The rise of Amazon
As Barnes & Noble and Borders were rolling out their national chains of superstores, a new mode of bookselling was beginning to emerge that would add another dimension to the reshaping of the retail landscape that was taking place in the 1990s: online bookselling. The key player here was, of course, Amazon. The brainchild of Jeff Bezos, a Princeton computer science graduate, Amazon.com opened for business from a suburban garage in Seattle in July 1995; by the end of 1998 it had become the third largest bookseller in the US.18 Amazon’s sales grew at a phenomenal rate throughout the late 1990s, increasing from $15.75 million in 1996 to $610 million in 1998, but so too did its losses: by 1998, Amazon was reporting losses of $124.5 million, which was more than 20 per cent of its turnover. By 2000, Amazon’s cumulative losses were a staggering $1.2 billion. Achieving profitability became an increasingly urgent corporate goal. In 2003 Amazon reported its first net annual profit of $35 million on net sales of $5.2 billion. By 2007 it was reporting net income of $476 million on net sales of $14.8 billion.
Spurred on by the astonishing growth of Amazon in the late 1990s, others began to enter the online bookselling market. Barnes & Noble had watched the rise of Amazon with growing concern, and in March 1997 it opened its own online bookstore, b&n.com. In 1998 Bertelsmann, which had already been planning to launch its own internet business, BooksOnline, acquired a 50 per cent stake in b&n.com for $200 million and rolled its proposed US operation into it. By 1999, b&n.com was posting sales of $202 million, making it the fifth largest bookselling establishment in the US. Barnes & Noble bought out Bertelsmann’s stake in b&n.com in 2003, and the following year it took full control of the online business. Although b&n.com is separate from Barnes & Noble and has a different corporate structure, the two companies work closely together and collaborate on the purchasing and managing of inventory, among other things. This gives b&n.com a certain competitive advantage vis-à-vis Amazon, its main rival, since it enables b&n.com to draw on a more extensive range of in-house inventory. The Borders group also launched its own online operation in 1997, but Borders.com trailed far behind Amazon and b&n.com, achieving sales of only $27 million in 2000. In 2001 Borders announced that it was handing its loss-making online operation over to Amazon, which became responsible for running the operation, fulfilling orders and providing customer service.
The great advantage of the online retailers is that they are able to offer a huge range of titles, many times more than the bricks-and-mortar bookstore. When Amazon.com started business, it claimed to offer over a million titles – ‘Earth’s Biggest Bookstore’ was the tagline – compared with about 175,000 titles in the largest terrestrial bookstore in the US. But of course, the comparison was not entirely fair, since Amazon’s listings were derived from the database of Books in Print and the books were not actually held as inventory. Amazon relied heavily on the major wholesalers, Ingram and Baker & Taylor, to supply the inventory: when Amazon received an order from a customer, it ordered the book from one of the wholesalers, unpacked it when it arrived in its Seattle distribution centre, repacked it and mailed it to the customer. This model had the huge advantage of being inventory-free, but the disadvantage was that it was relatively slow since books had to be ordered and mailed twice. So in 1996 Amazon began to expand its warehouse capacity and to build regional distribution centres, enabling it to fulfil orders more quickly and reduce the costs involved in double-handling the books. But the more Amazon moved in the direction of warehousing its own inventory, the more capital it tied up in physical stock and real estate, and the more it began to resemble a traditional retailer and to experience the financial pressures and problems associated with conventional bricks-and-mortar operations.
The online retailers competed with one another and with terrestrial bookstores not only in terms of the range of titles offered and those held in stock, but also by deep discounting. Amazon was preoccupied with ‘the customer experience’, and its research had led it to conclude that the three things that mattered most to book-buying customers were selection, convenience and price. By offering over a million titles it could excel on selection; by being open 24/7 and aiming to ship books directly to the customer as quickly as possible, it could score high on convenience; and by discounting a substantial proportion of its titles it could compete against the superstores on price. Amazon offered a discount of 10 per cent on 300,000 titles, a discount of 30 per cent on the top 20 hardback and top 20 paperback titles, and a discount of 40 per cent on a select number of titles. When b&n.com went live in 1997, it offered discounts on 400,000 titles, including discounts of up to 50 per cent on some bestsellers. To some extent, the online retailers could offer deep discounts of this kind because their overheads were lower than those of bricks-and-mortar bookstores, but they continued to offer substantial discounts despite the fact that they were running losses year on year because they regarded this as crucial to their ability to compete with the superstores. Both Amazon and b&n.com also introduced free shipping on orders over a certain amount to ensure that the total price of purchases remained low.
From its original base in the US book market, Amazon expanded its operations overseas and diversified its product range. A significant proportion of Amazon’s client base had always been overseas, but in 1998 Amazon moved directly into the European market by acquiring the British online bookseller Bookpages and the German online bookseller Telebuch and using them to launch Amazon.co.uk and Amazon.de. Other international branches were subsequently opened in Japan, France and Canada. By 2007, 45 per cent of Amazon’s revenue was being generated outside of North America. Amazon also diversified beyond its core business of books, in part by acquiring other online retailers and adding them to what was rapidly becoming a vast online shopping centre. In 1998 it added music CDs and videos, in early 1999 it moved into toys and electronics, and in September 1999 it launched zShops, an online shopping zone offering a wide range of goods from clothes and household appliances to pet supplies.
By 2006, online bookselling accounted for about 11 per cent of the book retail market in the US.19 This included all online booksellers, but Amazon had become by far the largest player with around 70 per cent of the online book market. In just ten years Amazon had risen from nothing to become one of the most important retail outlets for publishers – indeed, for many university presses and smaller publishers, Amazon had become their single most important customer. Even the large trade houses soon found that Amazon was among their top two or three accounts – one large house said that Amazon represented about 8 per cent of its business overall in 2006 and was growing by around 20 per cent a year. For some kinds of books, like hardcover non-fiction, Amazon’s market share was already as high as 20 per cent.
For publishers, the meteoric rise of Amazon and other online retailers was a welcome addition to the existing channels to market. At a time when terrestrial retailing was being consolidated increasingly in the hands of the large retail chains and many independents were falling by the wayside, the emergence of online retailing represented a major reconfiguration of the