The Everything Store: Jeff Bezos and the Age of Amazon (44 page)

Inside the company, Bezos rationalized the giveaway by saying that it sustained and even complemented the seventy-nine-dollar fee for Prime at a time when customers were buying fewer DVDs. But Prime Instant Video played another role. Amazon was now providing, as a supplementary perk, something Reed Hastings and his colleagues at Netflix priced at five to eight dollars a month. The service exerted direct pressure on a key rival and worked to prevent it from appropriating an important section of the everything store. Amazon too would offer films and TV shows in any form that customers could possibly want—all with the click of a button.

To Jeff Bezos, perhaps the only thing more sacrosanct than offering customers these kinds of choices was selling them products and
services at the lowest possible prices. But in the fractious world of book publishing, Amazon, it seemed in early 2011, was losing its ability to set low prices. That March, Random House, the largest book publisher in the United States, followed the other big publishers and adopted the agency pricing model, which allowed them to set their own price for e-books and remit a 30 percent commission to retailers. Amazon executives had spent considerable time pleading in vain with their Random House counterparts to stick with the wholesale model. Bezos now no longer had control over a key part of the customer experience for some of the biggest books in the world.

With no stark price advantage and increased competition from Barnes & Noble’s Nook, Apple’s iBookstore, and the Toronto-based startup Kobo, Amazon’s e-book market share fell from 90 percent in 2010 to around 60 percent in 2012. “For the first time, a level playing field was going to get forced on Amazon,” says James Gray, the former chief strategy officer of the Ingram Content Group. Amazon executives “were basically spitting blood and nails.”

Amazon felt major book publishers were limiting its ability to experiment with new digital formats. For example, the Kindle 2 was introduced with a novel text-to-speech function that read books aloud in a robotic male or female voice. Roy Blount Jr., the president of the Authors Guild, led a protest against the feature, writing an editorial for the
New York Times
that argued authors were not getting paid for audio rights.
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Amazon backed off and allowed publishers and authors to enable the feature for specific titles; many declined.

Book publishers were refusing to play by Amazon’s rules. So Amazon decided to reinvent the rulebook. It started a New York–based publishing imprint with the lofty ambition to publish bestselling books by big-name authors—the bread-and-butter of New York’s two-century-old book industry.

In April of 2011, a month after Random House moved to the agency model, an Amazon recruiter sent e-mails to several
accomplished editors at New York publishing houses. She was looking for someone to launch and oversee an imprint that “will focus on the acquisition of original commercially oriented fiction and non-fiction with the goal of becoming bestsellers,” according to the e-mail. “This imprint will be supported with a large budget and its success will directly impact the success of Amazon’s overall business.” Most of the e-mail’s recipients politely declined the offer, so Kindle vice president Jeff Belle asked the man who’d been steering him toward possible recruits if he himself might be interested in the job. “Well, the thought had crossed my mind,” replied Larry Kirshbaum, a literary agent and, before that, the head of Time Warner’s book division.

Kirshbaum, sixty-seven at the time, was the ultimate insider, widely known and, until then, almost universally liked. He had a well-honed instinct for big, mass-culture books and an intuitive feel for survival inside large corporations. When AOL acquired Time Warner in 2000, he directed the staff of Warner Books to wear I Heart AOL T-shirts and made a video of everyone standing around a piano singing “Unforgettable” (the company had just published Natalie Cole’s autobiography). He was thinking about e-books—and losing money on them—long before almost anyone else in the industry.

Kirshbaum reentered a very different environment than the one he had left in 2005 when he departed AOL Time Warner to become an agent. Animosity toward Amazon had become a defining fact of life in the book business. So he was considered by many of his former peers to be a defector, someone who had gone over to the dark side, a sentiment they did not hesitate to express to him, sometimes in pointed terms.

“There have been a few brickbats I’ve had to duck,” Kirshbaum says, “but I have a message I really believe in, which is that we’re trying to innovate in ways that can help everybody. We are trying to create a tide that will lift all boats.” He points to the industry’s similarly negative reaction to Barnes & Noble’s acquisition of the publisher
Sterling back in 2003, which raised the same fear that a powerful retailer was trying to monopolize the attention of readers. “We all worried the sun wasn’t going to come up the next day, but it did,” he says. Of Amazon, he says, “We certainly want to be a major player, but there are thousands of publishers and millions of books. I think it’s a little bit of a stretch to say we are cornering the market.”

Kirshbaum’s bosses in Seattle sounded a similarly conciliatory note. “Our entire publishing business is an in-house laboratory that allows us to experiment toward the goal of finding new and interesting ways to connect authors and readers,” Jeff Belle told me for a
Businessweek
cover story on Amazon Publishing in early 2012. “It’s not our intention to become Random House or Simon & Schuster or HarperCollins. I think people have a hard time believing that.”
¹³

Amazon executives charged that the book publishers were irrationally consumed with the possibility of their own demise and noted that resisting changes, like paperback books and discount superstores, was something of a hallmark for the industry. And when it came to fielding questions on the topic, Amazon executives perfected a sort of passive-aggressive perplexity, insisting that the media was overplaying the issue and giving it undue attention—sometimes with explanations that compounded and confirmed publishers’ concerns. “The iceman was a really important part of weekly American culture for years and his purpose was to keep your food from spoiling,” says Donald Katz, the founder and chief executive of Amazon’s Audible subsidiary. “But when refrigerators were invented, it was not about what the iceman thought, nor did anyone spend a lot of time writing about it.”

