Amazon Faces Competition From Japan

A major deal was announced yesterday which should propel Kobo into the top tier: the Japanese e-commerce giant Rakuten purchased Kobo in a straight cash deal for $315m.

It sounds like Kobo will continue to be run as a standalone company – the CEO is staying in place and all the employees are keeping their jobs – only now they will have the financial backing of one of the Top 10 internet companies in the world.

Make no mistake, this deal means that Kobo is now a serious player.

Rakuten

Rakuten are a huge international internet services, online retail, and e-commerce company with 10,000 employees, a market capitalization of around US$10bn, and major operations in Brazil, Germany, Taiwan, China, Thailand, Indonesia, as well as, of course, their home country of Japan (where they are much stronger than Amazon’s local operation).

They also own Buy.com after purchasing them last year for $250m, bought the UK-based Play.com in September for $40m, bought the busiest e-commerce site in France last year for $270m, and have significant interests in developing markets such as Russia.

In short, they are strong where Amazon are weak. Many Asian countries, including Japan, can’t even purchase e-books from Amazon, although a Kindle Store has been rumored for both Japan and China recently.

Kobo had already made inroads into the international market, opening stores in the UK, France, Germany, Australia, New Zealand, and Hong Kong. Last month, they signed two key strategic partnerships with major local chains – WH Smith in the UK, and FNAC in France – to add to deals they had already struck with Whitcoulls in New Zealand and Cheung Kong in Hong Kong.

They claim 50% of the e-reader market in Canada and around 10% in the US, although whether the latter number has held up since the collapse of their American partner, Borders, and the launch of new devices from competitors, is doubtful.

Indeed, the partnership with Borders was supposed to be their leg-up in the lucrative (and relatively developed) US market. Since that deal went south, much of Kobo’s focus has been on the far more open international arena where many of the major players (Apple, Amazon, Google) have yet to establish a presence in many markets.

Kobo had really struggled to get local retail partners in key international markets and, without the brand recognition of someone like Amazon, they couldn’t hope to shift significant numbers of e-readers (and hence e-books) through their own websites.

This deal changes all of that.

One of the major challenges that Amazon faces in their international expansion is in getting local content for new Kindle Stores. Without sufficient local content, they can’t launch. Naturally, local publishers have been dragging their heels – fearful of being disintermediated by Amazon, while at the same time exploring their own retail options.

Hiroshi Mikitani, the CEO of Rakuten, is fully aware that these local publishers may find it easier to deal with a company that is not Amazon. In an interview with the Wall Street Journal he said, “Everyone is very afraid of Amazon, publishers and retailers. We are more of an alliance-oriented company than Amazon. We want to establish relationships with retailers, rather than seeing one company dominating everything.” (Link may expire in a few days.)

As for Kobo, this deal could catapult them into first position in Asia, given the extensive presence (and deep pockets) of its new parent company, and give them a significant head-start in potentially lucrative markets such as Brazil.

Mike Serbinis, the CEO of Kobo, in that same Wall Street Journal article, said, “This is not a one-country game. Two-thirds of the book market is outside North America. We’re going into countries where we will be No. 1.”

The international market: bigger than it looks

The international book trade is estimated at around $90bn, of which, the US is responsible for about 30%. However, exclusively measuring the trade by revenue generated can lead to analysts vastly underestimating the potential size of international e-book markets.

Local book-price variances hugely skew those numbers. Books are expensive in the US and often more so in the UK and certain Western European markets. If you were to measure international markets by units sold, the picture would be very different.

Why is this important? E-books are cheaper, and will continue to get cheaper as the market develops. There is extraordinary downward pressure on price in the US from a combination of retailers like Amazon (and competitors who all price-match each other), increasingly militant readers (organizing boycotts and switching to lower priced books), and independent operators such as self-publishers and small presses (who are selling at bargain basement prices).

In fact, without the Agency Agreement (which prevents Amazon from discounting e-books from the major publishers), prices would already be far lower in the US.

As more of the market transitions to digital, lower prices per book sold will be paid by readers who won’t have to shell out $25 for a hardback to get new releases from a favorite authors.

And, as the unit price drops in markets such as the US and the UK, the international market will more reflect the picture we see when we look at relative unit sales, rather than relative revenue generated.

Take a country like Argentina, for example. Someone looking at GDP per capita may conclude that it’s not a country where people are going to be queuing around the block to buy Kindles or iPads.

This would be a mistake. GDP is an incredibly crude barometer. For example, the cost of housing prisoners is included. In a country like the US, with (by far) the largest per capita prison population in world gets the cost of housing, feeding, and securing those 2.5m prisoners gets added to its GDP.

