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The Opinion Pages | OP-ED CONTRIBUTOR
How Book Publishers Can Beat Amazon
AMAZON has caused no small controversy of late by refusing to accept presale orders on books to be released by the publisher Hachette and by understocking Hachette’s titles. These punitive maneuvers, which follow a dispute between Amazon and Hachette about e-book contracts, have led to significant delays in shipments of Hachette’s books to Amazon’s customers.
If you are wondering why Amazon would subject its customers to this inconvenience and wish to understand what’s really happening between Amazon and Hachette — and, indeed, all the major book publishers — you need to know the meaning of the word monopsony.
Op-Ed Columnist: Amazon’s ‘Bullying’ Tactics
The Supreme Court justice Sonia Sotomayor, when sitting on a lower court, once described monopsony as the “mirror image” of monopoly. Unlike a monopoly, which occurs when a seller of goods has the power to unlawfully raise prices of what it sells, a monopsony occurs when a buyer of goods has the power to unlawfully lower the prices of what it buys. Each violates antitrust laws: As the Supreme Court has long recognized, they both result in a misallocation of resources that harms consumers and distorts markets.
Take the e-book market, dominated by Amazon, which buys what a federal court once found to be 90 percent of all e-books sold in the United States. The monopsony power of Amazon, which has a current market share of 65 percent of all online book units, digital and print, is not just theoretical; it’s real and formidable. When Macmillan, the fifth largest book publisher, displeased Amazon in 2010 by proposing certain changes in business terms, Amazon exercised what has been described as its “nuclear option”: It promptly deleted the “buy” buttons in the Amazon online store for all of Macmillan’s books. In an instant, Macmillan’s entire business was in jeopardy.
The nuclear option was exercised for only a few days, a mere flexing of Amazon’s muscles. But imagine what would have happened if it had continued. With a major publisher out of the market for new manuscripts, authors would receive less money. And less money would mean fewer authors, and fewer books. (Nor are self-published authors safe from the power of a monopsony: While a traditional publisher like Macmillan needs an author’s consent to change the terms of his or her publishing agreement, Amazon reserves the right to change any provision of its agreement with any author at any time for any reason.)
How did Amazon attain such monopsony power? By providing valuable services? Perhaps, to some extent. But consider that from the moment it introduced its Kindle product, Amazon sold e-books at prices far below what it was buying them for. If Amazon bought an e-book from Hachette for $13, it resold it to a consumer for $9.99, losing $3.01 per e-book. It should come as no surprise that under these circumstances, e-book buyers flocked to Amazon.
But there was a problem. When a company has dominant market power and sells goods for below marginal cost, it is engaging in predatory pricing, a violation of federal antitrust laws.
All was well until the Justice Department, supported by a white paper supplied to it by Amazon, filed an ill-advised lawsuit against Apple and five of the major book publishers for antitrust violations. The publishers were charged with “price fixing” — but not for fixing prices: Not a single e-book price was fixed by the conspiracy contrived by the government. All the publishers did, as I argued in a friend-of-the-court brief at the time, was to move to the lawful app store model, which eliminated Amazon’s self-serving distortion of the e-book market.
Unfortunately, the publishers never had their day in court. Buckling under the expense and risk of antitrust litigation, they settled and agreed to restrictions enabling Amazon to resume many of its practices. With these restrictions set to expire, a new round of negotiations between Amazon and the publishers have ensued. Amazon is now wielding its monopsony power, beginning with Hachette, to drastically lower what it pays for e-books. A 30 percent take off the top, it seems, is not high enough.
So far, Hachette, to its credit, has been unbending. But Amazon still has its nuclear option. It would appear that unless Amazon backs down — through public pressure or government intervention — publishers will have no choice but to employ their own nuclear option: pull all their books from Amazon and throw their weight behind a law-abiding alternative. Perhaps the best solution would be an online marketplace controlled by the publishers — with the 30 percent commission being split 50-50 with the authors in addition to the author’s royalty.
If consumers are inconvenienced by the switch, once again they will have only Amazon to blame.
