Saturday, October 17, 2009

What happened to disintermediation?

A front page story in the WSJ Friday talked about Wal-Mart’s price war for online books, with $10 bestsellers. The money quote is pretty good:

"If there is going to be a 'Wal-Mart of the Web,' it is going to be," said CEO Raul Vazquez in an interview. "Our goal is to be the biggest and most visited retail Web site."
Wal-Mart is also planning on getting into electronic books. Amazon is responding every way that it can.

But there was one passage that I think that deserved more scrutiny:
The price war sent shivers through the publishing world. Wal-Mart's move, and similarly low prices for electronic books, may ultimately condition consumers to expect new titles to cost $10, a price that would force the publishing industry to re-scale its entire business, including the advances paid to writers.

"The endgame is rather scary for authors," said one book executive.
Here’s my question: why is it scary for authors?

Authors sell to publishers who (sometimes) sell to distributors who sell to retailers who sell to consumers. If there’s a price war that cuts the retail price to consumers, where is it written that authors are the ones who should suffer?

A decade ago, pundits and academic researchers and MBA teachers were saying that e-commerce would bring “disintermediation.” This means the starting and ending point of the value chain (content creator and content consumer) are essential, but one or more of the intermediaries is superfluous or obsolete.

Under this scenario, either the publisher or the retailer could get cut out of the detail entirely. For example, my favorite band released their latest album by self-publishing, cutting out its 30-year publisher Warner/Elektra/Asylum. (BTW, the album was initially released directly and exclusively to Wal-Mart, and sold quite well.)

So at best, for the publishers this suggests a three-way scramble between authors, publishers and resellers (mostly Amazon) to create a 2 vs. 1 coalition to squeeze the margins of the third. At worst, the top selling authors will emulate the top music artists and begin to bypass the publishers for direct distribution.

Of course, the returns and economies of scale are seriously skewed here. Amazon & Wal-Mart are running their price wars with the very top bestsellers, the same books that earn back their typesetting and printing setup costs in a day — and that keep the publishers’ doors open. Authors of million-copy novels can dictate terms to (or bypass) publishers in a way that authors of 500-copy academic books cannot.

Still, this re-opens the question of which intermediaries (if any) uniquely add value — and which ones have negotiating leverage. There are many publishers, but in the US only one Amazon. Even adding Wal-Mart and, the publishers don’t have a lot of options to disintermediate retailers. To me, the endgame for publishers seems scarier than a Stephen King novel.

Hat tip: Good Morning Silicon Valley on

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