Battle of the (E-book) Titans

Ask the Agent has been covering the developing story of the changing models for selling e-books and the struggle for market share between  Amazon and Apple.

An article appeared in the New York Times on March 17 that adds a new and troubling wrinkle to the story.

90% of the retail sale of e-books is now done by Amazon. This would be a monopoly by any reasonable definition. Amazon is cementing its dominance in the marketplace by offering  e-book downloads that can only be read by the Kindle, a media device that is manufactured by Amazon and sold exclusively  through Amazon. Thus if you own a Kindle, you can only buy e-books from Amazon. If you buy e-books from Amazon, you must buy a Kindle to read them.

Amazon has come to dominate internet retailing by aggressively discounting products in order to increase market share. They did this to great effect with books from the very beginning. They have been doing the same thing with e-books. Publishers have been selling e-books to Amazon for approximately $12.50. Amazon has been selling below cost at $9.95 for their  e-book  best- sellers.

If you ask the  major publishers how they feel about this, they will tell you privately, as they have told me,  that they are profoundly troubled by the market power of Amazon and are concerned that the deep discounting practiced by Amazon will devalue  what the marketplace thinks is a fair price for books. Last month the sixth largest American publisher, Macmillan, announced that it was changing its retail terms for e-books to the “agency model” which would not permit Amazon to discount titles. Amazon retaliated by pulling  “buy” buttons for all Macmillan books both electronic and physical.   This lasted only a week, but it should be a cautionary tale regarding the dangers of monopoly power in the distribution of ideas in a society or, in the case of Amazon, in the world.

Enter Apple and the iPad. It is difficult to imagine that Steve Jobs can be considered the friend of the little guy and a force against monopoly. Certainly the clout that Apple exercised with  the music industry in forcing them to accept   the iTunes model has done considerable damage to the music companies and artist royalties. But in publishing, as in Mid-East politics, the principle that “the enemy of my enemy is my friend” rules.

Five of the six largest book publishers fell into the arms of Apple and negotiated a new  sales model that allows the publishers to control the retail price sold to consumers of the book. But Steve Jobs is not Mahatma Gandhi and has imposed his own stringent conditions on the publishers. Under the new agreements with Apple, publishers will not be permitted to allow any other retailer to sell books below the price that is sold by Apple.

Amazon has reluctantly gone along with the new model, but is insisting on having a 3 year contract that would lock publishers into the current arrangement and guarantee that no other retailer will get better terms. Publishers are reluctant to agree to such a contract. The whole e-book market is in flux. Nobody knows what the e-book firmament will be like in three years.

But according to the New York Times, it gets a lot worse. Amazon has only agreed to the new “agency model” for the six largest publishers. The other 10,000 smaller publishers have not yet signed on with Apple. Amazon  has been speaking to them and telling them that they prefer to stick with the old model where Amazon can sell books for whatever price it chooses.

 These same publishers have spoken to Apple and have been told that Apple will only work with them if they sell to all other retailers under the same terms as  they are selling toApple. In other words, there is reason to believe that in order to do business with  Amazon, publishers will not be able to do business with Apple –and vice versa. A tough choice for the smaller publishers and a distressing possibility for the consumer.

The message Amazon sent forth during  last month’s negotiation between Macmillan was eloquent and persuasive.  That message was that  a publisher who doesn’t agree to Amazon’s terms risks having their books not be carried by the largest book retailer in the world.

Book publishers, and particularly smaller book publishers, are clearly getting whip-sawed by the two giants. The stakes are high for both Apple and Amazon. But the stakes are even higher for book buyers and the free marketplace of ideas.

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Book Banning at Amazon.com

I woke up this morning to the astonishing news that Amazon.com has stopped selling all titles from Macmillan , the sixth largest publisher in America.  I learned  about this first on Frances Dinkelspiel’s blog, Ghost Word.   Frances is a Macmillan author.

According to an article in The New York Times Amazon’s action was related to Macmillan’s decision to adopt new terms  for the sale of e-books to retailers based on the structure that is being implemented by Apple for its i-pad.  Under the new Apple model, publishers will have the ability to set the final retail price of an e-book  at  $12.99 to $14.99 for new titles. Amazon has been selling them at a loss for $9.99.  Macmillan CEO, John Sargent today wrote a letter to Macmillan authors explaining the dispute.

One can only hope and one must assume that Amazon’s decision is temporary and an act of saber-rattling. But the episode should be a clarion call for us to consider some very large issues about the dangers of monopoly power and how it can compromise the free dissemination of ideas.

A specter is haunting the world of books. From Amazon’s beginnings in the late 1990’s, the company has pursued a strategy of monopoly power. American consumers have embraced Amazon because of its outstanding “customer-centric” technology, its breathtaking selection, and its pricing. But this has not come without a cost. Amazon has gained a stranglehold on  the sale of books online and has attenuated the ability  of community-based bookstores, chains and independents, to survive at all.  With the interdiction of the Macmillan titles, they are now reaping the grapes of wrath.

