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Who Controls Publisher Prices? Amazon Fires the First Shot, Then Forges a Bitter Truce

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“Begun the e-book wars have.”
Yoda, Star Wars: Attack Of the Clones, slight paraphrase

Book shoppers going to Amazon on Friday were met with some puzzling results.  All books published by MacMillan had been pulled from the site. Apparently, Amazon and MacMillan reached something of stalemate regarding terms for e-book pricing.

Late Sunday afternoon, Amazon blinked, but did so through a relatively charged post in its Kindle Community forum. It’s clear this won’t be the last shot fired in this skirmish.

Most in the publishing industry watched warily as Apple asserted control over the music industry, wondering whether a similar third party would try to do the same for e-books.  As one of the largest media retailers in the US, Amazon was an obvious candidate for such a move, and their Kindle strategy goes way beyond asserting control over the nascent e-book market.  Author Charlie Stross explains:

They’re trying to in-source the publisher by asserting contractual terms that mean the publisher isn’t merely selling them books wholesale, but is sublicencing the works to be republished via the Kindle publishing platform. Publishers sublicensing rights is SOP in the industry, but not normally handled this way — and it allows Amazon to grab another chunk of the supply chain if they get away with it, turning the traditional publishers into vestigial editing/marketing appendages.

These sorts of power struggles are going to be the dominant issue for content creators in the digital age.  Is the content the valuable thing? Or does the networked retailer who makes the content visible/sells the content get to call the shots?  Are music companies bigger than iTunes?  Does Google need newspapers more than newspapers need Google?

In this case, the question was: Can publishers afford to do without Amazon?

Apparently, for now, they can.

MacMillan issued their own statement on what was happening. MacMillan is one of the companies that has signed on with Apple for the iBookstore, and has offered Amazon the same terms as Apple (the “agency model,” in which the publisher sets the price and the seller takes a 30% cut), or offered to continue the current Amazon wholesale pricing deal, whereby Amazon pays the publisher 50% of the hardcover’s retail price and then sells it at whatever price they want, but with e-book versions delayed by months :

In the ink-on-paper world we sell books to retailers far and wide on a business model that provides a level playing field, and allows all retailers the possibility of selling books profitably. Looking to the future and to a growing digital business, we need to establish the same sort of business model, one that encourages new devices and new stores. One that encourages healthy competition. One that is stable and rational. It also needs to insure that intellectual property can be widely available digitally at a price that is both fair to the consumer and allows those who create it and publish it to be fairly compensated.

Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digital media businesses). The price will be set the price for each book individually. Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time.

The agency model would allow Amazon to make more money selling our books, not less. We would make less money in our dealings with Amazon under the new model. Our disagreement is not about short-term profitability but rather about the long-term viability and stability of the digital book market.

Amazon publicly offered publishers and authors terms that cede a great amount of control to Amazon, particularly when it comes to pricing one’s own product.  Not surprisingly, publishers are unhappy with someone else trying to control their business.  John Scalzi has weighed in with an author’s perspective that the market should decide, not Amazon:

Do I think Macmillan (or anyone else) will be able to sell $15 ebooks? They could; after all, they sell $25 hardcovers (and similar amounts for ebooks, depending on the retailer). Now, some people won’t spend that much for a book, so they pick up the book later when it’s an $8 paperback. That’s fine, too. Likewise, I think it’s fine to attempt to charge $15 (or more) for an ebook for a brand-spankin’ new release to service the folks who just can’t wait, drop it to a lower price point (say, $10) later on in the run, and then drop it again to $8 or so when the paperback hits. That’s how I would do it, in any event. Would it work? Hell if I know. But that’s not to say it (or some other pricing scheme) is not in a publisher’s interest to try.

And to be blunt about it, it’s in my interest as an author as well, because, you know what? My royalty is a percentage of the sale price. . . . It’s not unreasonable to test the market and see what it will bear.

Variable pricing is incredibly important for publishers, and author Tobias Buckell has a lengthy post explaining the economics and the reasoning behind pricing a book high at its initial release, and gradually lowering the price over time (as so many other industries do as well).  Theresa Nielsen Hayden predicts that with fixed pricing, “the result would be fewer and less diverse titles overall, published less well than they are now.”  This is particularly crucial for scholarly and STM publishers, who often serve small academic communities.  Having prices fixed at an artificially low point that’s unsustainable will mean that those communities are no longer served.

