Amazon Proves Software Isn't Taking Over
The opening of Amazon.com's first brick-and-mortar store on Tuesday proves that software is not really "eating the world," as venture capitalist Marc Andreessen put it in 2011.
In his widely noted Wall Street Journal column about predatory software, Andreessen wrote:
Today, the world's largest bookseller, Amazon, is a software company -- its core capability is its amazing software engine for selling virtually everything online, no retail stores necessary. On top of that, while Borders was thrashing in the throes of impending bankruptcy, Amazon rearranged its web site to promote its Kindle digital books over physical books for the first time. Now even the books themselves are software.
Retail stores are still not strictly necessary, and yet Amazon now has one in Seattle. That's because the book market has proved less one-dimensional than publishers and sellers feared in 2010 and 2011.
In September, The New York Times revealed that the Association of American Publishers had registered a 10 percent decrease in digital book sales in the first five months of the year and that the number of independent bookstores was actually growing. This isn't to say that e-books are doomed: It's just that, in this process of disintermediation, publishers are losing some of the market to self-published authors on Amazon and elsewhere. Book publishers have plenty of resources for price competition (e-books cost next to nothing to produce) but they aren't using them because they're making money anyway.
Few book publishers are publicly listed, but the ones that are post solid results. John Wiley & Sons,which publishes "For Dummies" books among others, has an 11 percent net profit margin. Companies such as France's Lagardere, which includes major book publisher Hachette, or Scholastic, the U.S. publisher of the Harry Potter novels, make do with 2 percent margins. That's more than Amazon has been able to boast.
A lot of that money is made selling paper books. In 2010 and 2011, at the height of the e-book scare, I worked for Russia's biggest book publisher, Eksmo, and we were seriously worried that software was going to eat our business. Now, Yevgeni Kapyev, who runs Eksmo's non-fiction division, tells me that paper book sales are healthier than ever. His division's sales are up 20 percent year-on-year in the most recent quarter, and that growth is driven by categories that barely existed before, such as adult coloring books.
A hipster oddity? Sure, but millennials are an important force in the book market. They are feeding the growth of independent bookstores: They like the ambience, the socialization, the book-crazy salespeople who are good at recommending exactly what the customer is looking for. Even some big retailers are getting better at leveraging these advantages. In Berlin, the huge, centrally located Dussmann "culture store," which sells books and CDs, is an institution, and despite the seemingly obsolete nature of these wares, its sales reached 35 million euros last year, unchanged from 2013. The store is full of young people who come for readings and concerts and leave with old-fashioned books.
Even Barnes and Noble, which unsuccessfully tried to compete with Amazon in e-book sales and which struggles to halt a fall in revenues, has returned to profitability this year after four years of losses.
Today's book market is far more complex and multifaceted than it was 15 years ago. It's safe to say software hasn't destroyed it but instead forced all of its participants to play to their strengths. Publishers reach for potential strong sellers and insist on relatively high prices, authors rejected by publishers package and promote their own work the way nobody else can and traditional booksellers stress the personal experience. Amazon, too, isn't opening the real-world store as an admission of defeat. Its choice of titles to stock is going to be backed by the company's powerful analytics. In effect, software will be advising customers what to buy, but gratification will be instant, unlike on Amazon.com. I'm pretty sure there's room on the market for such a format, too.
In 2010, we feared that software would dismantle the book market as it had the music one. Back then, it was still possible to ignore the surprising growth in vinyl record sales. In 2009, 2.5 million of them were sold in the U.S., more than in any year since 1991. In 2014, that number was up to 5.6 million. In the first half, vinyl showed 52 percent year-on-year growth to reach $226 million in sales, more than music streaming companies make in advertising revenues from their free tiers. As streaming replaces another kind of software distribution channel for music, permanent downloads, antiquated analog technology is making a comeback because vinyl records sound better than digital ones to many audiophiles.
Andreessen, of course, was talking about software's ferocious appetite from an investor's perspective. The technological revolution has enriched many of those who got in on it and impoverished many who didn't. Yet the analog world is still able to throw off predator-resistant evolutionary branches, and that's great. I've noticed lately that my kids and their friends prefer paper books to digital ones, though I have completely switched to e-books. It's about personal preferences, not progress. That's why I'm pretty sure the manual gearbox, the custom-made suit, the hand-rolled cigar and even the paper magazine will be around 100 years from now.
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