Features

Amazon's Hit Man


In November 1997, on a night of pounding rain in midtown Manhattan, Rupert Murdoch threw a party for Jane Friedman, the new chief executive officer of News Corp.’s (NWS) HarperCollins book division. The luminaries of the publishing business, such as Random House’s then-CEO Alberto Vitale and literary agent Lynn Nesbit, crowded into the Monkey Bar on 54th Street, with its red-leather booths and hand-painted murals of gamboling chimps. Trudging six blocks through the downpour from the Time & Life Building, Laurence J. Kirshbaum, then the powerful head of Time Warner Book Group, brought a guest: a young online bookseller named Jeffrey P. Bezos, whose ambitions would eventually end up affecting the lives of everybody at the party. “It was one of those moments in your life where you remember everything,” Kirshbaum says. “In fact, I think Bezos still owes me an umbrella.”

How times have changed. Physical book sales have been flat for a decade and are starting to get eclipsed by e-books. Friedman left News Corp. in 2008. And Jeff Bezos, who once courted the publishing aristocracy of New York, now competes against them. Last May, Amazon (AMZN) hired Kirshbaum, 67, to run Amazon Publishing, a fledgling New York-based imprint whose lofty goal is to publish bestselling books by big-name authors—the bread and butter of New York’s book industry. In the high-rise offices of the big publishers, with their crowded bookshelves and resplendent views, the reaction to Amazon’s move is analogous to the screech of a small woodland creature being pursued by a jungle predator.

In interviews, Amazon executives cast their new effort as an experiment in the booming world of e-books, not a plan to displace the Big Six—Random House, Simon & Schuster (CBS), HarperCollins, Penguin (PSO), Hachette (MMB:FP), and Macmillan. “What we’re building is more like an in-house laboratory where authors and editors and marketers can test new ideas,” says Jeff Belle, vice-president of Amazon Publishing and Kirshbaum’s boss. “Success to us means working with authors who want to find new ways to connect with more readers.”

Talk like that hasn’t mollified publishers, and it’s easy to see why. They’re trying to protect a century-old business model—and their role as nurturers of literary culture—from encroachment by a company that consistently reimagines how industries can be run more efficiently. Book publishing, an inefficient industry if there ever was one, seems ripe for reimagining. According to a recent report by the Association of American Publishers, sales of adult paperbacks and hardcovers fell 18 percent between 2010 and 2011. Store chains such as Borders have been cartwheeling into bankruptcy, and independent shops are struggling to compete with the advantages enjoyed by online retailers, such as their freedom from collecting sales tax in many states. The lone bright spot is the rising sales of electronic books, but even that landscape is blighted: Fierce warfare for control of the new market, between Amazon.com, Apple (AAPL), Google (GOOG), and Barnes & Noble (BKS), threatens to turn minor combatants into accidental casualties.

And now this. Amazon could be an unstoppable competitor to big publishing houses. If history is any guide, Bezos, who declined to comment for this story, doesn’t care whether he loses money on books for the larger cause of stocking the Kindle with exclusive content unavailable in Barnes & Noble’s Nook or Apple’s iBookstores. He’s also got almost infinitely deep pockets for spending on advances to top authors. Even more awkwardly for publishers, Amazon is their largest retailer, so they are now in the position of having to compete against an important business partner. On the West Coast people cheerfully call this kind of arrangement coopetition. On the East Coast it’s usually referred to as getting stabbed in the back.

Over the last six months, Kirshbaum has been making slow, steady progress on behalf of Amazon. His division has signed authors such as Timothy Ferriss, the self-help guru, James Franco, the actor and budding novelist, and Bob Knight, the volcanic former basketball coach who will pen a business book, The Power of Negative Thinking. Even Nancy Pearl, the popular librarian and author of the Book Lust reading guides, announced she was partnering with Amazon in a project to publish 12 of her favorite novels that were no longer in print. In their biggest splash so far, Kirshbaum and Amazon paid an advance of more than $800,000 for a memoir by actress and director Penny Marshall, whose name hasn’t been mentioned so frequently in New York media circles since the days of Laverne & Shirley. By pursuing authors directly, Amazon can cut out the middleman and pass on the savings to authors in the form of higher advances and royalties, and to readers in the form of lower book prices. Executives at the major publishing houses see all of this and conclude that Amazon aims to put them out of business.

