Amazon unleashes the Kraken
Thursday, February 4, 2010 
Ah, so good to be back at my much neglected writing desk. For the record, I had a splendid time at UCONN. Full report later, but I’m going to postpone that to mention the whole Amazon vs. Macmillan thing that is still going on.
For those that don’t know (and many don’t), Macmillan, one of the “Big Six”—a house that includes Farrar, Straus, and Giroux, Picador, Tor, Henry Holt, St. Martins, Minotaur, Thomas Dunne, and countless others, has been pulled from Amazon over a pricing row regarding eBooks. Amazon did this without warning or explanation in a move that’s akin to the tantrum of a spoiled child. You see, they didn’t just pull Macmillan’s eBooks, they pulled ALL their books.
I won’t bore you with all the details, and other writers have done a yeoman’s job of explaining what this is all about, but for now, Amazon and Kindle users no longer have access to 1/6th of the books published in the English language. (What genius!) What was probably intended as a bold statement by Amazon has dissolved into a publicity nightmare, one rightfully earned.
Or as Scott Westerfeld so aptly wrote on his blog, “Hey, Amazon. When cutting off publishers, don’t start with the one that has the most science fiction writers. We will blog you dead!”
Don’t get me wrong. I love eBooks. My wife has a Nook. I love audio books as well. I’m actually an optimist about technology bringing in more readers—especially younger readers—the ones that are driving the industry right now. And I don’t see traditional books going away anytime soon.
But I don’t like bullying.
So what can you do? Buy Macmillan books elsewhere. Wolf Hall, Sarah’s Key, Ender’s Game, The Wheel of Time, Plum Spooky, yes—these are the kind of books you can’t buy from Amazon, at least not until they lick their wounds and learn to play nice.
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Reader Comments (10)
From a business perspective I can totally understand Amazon’s move, though I still don't think it was the best one. Basically Macmillan was coming back to Amazon with the deal Steve Jobs suggested to the publishers (which was, ironically, the one the record labels always wanted with the iTunes music store but he would never do) which essentially makes the ebook seller a transmitter of information, and not a seller. The 'agency model' as it's called, means amazon doesn't get to set the price they sell the book at... there is no MSRP, there is MRP. Apple’s plan is to make a small percentage on each book sold, and a bunch on the hardware. Amazon’s is not that different, but because Apple needs some of that market share that Amazon already has, Apple was willing to cut deals which granted the publishers a “better cut” of the money. Though I’m pretty sure it wasn’t as much about the “cut” for the publishers as it was control.
What Amazon was happy to do in the past was buy ebooks at X price (the figure I’ve heard is 1/2 the retail price of the hardcover... which is pretty much the same as the wholesale price of a hard cover as I recall) and sell them at whatever price point they decided ($9.99 for most “big” books). At this point in the game they were selling them for less than their cost as a way to buy ebook reader market share (and hence B&N tries to price accordingly now that they’re in the market so it’s less of an advantage for Amazon). I think they were smart here, because to get people to “buy in” to an e-Book reader you had to have both a LOT of content, and it had to be cheap. You could have gone with the video game console model of losing money on the hardware but making it up on the games, but with an all new market that’s tougher to do. Apple, doesn’t need you to “buy in” to an e-Book reader… it comes free as part of your iPad.
Macmillan claimed this discounting of ebook titles was devaluing the books and going to eat into their hardback sales. It probably WILL eat into their hardback sales (few people will buy both), but they were getting paid the same either way I believe (though I don’t know if they cut as favorable deals with authors on the ebook rights). From a business perspective I’m guessing the main objection is that it would be more difficult to judge how many hardbacks to have printed (a fixed cost) if anywhere from 50-500,000 of your readers may be buying digital. As to devaluing, there might be an argument to make there, though they seem to only pay lip-service to that concept when it comes to Wal-Mart & Target discounting hardbacks to sub-$10. I don't think they're delaying Wally world's shipments because they price the books too low. Though they do grouse about it, they're more than willing to take their money. JA Konrath has a great blog post on “selling paper” that details where some of Macmillan’s side of the problems live.