Amazon Is NOT the Vladimir Putin of the Publishing World In its battle with Hachette, Amazon is being compared to Putin and the Mafia—by critics who want you to pay more for books. Can you believe those…those…those…sons of bitches at Amazon? After launching almost 20 years ago and making virtually every book—new, used, dead-tree, electronic, audio, and I’m guessing any day now, olfactory—available to everyone in America at good-to-great prices, the company’s true character now stands revealed. It’s not pretty, folks. Despite a huge market share, Amazon apparently still wants books, especially the e-books that everyone agrees are the future of the medium, to be cheaper than what publishers and big-name authors want you to pay for them.
Just who the hell does Amazon think it is? Maybe a bare-chested tyrant who used to work for the KGB? Amazon is “like Vladimir Putin mobilizing his troops along the Ukrainian border,” a proprietor of an “e-book discovery site” tells The New York Times. “A bully,” offers Richard Russo, the novelist and president of the Authors Guild (which knows exactly how to bully mere “writers”). Amazon, says author James Patterson, who published 13 detective books last year, is waging “war” and doing unspeakable things for which “the quality of American literature will suffer.” No, wait. That’s all wrong. Amazon isn’t like a Russian despot waging a war, says Dennis Loy, proprietor of the small publisher Melville House. It’s more like “the Mafia.”
What Loy calls Amazon’s “extortion” racket is its decision to make it annoying as hell to buy books published by Hachette, a French-based conglomerate whose imprints include Grand Central, Little Brown, Hyperion, and others. If you try to order new Hachette books, including titles from James Patterson and other best-selling authors such as Malcolm Gladwell (who likens Amazon to the biblical Goliath in this interview), the odds are high that Amazon will actually charge the publisher’s cover price and tell you it won’t arrive for several weeks. Even the electronic Kindle version! In other words, kind of what buying books used to be like 30 years ago.
It may even recommend you buy a totally different book before you head over to the websites for Barnes & Noble, Hachette, or even Wal-Mart. Yes, that’s exactly how the mob works (well, except for the Gold Box Deals and that original miniseries featuring John Goodman as a congressman).
Both Amazon and Hachette have signed confidentiality agreements, so the exact nature of the negotiations between the two companies is anybody’s guess. But it’s clear that they are duking it out over the future price of e-books (a market that Amazon, more than any other single company, made viable with its cheap, user-friendly Kindle devices and cross-platform apps). “Inside the publishing world,” reports The New York Times, “the consensus is that Amazon wants to offer deep discounts on Hachette’s electronic books, and that the negotiations are not going well.”
If you try to order new Hachette books, the odds are high that Amazon will actually charge the publisher’s cover price and tell you it won’t arrive for several weeks. Even the electronic Kindle version! Hachette is the first major publisher to be engaged in this sort of wrangling, but it won’t be the last. If you had heard of Hachette before this latest brouhaha, you are either an author with a very good agent or you followed that fascinating federal lawsuit settled a few years ago. You know, the one about how five of the six biggest publishers on the planet conspired with Apple and Steve Jobs to fix e-book prices when the iPad was first coming to market in 2010.
Jobs wooed publishers who hated Amazon’s devotion to selling virtually all new e-books at what one executive called “the wretched $9.99 price point.” They were leaving money on the table, kind of like how iTunes does by selling hit songs for the same price as songs that nobody wants. It just didn’t make sense, the publishers figured, especially since Amazon was often losing money on each sale.
Traditionally, a bookseller such as Amazon would buy a paper-and-glue title at around half the publisher’s suggested retail price. The seller’s per-unit profit varied according to whatever price she set and how many copies she moved; that was also the basic formula for many commercial e-books, so Amazon could be underpricing itself just like it did when it steeply discounted its sales price for certain books. Retailers cut margins on sales all the time for all sorts of reasons: to build market share, to reduce inventory, to stave off competition, and more. By keeping prices low, Amazon was hurting everyone but the reader.
Because Amazon has emerged as the single-largest seller of traditional and e-books, its policies are hugely influential in setting industry-wide prices and practices. Which incidentally are far from what most people, and certainly most economists, would consider monopoly levels. Currently, Amazon accounts for about 41 percent of all new books sold, and two-thirds of new e-books.