In the middle of this stew of rancor and mistrust sits Kirshbaum. He was once the ultimate book industry insider, widely known and almost universally liked. He has a well-honed instinct for big, mass-culture books and was thinking about e-books—and losing money on them—long before almost anyone else in the industry. Many of his former peers now consider Kirshbaum a turncoat. In interviews, more than a dozen publishing executives said he had gone over to the dark side; some said they’d conveyed that sentiment to Kirshbaum directly. (None of the executives would speak on the record because Amazon is still a vitally important retail partner.) “I have a message I really believe in,” Kirshbaum says. “Which is that we’re trying to innovate in ways that can help everybody. We are trying to create a tide that will lift all boats.”
 

 
For years the marriage between Amazon.com and the big New York-based publishers was mostly a happy one. Amazon was expanding the overall market for books and giving publishers a new way to connect with readers. A few shrewd book-industry types even found a way to climb aboard the rocket ship. Jason Epstein, a veteran Random House editor, was an early consultant to Bezos and received stock in the company before it went public. Kirshbaum also saw Amazon’s promise early and bought shares in its 1997 initial public offering.

Back then, Bezos was cultivating friendly relations with publishers and trying to make his e-commerce company profitable. In 1999, when Businessweek asked him whether he would ever move from the business of selling books into the business of making them, Bezos demurred: “We’re really, really good at exactly one thing, which is helping customers discover things that they might want to buy online. And that’s enough.”

The rifts opened eight years later, during Amazon’s development of the Kindle e-reader. Representatives of Amazon streamed through the offices of New York publishers, urging them to accelerate the pace of digitizing their catalogs ahead of the device’s big launch. The book houses cooperated and even obediently kept the successive Kindle prototypes that Amazon showed them a secret from the outside world. Then Bezos got on stage at the W New York (HOT) hotel in Union Square in November 2007, and as part of the unveiling of the Kindle, proclaimed that he would sell New York Times bestsellers for $9.99.

Publishers were shocked, according to interviews with several industry executives. Amid all the collaborative preparations, they say, Amazon hadn’t divulged anything about its aggressive pricing plans. The worries escalated as Bezos appeared on talk shows, making promises to consumers to expect sub-$10 prices for popular digital books. Amazon itself was subsidizing the low prices and losing money on most of these titles, but publishers still had reason to be alarmed. Such a low price could set a new expectation in readers’ minds about how much books are worth and put enormous pressure on traditional brick-and-mortar booksellers selling print books at considerably higher prices.

Publishers could easily envision that the dawn of e-books might put those retailers out of business and give Amazon a monopoly on selling books. To imagine the implications of that outcome, they could and did talk to their music industry peers, who had allowed Apple to set the price of a digital song at 99¢ in the iTunes music store. That all but killed the compact disc, hastened the demise of music retailers such as Tower Records, and concentrated market power with Apple.

The discord between Amazon and book publishers spilled into the open in late 2009. Hachette and HarperCollins delayed the Kindle editions of memoirs by Edward M. Kennedy and Sarah Palin, hoping to direct readers to the pricier hardcovers. Inside their boardrooms, book publishers were considering a more dramatic response: demanding that they, not Amazon, set the price of titles for sale on the site.

In early 2010, a few weeks before Steve Jobs introduced the iPad, publishers met with Apple to hammer out prices for books on the forthcoming tablet. Publishers were happy to see the Kindle get some competition, and Apple needed happy publishers willing to sell their titles on the iPad. So Apple agreed to let the publishers set the prices for their e-books. The publishers decided they wanted the same arrangement—known in the business as “agency pricing”—with Amazon.

John Sargent, the plain-spoken chief executive of Macmillan Publishing, was the first to get on a plane to Seattle to inform Amazon of the decision and to threaten to withhold Macmillan’s books if Amazon did not agree to the new pricing model. Bezos and his colleagues reacted angrily by removing options to buy Macmillan’s books directly from Amazon. Amazon eventually relented, and e-book prices on bestsellers jumped from $9.99 to $12.99 or higher. (The publishers’ move has triggered ongoing antitrust investigations in Europe and Washington, D.C., over whether book publishers and Apple illegally colluded to raise e-book prices.)

Throughout the skirmish, Amazon was putting together its own publishing business—signing up books over which it, and not traditional publishers, would have total control on matters like pricing. At first, those efforts appeared nonthreatening. AmazonEncore, announced in May 2009, was set up to allow writers to digitally self-publish their work and to republish books that were no longer in print. A year later, Amazon introduced AmazonCrossing, an imprint to publish English-language translations of foreign-language books (one of them, The Hangman’s Daughter by Oliver Pötzsch, was translated from German and became a bestseller). Last year, Amazon announced a collection of Seattle-based imprints devoted to mysteries, thrillers, romance, and science fiction. None of those efforts in niche genres kept New York publishers and editors awake at night.

