by Brad Stone
Over the next year, Miller tangled with the European divisions of Random House, Hachette, and Bloomsbury, the publisher of the Harry Potter series. “I did everything I could to screw with their performance,” he says. He took selections of their catalog to full price and yanked their books from Amazon’s recommendation engine; with some titles, like travel books, he promoted comparable books from competitors. Miller’s constant search for new points of leverage exploited the anxieties of neurotic authors who obsessively tracked sales rank—the number on Amazon.com that showed an author how well his or her book was doing compared to other products on the site. “We would constantly meet with authors, so we’d know who would be watching their rankings.” Miller says. “I knew these people would be on their phones the second they saw their sales numbers drop.”
These tactics were not unique to Amazon. The company had finally learned the tricks of the century-old trade that is modern retail. Profit margin is finite. Better financial terms with suppliers translate directly into a healthier bottom line—and create the foundation on which everyday low prices become possible.
Walmart in particular had mastered this perpetual coercion of suppliers, and it did it with missionary zeal and the belief that it led to the low prices that made products like diapers affordable to lower- and middle-class Americans. Walmart is notorious for demanding that suppliers open offices in Bentonville, Arkansas, and integrate certain technologies, like RFID chips, into their products. The company is also known for specifying just how much it will pay for products and for demanding severe concessions if it believes a supplier’s profit margin is too high.
In Amazon’s early years, when the likes of Sony and Disney refused to sell directly to the company, Bezos had been on the short end of this Darwinian dynamic. He had learned the game firsthand. Now the balance of power was shifting. Now suppliers needed Amazon more than Amazon needed them.
In the midst of this changing landscape, Amazon started to pitch publishers on the Kindle.
The first two Kindle emissaries to the New York–based publishers presented an unlikely picture. Dan Rose, a longtime Amazon business development executive, led the early effort to bring publishers on board. Rose was of medium height, sported dot-com casual clothes like khakis and royal blue oxford shirts, and spoke easily about the coming opportunities of the digital age. He visited publishers with a former Microsoft product manager named Jeff Steele, an openly homosexual six-foot-four bodybuilder who wore dark suits and ties and cut a menacing figure—but who in reality had an exceedingly gentle temperament.
Their goal, set in the first half of 2006, was to convince jittery publishers to place yet another bet on e-books, despite the many previous failures and false starts in digital publishing. They were handicapped in their mission: Bezos didn’t actually permit them to acknowledge the existence of the Kindle, which remained top secret.
So Rose and Steele were forced to approach the topic circuitously, talking up Search Inside the Book and an e-book standard created by the French company Mobipocket, which Amazon acquired in 2005 to jump-start its e-book initiative. Owning Mobi technology allowed Amazon e-books to appear on a variety of different devices, like cell phones and PDAs.
Without any hint of why the prospects for e-books might soon brighten, publishers were reluctant to act. They already encoded their most popular titles in the standards supported by Sony, Adobe, Microsoft, and Palm, yet e-books remained an infinitesimally small part of their business. Digitizing backlist books also presented enormous legal challenges. For titles published prior to the late 1990s, it was sometimes unclear who actually owned the digital rights, and publishers were often loath to revisit the issue with authors and their agents, as they might view it as an opportunity to renegotiate their entire deal.
Rose and Steele’s progress was slow. Adding to the pressure, Bezos wanted biweekly reports on their march toward the goal of one hundred thousand e-books. “I described my job as dragging publishers kicking and screaming into the twenty-first century,” says Jeff Steele. “We found they really weren’t willing to do something interesting.” That summer, the duo finally convinced Bezos they couldn’t hide the ball any longer: they had to tell publishers about the Kindle. “Once they see it, they will get excited about it,” Steele argued. Bezos reluctantly agreed to allow them to show publishers a Kindle prototype, as long as it was within the confines of a strict nondisclosure agreement.