Unlike Putin annexing Crimea or the Mafia muscling in on, say, the bar and restaurant business, Amazon didn’t get that big by threatening violence or “scorched earth” (as one critic puts it). It got that way by relentlessly improving and diversifying its product offerings, customer service, and ability to sniff out what you might be interested in buying or accessing (the company’s uncanny success at this has freaked the shit out of its competitors since the company’s earliest days). Like every other legitimate business that must woo customers on a daily basis, it will wither and die the minute it stops giving us what we want at a price we’re willing to pay (does anyone still remember A&P supermarkets, which controlled its market like Walmart on steroids?)
Publishers and independent bookstores have a long history of being against booksellers discounting prices. In the 1920s and ’30s, the American Booksellers Association sued Macy’s for selling books cheaply, and Franklin Roosevelt’s National Recovery Act included anti-discounting provisions that were ultimately ruled unconstitutional. In the 1990s, the same ABA filed suit against Barnes & Noble and Borders for similar practices. So Hachette and the other publishers were all ears when Steve Jobs came a-calling with a surefire way to jack up e-book prices.
As The Wall Street Journal reported when the price-rigging case was settled in 2012, “The five publishers and Apple hatched an arrangement that lifted the price of many best-selling e-books to $12.99 or $14.99, according to the suit. The publishers then banded together to impose that model on Amazon, the government alleged.”
On behalf of authors and publishers, Jobs unveiled what he called his “aikido move,” which would not only change price points but shift to an “agency model,” where the seller gets a commission on each unit sold rather than buying a certain number of units at a fixed price. “We’ll go to the agency model,” Jobs explained, “where you set the price, and we get our 30 percent [commission], and yes, the customer pays a little more, but that’s what you want anyway.”
That’s an interesting line that doesn’t seem to make it into all the love being showered on Hachette by its public champions: Yes, the customer pays a little more, but that’s what you want anyway.
As the author of a well-reviewed but not great-selling book that came out in hardcover in 2011 and paperback in 2012 (here’s a Wikipedia link), I understand the totally legitimate desire of authors and publishers to squeeze every goddamn dime out of you, the reading public, whom we love so much.
As a libertarian, I am against the sort of lawsuit that the Department of Justice brought against Apple and Hachette et al., and I certainly don’t want to see Eric Holder’s minions figuring out the “true market value” of the next 13 James Patterson novels (word to the wise: as the recently deceased leftist historian Gabriel Kolko grokked, government intervention is mostly a way of fixing markets to the benefit of big corporations, not consumers; see also “Antitrust’s Greatest Hits”).
Mostly, though, as a reader, I want to pay the lowest prices for the widest range of books in whatever format. This fight between self-evidently evil Amazon and kind-hearted, literature-loving Hachette isn’t about the future of civilization itself (indeed, with the possible exception of Melville House’s Loy, heads of small presses seem to appreciate how Amazon has brought their titles to potentially global audiences). It’s really about how much readers are going to be asked to pay for titles coming out of big publishing companies. Amazon’s track record on that score is pretty damn great: It always wants the price to be lower. That sucks for publishers and authors, and maybe even for Amazon’s bottom line. But it’s worked pretty nicely for readers so far.
To be sure, in this current dispute, Amazon may end pissing off customers so much that we end up scurrying to actual real-world bookstores and other online sellers. That might be bad for Amazon. To the extent that it’s good for Hachette and other publishers who want us to “pay a little more,” that’ll suck too.
I trust the market to figure out the details of this. The publishers, after all, are constrained somewhat by Amazon’s market advantage. And Amazon is constrained by the publishers’ control over their titles. Both are constrained by the willingness of readers to shell out money for books that may or may not be worth buying. Given the number of sites—such as BN.com and Walmart.com—that are already “slashing prices” to take advantage of the Amazon-Hachette fight, I’m confident that the Republic of Letters will not only survive, but flourish to the benefit of readers, who are ultimately what it’s all about.
