anyone who did? Or, if this scheme actually does start making money for ForeWord, and you find it acceptable... would you think about starting PatHoltReviews.com?

Holt replies: Well,I have to smile back at you because the reality for any book review editor is that the real estate on which reviews reside is essentially "bought and paid for" by publishers. They may understand the importance of editorial freedom, and they do, but as money for ads increasingly goes to fewer and fewer big-budget titles, we all find ourselves wondering if there might another way. More to come about this after BEA.

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MORE LETTERS


Dear Holt Uncensored:

I think you missed the single most remarkable point in the Sunday NYT piece on Amazon. Leave aside all the hype -- as you note, that's all pretty predictable, if not staged.

Here's what's striking:

"Amazon has worked hard for years to convince publishers ... to sell goods to it directly, rather than forcing it to pay higher prices from wholesalers.

"Now Ms. Blake [who, you'll recall, is herself a publishing industry veteran] tells her group that Amazon can actually do better by buying many of its books from distributors, which offer quicker turnaround and allow Amazon to keep less inventory. Distributors are also less prone to making the kinds of shipping errors that wind up costing Amazon much money to sort out, she said."

Think about this for a minute. Small booksellers like to think that publishers victimize us with all sorts of ridiculous problems and demands. It's startling to see that big customers have exactly the same problems.

More importantly, consider what this says about publishing. Amazon finds the cost of these errors too much to bear -- so much so that they're willing to buy from Ingram at a lower discount than they get from publishers.

What about the publishing side of this? You know that fixing these errors has to be costing them too. And that publishers can't be happy about giving up those discount points by having to sell to Amazon through a distributor rather than selling direct. This has so many possible implications that it's mind-boggling -- for example, what titles that are considered unprofitable and not worth publishing now would become economically viable if publishers could get back those discount points?

When we consider what's going wrong in publishing, we tend to focus far too much on what's happening at the top -- megamergers, the bestseller mentality, etc. But I think the real problem is at the most basic level of the business, and in the most fundamental elements of customer relations. Publishers foul up so often and at such great cost that even one of their largest customers doesn't want to deal with them. This business is about taking and filling orders, about packing and shipping boxes of books -- and this is where publishers are failing.

Jim Huang, Director
Independent Mystery Booksellers Association


Dear Holt Uncensored:

You wrote that Amazon has been told to:

Concentrate on selling the more commercial high-turnover titles and cut back on the more literary slow movers.

No, Amazon.com doesn't do handselling. The correct statement would be "on stocking the more ..." not selling. They still sell whatever people want.

I wrote a more detailed critique of the Hansell article at . He was really suckered in by them, not just in the meetings he was allowed to attend, but by writing an article that focused on a few events (however staged or not) instead of looking at the context of things discussed in those meetings.

Glenn Fleishman


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