Book publishers needed only to listen to Jeff Bezos himself to have their fears stoked. Amazon’s founder repeatedly suggested he had little reverence for the old “gatekeepers” of the media, whose business models were forged during the analogue age and whose function it was to review content and then subjectively decide what the public got to consume. This was to be a new age of creative surplus, where it was easy for anyone to create something, find an audience, and allow the market to determine the proper economic
reward. “Even well meaning gatekeepers slow innovation,” Bezos wrote in his 2011 letter to shareholders. “When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say ‘that will never work!’ And guess what—many of those improbable ideas do work, and society is the beneficiary of that diversity.”

A few weeks after that letter was published, Bezos told Thomas Friedman of the
New York Times,
“I see the elimination of gatekeepers everywhere.” In case there was any doubt about the nature of Bezos’s convictions, Friedman then imagined a publishing world that includes “just an author, who gets most of the royalties, and Amazon and the reader.”
¹⁴

“At least it’s all out in the open now,” one well-known book agent said at the time.

A kind of industrywide immune response then kicked in. The book world rejected Amazon’s new publishing efforts en masse. Barnes & Noble and most independent bookstores refused to stock Amazon’s books, and New York–based media and publishing executives widely scoffed at the preliminary efforts of Kirshbaum and his fledgling editorial team. Their $800,000 acquisition of a memoir by actress and director Penny Marshall, for example, was targeted for particular ridicule and later sold poorly.

Meanwhile, Amazon continued to experiment with new e-book formats and push the boundaries of publishers’ and authors’ tolerance. It introduced the Kindle Single, a novella-length e-book format, and the Prime Lending Library, which allowed Prime members who owned a Kindle reading device to borrow one digital book a month for free. But Amazon included the books of many mid-tier publishers in its lending catalog without asking for permission, reasoning that it had purchased those books at wholesale and thus believed it could set any retail price it wished (including, in this case, zero). In the imbroglio that ensued, the Authors Guild called the lending library “an exercise of brute economic power,” and Amazon backed off.
¹⁵

Bezos and colleagues dismissed the early challenges Kirshbaum’s
New York division faced and said they would gauge its success over the long term. They were likely positioning their direct-publishing efforts for a future where electronic books made up a majority of the publishing market and where chains like Barnes & Noble might not exist in their present form. In that world, Amazon alone will still be standing, publishing not just scrappy new writers but prominent brand-name authors as well. And Larry Kirshbaum could once again be one of the most popular—and possibly one of the only—publishing guys left in New York City.

* * *

In December of 2011, as if seeking a fitting conclusion to a year filled with controversy over sales tax, acquisitions, MAPs, and the economics of electronic books, Amazon ran a ham-fisted promotion of its price-comparison application for smartphones. The app allowed users to take pictures or scan the bar codes of products in local stores and compare those prices with Amazon’s. On December 10, Amazon offered a discount of up to fifteen dollars to anyone who used the application to buy online instead of in a store. Although certain categories, like books, were exempt, the move stirred up an avalanche of criticism.

Senator Olympia Snowe called the promotion “anti-competitive” and “an attack on Main Street businesses that employ workers in our communities.” An employee of Powell’s Books in Portland, Oregon, created an Occupy Amazon page on Facebook. An Amazon spokesperson noted that the application was meant primarily for comparing the prices of big retail chains, but it didn’t matter. The critics piled on, charging that Amazon was using its customers to spy on competitors’ prices and was siphoning away the sales of mom-and-pop merchants. “I first attributed Amazon’s price-comparison app to arrogance and malevolence, but there’s also something bizarrely clumsy and wrong-footed about it,” wrote the novelist Richard Russo in a scathing editorial for the
New York Times.
¹⁶

The conflagration over the price-checking app diminished quickly. But it raised larger questions: Would Amazon continue to be viewed as an innovative and value-creating company that existed to serve and delight its customers, or would it increasingly be seen as a monolith that merely transferred dollars out of the accounts of other companies and local communities and into its own gilded coffers?

During these years of conflict, Jeff Bezos sat down to consider this very question. When Amazon became a company with $100 billion in sales, he wondered, how could it be loved and not feared? As he regularly does, Bezos wrote up his thoughts in a memo and distributed it to his top executives at an S Team retreat. I received a copy through a person close to the company who wished to remain anonymous. The memo, which Bezos titled Amazon.love, lays out a vision for how the Amazon founder wants his company to conduct itself and be perceived by the world. It reflects Bezos’s values and determination, and perhaps even his blind spots.

“Some big companies develop ardent fan bases, are widely loved by their customers, and are even perceived as cool,” he wrote. “For different reasons, in different ways and to different degrees, companies like Apple, Nike, Disney, Google, Whole Foods, Costco and even UPS strike me as examples of large companies that are well-liked by their customers.” On the other end of spectrum, he added, companies like Walmart, Microsoft, Goldman Sachs, and ExxonMobil tended to be feared.

Bezos postulated that this second set of companies was viewed, perhaps unfairly, as engaging in exploitative behavior. He wondered why Microsoft’s large base of users had never come out in any significant way to defend the company against its critics and speculated that perhaps customers were simply not satisfied with its products. He theorized that UPS, though not particularly inventive, was blessed by having the unsympathetic U.S. Postal Service as a competitor; Walmart had to deal with a “plethora of sympathetic competitors” in the small downtown stores that competed with it.

But Bezos was dissatisfied with that simplistic conclusion and applied his usual analytical sensibility to parse out why some companies were loved and others feared.

Rudeness is not cool.

Defeating tiny guys is not cool.

Close-following is not cool.

Young is cool.

Risk taking is cool.

Winning is cool.

Polite is cool.

Defeating bigger, unsympathetic guys is cool.

Inventing is cool.

Explorers are cool.

Conquerors are not cool.

Obsessing over competitors is not cool.

Empowering others is cool.

Capturing all the value only for the company is not cool.

Leadership is cool.

Conviction is cool.