Seeking Alpha
Profile| Send Message|
( followers)  

by Marty Lariviere

Many years ago I used to live in Boston and would on occasion wander over to Harvard Square. A frequent stop would be Harvard Book Store, a large independent bookstore. A lot of things have changed in Harvard Square since then but Harvard Book Store is still there. Forbes reports that one of the reasons is that a new owner made an aggressive bet on printing books in the store (The Man Who Took on Amazon and Saved a Bookstore, May 10).

Essentially, Jeff installed a printing press to close the inventory gap with Amazon. The Espresso Book Machine sits in the middle of Harvard Book Store like a hi-tech visitor to an earlier era. A compact digital press, it can print nearly five million titles including Google Books that are in the public domain, as well as out of print titles. We're talking beautiful, perfect bound paperbacks indistinguishable from books produced by major publishing houses. The Espresso Book Machine can be also used for custom publishing, a growing source of revenue, and customers can order books in the store and on-line.

You can walk into the store, request an out-of-print, or hard-to-find title, and a bookseller can print that book for you in approximately four minutes.

We have written about Espresso Book Machines before. They are a nifty piece of technology and from an inventory management point of view make a lot of sense for lower volume titles.

But here's the thing: Amazon (NASDAQ:AMZN) has the same technology. The story on this comes from Businessweek (Amazon vs. Publishers: The Book Battle Continues, Apr 26). (Also check out this video.)

Amazon acquired a rival print-on-demand provider, BookSurge, and began offering publishers the option of supplementing inventory with print-on-demand copies when physical volumes of a title sell out. Now called CreateSpace, the Amazon subsidiary mostly caters to small publishers and self-published authors. The technology has gotten better over time, and print-on-demand books are now indistinguishable from most paperbacks.

So why isn't Amazon sending books it prints itself? It should be able to trump what an Espresso Book Machine can do in terms of quality. The customer is not standing in front of the machine. Amazon could presumably get by with machines that take longer to print but deliver an even higher quality product. Further, this would work great with their distribution model since the book could be printed at whatever fulfillment center is closest to the customer to minimize time and shipping costs.

The problem is that publishers won't let them.

Publishers worry that a widespread shift to print on demand could, like the advent of e-books, disrupt their century-old business model. Companies such as Random House and Simon & Schuster have spent decades investing in their own supply chains, storing books in giant warehouses and developing the transportation infrastructure to ship those volumes to stores within days. If print on demand became widespread, publishers could cut their fixed costs and solve the perennial problem of stores returning unsold books. But that would throw into doubt almost everything else about the way big publishers conduct business, since they're compensated based on the range of services they provide, from editorial guidance to storage and distribution. Print-on-demand technology would make it harder for the publishers to justify keeping a large majority of a book's wholesale price.

One of the New York publishing chiefs says that even allowing titles to be printed on demand by Amazon when shortages occur is a bad idea, since it might encourage the company to order fewer printed books. And having a limitless inventory would give Amazon yet another edge over retailers such as Barnes & Noble, which publishers want to keep in business as a counterweight to the e-commerce juggernaut. Another top executive of a major New York publisher says there's too little trust in Amazon to consider its print-on-demand services.

It is hard to argue that publishing houses are just being paranoid. Amazon has reshaped the book industry in several ways and this would be another. Still, from a supply chain perspective, insisting on printing low-running titles through a conventional supply chain is suboptimal. Conventional supply chains are set up for best sellers and a process more tailored to small titles should do a better job.

Another thing strikes me: There is a research opportunity. Much has been written (some by me) on how contracts can coordinate a supply chain. Those papers usually focus on how to get different parties to carry the right amount of inventory. The action here, however, is to get the parties to agree on the right supply chain structure when one party has sunk an investment in an obsolete technology. Further, there are dynamic issues. The threat of using the obsolete technology guarantees the publisher a decent share of the pie. If the publishers give up that technology, their margins gets squeezed both because they cannot make a credible threat and because they cannot play Amazon off against brick-and-mortar bookstores.

Disclosure: No positions

Source: Amazon And Printing Books On Demand