Okay, it’s time to play Institutional Investor. Here’s today’s quiz:

Net sales of Amazon leaped by 39% in the third quarter of the year,  exceeding predictions of $7.35 billion. Fourth quarter revenues are estimated to be over $12 billion.  What happened to its stock on the day that news was announced?

1. It went up by 5%
2. It went up by 10%
3. It went up by 20%
4. It went down by 4%

If you guessed 1, 2 or 3 you don’t know jack about investing.  In fact it dropped 4.01% to $158.35, because investors were disappointed. Why?

According to Publishers Weekly‘s Jim Milliott it wasn’t the earnings. It was the spending. “Investors were disappointed,” he wrote, “with the company’s higher spending on new distribution centers. Analysts said they were concerned about the cost of the 10 giant warehouses that opened in the third quarter, which ended Sept. 30, and a handful more that are to open before the end of the year.”

In a publishing environment that has shifted to digital delivery – and who knows more about that than Amazon? – the construction of brick and mortar depots to contain printed books feels not just counterintuitive but downright perverse.  This is especially true because Amazon has the wherewithal to do away with warehouses altogether. It’s called print on demand, and Amazon has a division called CreateSpace devoted to printing books on demand.  Sometime back we speculated that Amazon’s POD operation could make warehousing a thing of the past. (See The Nine Gazillion Pound Gorilla Bares Its Fangs.)

Though Milliott points out other reasons that investors were not enchanted by a growth surge that would be the envy of any other company in the world, Amazon’s heavy bet on a fading world of tangible goods could continue to drag the stock down.

Read about it in detail in Print, Digital Book Sales Accelerated in Third Quarter, Amazon Says

Richard Curtis

From time to time we bring back some of the more popular articles and blogs posted on E-Reads. This one is from April 2008. The name “BookSurge” for Amazon’s print on demand company was eventually changed to CreateSpace.
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I write this blog in two capacities: as an authors’ advocate and as president of E-Reads, an Internet publisher that, in addition to publishing e-books, prints its titles on demand for readers who prefer traditional volumes. Indeed, fifty percent of our company’s revenues are generated by print on demand. Our PODs are produced by Lightning Source Inc. and sold on Amazon. The excellent relationships we enjoy with both firms have enabled us to realize our vision of what a twenty-first century publishing venture can be. We are happy to claim them as partners and would hate to be placed in the position of choosing between them. But Amazon’s proposed policy requiring small presses such as E-Reads to shift its POD business to its BookSurge press would do just that.

Though Amazon’s ploy comes as a shock to publishers and authors, it did not come as a surprise to me. In the summer of 2005 Amazon.com announced the acquisition of MobiPocket, an e-book company, and BookSurge, a print on demand operation. A lot of ink was spilled on the MobiPocket deal but no one except me speculated on what it meant for a book retailer to have the capability of printing books on demand. In a guest editorial in Publishers Weekly, I wrote,

“It’s hard to say for sure what is behind amazon.com’s acquisition of BookSurge, the on-demand book-printer. But any move the Nine Gazillion Pound Gorilla makes is worthy of serious consideration. Indeed, the implications of the deal, especially combined with amazon’s purchase of e-book company MobiPocket, are profound.”

The implications were so disturbing that PW’s editors urged me to tone down my speculations, which seemed to fall at the red end of the spectrum of possibility. Actually, I suspect that the editors were so freaked out that they went into denial. And who can blame them? In my editorial I spun the logic of Amazon/BookSurge to the max.

Here is the conclusion I reached: If Amazon is capable of printing books on demand, they will no longer have to carry any physical books in their warehouses at all! They simply have to load the files of Random House, HarperCollins, Hachette, Penguin, and every other publisher onto their server and print all of their books – frontlist as well as backlist – on demand. It would not only be a huge savings for Amazon in terms of warehouse space – it would be a huge savings for the publishers, too: they all would eliminate printing, warehouse, and freight costs at a stroke. Yes, they would still have to print and distribute books to other retailers besides amazon, but such sales would be modest compared to those of Amazon with its incomparable marketing and technical capabilities. Allowing Amazon to become the POD press for the publishing industry is a very seductive lure to publishers operating on razor-thin profit margins. But it would also enable Amazon to undercut bookstore prices, put Barnes & Noble and other bookstore chains and independent booksellers out of business and complete its march to monopoly. While you’re trembling, consider the possibility of a mega-retailer ultimately deciding what you read as well as how and where it’s printed.

If you are as incredulous as my Publishers Weekly editors were, ponder this statement in the letter just issued by the amazon.com books team: “It isn’t logical or efficient to print a POD book in a third place, and then physically ship the book to our fulfillment centers. It makes more sense to produce the books on site, saving transportation costs and transportation fuel, and significantly speeding the shipment to our customers.” You need only to remove the term “POD” from that statement to arrive at the terrifying conclusion that I reached in 2005.

Though I have railed for decades against the stupidity and wastefulness of an industry based on tangible books sold in brick and mortar stores, I have to wonder whether Amazon’s Orwellian vision of absolute zero-returns efficiency is even more destructive than a traditional business model that pulps one copy for every two it distributes.

It is vital for publishers of every size to confront this potential restraint of trade.

- Richard Curtis

BookSurge is a quiet little outfit that has made a lot of noise – some of it strident – since its modest beginnings as a print on demand press. An article by Jim Milliot in Publishers Weekly indicates that BookSurge’s voice will be absorbed into the roar of a self-publication factory. Both are owned by Amazon.

Amazon’s acquisition of BookSurge a few years ago prompted me to speculate on just what the book retail giant could want with a little POD company. In a guest editorial in Publishers Weekly, I wrote, “It’s hard to say for sure what is behind amazon.com’s acquisition of BookSurge, the on-demand book-printer. But any move the Nine Gazillion Pound Gorilla makes is worthy of serious consideration. Indeed, the implications of the deal, especially combined with amazon’s purchase of e-book company MobiPocket, are profound.”

In time our questions were answered when Amazon began leaning on publishers to shift their print on demand business to BookSurge, occasioning a blog (The Nine Gazillion Pound Gorilla Bares Its Fangs) describing the alarm that many publishers felt at the prospect of being pressured to give up their relationship with BookSurge’s competitors.

The glare of publicity (plus an antitrust lawsuit by a company called BookLocker that remains pending as of October) seems to have checked BookSurge’s conquistadorial ambitions. And now the firm is to be integrated into CreateSpace, an Amazon division providing tools to self-publishers. “The move will make CreateSpace the single platform for all BookSurge and CreateSpace authors and publishers,” writes Milliot, who goes on to cite CreateSpace’s website: “During the coming months we will be transitioning all BookSurge accounts to CreateSpace, after which the BookSurge brand will be retired.”

A lot of e-ink has been spilled of late about self-publication, which some of us prefer to call vanity (see You Got That Right, Ecclesiastes) and we are going to see a lot more as a clash of vanity titans shapes up, with Author Solutions (AuthorHouse, iUniverse, Trafford, Xlibris, Inkubook etc.) in one corner and CreateSpace in the other. And if you cast your eyes on the ringside seat behind CreateSpace you’ll see our quiet little friend BookSurge.

Richard Curtis