I think Macmillan’s real problem, is the control of it. If Amazon has the lion’s share of the market, it can then determine what the long term pricing should be, AND can start to sidestep the publishers. JA Konrath’s piece details how he’s making a decent bit of money off of Kindle sales on his out of print books which he now retains the rights to… and in a couple months Amazon is changing from giving the author’s 35% of the sale price to giving them 70%. This has to worry Macmillan as it doesn’t need many authors of the level of Stephen Covey deciding to sell direct through Amazon, to cut severely into their bottom line. At this point Macmillan can still say no to Amazon, but if they still have the lion’s share of the market in 5 years, and eBooks are now 50% of the market instead of 5%... well then they’re at the whim of Amazon (though I do question the wisdom of throwing in your lot with Apple here… I don’t think they’ll be any more of a benevolent monopoly to the publishers than Amazon will)
With the iPad looming, what Amazon NEEDS to stay in this game, is to keep market share. They have, by some estimates, about 90% of the eBook market right now (probably down to 80% after the Nook introduction this xmas), and it's almost impossible for them to keep that percentage in a market that Apple has jumped into. Steve Jobs (and I'm an apple fanboy as well, but I picture him sitting in a lair, petting a white cat, watching all this and letting out the occasional mwahahaha) doesn't need to sell eBooks by the ton to make this work for him. Apple has always been a hardware company and thus he only needs a good bullet point and access... so he can (and did) cut deals with the publishers that were quite favorable to them so he could have the big boys playing on his toys. For Apple, they’ve got so many fingers in the pie that if they can just say “you can buy any of the major books you want on the iPad” they’re going to make more money selling the device (and then songs and apps and books).
To that end, I imagine Amazon (and Macmillan) was rightly realizing that their market share leverage was at risk, and had to move soon. Macmillan laid down the law. Said either you sell them AT the price we want IN the way we want, or you can keep the old model, but get them delayed by 6+ months when Apple will get them on zero-day because they agreed to these terms. Amazon realizing they won't have the same leverage in 60 days opted for the nuclear option of removing the entire Macmillan catalog from their store (well, you can buy used copies, or from 3rd party, but Amazon isn't selling them to you). While Amazon did post something saying they would "ultimately" have to give in to Macmillan and play by their rules because they want to sell you ALL books, they haven't fully "given in" just yet (you still can't buy a good number of Macmillan books from Amazon, though apparently some are creeping back into the catalog as the week & negotiations progress). Amazon probably felt, that they had their back against a wall with Apple on the horizon... if the iPad hadn't been coming the eBook market for the next couple years would have probably broken down to 60% Kindle to 25% Nook + also rans. With Apple on the horizon I think it's going to break down more like 50% iPad, 30% Kindle, 10% Nook + also rans.
Interestingly enough, or not, the Amazon stock took a hit on the stock market, though all the speculation from the business analysts were not that it took the hit because it pulled the books, but because it said it would capitulate to Macmillan's 'demands'.
I think what Amazon really SHOULD have done, is post a front page letter on their site detailing why there was a chance that they wouldn't be selling Macmillan titles on the Kindle any longer, and let the consumers push back on Macmillan about it if that’s what they wanted. Macmillan and Amazon are both looking at things which will fundamentally change if and how they make money. Amazon has to worry about the iPad, and Macmillan has to worry about how eBooks change their business model. Apple doesn’t have to worry about so much. Sadly, the authors are the ‘collateral damage’ here. And, because Amazon was the one who used the nuclear option, Amazon will be the ones who come out looking like the bad guy (though there are certainly people who are saying that Amazon is only fighting for the customer and are pleased with them… you just aren’t as likely to find them on author’s blogs).
http://www.tor.com/index.php?option=com_content&view=blog&id=58735
(I can't say I'm surprised that the Macmillan letters have been better done than Amazon's was... they've got better writer's than Amazon :D)
I don't have as much of a problem with what Amazon did, rather it's the way they did it. And I think their dip in stock price is also a reflection of investors realizing that Apple is going to start eating Amazon's lunch when it comes to eBooks.
