Amazon declares war on Friday, concedes on Sunday (updated)

Well, this has been an unusually interesting weekend. For those who haven’t been glued to the interwebs, on Friday Amazon stopped selling all print books and ebooks published by Macmillan and their many imprints, including Farrar, Straus & Giroux, Tor, Henry Holt, and St. Martin’s Press.

This is the first shot with real bullets in the war over the future of ebook pricing. It can’t be a coincidence that it happened this week, after Apple announced the iPad and the iBooks app/bookstore and its deal with five of the six major U.S. publishers–of which Macmillan is one. Amazon has gained ebook market domination by selling many new ebooks for its Kindle at a loss. (Under the wholesale model, for new books (print or ebook) big retailers like Amazon pay the publisher 50% of the hardcover list price but can sell it for whatever price they want.) Amazon set the retail price for many ebooks at $9.99 even though it often had to pay the publishers more than that in order to drive sales of its Kindle and the Kindle-only formatted ebooks. Most other ebook retailers can’t afford to take a loss, so their prices are higher than Amazon’s, which convinced more people to buy the Kindle and increased Amazon’s market share. (This is the same thing that happened with print book pricing in the Amazon vs. independent booksellers battle.) But publishers feared that once Amazon completely dominated the ebook market, it would start putting pressure on them to lower their wholesale prices so that they could continue to sell ebooks at $9.99 and make a profit, but push the losses onto the publishers and authors. To try to regain a bit of control, some publishers began to withhold their ebooks from Amazon or delay them until a few months after the release of the hardcover.

Then Apple comes along and makes a deal with the publishers to sell their ebooks on the iPad. Publishers could set their own prices (ebooks would be priced individually, according to a formula tied to the print price, with most new ebooks between $12 and $15 and lower prices for backlist titles) and Apple would take 30% (this is the agency model, to be explained below). To the publishers, this seemed like a much better (more sustainable and profitable) idea, especially since Apple is one of the few companies that could take on Amazon and open up the ebook market to some real competition. If publishers could sell their ebooks profitably through Apple’s ebook store, they could resist Amazon’s push to lower their prices to a level that publishers believe would be disastrous to the industry.

So now that publishers have found an ebook pricing model they can live with, they want Amazon to agree to it as well. It would allow everyone (including Amazon) to make a profit, ebooks will still be priced significantly lower than print books so the ebook market would continue to grow, ebooks would be available simultaneously with the hardcover publication, and the price of ebooks will drop throughout the life-cycle just like print books do. Amazon, however, might lose their market advantage if they can’t significantly undercut everyone else on price. If Amazon chooses to stay with the current wholesale model and set their prices below everyone else to gain market share, publishers can accordingly choose to withhold or delay the release of the Kindle ebooks. As my husband commented this morning, it’s the clash of the monopolists, and he’s strangely unsure who to root for in this fight.

Apparently Amazon has decided to make an example out of the first publisher to try to renegotiate ebook terms. As recounted by John Sargent, the CEO of Macmillan, in a letter released yesterday:

This past Thursday I met with Amazon in Seattle. I gave them our proposal for new terms of sale for e books under the agency model which will become effective in early March. In addition, I told them they could stay with their old terms of sale, but that this would involve extensive and deep windowing of titles. By the time I arrived back in New York late yesterday afternoon they informed me that they were taking all our books off the Kindle site, and off Amazon. The books will continue to be available on Amazon.com through third parties.

I regret that we have reached this impasse. Amazon has been a valuable customer for a long time, and it is my great hope that they will continue to be in the very near future. They have been a great innovator in our industry, and I suspect they will continue to be for decades to come.

It is those decades that concern me now, as I am sure they concern you. 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 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.

So, Amazon is punishing Macmillan by refusing to sell its ebooks or printed books and is sending a message to the other publishers as well. (Yes, you can buy Macmillan books and ebooks elsewhere, but considering Amazon’s market dominance, this will still hurt the publisher and the authors.) Right now, Amazon is the 800-pound gorilla, so they are acting now before the iPad comes out to try to shut down this publisher rebellion before it gains traction. But if the publishers hold firm and rally together behind this new 30% commission/agency model, Amazon is faced with a problem. Are they really going to banish all of the major publishers from their site? By refusing to sell books their customers want, Amazon’s revenue will suffer and customers will be forced to shop elsewhere. As my grandmother would say, they are cutting off their nose to spite their face. With Apple looming on the horizon, it seems like an act of desperation.