Publishers in this fight have advantages that their music and newspaper brethren lack in their struggles:

  1. The music industry was (and still is) fighting off a vibrant filesharing community that makes all of their products readily, if illegally, available for free.  Boycotts, and taking their products off of the market, meant driving more customers toward filesharing.  For the book industry, while piracy does exist, it is not yet at the level of music filesharing, where illegal downloads vastly outnumber legal sales.  Refusing to make a Kindle version of a book available will certainly drive some to create their own unauthorized versions which they will distribute.  But now is the time to make this move, as e-books only make up a small percentage of the market.  Sacrificing those few percent of sales may be worth it in the long run.
  2. Unlike newspapers, publishers have unique content that isn’t easily replaceable.  If you want to read about today’s top news story, you can get that information from a nearly infinite number of sources. If you want to read “The DaVinci Code,” you can’t readily substitute in another book to recreate that experience.
  3. There are plenty of other outlets for MacMillan’s books, both print and electronic.  If you’re trying to buy book X from Amazon and they don’t have it, most people will head over to Barnes & Noble or Borders or countless other online booksellers to buy the same book (not to mention Apple’s upcoming e-bookstore).  This is likely why Amazon blinked (and it would have been a great time for B&N to start a new “Not Available on Amazon” campaign with MacMillan).

Because of these factors, MacMillan seems to have made their move at the right time. We’ll have to see if other major publishing houses concur, but it’s important — unless publishers are willing to live under the thumb of the likes of Amazon, Google, and Apple. Remember that without products to sell, Amazon is just a bunch of empty warehouses, and the iBookstore is a blank website.

Amazon may be right — $9.99 may be the correct price for e-books. But that figure should be discovered by testing the market, not by decree.  In their clearly angry and somewhat bizarre surrender notice (apparently monopolies are bad when it comes to MacMillan’s products, but good when it comes to the Kindle), Amazon assumes all MacMillan books will be $14.99, but I’m willing to bet this will not be the case, at least not over the entire course of the book’s lifespan.

This will certainly not be the last standoff between a content creator and a content retailer. Early confrontations like this will set the tone for how far the publishing industry is willing to go to remain independent and in control of its own business, and thanks to MacMillan, Amazon’s sweeping power play has for the moment failed.  Other publishers will likely follow MacMillan’s lead and demand agency model deals.

These battles are far from over, but for now it seems publishers have the upper hand.

(10:51 AM, Edited to correct Amazon’s ranking as a bookseller, which was previously incorrectly stated, see comments below)

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About David Crotty

I am a Senior Editor with Oxford University Press' journal publishing program. Prior to that I served as an Executive Editor at Cold Spring Harbor Laboratory Press, and was also the commissioning editor for their book publishing program. Many years ago, I was a research scientist, receiving my Ph.D. in Genetics & Development from Columbia University, and doing postdoctoral research in neural development at Caltech.

Discussion

35 thoughts on “Who Controls Publisher Prices? Amazon Fires the First Shot, Then Forges a Bitter Truce

  1. Publishers will always have the upper hand because, as Amazon put it, “[publishers have] a monopoly over their own titles.” Good content has value. Bravo to Macmillan for realizing this and leveraging it.

    Posted by Kevin Cohn | Feb 1, 2010, 11:11 am
  2. Amazon is not the largest book retailer in the U.S.; Barnes & Noble is. Amazon is the largest ebook retailer in the U.S., and may be the largest book retailer overall on a global basis, but B&N is significantly larger than Amazon in its home territory. Amazon notoriously does not break out its figures, so comparisons are difficult to make, but anyone who has looked at a sales-by-channel report for a trade publisher (where the big numbers are) remains quietly respectful of B&N.

    Posted by Joseph J. Esposito | Feb 1, 2010, 11:46 am
    • Thanks for the correction Joe–the linked article actually says “media”, not “books”. I’ll fix the blog posting to reflect this.

      Posted by David Crotty | Feb 1, 2010, 11:50 am
  3. Fast Company has a very timely post on this, claiming it shows that Amazon hates you and publishers: http://bit.ly/cen9xy.

    Posted by Kent Anderson | Feb 1, 2010, 11:51 am
  4. I may be the lone voice in this instance, but I think Amazon is getting a bad rap here. Amazon is correct to point out to publishers that the marketplace is protesting a price hike on digital titles, in part because of ordinary resistance to price hikes and in part because the value offered by the publisher is less than the price being set. Traditional trade publishers are suggesting that its the content that users pay for — not the package– but as long as the terms of use for digital are less flexible than the terms of use for print, consumers are going to resist the pricing that publishers feel “entitled” to charge.

    Consider this alternate view from Silicon Valley Insider: http://bit.ly/92D4YK

    Posted by Jill O'Neill | Feb 1, 2010, 12:14 pm
    • The post you link to does point out an interesting thing — that Amazon was paying MacMillan full freight then selling the books at $9.99, possibly for a loss. But the macro issue of the devaluation of e-books just as they are becoming closer to mainstream strikes me as the real point here. To me, physical books have become virtually worthless — I finish one, and I can’t wait to get it out of the house. Even our local library won’t take them because they have too many books, and too many people wanting to get rid of their physical books — so there’s a moratorium.

