A few days ago, I posted a blog on the benefits of horizontal markets. In researching the post, I came across a large number of ebook distributors -- some vertical and some horizontal. However, nearly all were small, most with a very limited number of titles. It is not difficult to see that ebook distribution is dominated by a few companies. Why? After all, the costs of setting up and selling ebooks is relatively low. Any company who wants to pay for server space could set up an ebook store and start selling. And, trust me, many have. Why, then, is ebook distribution dominated by only a handful of companies? The answer comes from understanding the nature of platforms and two-sided networks.
Ebook distributors connect readers with publishers and authors. These companies create relationships with readers (which costs quite a bit) and maintain those relationships over time (which costs less and offers considerable profit). Because of this, the industry favors larger companies that can leverage existing relationships, that can afford a significant customer acquisition investment, and that have the marketing know-how to bring consumers in. Because of this, it is not surprising that the largest ebook distributors are large companies: Amazon and Sony. (And, they are being joined by other heavyweights: Google and Barnes & Noble).
However, something more fundamental is happening: As a company increases in size (measured by the number of users it is able to acquire and retain), its ebook platform becomes more attractive to publishers and authors. This large base of users provides an incentive for additional publishers to join and for existing publishers to add more content. Importantly, this pattern repeats itself: An increase in size on one side of the platform leads to an increase in size on the other. More users leads to more content and more content leads to more users.
To compete successfully, therefore, distributors must pass a certain threshold of users and content. While theoretically many companies could pass this threshold, the ebook market is relatively small, leading to the success of a few large companies.
These large companies have recognized that the nature of platforms and two-sided networks provides an opportunity to gain market share and exert control over the market. Amazon has grown the size of its platform by subsidizing the content creation side -- publishers are currently paid the same amount for an ebook as a print book. This increases the incentive to provide content by offsetting any potential print cannibalization. And, with this content comes new users.
But, creating a large platform only has value if the company can keep customers. In Part II of this post, I’ll examine how distributors have attempted to lock consumers into a platform by using proprietary file formats and DRM.