Then last March, Random House, the biggest book publisher in the U.S., announced that it too would sell e-books using agency pricing. Amazon could no longer run the best play out of its playbook—slash prices and sustain losses in the short term to gain market share over the long term. Sure enough, with no stark price disadvantage, the Nook e-reader store and Apple’s iBookstore for the iPad started to gain market share. “For the first time, a level playing field was going to get forced on Amazon,” says James Gray, a director at British bookseller John Smith & Son and the former chief strategy officer of the Ingram Content Group, a major book distributor. Amazon execs “were basically spitting blood and nails.”

The next month, an Amazon recruiter sent an e-mail to several editors at big publishing houses, looking for someone to launch a new New York-based publishing imprint. “The imprint will be supported with a large budget, and its success will directly impact the success of Amazon’s overall business,” read the e-mail, which was obtained by Bloomberg Businessweek.

Kirshbaum, who left Warner Books in 2005 to become an agent, was helping Amazon’s Jeff Belle, in an unpaid capacity, to recruit editors for the new publishing effort. In the middle of that process, Belle asked Kirshbaum if he himself wanted to come aboard to lead the new effort. “Well, the thought had crossed my mind,” Kirshbaum replied.

The hire was announced in early May. Kirshbaum gave Amazon’s audacious goal, to recruit big-name authors, immediate credibility. “Larry Kirshbaum,” says Mike Shatzkin, a publishing consultant who writes a widely followed industry blog, “has gone from one of the most well-liked people in publishing to the one of the most reviled.”
 

 
Kirshbaum was born in Chicago in 1945. His father was a commodities trader at the Chicago Board of Trade, and his mom wrote jingles for an advertising agency. He attended the University of Michigan, where he was managing editor of the school newspaper (at Warner Books, he decorated his office with Michigan gear and would sing the fight song on request). After graduation, he worked as a reporter for Newsweek and in 1969 co-authored a book, Is the Library Burning?, on the campus protest movement, which was published by Random House. It now sells used for 8¢ on Amazon.

While hawking his book, Kirshbaum grew infatuated with publishing. He moved to New York and joined the marketing department at Random House, and in 1974 landed at the publisher that would become Warner Books, as marketing vice-president. He would spend more than three decades there and rise to become chairman and CEO, presiding over a golden age in which the company combined the literary sensibilities of its Little, Brown imprint with the mass-market muscle of Warner Books. Kirshbaum and his team paid big advances to publish books by the most prominent business figures in the world, including Bill Gates, Jack Welch, and Michael Eisner. They signed bestselling novelists such as David Baldacci, James Patterson, Nelson DeMille, Sandra Brown, and Nicholas Sparks. There were some breakout successes, like the treacly 1992 The Bridges of Madison County, and crass commercial calls, such as Madonna’s pornographic coffee table book, Sex, which was wrapped in plastic and sold for $50.

Kirshbaum was also an early backer of electronic books. In 1995 he formed a group called Time Warner Electronic Publishing and started putting books on floppy disks. A few years later he got Time Warner (TWX) to invest more than $10 million to develop digital titles for an early e-reading device called the Rocketbook. That didn’t work either. “The world just wasn’t ready for it,” Kirshbaum says. “We didn’t have the Kindle.”

Kirshbaum left Warner Books at the end of 2005. He set up a literary agency, LJK Literary, and went on to represent Steve Forbes, Rafael Nadal, and economist Jeremy Rifkin. One common refrain from his current rivals is that he failed as a book agent. Kirshbaum allows that it was not a perfect fit. “I think I’m a publisher at heart,” he says. “I love the business.”

As he began to work on Amazon’s behalf last summer, agents, at least, were excited, because getting deep-pocketed Amazon into the game of bidding for books could translate into larger advances. “I want to do business with Larry wherever he is,” says agent Scott Waxman, who sold Amazon the Bob Knight book. “Do I think this is something that would make the Big Six publishers uncomfortable? Yes, with a big capital Y.”

Kirshbaum suggested in some conversations with publishing execs that perhaps Amazon could collaborate—it would handle e-books and let traditional houses print their paper copies. (On Jan. 24 his group announced such an agreement with Houghton Mifflin Harcourt, which will license Amazon’s books and distribute copies in print under its New Harvest imprint.) Friends suggested that Kirshbaum had been out of the business too long and didn’t realize that Amazon was now viewed in New York circles as predatory and pathologically secretive.