      The marginal cost of a physical book is essentially very small (especially in a consignment sales model, in which 40-60% are destroyed anyhow), so the cost-based argument that e-books should be much, much cheaper starts to unravel.

      This is a value-based move by MacMillan, not a cost-based move.

      Is the value of a book in the printed book? Not solely anymore, and not always. It’s being abstracted by all the new electronic reading environments we’re getting. Is the value of a book in the experience of reading? Certainly. So, I think it was the right call by MacMillan to push this. With Amazon selling 6 e-books for every 10 print now, this is no longer the period to lower prices to drive adoption. Adoption is occurring. Now, publishers need to shift their cash registers to where the customers are, and get a fair price. A fair price ($14.99) is still cheaper than the full price in this case.

      Posted by Kent Anderson | Feb 1, 2010, 1:10 pm
    • But doesn’t a set price point mean that it’s impossible for a publisher to experiment, to really determine a fair price that customers are willing to pay? Why $9.99, why not $8.99? You’ll note that MacMillan wants to price their books in a range from $14.99 to $5.99. If customers won’t buy them for $14.99, then MacMillan will abandon that price point. Why is it wrong to ask for variable pricing over the lifespan of a book? A brand new, just on the market hardcover costs $25-30 (and people seem willing to pay that amount, by the way). Over time, it gets discounted, comes out in paperback at a lower price, and then hits the remainder table. The fixed $9.99 price that Amazon is demanding takes away this ability to maximize sales as the market changes. If, as the linked Insider article suggests (shouts, whines really) $14.99 is too much for an e-book, the market will adjust. That’s how free markets work.

      Amazon tried to pull a WalMart here, to dictate price to a supplier, but unlike WalMart, they don’t have the market power to pull it off. Note that WalMart’s behavior in this manner resulted in lower quality products and massive offshoring of jobs by the way, something along the lines of the Nielsen-Hayden quote above on how it would stunt the output of publishing houses. As an editor with a scholarly publishing house, we’d have to abandon 90% of the books we publish in order to hit a $9.99 price point and stay afloat. Lower quality and less choice don’t strike me as things that are particularly customer-friendly.

      Read the linked Stross article above, this is more than just Amazon trying to keep prices down, this is Amazon trying to take over an entire industry, and it’s a good thing they failed. Amazon is trying to exploit a monopoly generated by their DRM system to the detriment of both customers and suppliers (and that includes self-publishing authors and regular authors whose royalties would have suffered under Amazon’s terms). Both sides in this dispute are trying to maximize their earnings, that’s what companies do. But one side results in a varied, open marketplace, the other results in a monopoly chokepoint that’s bad for consumers, suppliers and creators.

      Posted by David Crotty | Feb 1, 2010, 1:13 pm
      • “Amazon tried to pull a WalMart here, to dictate price to a supplier…”

        Exactly!

        If Macmillan wants to charge more and the market won’t pay – then so be it. But, that wasn’t the case here.

        Even if Amazon tried to get better terms for themselves (higher percent), I could get behind that – all’s fair, right?

        But to just try and set an arbitrary price is nuts… or maybe we should call it “Amaz..ing”

        Posted by ann michael | Feb 2, 2010, 7:42 pm
    • An author responds directly to the Silicon Alley piece. The words “whiny” and “entitled” are used.

      Posted by David Crotty | Feb 5, 2010, 2:39 pm
  5. Another interesting post about the PR mistakes Amazon perpetrated this weekend:

    http://whatever.scalzi.com/2010/02/01/all-the-many-ways-amazon-so-very-failed-the-weekend/

    Posted by Kent Anderson | Feb 1, 2010, 1:13 pm
    • On a discussion of Scalzi’s post, Teresa Nielsen Hayden hits the nail squarely on the head again:

      Amazon’s shooting for an effective monopoly on ebooks. At the moment, they’re trying to take over a lot of the powers and functions of publishers, only without doing all that tiresome value-adding work that publishers do.

      Posted by David Crotty | Feb 1, 2010, 1:51 pm
    • Them’s fighting words.

      > I don’t want to break my netbook.

      He should pre-order an iPad!

      Posted by Kevin Cohn | Feb 1, 2010, 1:20 pm
    • Kind of fascinating to see an issue that can unite so many disparate groups–old media corporations, authors, copyleft activists, self-publishing advocates, etc.