The US has just 5% of the world’s population, but 25% of the world’s prisoners. This skews GDP, and is just one of the many, many ways that this metric is an imperfect measure of a country’s general economic well-being, or it’s citizens relative ability to purchase things like e-readers.

I know from living in Buenos Aires that Argentina (like many countries in the so-called “developing world”) is awash with gadgets – smartphones are ubiquitous and MP3 players, laptops, and internet cafes are common – and the people have an undying love affair with books.

There are bookstores everywhere, writers are hugely respected, and it could be argued that reading is much more important in cultural terms than in the UK or the US. The Buenos Aires International Book Fair (one of the top five in the world) attracts over one million people each year (from the general public) through its doors.

Naturally, as the cost of living is much lower than the UK or the US, books are much cheaper, and measuring the relative e-reading potential by the revenue generated by the publishing industry doesn’t reflect those lower prices.

Why is this important for indie writers? We sell books cheaply. Our books will be much more affordable to the average reader than trade-published books.

If you think how much US readers (with much more disposable income) baulk at paying $14.99, you can imagine how much more attractive an indie book at 99c or $2.99 will be to someone in Buenos Aires.

And this is just one country of 40m people in a region with 400m people. Brazil has nearly two-thirds the population of the US and no real bookstore infrastructure (many books are sold, quite effectively, door-to-door). It is ripe for e-reading.

Yesterday, the CEO of Saraiva – the largest book retailer in Brazil – announced that the recent Steve Jobs biography became the biggest selling e-book in the company’s history, with e-sales matching 22% of print sales.

While the nature of the book (and its target market) is skewing those astonishing numbers, these figures still surprised everyone in the Brazilian book business, as the digital market there is still considered to be in its infancy.

The retailers said that price was a key factor (the digital version is around two-thirds of the price of the print version), and that the size and weight of the print book (628 pages, hardback) brings the relative comfort and convenience of e-reading into sharp focus.

It’s the first bona fide e-book phenomenon in Brazil, but it won’t be the last, not with an army of tech-savvy purchasers evangelizing about the benefits of e-reading.

And while the potential in Latin America is huge, the potential in Asia is just staggering.

Self-publishers & Kobo

How does this deal affect self-publishers? Well, if you aren’t listing your books at Kobo, you should remedy that immediately. At the moment, the only easy way to get into the Kobo store is through Smashwords.

I don’t know any self-publisher who is seeing significant Kobo sales. Indeed, many self-publishers don’t list with them after pricing issues in the past. Kobo had taken it upon themselves to automatically discount many titles (as Google do right now), removing pricing control from self-publishers.

Amazon, with their strict price-matching policy, dropped the prices of the affected books, knocking many writers out of the golden 70% royalty zone. Because of the delays in the Smashwords system in getting new prices out to Kobo (which would stop Amazon matching the lower price), many decided to opt out altogether rather than risk losing so much royalty money – often for several weeks.

This issue was resolved earlier this year, and Kobo have since pledged not to discount any Smashwords titles. Clearly, Kobo are poised to grab a much larger share of the international market and any self-publisher should be listing with them right now.

For those who refuse to use the Smashwords system, I have two pieces of good news.

First is that – at some point next year – Smashwords will allow the direct upload of EPUB and MOBI files, so those who take pride in their e-book formatting won’t have to be subjected to the crude indignities of the Meatgrinder system.

Second, Kobo plan to open up their system for direct publishing, just like KDP. This will be the preferred option for many, given the lack of control self-publishers have over how their listings appear on Smashwords partner sites. In addition, there have been many reports that those who upload with partner sites directly (such as PubIt) have far greater visibility.

Finally, many self-publishers have felt that Kobo was hostile to them, and that their listings were ghettoized. Some have suspected that this attitude was a result of the (former) majority shareholder being Indigo – a Canadian chain of bricks-and-mortar bookstores – who felt their natural partners were trade publishers, and who didn’t seem that comfortable with the idea of self-publishers listing with them in the first place.

A Japanese e-commerce company may notice that a third of the top-selling e-books on Amazon are from independent operators and may take a more progressive attitude towards our business.

David Gaughran

Born in Ireland, he now lives in a little fishing village in Portugal, although this hasn’t increased the time spent outside. He writes novels under another name, has helped thousands of authors build a readership with his books, blogs, workshops, and courses, and has created marketing campaigns for some of the biggest self-publishers on the planet. Friend to all dogs.