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Wal-Mart announced on 10/15/09 that it would begin selling the hottest best-selling books on line for $10 each. Amazon instantly matched that price. Wal-Mart responded by lowering the price to $9.

The public has generally welcomed this. “Cheap books!? Sounds great!”

Top authors like Dean Koontz are also welcoming it, but they’re not sure. That vague discomfort is much warranted.

Brands versus commodities

A basic principle I learned at Harvard Business School applies to this price war. Indeed, the price war is caused by the principle.

There are two kinds of products/services: branded and commodity.

A branded product is what it sounds like. Campbell’s soup is a branded product. So is Microsoft Windows. The price at which a branded product sells is based on the quality of the product and the strength of the brand.

Fungible

Commodities are fungible things like an ounce of gold or a bushel of wheat or pork chops. Fungible means each one is the same as all the others.

With a commodity, the lowest-priced producer wins. Wal-Mart is a commodity business model. People buy from Wal-Mart because they have low prices. To a lesser extent, they trust Wal-Mart more than, say, a guy on the street selling for a low price out of his car trunk. But the predominant reason people buy at Wal-Mart is price. Indeed, their current slogan is, “Save more. Live better.

If your company has the ability to buy or produce things very cheap, you should try to commoditize the product-service in question. Basically that means you brag about your low prices.

Huge size, lack of unions

How might a company have the ability to sell cheap? One reason would be huge size that lets them achieve economies of scale like driving down the prices of their suppliers. They also can afford hyper efficient computer systems, logistics, and so on. At every step of their business model, the watchword is cheap, cheap, cheap. They avoid unions and areas of the country where employees are unionized and local laws favor unions.

Copyright

Books and records are potentially the ultimate branded product. One big reason is copyright law which is much better than patent law. The richest man in the world—Bill Gates—depends on copyright law.

Not the company

The brand in book and music is not the company. No one gives a rat’s rump about which company publishes a book or distributes a record (audio CD or MP-3 or whatever). The brand is the book author or the recording artist.

So if books and music are the ultimate branded products, why are Amazon and Wal-Mart behaving like they are commodities?

Very simple. When a book or recording is available at more than one retailer, it instantly becomes a commodity. The 9/15/07 Wall Street Journal had an article titled “The Distribution Trap.” It inspired me to write an article at this Web site titled, “Self-DISTRIBUTION is more important than self-PUBLISHING.”

Dream

Here is a pertinent line from that Wall Street Journal article:

It’s every manufacturer’s dream to get on the shelves of Wal-Mart and other mega-retailers. Too often, it turns into a nightmare.

We learned that at Harvard Business, although the villain back then—in 1975—was Sears, not Wal-Mart. The story was told of the small manufacturer who got a big order from Sears. Ecstatic, he expanded his factory and bought a bigger nicer home and bigger nicer cars. Then, the next year, Sears gave him an even bigger order, but also told him they wanted a lower price. How can he refuse? He has bigger factory and home mortgages and bigger car payments.

As Marshall McLuhan said,

To the spoils belongs the victor.
 

Crown Books

One of my Harvard Business classmates was Bobby Haft. He founded Crown books, the first company to discount book prices. His used to appear in his own commercials saying in his extreme New Jersey accent:

Books kawst too much. That’s why I started Crown Books. If you paid full price, you didn’t buy it at Crown Books.

He figured out that books became a commodity when they were available from more than one retailer. Fundamentally, the copy of Stephen King’s Under the Dome you buy from Amazon is identical to the one you buy from Wal-Mart or Crown Books, if that company still existed. Since the copies are identical, the only way Amazon can compete with Wal-Mart is on price.

Poof! Instant transformation of a branded product into a commodity. It’s simple and obvious, if you think about it. But millions, including big successes like Stephen King, have apparently not thought about it and are behaving like lemmings.