Disclosure: The founder of Amazon, Jeff Bezos, is a supporter of Reason Foundation, the nonprofit that publishes Reason magazine, Reason.com, and Reason TV, where I write and edit. I have never had any contact with him or anyone at Amazon except as a customer. Although I greatly admire Amazon as a company and, as a part-time resident of a small town in Ohio, benefit greatly from its services, I am not uncritical of it, either.
How the Amazon-Hachette Fight Could Shape the Future of Ideas While the bookseller and publisher are battling over mundane business specifics, the state of publishing hangs in the balance. JEREMY GREENFIELDMAY 28 2014, 4:25 PM ET
Reuters Over the past several months, what started as a quiet trade dispute has intensified and become public as the largest bookseller in the world, Amazon, and one of the biggest publishers, Hachette, battle over their next contract.
You may have noticed little things, like that book you wanted from Amazon was going to take weeks to reach you—rare for a retailer that puts service to customers above all. Or perhaps you wanted to pre-order the latest J.K. Rowling title The Silkworm on Amazon so it arrives at your doorstep the day it comes out, but can’t for some reason. Instead of being able to buy it with one click, a patented Amazon innovation, you are offered the option of signing up to receive an email update when it does become available.
Or maybe you noticed the dozens of articles published in the New York Times, the Wall Street Journal, Reuters, the Guardian and practically every local paper from New York to Seattle. What was for a short while a private contract negotiation, both sides digging in, has become a public matter, with recriminations and finger pointing in the publisher, author, and literary agent communities and a solitary, somewhat even-handed statement from Amazon, in which it admitted that it anticipated a long, protracted dispute. (Amazon had previously declined all requests for comment on the matter, including one for this article; Hachette has provided a handful of written statements, including one most recently in direct response to Amazon’s statement.)
Why? A contract negotiation between a supplier and a retailer rarely makes it into the press, and the specifics of this one—e-book discounting and Hachette’s profit margin—are no more interesting or significant than many others that garner far less attention. But in this case, it’s not the price of flat-screen televisions or how they’re displayed in stores that’s at stake—it’s the future of ideas in America.
Let me explain.
By some estimates, today Amazon controls around 50 percent of all book sales—physical and electronic—in the U.S. In the past decade, the company has steadily grown that market share, taking it from Barnes & Noble (shrinking), Borders (bankrupt since 2011), and independent bookstores (around 2,000 remain today out of the nearly 7,000 there were in the mid-1990s). It also built most of the e-book business in the U.S. following the successful launch of the Kindle e-reader in 2007. It wasn’t the first e-reader on the market, but by allowing customers to download e-books over a private, customized network built for the purpose, as opposed to making them connect their e-readers to a desktop or laptop computer connected to the Internet, it quickly became the most popular. In 2010, Amazon was estimated to control 90 percent of the growing e-book business. That’s when Apple, with the support of five of the world’s six largest publishers, launched iBooks, a main feature on its brand new iPad. Within two years, Amazon’s market share in the now much larger e-book business was thought to dip to around 65 percent, with Apple at around 10 percent and Barnes & Noble’s Nook business, launched in 2009, at about 25 percent.
How Apple and Barnes & Noble were able to loosen Amazon’s stranglehold on e-books is now a matter of public record. The five publishers—Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster—were found by a federal court to have colluded with Apple to fix the prices of e-books across retailers, meaning that popular, best-selling titles, most of which were published by these five companies, would cost the same at every e-book retailer (Random House was the only one among the world’s biggest publishers not to participate). Aside from fines, part of the remedy to the harm to the free market caused by the publishers’ crime was that each publisher had to renegotiate its contracts with its retailers—primarily Amazon, Barnes & Noble, and Apple—and, importantly, they were forbidden from hewing to the terms of their old contracts, that they and not the retailers would set the prices of e-books and that those prices would be the same no matter where you purchased them.
