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Big Retailers Seek Exclusive Deals on Books and Albums

| Written by Justin Dahlheimer | No Comments | Updated on Oct 8, 2008 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/big-retailers-seek-exclusive-deals-books-and-albums/

When a small publisher recently agreed to let Amazon.com be the exclusive seller of a new book about Barack Obama, the deal sparked a flurry of protest from independent booksellers and provided new evidence that the e-commerce giant intends to leverage its power as a retailer to gain more control over the production and distribution of books.

So far, such exclusive distribution deals have been rare in the book world. But they have become increasingly common in the music industry. The nation’s largest music sellers — Wal-Mart, Target, and Best Buy — now routinely secure the right to be the only retailer carrying a new album by a marquis act. Many observers believe the growth of these deals is harming independent music stores and, ultimately, consumers.

Hot Off Amazon’s Presses

Eager to make Robert Kuttner’s acclaimed new book, Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency, available to the 15,000 people who attended the Democratic National Convention in late August, the book’s publisher, Chelsea Green, made a deal with Amazon. Each convention-goer received a coupon to buy the book at a discount at Amazon.com, which used its print-on-demand (POD) technology to churn out copies weeks before the book was shipped to other bookstores on September 15. Amazon also featured the book prominently on its site.

The goal was to bring the book, which Kuttner had just completed, to the market quickly and use the Amazon promotion to build demand that would ultimately payoff in more sales at all retailers, according to Chelsea Green, a well-respected publisher of mostly political and environmental titles. “This is about a publisher\’s commitment to get one of a very few pro-Obama books out into the marketplace in the shortest amount of time,” explained the company’s president, Margo Baldwin.

But independent booksellers felt they had been sidelined by a publisher that, lacking the size and marketing budget of the big publishing houses, had long relied on independent stores to help promote its books.

“Chelsea Green has asked independents to form a partnership with them. You can’t ask us to do the grunt work and then go behind our backs,” said Gayle Shanks, co-owner of Changing Hands bookstore and president of the American Booksellers Association. In an open letter to the book industry, Shanks said the arrangement with Amazon was “short-sighted and counter productive” and that it came at the expense of “supporting those values that underpin a free society that depends on open market access.”

All bookstores have access to print-on-demand. Lightning Source, a POD subsidiary of the book wholesaler Ingram, has a distribution partnership with independent bookstores, as well as chains and even Amazon. A deal with them, according to Shanks, could have made the vouchers redeemable through all retailers, giving convention-goers the option of shopping at Amazon, a chain, their own hometown bookstore, or at one of several independents in Denver.

Hut Landon, executive director of the Northern California Independent Booksellers Association, contends that the real harm is not the lost sales to Amazon. It’s that people get excited about the book and then find that their local bookstore doesn’t have it. “It’s the public perception that independent bookstores aren’t as up-to-speed, which is a huge competitive disadvantage.”

Amazon’s Longterm Strategy

This is only the latest example of what appears to be a concerted strategy by Amazon to leverage its retail market power to control digital books and print-on-demand publishing.

Last year Amazon launched Kindle, a portable electronic reading device. Content for Kindle, including books and subscriptions to newspapers and magazines, can be purchased only through Amazon. To promote Kindle, Amazon has offered free downloads of certain books and exclusive content, such as a commencement speech by the popular author Mitch Albom.

Now Amazon is negotiating with publishers to release books exclusively through Kindle. Its first deal is with Globe Pequot Press, which will publish two titles, biographies of Cindy McCain and Michelle Obama, only on Kindle.

Amazon is also fortifying its position as a manufacturer of books. Earlier this year, the retailer issued a new policy that requires print-on-demand publishers (those who do not keep inventory of their books but have them printed as orders come in) to use Amazon’s POD subsidiary, BookSurge, for any books they sell on its site.

Those who opt to continue using another printer can still sell through Amazon, but under terms that do not make economic sense for publishers: they must offer an even deeper discount to Amazon and keep five copies of each title in its warehouses.

A Maine-based POD publisher, Booklocker.com, has filed a class action lawsuit against Amazon, arguing that the retailer is violating antitrust law by engaging in “tying” “”leveraging its retail market power to force publishers to use its printing service, which some publishers contend offers inferior quality. (More details on the suit here.)

To use BookSurge, publishers have to create electronic files specific to its propriety format. Consequently, publishers who also distribute their books through Lightning Source or another POD service will now have to format their titles twice, a costly venture that also slows down the production of new titles.