In the fall of 2006, Amazon began showing the device to publishers. At the time, Fiona was unimpressive; it looked like the cream-colored bastard child of a BlackBerry and a calculator, and it froze up as often as it worked. Publishers thought Amazon might be hawking the e-book equivalent of Betamax, the failed Sony home-video format of the 1970s. They saw mostly what wasn’t there: no color, no video, no backlight. The early prototypes did not have working wireless access either, though Amazon executives described what the experience might be like while they feebly demonstrated the device by loading SD cards with sample e-books.
During these unproductive months, Amazon developers conceived of a potential shortcut to their goal, which they dubbed Topaz. Topaz was a program to take the scanned digital files from Search Inside the Book and repurpose them in a format suitable for the Kindle. Amazon offered this as an option to publishers, arguing that it would help them decrease the costs of digitizing their catalogs, although the digital file would remain exclusive to the Kindle. Large publishers like Simon and Schuster did not want to create a new dependency on Amazon, but some smaller publishers jumped at the option.
By early 2007, Amazon could demonstrate the Kindle’s wireless access, and, finally, some publishers understood its potential. John Sargent, the CEO of Macmillan, and some other executives became converts when they recognized for the first time that giving customers instant gratification—the immediate download of any e-book at any time—might allow Amazon to succeed where Sony and others had failed. Of course, as Bezos had feared, it leaked. Engadget, the technology blog, had the first details about Amazon’s new e-reading device, and soon after, Victoria Barnsley, the CEO of HarperCollins UK, confirmed at an industry event that she had seen the device and was “rather impressed.”12
The Kindle was supposed to go on sale for the 2006 holidays. But it was delayed another year as Bezos relentlessly pressured Steve Kessel and his team for fixes, new features, and a larger catalog of e-books. By that time, Dan Rose had departed Amazon to join the budding social network Facebook, and Jeff Steele and his group reported directly to Kessel. Steele also worked alongside the merchandising director from the physical books group, Laura Porco.
Porco, a graduate of Ohio State University and one of Lyn Blake’s hires, was a blunt and tenacious advocate for Amazon’s cause. She channeled the intensity of Bezos, ruthlessly aiming to exact profit margins from Amazon’s relationships with its suppliers wherever she could. Prior to joining the Kindle group, she battled with the movie studios, pulling Disney out of Amazon’s recommendations in the midst of one negotiation (a tactic that didn’t work) and clashing so fiercely with executives at Warner Home Video that the studio famously banned her from its buildings, according to several of Porco’s colleagues. One Random House executive called her Amazon’s “battering ram.” Even her colleagues were in awe of her Hyde-like transformation when conducting the company’s business. “Laura can be one of the kindest people, but when it comes to Amazon she wants to drink blood,” says Christopher Smith.
A few years after the original Kindle negotiations, a publishing-industry executive visited Amazon to discuss a job opening at the company. He was interviewed by a series of Amazon book executives, including Porco, who asked only one question: “What is your negotiation strategy?” The executive replied that he believed a successful negotiation must make both sides happy. Porco’s passionate view, according to this executive (who did not get the job), was that this was an “un-Amazon” response and that one party must always win.
This is not to pick on
a particular Amazon executive, but to illustrate a point. Inside the company at the time, the culture was self-perpetuating, and those who couldn’t channel Bezos’s fervor on behalf of Amazon and its customers didn’t stay with the company. Those who could do it stayed and advanced.
Erick Goss, a veteran of the book group, could no longer abide the Jeff Bots, and he moved to Nashville in 2006 to care for his ailing mother. He took a job at a competitor, Magazines.com, and Amazon threatened to sue him for violating his noncompete clause. (The matter was settled privately.) Goss admitted to mixed emotions about Amazon. He was proud of the difficult things he and his colleagues had accomplished. But he also found it increasingly hard to reconcile the company’s approach toward its partners with his own Christian values and says that for a year after leaving Amazon, he had post-traumatic stress disorder.