Fast-forward to 2014 and Hachette’s contract with Amazon is up again. It’s been nearly two years since Amazon regained control of the prices of many of the e-books it sells, and prices for best-selling e-books have plummeted, with Amazon leading the way when it comes to discounting; the consequences to its competitors have been predictable. Sony, one of the first companies to sell e-books in the U.S., has abandoned the business completely, except in Japan, to a former competitor, Canadian e-book upstart Kobo. Meanwhile, Kobo is rumored to have all but given up on growing its business in the U.S. and has closed its office here. Barnes & Noble has reported mounting quarterly losses for its e-book operation over the past several quarters. Apple does not publicly report its e-book sales; neither does Google, which also sells e-books, but its market share in the U.S. is thought to be vanishingly small.
Hachette is the first among the world’s five largest publishers (Penguin merged with Random House last year) to sign another contract with Amazon since its court-mandated contract in 2012—and likely the most important. In the coming two years, Amazon and its competitors will renegotiate contracts with all of the world’s largest publishers and in 2015 they will be again allowed by law to negotiate contracts where they determine the prices of e-books. Amazon likely doesn’t want this and, by the looks of it, is even willing to inconvenience its own customers in the short term to ensure this long-term outcome.
In its statement, Amazon wrote:
When we negotiate with suppliers, we are doing so on behalf of customers.
If you do need one of the affected titles quickly, we regret the inconvenience and encourage you to purchase a new or used version from one of our third-party sellers or from one of our competitors. Amazon is willing to go so far as to push customers to its competitors to win this battle. There are two major issues at play. The first is the price of books, particularly e-books. Amazon wants to continue to control it and to offer any discount it chooses to consumers; Hachette, on the other hand, likely wants to leave an opening for the possibility of going back to its previous pricing scheme in 2015. If it can set the prices across retailers, it can do a little to help protect its other trading partners, most importantly Apple and Barnes & Noble. Amazon, unlike Barnes & Noble, for instance, doesn’t need to make money on books to be profitable. It can theoretically lose money on each sale of an e-book if it makes up the difference when it sells a garden rake or a package of diapers. Trying to compete on e-book prices with Amazon has been a major factor in driving Sony and Kobo out of the U.S. e-book market.
The second issue in the negotiation is what’s known in the book publishing industry as “co-op.” It’s a form of marketing: Publishers pay retailers to ensure customers see their books in stores. For instance, when you see a cover of a book displayed on a bookstore shelf and not its spine, that’s no accident. A publisher paid for that special billing. Amazon wants Hachette to pay more for placement on its website. By paying a higher rate of co-op, Hachette would essentially be transferring some of its profit margin to Amazon.
Like nearly every business dispute, this one is about money.
But, ultimately, it’s about so much more than that.
“We’ll still have lots of romance books and James Patterson will still write his books. But serious nonfiction books won’t get published. Those are the books that will go first.” Let’s assume Amazon wins this negotiation with Hachette and secures pricing control over e-books and a higher payment for marketing services (essentially, a bigger piece of Hachette’s profits). Hachette books are once again in stock and available for readers in a matter of days; “buy buttons” are restored for book pre-orders; the sales resume their flow. When the next publisher is up for renegotiation (either HarperCollins or Simon & Schuster), they will know what they are in for in terms of losses of sales and damage to reputation among authors, if they don’t sign. Each publisher that agrees to whatever terms Hachette is resisting now will make it more likely that the next will do the same.
More liberal discounting practices will give Amazon the power to continue to gain market share and it’s easy to imagine a scenario where it controls three-quarters of all book sales in the U.S. At the same time, higher co-op payments would make book publishers less profitable and less likely to invest in riskier book projects.
Long-time industry consultant (and partner in Digital Book World, my employer) Mike Shatzkin explained to me what would happen next:
Let’s say Amazon goes to 70 percent and they’re basically the pipes for everything and they’re indispensable and you can’t publish a book without them. So, what do they do then?
If they’re still trying to maximize profits, we’ll still have lots of romance books and James Patterson will still write his books. But serious nonfiction books won’t get published. Those are the books that will go first. Nonfiction books, like Walter Isaacson’s biography of Steve Jobs, are expensive and risky to produce and rarely sell well, yet many of these books drive intellectual thinking in the U.S. Robert Caro’s latest book on Lyndon Johnson The Passage of Power: The Years of Lyndon Johnson took nearly a decade to write—and that means investment and risk.
