Everyone knows that e-books are overpriced. A few megabytes of text cost nearly the
same as an actual hardcover book, plus the e-reader itself will set you back another
$100 or so. Additionally, you can’t sell a used e-book after you’re done. But the e-book
market is surging, and e-book sales overtook hardcovers in copies sold during 2011 on
Amazon.com. Random House said that over 20% of their sales came from ebooks in the
first half of 2011. http://paidcontent.org/article/419-over-20-percent-of-random-house-
Historically, publishers have paid bookstores such as Barnes & Noble to distribute their
titles, and as sales moved to the internet they began to rely on sites like Amazon. For
hardcover books, publishers like Random House could easily ship books to Amazon’s
warehouse and rely on them to take care of moving the merchandise. But with e-books,
the necessity for a middle man has dissipated.
According to a NY Times article, http://www.nytimes.com/2010/03/01/business/media/
01ebooks.html?_r=1, the middle man generally takes about 50% of the price of a book.
Wouldn’t it be great if a publisher such as Random House, the largest publisher in the
world, could cut out the middleman? Amazon currently has a 70% market share for e-
books, and Random House is the biggest publisher. Random House gives Amazon about
50% per e-book’s profit when it could be selling to the consumer directly. Random
House could put itself in great position by purchasing an e-reader, such as Kobo, and sell
books directly through it.
Of course, Random House still needs to offer their books on Amazon, if only because
Amazon has the largest market share. But by cutting out the middle man, Random House
could sell e-books for 50% less than print books (a greater discount than the current 10%
discount that e-books go for). E-book buyers would flock to Random House’s website.
And for those that don’t, Random House could offer a 30% discount to Kobo users.
Another great effect will be better sales. If Random House books are 50% cheaper than
any other publisher, sales will simply go up. The New York Times Bestsellers list will
subsequently be filled with Random House titles, regardless of how much each book
costs. Kindle users who buy through Amazon will feel pressured to switch to a Kobo, in
order to save significant money instantly.
The reason why Random House should acquire Kobo is that it is the best independent e-
reader and reviews thus far have been extremely positive. (From personal experience,
the Kobo is definitely of equal caliber to the Kindle or the Nook). Even though Kobo
is significantly smaller than Amazon, Barnes & Noble or Sony, it has still impressively
managed to sell over 5 million current devices. Though it may take some coaxing to
acquire Kobo, as they were purchased in January for $315 million by Rakuten, the
argument is that Kobo would still be the cheapest and most effective e-reader to acquire.
The benefits of a Kobo acquisition is that by lowering prices and selling cheaper through
the Random House website, the Kobo instantly becomes more popular, Random House’s
sales go up, and Random House can even make deals with other publishers to sell their
books and take significantly less money than Amazon would as a middleman.
The only question is how easily Random House could wrest Kobo from Rakuten and
what valuation they will be able to purchase it for. Random House will get significantly
more synergies than Rakuten can which makes it worthwhile for Random House to pay a
higher price. Frankly the times are a changing and Random House has the ability to take
a giant leap into the digital age with this acquisition.