      Posted by David Crotty | Feb 1, 2010, 2:07 pm
  6. Author Scott Westerfield’s response:

    So to the “a pox on both your houses, Macmillan and Amazon” crowd, I must say that I think your analysis is lazy. This is not a case of two corporations pissing down on us mere mortals with equal disdain; it’s a case of complex negotiations in an ancient industry with many arcane traditions that’s in a state of technological flux, being conducted at a level which the overwhelming majority of readers do not understand (nor should they have to), and which were going along in a way that made, frankly, perfect sense to those of us who understand this industry a little, when suddenly, out of the blue, one of the sides in this negotiation spat their pacifier across the room in a very public and embarrassing display of petulance. And that corporation was Amazon.

    Posted by David Crotty | Feb 1, 2010, 2:20 pm
  7. Harper-Collins appears to be jumping on the agency model bandwagon with MacMillan.

    Posted by David Crotty | Feb 3, 2010, 2:42 pm
  8. An accurate and fairly entertaining response here to the “e-books cost nothing to make” and “all publishers are greedy and trying to destroy the e-book market” crowd that seem to be filling so many discussion forums on the Amazon/MacMillan spat.

    Posted by David Crotty | Feb 3, 2010, 4:46 pm
  9. The next domino falls, Hachette moves to an agency model for e-books.

    Posted by David Crotty | Feb 5, 2010, 9:31 am
  10. I hate to interrupt this case of group think run amok (David, do you want to cite me the wikipedia entry on group think?) but it’s funny what you guys and many publishing insiders have convinced yourselves is pricing flexibility versus a “fixed” pricing, letting the market decide prices versus setting by decree and on and on.

    The big six book publishers are wholesalers. In general, they do not get to set retail prices, a policy backed by sound economic and business theories although legally muddied by a 2007 Supreme Court decision. In any event, wholesalers colluding to set prices is both economically unwise and illegal. As long as they don’t collude, however, they have total control over the prices they charge retailers. And they have total flexibility to set the prices as they see fit and in the best interests of their financial and business needs.

    Amazon has not set a “fixed” price of $9.99 for ebooks and if you look for more than 10 seconds, you’ll quickly see that ebook prices are all over the map and even change over time for the same book. Amazon and web retailers in general are the greatest ongoing experiment in real-time pricing theory and maximizing total revenue the world has ever seen. Far from driving down prices, as I and others were writing about a year ago, Kindle prices had been creeping upwards prior to the current wave of new competition. There is total pricing flexibility in this model and the market — the customers and their actions — are a key variable in setting prices. Another key input, no doubt, is the wholesale price (Amazon may be able to absorb some losses but it’s not an infinite capacity and hence many ebook versions of new books start well above $9.99).

    For some of the bloggers you included to say stuff like Amazon wants to sell my books for $9.99 and my publisher wants to sell them for $5.99 to $14.99 (or the flat out lie: “Amazon prices ALL its Kindle e-books at $9.99 or less.”) strikes many readers and book buying customers as kind of funny. Amazon prices flexibly and tries to maximize revenue over the long-term in part by building customer loyalty with discounts. Many new Kindle ebooks are priced above $9.99. Many older titles, already out in paperback, are priced well below $9.99.

    Contrast that with what publishers have financially backed, supported and/or praised in the ebook space over the past few years. Sony’s 2006 rollout of an online ebook store where most prices equaled the hard cover list price or more! Scrollmotion’s failed iPhone app model that priced new ebooks at the hard cover list price. And on and on. Right now on Fictionwise, you can see vast numbers of Macmillan titles that are available in paperback priced at $14.99 for ebooks. And, as a related side note about “flexible” pricing, music publishers said they wanted to replace Apple’s decreed price of 99 cents/track with a range of 69 cents to $1.29. Consumers have seen how that ended up, with the vast, vast majority of tracks sold priced at $1.29 or 99 cents and almost none at 69 cents, even for really old music that has no doubt earned back upfront royalties decades ago.

    That’s why we don’t buy it. The big six publishers don’t want more flexible pricing, they don’t want “fair” pricing and I doubt they give much of a darn about 90% of the authors and books published every year or the fans and readers of those works. They are pieces of large conglomerates fixated on maintaining high profit margins. And like many other old-line media, they appear hostile to the digital marketplace because ultimately the digital world does not require the kinds of capital-intensive infrastructure to produce, distribute and promote books and other kinds of content that is the raison d’être for the existence of those giant publishers.

    Posted by Aaron Pressman | Feb 5, 2010, 1:59 pm
    • It is kind of fascinating watching the various factions weigh in here. You have authors and publishers certainly taking the side of a corporation (MacMillan) who is acting to maximize revenues at the expense of potentially higher prices for consumers. Obviously we’re biased in that we need to earn a living and stay in business. Then you have an odd sub-section of consumers who seem bent on supporting another mega-corporation who are trying to establish a monopoly chokehold on a market which will eventually result in higher prices, less selection and lower quality products.

      The thing your argument misses is Amazon’s motivation here. They’re not trying to offer “fair” pricing or even flexible pricing to suit the market. They’re trying to offer e-books as a loss leader to sell Kindles. Once Kindles are established as the dominant way to read an e-book, then Amazon becomes the monopoly supplier for those e-books. That’s why they’ve been willing to sell books at a loss.

      You’re right though in that the big publishing houses don’t really care about what’s “fair” (though wrong in that they really do want flexible pricing). What publishers want is to maximize profits, like every single other industry on earth. Go to your local chain store and tell them you want a “fair” price rather than the maximum price the market will bear, see how the cashier reacts. Why should the book industry be held to a different standard from everyone else?

      Publishers want to make money. They want to sell e-books. They will experiment and find the right price, the one that brings maximum revenue (and that includes flexible pricing over the cost of the book’s life, just as we see for print books). That’s as fair as it’s ever going to get. It may not be the price you want or that you think is fair. Your option is the same as it is for every other product on the market. If it’s too expensive, don’t buy it.

      Arguments that publishers want to kill the e-book market are hogwash, pure and simple (addressed well here). Yes, publishers are being very cautious about developing that market, trying to learn lessons from other industries that digital has destroyed. Furthermore, the concept that e-books are magically inexpensive to produce and don’t require extensive infrastructure is nonsense as well (addressed here, here and here).

      Posted by David Crotty | Feb 5, 2010, 3:46 pm
  11. It’s also funny that I don’t see authors and publishers up in arms about the deeply discounted hard cover books sold by big box retailers like Costco and Walmart (I have even seen cases where Kindle ebooks cost more than Costco’s hard cover price). Publishers cannot have much credibility on this issue when some of the largest sellers of print books are deeply undercutting the “value” of these works, crowding out demand for lesser-selling works and destroying independent book sellers far, far more than ebooks.

    Posted by Aaron Pressman | Feb 5, 2010, 2:11 pm
    • I agree, publisher should be up in arms about the affects that big chain stores are having on our business. Great article here discussing how this is exactly what killed the music business (and good commentary here). Though the issue may be less about price than about consolidation and the limitations that come with it.

      But two wrongs don’t make a right. Publishers being wrong about big chain b&m stores doesn’t make Amazon any more right for their own attempted stranglehold.

      Posted by David Crotty | Feb 5, 2010, 3:50 pm
  12. A good piece on the agency model for publishers and the Amazon/MacMillan battle can be found here:

    At the heart of the model is the proposition that ebooks aren’t essentially different from hardcopy books. Ebooks are just another repro technology.* Furthermore, online ebook sellers like Amazon aren’t publishers; they’re distributors or booksellers.*

    The difference between the agency model and Amazon’s plan for world domination is that Amazon wants to license* the ebooks in its Kindle program, control their content, and set their prices. That is: it wants to be the publisher, not a distributor or seller. This might be doable if Amazon were out there negotiating to buy rights at market prices. It isn’t. Amazon expects to have the rights just handed over, as though it were doing the conventional publishers a favor.

    Posted by David Crotty | Feb 8, 2010, 11:30 am
  13. Even the mighty Google seems to have been brought to heel in their negotiations with publishers. A competitive marketplace is a lovely thing.

    Posted by David Crotty | Feb 9, 2010, 2:15 pm
    • A competitive marketplace? Ay caramba, David. This is an example of what happens in an uncompetitive marketplace. Google is the new entrant, Google is the company with a new business model, Google is the company that wanted to enhance consumer benefit by going beyond existing ebook vendors and allowing printing and sharing of ebooks. The big six publishers are the entrenched oligopoly that have controlled the high-selling end of the book market for decades, that have raised prices faster than inflation for at least a decade, that have helped destroy the availability of midlist books and that have continuously pushed to reduce consumer benefits in the ebook space with higher prices, tight DRMs and delayed releases.

      Look what has happened here. A ground-breaking retailer used its ability to discount to ignite the long-moribund ebook market. The success of that retailer attracted other smart retailers to enter the market and/or improve their own offerings.

      Suddenly all that progress, growth and consumer benefit is threatened because the oligopoly of book publishers figured out a strategy (one that would probably have been illegal before the Supreme Court’s controversial 2007 decision on wholesalers dictating retail prices) to put the kibosh on all the retailers.

      And please don’t go on and on with your Amazon wanted a monopoly bit. The structure of the market made that highly unlikely, as current events are now bearing out. There is no barrier to entry for competitors to introduce competing ebook stores and devices and plenty of ways for those competitors to entice consumers to switch despite the fact that consumers face some loss of value by not being able to transfer Kindle ebooks to other platforms.