Kirshbaum acknowledges some friction with his former cohorts but downplays it, pointing to the industry’s similarly fearful reaction to Barnes & Noble’s 2003 acquisition of the publisher Sterling for $115 million. Publishers thought their world was coming to end then, too. (The beleaguered retailer recently said it plans to sell Sterling.) Nancy Pearl, the librarian-author, knows the animosity is real and has experienced it firsthand. She says that when she announced her deal with Amazon this month, the ensuing criticism on Facebook and Twitter was so nasty that she stopped checking social media. “I suspected people would not be happy with this,” she says. “But I didn’t expect the vitriol.”
 

 
“Publishers are selling drinks on the Titanic,” says Joe Konrath. “They are doing so much to protect their paper industry that they are disregarding the needs of customers and are treating authors poorly.” Konrath was once a struggling mystery writer living outside Chicago with hundreds of rejections to his name, nine unpublished novels, and a tempestuous relationship with the publisher of two of his books, Hyperion. Then two years ago he started experimenting with uploading those books directly to the Kindle marketplace. Now, under the name J.A. Konrath, he says he’s making about $4,000 a day and collecting a 70 percent royalty on every book he sells.

When Kirshbaum started at Amazon, he found big-name authors who shared Konrath’s willingness to try a nontraditional approach. Tim Ferriss’s books, The 4-Hour Workweek and The 4-Hour Body, were published by Random House, and both appeared on the New York Times bestseller list. Amazon will publish his new book, The 4-Hour Chef, in September. “For me it was a choice between publishers embracing technology and a world-class technology company embracing publishing,” Ferris says. “The latter will give me more of a chance to improvise and experiment.”

It’s becoming clear what Amazon and its authors mean when they talk about experimentation. In November, Amazon introduced a free e-book lending library. Members of its Prime two-day shipping program who own a Kindle can select one book at a time and download it for free. Big publishers, who already didn’t like the $9.99 price, reacted badly to the proposed $0 price and declined to participate in the program. Amazon’s own books, of course, will be a part of the lending club. In the future, Amazon could also do things like preview chapters of its forthcoming books to sell individually as “Kindle Singles” or package an e-book together with an audio book and sell it at one price, so that readers can switch between the two formats as they’re on the move.

One unresolved challenge for Amazon will be to find a way to get its paper books into traditional bookstores. Amazon’s deal with Houghton Mifflin Harcourt will make print books available for stores that want them. But it’s difficult to imagine Wal-Mart Stores (WMT) and Costco Wholesale (COST), two of the biggest booksellers in the country, going out of their way to lend their archenemy a hand. Barnes & Noble appears to be locked in an awkward standoff with Amazon over this issue. CEO William J. Lynch Jr. says Amazon must make its books available in the Nook format before he will carry them on his shelves. “Their strategy is to restrict content to their own retailing platform, which we think is a bad thing for consumers,” he says. Amazon executives say they’re ready to compromise on this issue but that Barnes & Noble is not.

Kirshbaum’s rivals predict, perhaps wishfully, that Amazon is about to get an education in the burdens of book publishing. “They will understand there’s a reason publishers exist, and it’s not just to hike up prices,” says Morgan Entreken, the president of Grove/Atlantic. The late-night phone calls from neurotic authors, the frantic edits on awful manuscripts—this is a business that demands more handholding than Amazon generally seems comfortable with. Then again, Amazon can deliver a trampoline or a 20-pack of ramen in 24 hours, so it’s fairly comfortable with complexity.

Critics even whisper that Kirshbaum has, in fact, already failed, because he has yet to lure a true franchise novelist, a Stephen King. Jeff Belle, the Amazon vice-president, shrugs that off. “Larry just sat down in his chair in July, when there was literally no chair to sit in. He is starting up a new business, hiring a team, and acquiring books all at once.”

Bezos and his minions will, characteristically, gauge the success of their new publishing effort over the long term. They are likely positioning Amazon Publishing for a world that is still a few years away, in which a majority of books are distributed electronically. In that world there could be even fewer traditional bookstores than there are now, and Amazon may look a whole lot more appealing to prominent authors. And Larry Kirshbaum could once again be one of the most popular guys in New York.

Stone_190
Stone is a senior writer for Bloomberg Businessweek in San Francisco. He is the author of The Everything Store: Jeff Bezos and the Age of Amazon (Little, Brown; October 2013). Follow him on Twitter @BradStone.

Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • NWS
    (News Corp)
    • $14.48 USD
    • 0.11
    • 0.76%
  • AMZN
    (Amazon.com Inc)
    • $297.73 USD
    • -1.15
    • -0.39%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus