Wal-Mart and Amazon: Price Wars Reopen Question of Intermediaries

A front page story in the WSJ Friday talked about Wal-Mart’s (WMT) 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 Walmart.com," said Walmart.com 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 (AMZN) 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. (By the way, 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 keeps 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 BN.com (BKS), 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 SJMercury.com

Disclosure: none

Comments

[casey00001:]

It seems like Uncle Wally is looking out for the country, not Uncle Sammy. God Bless Sam Walton.

Oct 18 09:26 AM

[wn98nec:]

People are looking at this from a very narrow viewpoint. Yes, we all like the cheap prices at Walmart. However, look at all the family businesses that Walmart has put out of business. How rich does the Walmart family need to get? I also find that a big part of what Walmart sells is junk! Their rebounder prices were cheap, but the were also junk. They broke very easy. Haven'tchecked them recently. Walmart used to sell only American? Now, most of their merchandise is junk made in foreign countries. I like to save money, but at what price? Walmart is another way to destroy American family businesses. Smaller, quality businesses that cannot compete with the giant. Are we better now than we were before Walmart???

Oct 18 09:50 AM

[a. palmer jr.:]

If the Walton family could compete, why not others? Wal-Mart doesn't have a monopoly on cheap prices...anyone can do it. I see prices on eBay and a local flea market I go to that have Wal-Mart beaten to pieces. It can be done. Wal-Mart just did it first, or at least they're given credit for that, but doesn't mean they're the only ones. Wal-Mart gets sweet deals from wholesalers because they're so big but that doesn't mean that you and I and hundreds of other people couldn't go together and start a chain bigger than they. Copy Wal-Mart's model but sell more quality merchandise and fix their problems and you have a store that beats them.

Oct 18 10:15 AM

[casey00001:]

Who employs more people in your town? The little mom and pop shops with the inflated prices or the Walmart? Walmart is also one stop shopping. Nobody is forcing you to buy inferior goods. That's the big picture.


On Oct 18 09:50 AM wn98nec wrote:

> People are looking at this from a very narrow viewpoint. Yes, we
> all like the cheap prices at Walmart. However, look at all the family
> businesses that Walmart has put out of business. How rich does
> the Walmart family need to get? I also find that a big part of
> what Walmart sells is junk! Their rebounder prices were cheap, but
> the were also junk. They broke very easy. Haven'tchecked them recently.
> Walmart used to sell only American? Now, most of their merchandise
> is junk made in foreign countries. I like to save money, but at
> what price? Walmart is another way to destroy American family businesses.
> Smaller, quality businesses that cannot compete with the giant.
> Are we better now than we were before Walmart???

Oct 18 12:07 PM

[Chancer:]

I priced Sarah Palin's hardcover book.

List $28.99

Borders with 40% coupon $17.39

Walmart with FREE shipping $8.99

Bookstores can't compete with that.

Oct 18 04:58 PM

[Skillet1:]

One thing missing from this discussion is the power of the publisher to restrict sales to Wal-Mart. As the author points out, publishers do not like their product being devalued to $9. These price wars will ultimately kill them. A possible result of this is for the major publishers e.g. Scholastic, Harper Collins, Simon & Schuster, etc. to simply say, Wal-Mart.com, if you continue with this pattern of price cuts, the next time we take pre-orders for Harry Potter or Stephen King, you don't get any. You can't sell product for $9 if you don't have any to sell. There is no law that forces a company to sell their product to anyone else, regardless of whether they pay the "going rate". In the grand scheme of book sales, Wal-Mart.com is tiny. Not selling product to them would not have a material effect on the publishers. This price war certainly did generate a lot of buzz for Wal-Mart.com, but their parent Wal-Mart is not going to subsidize a losing business for very long. This is a huge money loser and not sustainable.

Oct 19 07:53 AM