      By contrast, the barriers to entry to crack the big six publishers’ oligopoly remain at this time quite substantial. Only a handful of companies have the printing and distribution might to handle print best-sellers. Because print still represents the lion’s share of the book market, few authors can afford to ignore the print side and just go with an ebook release while even fewer still are famous enough to demand that the big six separate their ebook rights (look at the tussle that’s erupted over just a few famous authors trying to get control of their own backlist for ebook purposes).

      Apple or Google or B&N can spend a few months cutting deals with the big six and overnight become big players in the still tiny ebook market. No one can challenge the big six in the print world, at least for the foreseeable future.

      Posted by Aaron Pressman | Feb 9, 2010, 9:33 pm
      • Wow. Quite a rant about the big 6 publishers, but I’m not sure how relevant it is to my comment about the e-book retailer space. Let me put this simply:
        Having many companies active as retailers for e-books makes for a more competitive market than having one company controlling the whole thing.

        Would Amazon have changed their terms from demanding 65% of sales revenue to their current 30% without competition from others? Would Amazon have purchased Touchco in an attempt to improve their device offerings without the presence of Apple’s iPad? Would Google have improved their offer without the presence of Amazon and Apple?

        I have no ties to the big 6 publishing houses, I work for a small, not-for-profit niche scientific publisher. The moves made here by MacMillan and others, however, are directly beneficial to my company. There is no way we’d be able to enter the e-book market under the terms Amazon was initially offering. We publish large technical manuals that appeal to a small audience. They usually cost upwards of $150 and they don’t sell a huge number of copies. $9.99 wasn’t exactly going to cut it for us. Now, because we can demand the same terms as the big 6, we can experiment in this space and see if it interests our customers.

        I’ll ask you straight out–are independent publishers and independent authors better off with an agency model or better off with Amazon’s original demands to license rights and take on the role of the publisher themselves (without providing any of the value adding work usually done by a publisher)? Are independent publishers and authors better off with a 70% cut of revenue or a 35% cut? Without the moves by MacMillan here, what sort of terms do you think Amazon was going to offer small publishers or independent authors?

        —And please don’t go on and on with your Amazon wanted a monopoly bit. The structure of the market made that highly unlikely, as current events are now bearing out. There is no barrier to entry for competitors to introduce competing ebook stores and devices and plenty of ways for those competitors to entice consumers to switch despite the fact that consumers face some loss of value by not being able to transfer Kindle ebooks to other platforms.—

        Let me rephrase that for you:
        And please don’t go on and on with your Apple wanted a monopoly bit. The structure of the digital music market made that highly unlikely. There is no barrier to entry for competitors to introduce competing music stores and devices and plenty of ways for those competitors to entice consumers to switch despite the fact that consumers face some loss of value by not being able to transfer DRMed iTunes purchases to other platforms.

        Hmm, how’s that working out? Apple only has what, 70-80% of the music download market?

        I find it odd how willing you are to champion companies looking to exert such dominance over markets, companies like Google who are known for ruthlessly destroying anyone who dares compete with them (and many companies well outside of their own space). Why should we laud Amazon, Apple or Google for making power plays to control entire markets yet fault the big 6 publishers? Shouldn’t they all receive the same level of criticism?

        Posted by David Crotty | Feb 9, 2010, 11:37 pm
      • This rant is almost stunningly ill-informed. The competition among the six largest trade publishers is brutal. Go to work for one. It’s a killer. The competition is to acquire the rights to the books that can satisfy mass-merchandise channels. The authors that aren’t published by these houses are those who are deemed not to have the stuff. Most of the time the editors get it right. But it’s a highwire act. Oligopoly? My god. These people are trying to kill each other.

        Posted by Joseph J. Esposito | Feb 9, 2010, 11:44 pm
        • The big six are a text book case of oligopoly — they’re even in textbooks. They are a small group that collectively can exercise a lot of control — dominance — over the terms of sale in the book market. That doesn’t mean they have to do everything in concert. Look at some other classic examples – the members of OPEC collude openly to set oil prices but still bicker amongst themselves and cheat on the quotas they’ve set. Sports teams with an explicit antitrust exemption bar competition from new teams, bargain collectively with players unions and TV networks yet still compete hard for talent. The record labels, I’m sure, could be described just as you describe the Big Six, but that didn’t stop them from colluding illegally in the mid-1990s to raise CD prices, an action that cost consumers about $500 million, according to the FTC.

          Posted by Aaron Pressman | Feb 10, 2010, 9:48 am
  14. David, I don’t know if you’re purposely mis-describing Amazon’s self-publishing platform and negotiated deals with various publishers or you are just ignorant. In the pre-iPad Kindle ecosystem, publishers had each negotiated all manner of deals with Amazon for royalties. Large publishers got half or more of the print hardcover list price, not 35% of the ebook retail price. Unpublished Joe’s and Jane’s and very small publishers that didn’t cut their own deals could use the self-publishing platform where they could set the list price at ANY level they wanted and Amazon would pay them 35% of that list price on all sales. Bigger publishers, too, set list prices all over the map and Kindle prices were all over. Since the Kindle store opened, there have always been expensive specialized trade texts for sale. It was a “gotcha” parlor game for some web sites when Kindle was first announced to list all the $300 medical texts and so on.