Think of book publishers like venture capital firms. They invest in individual titles in the form of advances and the sunk costs of editing, packaging and distributing a book. Most of those bets lose money. Some make a lot of money (for every Fifty Shades of Grey there are dozens of money-losing duds). It all evens out to an industry where a strong year is one where a publisher clears a 10 percent profit margin.
As more book sales flowed through Amazon, it would have even more direct control over what people read. The company would have little incentive, for instance, to surface books readers are less likely to buy. If The Hunger Games is all the rage, then the company is best served pushing that title toward its readers at the expense of other books. Or, much more nefariously, it could discourage readers from buying books with a point of view it doesn’t agree with.
Jeff Bezos, Amazon’s founder and CEO, and the company’s stockholders, have so far shown little or no bias toward political ideas or pushing one book over another for any reason but profitability, but that’s not to say that someday that won’t change. (Alarm bells went off across the publishing industry when the Washington Post, now owned by Bezos, was seen as publishing an Amazon-leaning article about its dispute with Hachette; later the same day, it ran a more even-handed account.) The rules of media ownership in the U.S. are built partially around the concept of not giving any one party too much control over the flow of ideas. Should Amazon become the sole place most books are purchased, it could start to have too much control over what we read. Shatzkin elaborated:
Amazon has so much control over what it surfaces. Even if Amazon doesn’t do anything overtly to prevent certain books from being published, they would have so much control over what you’re likely to see or buy, it’s not good for democracy. Perhaps it was coincidence, but one of the books caught in the crossfire of this dispute is Brad Stone’s The Everything Store, the best and most widely read book about Amazon—a book that Amazon royalty, notably Jeff Bezos’s wife in an Amazon review, are not fans of.
While this battle rages, some of Amazon’s competitors are trying to take advantage. A new e-book retail start-up founded and owned by a former agent and a consortium of authors, Zola Books, has announced a 30-percent-off sale on all Hachette titles. Bookstore chain Books-A-Million is putting certain Hachette titles on sale and has been very communicative to its customers in response to the Hachette-Amazon flap. Mark Coker, the founder and CEO of self-publishing distribution platform Smashwords, also sounded the alarm in a recent blog post, warning authors that as suppliers to Amazon, they should watch this negotiation closely. New distribution channels are also rising. A prominent Hachette author is dabbling in launching his own author-powered direct book sales platform. Librify, a digital book club start-up, just inked a deal with Target for its summer book club plus retail platform launch.
“Publishers are in need of alternate distribution channels and there are companies eager to work with them on new business models that work for publishers and fill a consumer need,” Joanna Stone Herman, founder and CEO of Librify, told me. To be sure, Kindle customers who primarily buy books directly on their e-readers may not be swayed by attempts from rivals to woo them out of the Amazon walled garden. You can’t buy Books-A-Million books on your Kindle.
Regardless of what may happen between Amazon and Hachette, both companies believe this round of talks to be absolutely crucial for their futures; both are risking so much. Amazon, the self-styled customer-centric company, is risking its relationship with its customers and a reputation that it has painstakingly won by being the best, cheapest, and most consistent online retailer for a decade or more. Some in the press have already turned on Amazon. And Hachette, though owned by $10 billion French media conglomerate Lagardère, is a much smaller company and is losing millions in this battle. It’s also risking its reputation among authors, its most important group of partners; why should an author work with Hachette if it can’t even effectively distribute books through Amazon?
The dispute is about money, but the outcome—whether Hachette gives up on pricing and pays a little more for marketing, or not—is about so much more. Amazon equated Hachette with its other suppliers in its statement: “At Amazon, we do business with more than 70,000 suppliers, including thousands of publishers. One of our important suppliers is Hachette….” Hachette doesn’t feel the same way, according to its response to the Amazon statement: “By preventing its customers from connecting with these authors’ books, Amazon indicates that it considers books to be like any other consumer good.”
But, it added, “They are not.”