I really don't see Amazon having ANY positive move in all of this. They own the market, with a device that suddenly looks pretty feeble. Their only advantage now is price, and *poof* it's going bye-bye. They've painted themselves into an all-or-nothing corner now.
Can they even sell eBooks to the iPad? Or does their DRM link their eBooks strictly to the Kindle?
I have a friend at work who had been weighing eBook readers for ages, and tried out the Kindle app on the iPhone and bought a couple books... he tried the nook and ended up with the Kindle because he didn't like the hardware for the nook. He's also a HUGE apple fan and while he's tempted by the iPad he's very happy with his iPhone/Kindle combo at this point. I don't see as many people with Kindles (and those are also a lot of people who will have iPhones as well) switching to iPad w/ version 1.0... but if Apple makes a few key upgrades with 2.0 that's when there will be possible switchers. Then it will be interesting to see if they switch to buying books for iPad, or keep using Kindle app to read books on iPad instead.
First off I think Macmillan made its first real PR mistake with the advert in the NY Times for a book saying “Available everywhere you buy books, except Amazon.com”… I think that depletes their high-ground standing a bit. Amazon still owns the jerk move ground, but prior to that Macmillan had really done a great job of SEEMING classier (not involved in the negotiations I have no idea if they actually WERE classier).
I was looking at the numbers a bit this morning and I suspect that the publishers (now three of the majors are planning on moving to the Agency Model... including Harper Collins & Hachette) may do themselves more harm than good with this. If it was preserving their payment model it would be one thing, but I'm really unsure what they're hoping to accomplish here unless they just want to kill eBooks (though I could potentially see how it might work if they just want to kill Kindle & Nook and be beholden to Apple).
Bear with me here. In the "real" world, they sell hardback books for about 50% of the retail MSRP. So that $29.99 Gathering Storm is sold to a retailer at $15ish. The retailer just needs to sell it for more than $15 to make a “profit”. For places like Borders that means they discount the book to $23.99 ($17.54 for B&N, and $16.50 for Wal-Mart). In some cases Wal-Mart, Target, & Amazon have bought in such huge quantities (and hence gotten even steeper discounts) that they’ll sell them for more than 50% off (or they’re just eating the loss in the name of getting people “in the store”). Publishers haven’t balked too much at this as A) they get paid either way and B) those discounts are more likely to mean they’ll have fewer remaindered books. They have made statements about devaluing books, but it seems to have been more lip-service than anything with weight behind it.
What Amazon has been doing with Kindle books (and in theory what B&N is doing with Nook books as they’ve been competing on book price with Amazon) is buying them at 50% of hardback retail price, and selling them at a loss to get to the $9.99 price point they think eBook adoption hinges upon. Presumably they are making money on the hardware, and on some of the less discounted books. What they’ve been doing with eBooks is almost the same thing retailers have been doing with dead tree Books all along; buying wholesale, selling at “retail” of their own choosing.
What the Agency Model does is make it so the retailer no longer has control of the price of their product. While Macmillan has argued that they want control of the price of their product, they’ve never had it before. They only exhibited as much control over the price of the product as they could by setting the wholesale price. If Amazon, B&N, Wal-Mart wanted to buy two million copies of Harry Potter 8, and give them away as thank you gifts to their customers, that’s what they would be able to do with a dead tree book. Under the agency model, the retailers could no longer do that. They can’t compete on price anymore.