The new policy enables Amazon to take both more control and more revenue from publishers. Not only does Amazon charge fees for formatting and printing books, it sets the retail price and wholesale price of the publisher’s title.

Through Kindle, BookSurge, and the “Search Inside” feature that Amazon uses for most other titles sold on its site, the retailer has amassed an enormous electronic library, all of which is accessible only through its propriety technology.

More than a few people are worried that this will ultimately lead to a world in which just one company controls large swaths of what is published and retailed. “It is inevitable that Amazon begins publishing its own titles,” said Lloyd Jassin, who chairs the New York Center for Independent Publishing.

How Borders and Barnes & Noble will respond to Amazon’s actions is unclear. Both may step up efforts to publish their own titles. Borders has a history of publishing books through its subsidiary, State Street Press, that are available only at its stores. Its latest exclusive is Between the Lines: A View Inside American Politics, People, and Culture by Newsweek columnist Jonathan Alter. Barnes & Noble also has its own publishing house, but has generally made its books available to all booksellers.

Barnes & Noble’s response to Chelsea Green’s deal with Amazon was quite different from that of independent bookstores. While the independents complained, most still ordered copies of Kuttner’s book after it became available to them, recognizing it as worthwhile and timely for their customers.

Barnes & Noble instead canceled its order for 10,000 copies “” an indication that, should an arms race of exclusive distribution deals break out among the two book chains and Amazon, it will likely be to the detriment of authors, publishers, and readers, all of whom are better served by a more diverse and open market.

Big-Box Chains Corner New Album Sales

One area where exclusive distribution deals have already gained more than a toehold is the music industry. For several years, big-box retailers, which now account for more than half of all album sales, have been securing deals that allow them to be the only seller of a new album for the first few weeks or months of its release.

Wal-Mart, for example, has been the only store selling new albums by AC/DC, Garth Brooks, Journey, and the Eagles. Starbucks held a 6-week exclusive on an acoustic version of Alanis Morisette’s “Jagged Little Pill.” Target sold a special edition of Bon Jovi’s “Bounce.” Best Buy just snagged Guns N’ Roses’s new album “Democracy.”

These deals are on the rise as bands and record labels try to leverage the marketing power of a big chain to boost sales of an album. But what remains to be seen is whether the damage these deals do to independent stores and overall sales of backlist and lesser known albums will ultimately do more harm than good for the industry and listeners.

“Its very insulting that a trading partner would do this,” said Don Van Cleave, president of the Coalition of Independent Music Stores. “It’s hypocritical for a record label to expect us to sell their little bands, but keeps their big bands away from us.”

Like bookstores, a primary concern for independents is not disappointing their customers or appearing out of date. Many end up buying copies of exclusive releases from the chains. “It’s humiliating to have to go to Wal-Mart and buy all their records,” said Van Cleave, “but we can’t send customers out the door””they may never come back.”

Mike Dreese, CEO of Newbury Comics, an independent chain of 27 record stores in the Boston asked in a recent Billboard article, “At what point does that level of exclusivity hurt the public? I don’t know yet, but we are getting there. As a society, we want to see creative competition, not monopoly exploitation.”

Exclusive distribution deals are not necessarily a violation of antitrust law and can have a legitimate place in a competitive market, according to Albert Foer, president of the American Antitrust Institute. “The strength of an antitrust argument would increase as the period for the exclusivity expands and if independents can demonstrate that they have been foreclosed from the market to a more substantial degree,” he explained.

Most independent music stores have given up trying to compete with the chains for the big bands. Instead, they focus on up-and-coming artists and have started carrying exclusive material from these acts. Think Indie, a nationwide consortium of independent music retailers, provides its members with a catalogue of exclusive releases, live shows, memorabilia, and other limited edition material that is unavailable at the chains.

Marginalizing independent music stores may cost the industry more than it gains from working with Wal-Mart and other chains. Independents have “unmatched knowledge and a far better catalogue of music,” according to Bob Fuchs of the Electric Fetus in Minneapolis. They stock a broad backlist of albums and play a critical role in providing avenues for new artists to build popularity.

The chains, on the other hand, have no real interest in music “” or anything they sell for that matter. All that counts is sales-per-square-foot. Even as they have negotiated exclusive rights to an expanding roster of albums over the last year, Wal-Mart, Target, and Best Buy have also been downsizing the amount of store space they devote to CDs.

 

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About Justin Dahlheimer

Justin Dahlheimer is a researcher with the Institute for Local Self-Reliance and the author of the reports, “Balancing Budgets by Raising Depletion Taxes” and “The Benefits of North Dakota’s Pharmacy Ownership Law.”

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