Jeff Steele, the gentle giant who spearheaded Amazon’s outreach to the publishers, also grew to dislike Amazon’s creeping aggressiveness. “I didn’t like to bully people. Every reasonable business-development deal should involve some sort of compromise, some give-and-take,” he says. “I just got uncomfortable.” In what became the final straw, Steele quarreled with Kessel over the terms of Amazon’s contract with Oxford University Press, which supplied the digital dictionary that was embedded in the Kindle. Kessel wanted to renegotiate the already completed contract to exact more favorable terms from the publisher. Steele bluntly told him that the deal had already been negotiated and that it was unethical to revisit the contract. Soon after, Steele got into a shouting match with Laura Porco and was asked by Kessel to collect his things and leave the company. Porco then took over the Kindle effort.
The next few months were tense. Amazon’s inducements to publishers were followed by threats. Publishers that didn’t digitize enough of their catalogs, or didn’t do it fast enough, were told they faced losing their prominence in Amazon’s search results and in its recommendations to customers. Years earlier, the music labels had scampered into the arms of Apple despite their reservations, since they were facing the even more ominous threat of rampant music piracy. But books were not as easily pirated and shared online, and book publishers feared no similar bogeyman. So Bezos finally had to turn Amazon into one.
What had started out as Amazon’s soliciting publishers for help had evolved into the equivalent of a parent threatening a child. After realizing they did not yet have the Oprah Winfrey book club pick, One Hundred Years of Solitude by Gabriel García Márquez, Porco sent an e-mail to Random House’s head of sales demanding to know why there was no e-book version available. The note, which came during the middle of the night New York time, was so contemptuous and incendiary that it made the rounds within the publishing company. (Knopf, the Random House imprint that published the book, wouldn’t have the digital rights for another year.)
Publishers felt caught up in a schizophrenic assault by Amazon that combined supplication and threats and alternated urgency with delay. Porco and her team presented list after list of books that publishers needed to digitize, then screamed when e-books weren’t produced fast enough. Amazon also appealed directly to agents and authors, alienating publishers, who were uncomfortable seeing one of the world’s largest retailers speaking with their most prominent authors. “It seems clear to me that the insanity being directed at us was coming directly from Jeff Bezos, who had some mania about a magic number that needed to be hit about the number of titles available on the Kindle on the word go,” says one publishing executive.
Amazon and its publishing partners now occupied entirely different worlds. The e-book business didn’t exist in any meaningful way, so publishers couldn’t understand why they were being berated and punished for not embracing it. Amazon executives saw themselves as racing toward the future and fulfilling Bezos’s vision of making every book ever printed available for instant digital delivery, but at the same time they were trying desperately to beat Apple and Google to the next vital phase in the evolution of digital media.
And there was one other ingredient in this piquant stew. Bezos decided that the digital versions of the most popular books and new releases would have a flat price of $9.99. There was no research behind that number—it was Bezos’s gut call, fashioned after Apple’s successful ninety-nine-cent price tag for a digital single in iTunes and based on the assumption that consumers would expect to pay less for an e-book than they did for a traditional book, as an e-book had none of the costs associated with printing and storage. Since Amazon bought e-books from publishers at the same wholesale price as it bought physical books, typically paying around fifteen dollars for a book that would retail at thirty, that meant it would lose money on many of its sales. Bezos was fine with that—he believed publishers would eventually be forced to lower their wholesale prices on e-books to reflect the lower costs of publication. In the meantime, it was just the kind of investment in Amazon’s future that he loved. “Customers are smart, and we felt like they would expect and deserve digital books to be lower priced than physical books,” says Steve Kessel.
Amazon knew quite well that publishers would absolutely hate the $9.99 price. The $9.99 e-books were considerably more appealing to some customers than the more expensive hardcovers, the industry’s most profitable format, and the pricing pulled the rug out from under traditional retailers, particularly independent booksellers, who would suddenly find their shelves stocked with what some book buyers might soon view as overly expensive relics. Everyone had watched this precise dynamic play out in music, with disastrous consequences for physical retailers.