There’s been a lot of discussion in the blogosphere over ebook pricing, which I won’t rehash here (see the TeleRead blog or the various publishing/book blogs in my sidebar for background). However, I do think a dynamic pricing scheme for ebooks makes sense. In most cases, a book is published first in hardcover at a higher price (usually between $24 and $28, though Amazon and the other big discounters sell them at 30 to 50% off that price). About a year later, the book is published in trade paperback at a lower price (usually between $12 and $16, with fewer/smaller discounts). If you want to read a book when it first comes out, you have to pay a premium for it, as you would when a movie is first released. If you don’t want to pay this premium, you have to wait to buy it at a lower price or borrow it from your local library. As most ebooks are priced below the price of a trade paperback or discounted hardcover, you can see why some publishers don’t want to make them available until after the hardcover has run its course. (It’s the hardcover sales to the public and libraries that allow publishers to recoup much of their costs, and authors receive far more per book from hardcovers than they do from paperbacks.) But in the same way you release the book twice–first in hardcover at a higher price, later in paperback at a lower price–why not release an ebook at the same time as the hardcover at a lower price than the hardcover (for example, the price of a trade paperback, to account for lower production/distribution costs and the fact that unlike a paper book, you don’t really own it because of DRM and can’t resell it)– say $12 to $15– and then lower the price of the ebook to $10 or less when the trade paperback comes out.

With a dynamic pricing model, consumer behavior will eventually set pricing levels. If consumers are willing to pay more for immediate access or are willing to wait in order to pay less (like with print books), then that will become the standard. If consumers demand immediate access to ebooks but will only pay $10 or less, publishers may have to reconsider their entire model–perhaps abandon the hardcover and release new books in trade paperback to keep the prices between print books and ebooks more in line with each other. Consumers would love this, as it would lower book prices, but the publishing industry would have to change significantly, much as the music industry was forced to.

Authors, of course, are the collateral damage in this fight. Here are some blog posts of note, some by authors whose books are no longer for sale on Amazon:

Update 1IndieBound, the collective website of U.S. independent bookstores, has posted a reminder that “Macmillan books available here – and at thousands of independent bookstores across the country!” You can search for your local independent bookstores on the IndieBound website. If you are looking for an online bookstore, check out Powells.com, which sells new, used, and out of print books and ships worldwide.  By the way, Powells and IndieBound also have affiliate programs, in case you are thinking about switching your book links away from Amazon.

Update 1.5: Another option for those looking for online booksellers who have affiliate programs and will ship internationally is The Book Depository, recommended by Cheryl Morgan. The Book Depository (.com for the U.S. or .co.uk for the rest of the world) offers free worldwide shipping.

Update 2: This just in from Nick Mamatas’ blog. The following announcement about Macmillan was posted on Amazon’s Kindle community board at 2:22pm (PST) today, signed by the Amazon Kindle team:

The Amazon Kindle team says:

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.

I just checked, and Macmillan books are still not available for sale on Amazon. I wonder how long this “temporary” boycott of Macmillan books and ebooks will continue.

The news of the announcement is racing throughout the blogosphere and Twitter. Here’s the New York Times blog post, titled “Amazon Concedes on Electronic Book Prices.”

I’ll give John Scalzi the last word:

Dear Amazon,

Now that you’ve admitted that you’re going to accept Macmillan’s pricing proposal on ebooks, would you mind turning the “Buy Now” button back on for all my Tor books? Pretty please? The longer you wait, the more I’ll have to think you’re just being petulant and foot-stompy about it.

Kthxbye,

JS

P.S.: Come here, have a hug. Let’s never fight again, okay?

No, seriously. Let’s never fight again.

Thanks.

4 responses to “Amazon declares war on Friday, concedes on Sunday (updated)

  1. IMO, Amazon hasn’t conceded anything. This is posturing for the customers.

    It’s getting interesting.

  2. Hi Lisa! Content providers (and publishers) cannot survive in an industry where distribution of a digital product takes as big a piece of the pie as distribution/warehousing of physical product. This is the world Amazon and the Nook are trying to force on an already incompetent and stumbling publishing industry.

    Despite the initial lukewarm response to the iPad itself, it has struck a hopeful note for the future with its choice of both the .epub format and the agency model for digital books.

  3. Pingback: Tweets that mention Amazon declares war « Lisa Gold: Research Maven -- Topsy.com

  4. Pingback: Sterling Editing » Written on the internet

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