This is where it gets wonky for me. Unless they’re intending to try and sell dead-tree books under the Agency Model as well, they are going to be putting up an eBook at $12.99 or $14.99 against a hardback version selling at $16.50-$23.99. In most cases, it looks like it will be a $14.99 brand new best seller in ebook format going up against a $17-$18ish hardback. As others have pointed out, you can say the “content” is the same all you want, but from a consumer perspective buying bits vs buying “real object” there is an understanding/expectation that they will pay less for impermanent versions (think $15+ for a CD, or $8.99 for an MP3 album). So while the publisher is saying “we’re going for better pricing” the reality of it isn’t a comparison of a $14.99 ebook to a $28 hardback as much as it is a $14.99 ebook vs a $17.99 hardback. And that, I expect, is going to mean fewer eBook sales overall, especially for dedicated eBook readers like the Kindle & Nook.
The iPad has the advantage (and disadvantage) of not being an eBook reader. It has that function, but people aren’t going to be buying it specifically to read books on. So it will have its base of users either way. And that means there will be millions of people who may buy a book or two on it when they’re on vacation. The Kindle & the Nook need to have a reason to be purchased, and aside from ease of transport, part of the “plus” of these devices is to be able to purchase cheaper versions of a book with the understanding you’re giving up the permanence/tradability/re-sale-ability/etc of having a distinct physical object for each book you purchase.
As any good actor or writer knows, the key question is “what is the motivation?” As large corporations one has to assume a primary motivation is money and profit. Amazon’s motivation is relatively easy to discern, they want to maintain their role as a primary destination for the purchase of books and media (and ergo, make stacks of cash). Apple’s motivation is also relatively easy to figure out (aside from Steve Jobs wanting to rule the world), they want to make money in as many key media markets as possible, primarily as a means of continuing to sell hardware to as many people as possible (and ergo, make stacks of cash). Authors’ motivation is, I think relatively easy to understand as well… they just want to A) have their work read and appreciated and B) feed the family. That leaves Macmillan (et al).
So my main question is: What is Macmillan’s motivation? They don’t want to be tied to Amazon’s whim on pricing, though they make even more money on that than they will under the Agency Model. There have been elegant posts from many writers on why publishers still need to exist (because eBooks aren’t the end of publishing). Some of the reasons are much the same ones as why record labels still need to exist, but even more so. There is the culling the wheat from the chaff process, the editing, the marketing, the whole bunch of other crap that happens. I’ve seen Digg, I don’t think crowd sourcing all book decisions is a good plan (though it probably could be effective in some cases). Is it all about the control of the property rights for Macmillan? I assume they see that this will hurt more than help the dedicated ebook readers, and it will help the iPad more than it will help Macmillan. Are they worried about getting locked in to Amazon? Why wouldn’t they get equally worried about getting locked in with Apple should this move cripple the Kindle & Nook? Are they worried about some sort of publishing paradigm shift that removes them from the equation? Is there some problem for them in determining publishing costs for a book that may or may not sell in dead-tree or eBook format? Does that expose them to greater risk of loss from remainders? Are they hoping to keep selling mostly dead-tree books?
For me, it’s these questions regarding the publishers that I haven’t figured out yet. I’m hopeful there will be a good discussion to follow. What I see coming from this Agency Model is that dedicated eBook readers will be less common & less popular, and that eventually Apple will own the space and once that’s the case they’ll be in more of a position to dictate the pricing structure to the publishers and consumers. I also see a future for eBooks that might mean only big publishing houses, and Apple, and mostly best sellers being available on the iPad. I’m not saying that’s a certainty by any means, just that it seems a more likely future if the Agency Model works out to be as much more in Apple’s favor than anybody else’s as it seems (what, you’re going to be SURPRISED if Steve Jobs made the best business move for Apple in all this?)
Obviously this link is to a piece with an agenda, but it’s an interesting take on the subject:
http://dpakman.wordpress.com/2010/02/03/wading-in-on-amazonmacmillan-pricing-debate/