I'd like to introduce three keywords that need defining before you can understand Amazon: Disintermediation…. Monopoly…. Monopsony….
[T]he peculiar evil genius of Amazon is that Amazon seems to be trying to [take advantage of disintermediation to] simultaneously establish a wholesale monopsony and a retail monopoly in the ebook sector….
Until 2008, the ebook side of publishing was a vestigial, if not irrelevant, irritation from the point of view of the major publishers—at less than 1% of their turnover it was lost in the line noise. However, as subsidiaries of large media conglomerates, the executives who ran the big six had all been given their marching orders about the internet: DRM restrictions would be mandatory on all ebook sales, lest rampant piracy cannibalize their sales of paper books…. [P]ublishers aren't software companies. They just want to sell books. And so they outsourced the DRM to the ebook resellers. Including Amazon…. For AMZN, the big six insistence on DRM on ebooks was a windfall: it made the huge investment in the Kindle platform worthwhile, and by 2010 Amazon had come close to an 85% market share in the ebook sector (which was growing at a dizzying compound rate of 100-200% per annum, albeit from a small base). And now we get to 2012, and ebooks are likely to hit 40% of total publishing sales by the end of this year, and are on the way to 60% within five years (per Tim Hely Hutchinson, CEO of Hachette UK). In five years, we've gone from less than 1% to greater than 40%. That's disruption for you!
Now, most ebook customers are not tech-savvy. It is possible to unlock the DRM on a Kindle ebook and transcode it to epub… but it's non-trivial…. So, because Amazon had shoved a subsidized Kindle reader or a free Kindle iPhone app into their hands, and they'd bought a handful of books using it, the majority of customers found themselves locked in to the platform they'd started out on. Want to move to another platform? That's hard; you lose all the books you've already bought, because you can't take them with you.
By foolishly insisting on DRM, and then selling to Amazon on a wholesale basis, the publishers handed Amazon a monopoly on their customers—and thereby empowered a predatory monopsony….
Anyway, here's the important take-away:
DRM on ebooks is dead…. [T]he big six publishers' Plan B for fighting the emerging Amazon monopsony has failed…. This means that they need a Plan C. And the only viable Plan C, for breaking Amazon's death-grip on the consumers, is to break DRM. If the major publishers switch to selling ebooks without DRM, then they can enable customers to buy books from a variety of outlets and move away from the walled garden of the Kindle store…. If they don't, they're doomed. And all of us who like to read (or write) fiction get to live in the Amazon company town.