Amazon.com and the Used Book Business (AMZN)

A WSJ article by Jeffrey Trachtenberg describes publishing executives' consternation at the way sales of new books are being cannibalized by sales of "almost new" books, specifically by sellers on Amazon.com (ticker: AMZN). Here are the stats, some loopy quotes from two literary agents, and the implications for Amazon's stock:

The stats:
Sales of used books are rising 25% annually, and constituted 2.8% of total book sales in 2004 of $21 billion.

Loopy, anti-free-market, interventionist reactions from the publishing industry:

The online transaction providers should pay a fee; the commission should be paid directly to the publisher, who should pass through 100% of that income to the author.
(Richard Pine, partner in New York literary agency InkWell Management LLC)

I'd like to see the author getting 10% of a used book sale.
(Ann Rittenberg, president of Ann Rittenberg Literary Agency Inc.)

The real issue:
Book pricing hasn't taken into account the fact that the Internet has reduced friction in the used book market by allowing buyers to find used books and sellers to resell books cheaply and easily. That actually raises the value of new books, by raising their resale value. Publishers and authors should learn from the car industry, which realized long ago that the resale value of a car impacted how much consumers are willing to pay for new models. (Cars with rapid depreciation command lower new prices than models with slower depreciation.) So the solution is for publishers to raise the price of new books to capture the rent from books being resold and read by multiple customers.

Stock impact for Amazon:
Amazon's key challenge is to wean itself off direct sales to customers, because two factors are exerting continued downward pressure on online retailers' margins. They are: (1) consumers are better able to shop around due to improved search and comparison shopping, and (2) increased competition from the entrance of more offline retailers into the e-commerce market. Amazon is also under pressure to demonstrate to investors that it can generate returns on equity similar to eBay, Google and Yahoo, but that won't be possible if Amazon has to tie up capital in sales inventory.

The solution? Become a platform for third party sellers, charging a commission on transactions but avoiding managing its own inventory, supply chain and shipping.

In that context, the growing anger among publishers about Amazon's third party sales of used books is incrementally positive. It shows that Amazon is actually getting somewhere. The key question going forward is whether Amazon can achieve similar success outside books and music.

Finally, if publishers' behaved rationally and raised new book prices to capture the rent from resales, Amazon would benefit. Despite a lower number of new book sales, Amazon would make more gross profit per new book sale and would also generate significantly higher fees from higher volume of used book sales.

Your comments and thoughts would be appreciated!

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