e’s doing it, I’m doing it, we’re all doing it

It seems a price-war is breaking out in the electronic book market.  British retailer WH Smith halved the price of its entire e-book range last week.

This raises an important business strategy question: How can the e-book vendors avoid ending up in a downward price spiral?

Consider the situation: the actual marginal cost of selling each book is very close to zero for all vendors.  Sure there are a range of ‘lumpy’ costs in setting up the web interface, the transaction system, the relationships with publishers and developing a brand that consumers know and trust.

But selling the next electronic copy of any book is pretty much costless. The publisher needs to get their cut, but for the retailer there are no warehousing or inventory costs and no delivery costs.

Why chase a 100% margin in vain, while your competitor is selling the same title at a 50% mark-up?  And if you drop to 49%, why won’t they drop to 48%? And on it goes?

This becomes a classic low-cost wins scenario.  Can the retailers do anything to differentiate themselves?

And how to the retailers running both “clicks” and “bricks” stores cope?  How do they reconcile their pricing of physical books relative to the e-versions?

Advertisement

Will books be the next records?

My post of last week about the exaggerated death of vinyl records (and their resurrection) has got me thinking about the challenge to the physical book from the Kindle and other similar electronic devices.

Will Kindles, and any eventual and probably much sexier Apple i-Tablet thingie, kill books?

The contrast with recorded music is a curious one. Music has had a shifting portability dimension in modern times mainly built around the “player”.

Phonographs and record players had limited mobility, while radios became more portable (but lacked storage/choice elements). As storage media changed (to 8-track cartridges and cassettes) car stereos became possible, and eventually mobile personal stereos (both boombox and Walkman styles) the norm.

With CDs we got sound-quality and durability that created an expectation that our music should be available everywhere. Digital music was thus just the next step. Of course, there was that disruptive technology stage where digital was a poor substitute and the players were clumsy, but Apple sorted that all out for us.

The pace of change in the book industry has been much slower. The basic product is not much different to that of 100 years ago. Yes, the printing technology has been transformed, but the reading experience is pretty much the same. Portability has never varied as the content and the medium have remained one and the same.

The big question then becomes whether the embodiment of the book is more overwhelming for consumers than in the music market. I can see that carrying multiple titles around in a Kindle is more practical when travelling, or as a students, but beyond that I personally am pretty wedded to carrying a single book on public transport, to a cafe etc. I like the diversity of covers, typefaces, textures, weights, sizes etc and associate them strongly with my reading experience.

If others share such emotive connections, are Kindles a real threat to publishers, printers and bookstores? Or are they just the cassette player of the noughties?

Has Amazon caught the forward integration bug?

Every time I think I’m done with this vertical integration obsession another example pops up.

Rumours are flying around the news sites that the giant of online retailing Amazon might be bringing a portion of its delivery process back in-house.

They are reportedly considering opening old school bricks-and-mortar shop fronts in the UK where buyers can pop past to pick up their purchases.

This would represent a substantial shift in the business model of the firm, and also a convergence back with various other high street retailers (most notably in the UK Argos) who also have a strong online presence.

It is also an interesting example of adaptation to the quirks of infrastructure and custom from location to location. Parcel deliveries may be less practical in the UK given different living arrangements, and customers are more densely situated meaning such distribution points could be viable.

The upside of income elasticity

While, as I discussed earlier, some product markets such as champagne are struggling in the wake of the current economic downturn, others seem to be holding up well. Melbourne newspaper The Age reports that local book retailers are faring better this Christmas than last.

So the income elasticity seems to be helping out here. Possibly books are inferior goods (i.e. sales go up as income drops). It is more likely that what we are seeing is consumers, conscious that their incomes are not rising or a little more uncertain, switching from more frivilous leisure goods (including champagne and travel) to more time-heavy commitments such as reading.

What other products might be experiencing such boosts in sales?