    Now there is the post-iPad, post-Macmillan Kindle ecosystem. Some things have changed. Under self-publishing, Amazon now pays 70% of an ebook’s list price if that price is under $10 and meets certain other conditions. I don’t think that helps you since you say your books sell for much higher prices (p.s. it’s still not an agency model at all – Amazon still can discount off your digital list price and you still get a fixed percentage of the list price). Macmillan and soon a couple of other of the big six have just renegotiated their own special deals. How exactly does this help your press? Not at all. It is not “directly beneficial” to your company because those terms don’t apply to your company. And furthermore, Macmillan agreed to a maximum ebook price of $14.99, which means a lot to consumers who were paying generally less but still doesn’t remotely solve your issue. (There was previously and still is no list price cap for the self-publishing platform).

    Next, you have confused the effects of the tremendous and healthy competition among ebook retailers with the complete lack of competition and unhealthy oligopoly among ebook suppliers (for mainstream-type books). Amazon cut the price of the Kindle, opened international versions, changed its self-publishing royalty rate, announced it would allow 3rd party apps on Kindle and made several other pro-consumer moves months and weeks BEFORE Macmillan CEO John Sargent arrived in Seattle with his new demands. They were clearly reacting, as we discussed after your panic at Amazon comment the other day, to stories about terms and features Apple was circulating, B&N’s terms, Sony’s new models and features and so on. Macmillan wanted an agency model, where the publisher sets retail prices. That’s not something Amazon is offering you or anyone but a couple of the big six. Independent publishers and authors are much better off with more retailers competing to sell ebooks, yes. They are not any better off because of the big six or with the agency model which actually generates LESS revenue for publishers and authors. And if, as basic economics might suggest, higher prices reduce demand for ebooks and scare off customers, that’s probably bad for the indies, too.

    I’m not championing any companies. All companies can help or hinder their customers. Google and Amazon obviously have done things you find offensive in some areas. When Amazon yanked back copies of “1984,” many, many people were outraged (I blogged about it extensively). Companies operate within the realities of their markets and the laws of the land.

    I’m not sure you understand the term “monopoly” in an economic context. It doesn’t mean having a really, really big market share. It means have dominance over the terms of sale in a market (generally, being able to dictate the price). As we just saw in Apple’s losing struggle against another powerful group of content suppliers, the record labels, Apple has no such dominance. Other companies freely enter the downloadable music and MP3 player markets and compete. Do you really think it was because of Apple’s dominance, for example, that the Zune has failed? Or is because it’s a pretty lame product that doesn’t offer enough attractions to pull away iPod customers?

    Ironically, it was Amazon’s entry into MP3 sales that facilitated the record labels’ win over Apple despite Apple’s then-ultra-high market share. In just a short time after all the big labels allowed Amazon to sell DRM-free music (and not Apple), Amazon picked up 16% of music customers and was growing fast. Apple gave in to the labels. They have the power over price, not Apple (subject of course to other market realities, like the current recession).

    I’m not lauding any companies for being sweet and wholesome. I’m in favor of companies that innovate in ways that benefit consumers. That can be through producing cool new gadgets like the iPhone. It could be movie studios deciding to set the wholesale price of DVD movies much lower than they priced video cassettes, perhaps undermining the rental market somewhat but creating a bonanza for movie lovers (and sparking the creation of a new $10 billion market). It could be Amazon recognizing that discount ebook prices and other innovative features would unleash a similar explosion of sales.

    The big six book publishers like Macmillan could be an oligopoly and still be worthy of praise and excitement. They are choosing to do things that don’t benefit their customers, perhaps to preserve legacy markets. If they changed course, I’d be happy to celebrate their good sense.

    Posted by Aaron Pressman | Feb 10, 2010, 12:39 am
    • I do get what you’re saying about the publishing oligopoly, I just don’t see a great upside to shifting that market dominance to a different set of companies, particularly when one notes that Amazon, Apple and Google have been just as brutal and customer-unfriendly as the publishers, if not moreso. We’ve all seen what happens to companies when a retailer like WalMart gains absolute control over the market for their product. WalMart demands lower and lower prices, the company is over a barrel and has to cut quality in materials and manufacturing, cut worker benefits and offshore production to keep themselves in business. Customers get lower prices, but they also get poorer quality products and less selection. I’d rather see that power kept within the industry because 1) I like my job and need to feed my family, 2) the publishing industry adds value to an author’s work and deserves the rewards for doing so, while the retailer does not add that same value, and 3) control of prices will allow the publishing industry to continue to provide quality and experiment with/develop new authors, rather than having to cut all of these activities to hit the desired price point of a retailer looking to use books as a loss-leader (good article here on how cd’s as loss-leaders killed the music business).