So Amazon decided not to let publishers know about the planned $9.99 price, lest they object. This was easily rationalized; retailers have no obligation to tell their suppliers how they plan to price products, and doing so could theoretically raise the specter of vertical price fixing and attract the attention of antitrust authorities. Still, Amazon had approached publishers as a partner, and now it was deliberately withholding a key piece of information. “We were instructed not to talk about pricing strategy,” Jeff Steele says. “We knew that if we priced e-books too low, they would fear it would devalue their product. So we just said pricing had not yet been decided.”
Oblivious to the pricing plans, publishers slowly came aboard, digitizing larger parts of their catalog. By the fall of 2007, Amazon had ninety thousand books in the Kindle library, tantalizingly close to Bezos’s goal. Kindle owners would have the equivalent of a Barnes & Noble bookstore at their fingertips.
When Bezos finally stopped delaying and set the launch of the first Kindle, executives from all the major book publishers flocked to the press conference. They had been bruised and battered by Amazon over the past few years but they came together as an industry to take a cautious step toward what promised to be the inevitable future of the written word—a future with a major surprise waiting for them.
On November 19, 2007, Jeff Bezos stepped onto a stage at the W Hotel in lower Manhattan to introduce the Kindle. He spoke to an audience of a hundred or so journalists and publishing executives, a relatively small crowd compared to the reverential throngs who gathered for the product rollouts of Apple. Wearing a blue sport coat and khakis, Bezos stated that Amazon’s new device was the successor to the five-hundred-and-fifty-year-old invention of blacksmith Johannes Gutenberg, the movable-type printing press. “Why are books the last bastion of analog?” Bezos asked that day. “The question is, can you improve upon something as highly evolved and as well suited to its task as the book, and if so, how?”
The original Kindle, priced at $399, was clearly the product of all the compromises and anxieties that had gone into its labored three-year development. It was meant to disappear in the reader’s hands, yet it sported a wedge-shaped body with a jumble of angular buttons, an attempt to make a bold design statement while allowing for the easy entry of text. Bezos wanted a device that did one thing extremely well. But the former Palm engineers at Lab126 had watched the PalmPilot get overtaken by more versatile gadget
s, so at the last moment they packed the Kindle with other features, like a Web browser and an MP3 player, which were quarantined in an unusual “experimental” section of the device.
In retrospect, the first Kindle provided an exultant answer to Bezos’s question. In many respects, it was superior to its analog predecessor, the physical book. It weighed ten ounces and could carry two hundred titles. The E Ink screen was easy on the eyes. Whispernet, the name Amazon gave to the Kindle’s free 3G cellular network, allowed readers to painlessly download books in a flash. “I think the reason Kindle succeeded while others failed is that we were obsessive, not about trying to build the sexiest gadget in the world, but rather [about building] something that actually fulfilled what people wanted,” says Russ Grandinetti, a faithful Jeff Bot who later joined the Kindle team.
Competitors were caught flat-footed by the success of the Kindle. A few weeks before the W Hotel event, I wrote about the forthcoming launch for the New York Times and spoke to Stephen Riggio, then the CEO of Barnes & Noble. Riggio and his brother were still bruised from their early foray into e-reading with the Rocketbook and felt that customers had flatly rejected the idea of e-books. “The physical value of the book is something that cannot be replicated in digital form,” Riggio told me. “People love to collect books and to have them in their home and on their shelves. I would say it could never be identically replicated because of the value of books as physical objects in consumers’ minds.”13
Riggio had heard the rumors about the forthcoming Kindle but doubted Amazon’s prospects. “Certainly there’s an opportunity to get back into the business but we think it’s small at this moment and probably will be small for the next couple of years,” he said. “When the market is there, we’ll be there.”