Crown was too small to win the price-cutting war

The flaw in Bobby’s theory was that he could be the low-cost producer. No way. He was never the biggest book retailer. He instantly got underpriced by bigger retailers like Sam’s Club and Costco. Amazon could also undercut him because they had no brick-and-mortar stores. Crown went out of business. But Bobby had let the book discounting cat out of the bag.

Only one company can win in commodity businesses. Indeed, Wal-Mart said,

If there’s going to be a ‘Wal-Mart of the Web,’ it’s going to be Wal-Mart.com.

Business self-destructing

The music business is self-destructing. Part of the problem there is piracy. But the other part is more than one retailer selling the recordings in question. They can only compete with each other by price cutting. That way lies bankruptcy.

Bottom line. Any author or recording artist who sells their creation through more than one retailer needs his or her head examined. They should all do like I do and distribute their creations themselves exclusively on their own Web site. I explain how to do that in my book How to Write, Publish, and Sell Your Own How-To Book.

‘Real’ publisher or record company?

The notion that you need a “real” publisher or record contract with a major distributor ended, or should have, when the Internet was created. The typical stupid response from the authors and artists is

I don’t have time for distribution.

Bullshit! My wife and son do it at our house, for an hour or so a day while they are watching TV. What you don’t have time for is letting retailers get rich ripping you off while you create books and music for minimum wage. Wise up.

Why does Amazon still exist?

Since Amazon founder Jeff Bezos made the cover of the 1999 Time magazine as Man of the Year, I have been amazed that Amazon still exists. It is an Internet middleman. Internet middleman is a redundant phrase. The Internet is not a place for middlemen to operate. It is the end of middlemen. The fact that Amazon still exists is a monument to the stupidity of millions of branded product creators. I am not one of them. You should not be either.

Consumers will get screwed

Ultimately, the consuming public is going to realize they have been screwed as much as the authors and recording artists. You can already see it in real estate investment books. It used to be that books about real estate investment in the book stores were actually books about real estate investment. Now, the book store shelves containing real estate investment books are nothing but teaser, loss-leader, lead generators. Real estate investment authors other than I now treat book stores as an advertising medium, not as an information distribution medium. The purpose of the real estate investment books in book stores is to get you excited about how easy it is to get rich quick in real estate investment so you will provide your name and phone number to the author in question. Then their Utah telemarketing boiler rooms will go to work on you pressuring you to sign up for some worthless, but very expensive, seminar or “mentoring” service.

Death of the book store

You can also see it in the book-retailing business. When I started as a book author in 1981, books were sold by independent book stores and some small chains like Walden and B Dalton. Then, book retailing became an oligopoly dominated by Amazon, Ingram (the top and almost only book wholesale distributor), Barnes & Noble, and Borders. They told author-publishers like me, in so many words,

We’re big. You’re little. We’re cutting how much we pay you again. If you don’t like it, tough!

My distributor fired me

Year after year I got a letter from my book store distributor saying we will pay you less next year. I immediately started selling my books myself direct to consumers in addition to selling through book stores. Ultimately, I complained so much that my book store distributor, Publishers Group West (PGW), fired me after 20 years of distributing my books nationwide to book stores.

My net income went up 257% in one year because I cut out middlemen PGW, Ingram, Amazon, B&N, and so on. PGW went bankrupt a few years later, but not until after I sued them and won (and received) $25,000 for books they would have only had to pay $9,000 for if they had behaved themselves. My book self-publishing friends were afraid to piss PGW off by complaining the way I did. They were not fired by PGW, but they lost tens of thousands of dollars when PGW went bankrupt. I did not lose a penny. Nice guys, and timid, dumb guys, finish last.

In the not-too distant future, there will be few, if any, book stores. One huge chain will win the price war. After they do, you will buy from them or do without. Guess what will happen to prices and the quality of the information in the books then?

More authors will switch to the book-as-teaser-advertising-brochure, lead-generator business model. And more will wise up and self-publish and self-distribute as I do.

There is no free lunch. Ultimately, you get what you pay for, including from cheap books.

John T. Reed