      You may not agree, and seem to feel that the technical accomplishments in software and hardware for selling and displaying content should grant them the power to run those content industries. I don’t think that’s good in the long run for publishing, authors or readers.

      Specifically:
      —I don’t know if you’re purposely mis-describing Amazon’s self-publishing platform and negotiated deals—
      Amazon had two general deals set up pre-iPad. Self-publishers licensed their material to Amazon and got 35% of the proceeds. Big publishers got 50% of the hardcover price on an e-book. The latter was, of course, unsustainable, as Amazon ended up losing money on most e-book sales, eating the loss in an attempt to sell Kindles, build the market and lock-in customers. There’s no way Amazon was going to continue with this business model for long, but once they’d established the price point for e-books at $9.99 and themselves as the dominant force in the market (estimated at 90% here), they’d have the hammer to demand a better deal from all publishers, resulting in even slimmer margins for those publishers and the loss of variety and quality noted above.

      Post iPad, Amazon changed their licensing deal with self-publishers, offering a better rate (clearly a competitive marketplace was better for self-publishers as their cut just went up), provided those self-publishers met Amazon’s price point and other demands. MacMillan (and shortly others) have negotiated a new standard, the agency model, getting that same 70:30 split but not conforming to Amazon’s demands as far as pricing and licensing goes. That is rapidly becoming the industry standard. You may doubt that those terms will extend beyond the big 6, but Apple seems to be willing to offer them across the board. Google looks to be doing the same. If Amazon won’t offer those same terms, my company will simply not sell through them, and most independent publishing houses will likely do the same. If Amazon hopes to remain competitive in this market, they need as complete a catalog as possible. If they wish to be the one retailer with an incomplete supply, that’s their decision, but I see it as unlikely. Here the oligopoly throwing their weight around has improved the lot for the indies, as has competition in the marketplace.

      I’m not confusing the actions of MacMillan with the results of competition in the retail marketplace. MacMillan’s actions were possible due to that competition. Again, you’re convinced only the big 6 will see those terms from Amazon, Apple and Google. Do you have any evidence that confirms this, or are you speculating? If Amazon won’t offer similar terms to their competition, do you think this will hurt their place in the market?

      Yes, higher prices may be rejected by buyers. But that’s how the free market works. I’d rather see that, and see publishers have to adjust and find ways to make things profitable at a lower price than see our products condemned to be loss-leaders used to sell other items.

      —I’m not sure you understand the term “monopoly” in an economic context. It doesn’t mean having a really, really big market share. It means have dominance over the terms of sale in a market (generally, being able to dictate the price). As we just saw in Apple’s losing struggle against another powerful group of content suppliers, the record labels, Apple has no such dominance.—

      Really? Music companies wanted prices to range from $1.25 to $2.99 per song. Because Apple “has dominance over the terms of sale in a market”, they held the price at $0.99 for several years, and then, in order to get the concession of dropping DRM, let the ceiling rise to $1.29, still less than the music companies wanted. That sounds exactly like the “monopoly” you’re describing.

      —Do you really think it was because of Apple’s dominance, for example, that the Zune has failed? Or is because it’s a pretty lame product that doesn’t offer enough attractions to pull away iPod customers? —

      Have you seen the new Zunes, or any of the reviews? They’re arguably vastly better products than iPods:
      Gizmodo
      “The Zune HD is the best touchscreen PMP on the market. It’s got the most unique vision, the most impressive hardware and the most stylish software.”
      CNet
      “The Zune HD delivers one of the best portable music and video experiences money can buy.”

      It seems quality of the device is not what’s stunting Zune sales.

      Posted by David Crotty | Feb 10, 2010, 3:42 pm
  15. p.s. what prompted my comment was obviously your comment “Even the mighty Google seems to have been brought to heel in their negotiations with publishers. A competitive marketplace is a lovely thing.” That story is about how Google is being forced to abandon some of the pro-consumer features of its ebook service (like printing and sharing) at the behest of the newly emboldened big six. It’s a story of the lack of competition and how it’s harming the ebook market.

    Posted by Aaron Pressman | Feb 10, 2010, 1:16 am
    • Loveliness is in the eye of the beholder. I’m a publisher, writing a blog aimed at the publishing industry. The competition between Google, Apple and Amazon has indeed worked to the benefit of that industry. It may indeed stunt growth, at least in the short term, but it strikes me as being important for long-term survival.

      Posted by David Crotty | Feb 10, 2010, 3:47 pm

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