There are a lot of legal subtleties associated with this issue. Whether a manufacturer (the publisher) can dictate the final selling price of a product to a retailer is an important anti-trust question that won’t be resolved by blogging. But the manifest power of Amazon to effectively cut off  a book publisher’s access into the largest channel of book sales,  the Internet, should give us  pause.

What is this dispute all about?  What’s at stake here?  We have made several recent blog entries on the implications of the e-book revolution. E-books are currently a small niche market for trade books, still less than 4%. But their market share is growing exponentially. Currently electronic book readers are the hottest products in consumer electronics.  It is altogether likely that the book business, not unlike the music business, will reach a kind of tipping point in which e-books will become the standard and paper-based books will become the niche.

Not surprisingly, Amazon jumped on board early. It developed  and marketed the Kindle, an excellent product. Very quickly Kindle became the shorthand word for “book reader”, just as Amazon became the shorthand word for “Internet retailer”. Also, not surprisingly, Amazon has designed the entire system to give it effective monopoly power over the distribution of e-books.

Kindle technology only allows downloading from Amazon and requires that any book purchase will be made through Amazon only.  Amazon has priced the books aggressively. Most new e-books are being sold as Kindle downloads for $9.99. This is a considerable discount from the costs of new hardbacks. Their retail price is typically $25-30. Hardback  discounted prices on Amazon are $15-18. Amazon purchases e-books for about $12.50, a price similar to the  cost for non-e-books. Amazon sells them as loss leaders. This strategy has sought and has succeeded in allowing Amazon to dominate the e-book market.

Publishers have problems with this.  They feel, and I agree with them, that by pricing  books so low, it will inevitably cause the book buyer to devalue books as a commodity. They will come to feel that a book is only “worth” $9.99. With customer pressure to make this price the de facto “list” price and with Amazon’s market power, the  publishers will have to change their business model to accommodate the new reality and begin selling books to Amazon for  something closer to $5 per book instead of $12.50. Good for the consumer, right? Wrong.

We have spoken in an earlier blog entry about the unfortunate tendency of Internet Culture to devalue the worth of intellectual work.  But there are costs to producing books, just as there are costs to producing any product. E books have no manufacturing costs, but there continues to be marketing, publicity, editing, and…yes…sometimes this seems like an afterthought….creating.

And so it all comes down to the irreducible and irrefutable fact that books cost money. And publishers will not be able to produce books or pay the writers a decent royalty  in return for revenue of  $5 per book. Certainly the literary “tea-partiers” will tell you that publishers are dinosaurs, that the essence of the Internet is “disintermediation” and that the future is with authors selling direct to the reader. That most of these books are being “mediated” through Amazon is a detail often overlooked. But let’s leave that for now.

Self publishing is a worthy endeavor and has brought many fine books to the market that would have otherwise died. But it is a bit of a quagmire of unfiltered material. It is a little hard to separate the dross from the gold.  This  fits in quite well with the Internet Culture of  Wikipedia (see previous blog entry)  in which everyone is an expert.

The emerging business models for the e-book, Apple and Amazon alike, are bad news for authors. Any way you calculate it, author’s are going to suffer reduced royalties. The publishers will realize huge cost savings with the e-book if the price of the book is comparable to  paper-based books. With e-books, there are no manufacturing costs, warehousing costs, shipping costs, packaging costs, and, crucially, no returns. Since the e-book is non-transferable, publishers will not lose sales from book borrowing or from the used book business. How this will all affect libraries is still unclear to me.

But authors are being asked to reduce their  percentage royalties for e-books. And the reduced retail price, both under the Amazon and the Apple model, will drive consumers away from physical books very rapidly and will force authors to take a smaller percentage of a dramatically smaller pie.

I am very worried.

UPDATE: AMAZON RESPONDS.

At 2 PM today, Amazon posted an announcement on their website addressing the issue of Macmillan. It is as follows:

“Dear Customers:

Macmillan, one of the “big six” publishers, has clearly communicated to us that, regardless of our viewpoint, they are committed to switching to an agency model and charging $12.99 to $14.99 for e-book versions of bestsellers and most hardcover releases.

We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books. Amazon customers will at that point decide for themselves whether they believe it’s reasonable to pay $14.99 for a bestselling e-book. We don’t believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative.

Kindle is a business for Amazon, and it is also a mission. We never expected it to be easy!

Thank you for being a customer.”

This is typical and predictable public relations strategy of Amazon. It has all the elements of  a Zen-like, or more accurately, a  Hegelian position wherein Amazon seeks to weave contradictory forces into a new and higher synthesis. Coincidentally, it sends some less than Zen-like messages. 1)Amazon can’t stop  selling Macmillan books indefinitely, but we can surely display our power to intimidate.  2) Other publishers, take note. and 3) Publishers have monopolies. Amazon just has customers. 4)We just want to help our customers buy books cheaper.

This is a cynical, manipulative, deceptive, and self-serving response.