Vertical Integration Maximizes Creativity and Profit at Audible

With over 180,000 titles available, Amazon subsidiary Audible dominates the $3 billion global market for audiobooks. The near market monopoly enjoyed by Amazon/Audible demonstrates the ability of vertically integrated companies to maximize value for the customer (at least in the short term) through coordinated products and services while capturing significant value for shareholders.

Growing at 25% in 2014, audiobooks that can be listened to on-the-go represent a huge opportunity for the publishing industry to reinvent what it means to consume literature. Audible is the clear leader in this space, representing some 90% of sales for major audiobook publishers and topping consumer polls, such as this poll by Lifehacker with 70% of the votes. Potential listeners are attracted to Audible by its evocative television advertisements such as this year’s “Stories that Surround You” series and paid spots on popular podcasts. Free 30-day trials entice users to join the service, and the result is that more than half of Audible’s customers are first-time audiobook buyers, and many are unaware that competitors even exist. Once drawn to the Audible platform, users are able to listen to audiobook excerpts before they purchase, ensuring that they like the narrator’s voice and style.

High quality content has differentiated Audible since its founding in 1997 by journalist and author Donald Katz. Recognizing the importance of captivating narrators to the listening experience, Katz has recruited established Hollywood actors and professional narrators to perform the voice company’s voice work. Audible was acquired by e-commerce giant (and long-time book specialist) Amazon for $300 million in 2008. Since then, the companies have sought to integrate their offerings and expand the ways that customers are able to experience and enjoy literature.

At the moment, publishing companies usually make the decision about which audiobooks will be released (or not). To increase the volumes available, Audible has set up the Audible Creation Exchange, a platform to connect narrators and sound engineers with writers, to enable book authors to develop audio versions of their works for free and monetize their distribution.

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In an era where content is king, the only sensible thing to do is move up the value chain. Following the example of Netflix and Amazon in video streaming services, Audible has begun to partner with high profile artists to create original content available only in the audiobook format. The company recently released a collection of short stories called White Man’s Problems, written by a “virtuosic new voice in American fiction, Kevin Morris” and narrated by such diverse talents as Academy Award winner Matthew McConaughey and nominee Minnie Driver and South Park creators Trey Parker and Matt Stone.

To enhance the audiobooks themselves, Audible has sponsored contests to generate user-inspired illustrations by professional artists, many of which are very beautiful and seem especially well suited to accompany children’s books.

While these innovations have raised the bar on audiobooks in general and have brought many new listeners to the genre, it is impossible not to recognize that Audible’s content is really meant to be enjoyed in concert with other Amazon products and services. For example, Audible audiobooks can be purchased through GoodReads (also owned by Amazon) which aims to create virtual book clubs and socialize friends’ reading lists to make better book recommendations.

In other words, Audible is being used to help capture Amazon customers across multiple platforms. Kindle ebooks are sold with Audible add-ons where available (though the audiobooks must be purchased separately and may cost as much as an additional ebook). Whispersync makes it possible to go back and forth seamlessly between text and audio (again, where available) and has been made available on the recently released Amazon Echo. Finally, tie-ins are being made to other Amazon content, such as their exclusive interviews with the cast of Transparent, the Amazon original web series.

And now for the bad news. Audible upgrades have been plagued with serious glitches documented exemplified here and here. The best features (such as Whispersync) are not widely available. And with one company dominating so much of the market, customers may expect that Audible will eventually raise prices and/or reduce the quality of its services. There are a few competitors in the space offering access to audiobook content through different business models. Overdrive Media allows audiobooks to be rented from public libraries and played on a number of devices, and Scribd’s all-you-can-eat monthly subscription model aims to compete on cost. Not to be outdone, Audible is currently testing such an unlimited monthly service in Japan, though it is not yet an option for most users.

In my final estimation, Audible and parent-company Amazon are digital innovation winners. Starting early with the first audiobook players, Audible continues to improve on its offerings and find new ways for its customers to engage with literature in this dynamic emerging art form. The company’s strength comes from its vertical integration, which makes it possible to capture the highest value links in the supply chain.