Sunday, January 31, 2010

More on Amazon-Macmillan

I've just been reading Charles Stross's account of the dispute, which I can't entirely agree with. (But I'll also note that the expectations and beliefs of his commentors are generally much, much further from reality.) I probably have some facts wrong -- the best reporting I've seen on this so far is, inevitably, from Publishers Lunch, which is an e-mailed newsletter, so I can't link to it -- but here's my attempt to clear up some points of confusion and doubt.

(And, as always, let me emphasize that I am speaking as a private individual; I do work as a Marketing Manager for a major US publisher, but it's not the one in question here and I do not speak for any company in any capacity.)

1. Stross wrote that the traditional publishing supply chain ran "author -> publisher -> wholesaler -> bookstore -> consumer," and that Amazon, fueled by The Awesome Power of Teh Internetz (Stross was much more serious on this point than I am) is disintermediating everyone and trying to grab both sides.

Yes and No. Yes, Amazon does buy directly from publishers rather than from a wholesaler. No, this is not a new or unique thing. Big customers tend to buy direct from publishers -- Barnes & Noble does, Borders Group does, Hastings does, Indigo/Chapters does, Books-a-Million does, Wal*Mart does, Target does, and so forth. Wholesalers are still strong players in the space, but -- except possibly for a publisher that sells primarily to libraries or small independent stores -- they're unlikely to be the dominant customer for any publisher.

The issue with Amazon is very similar, if not identical, to the issues publishers have had with B&N and Borders (and with W.H. Smith's and Waterstone's in the UK) over the years, and with the issues Wal*Mart perennially has with its suppliers. The retailer wants to control the terms of its supply chain -- demand higher discounts, schedule deliveries according to its needs, maneuver suppliers into the lines of business the retailer is most interested in, etc. -- and has more leverage to do that as it becomes a larger percentage of its suppliers' businesses. The Wal*Mart comparison is particularly interesting, since it's the #1 toy retailer in the US, as well as (I believe) the #1 grocery chain -- so it has a lot of leverage, and has been very active in using that leverage.

So the central issue really isn't inherently about "The Internet" or information wanting to be free, or even the shift to e-books (though that was the touchstone for this event). It's about who has more power: the retailer (who has the relationship with the consumer) or the supplier (who has the products that consumer wants). To be blunt, it's a naked power struggle.

Similarly, Stross writes that Amazon buys wholesale and sells retail, which is their key strength -- this is true but very far from unique. So does B&N, so does Borders, so does Books-A-Million. The difference -- and here's where the Internet has been important -- is that Amazon's cost structure is much lower than its competitors, since it doesn't have to maintain costly retail locations around the country and actually provide jobs to people that sell books. Amazon has used that cost savings to buy market share since its very earliest days; it's one of their most-favored weapons, and they come back to it again and again.

The possible transition looming is that e-books not only don't require that nationwide cost structure, but are actually more difficult to sell through that cost structure. If e-books become the dominant form (which is an immense "if"), then operations like Amazon are almost guaranteed to become dominant, and Amazon is already in by far the strongest position in that space. And even if e-books top off at 10-15% of print books (as audiobooks did before them), that's still a huge piece of the business, and a massive amount of leverage for the dominant player (at the moment, Amazon) in that space.

2. The agency model.

Traditionally, books have been physical objects, sold by publishers on a returnable basis. This is an oversimplification -- some retailers, including Amazon from some publishers, buy a lot of their books non-returnable to get higher discounts -- but it's a good first approximation of the standard book business.

E-books, obviously, are not physical objects, and won't be sold returnable, unless they're embodied in a specific medium. (And we all know how well that worked out during the "enhanced book" CD-ROM mania of the mid-90s.) But they've piggybacked on that distribution model, since they were sold by publishers to booksellers, and started out as a minor sideline.

As they've grown in profitability and importance, though, that model has been bent and twisted in various directions. In the current format wars, nearly every seller of e-books has a unique (and often proprietary) format, and sometimes oversees conversions to their format (for example, Amazon does). It's been clear for a while that e-books would eventually move to a different model, but the question of which model has been a contentious one.

And why wouldn't it be? Every player in a market wants a model that gives it more power and control, while lessening the power and control of its competitors and/or trading partners. This is always a bruising process, and always will be.

Apple tossed a hand grenade into the middle of this slow-motion knife fight with the iPad and its "agency model." Apple, unlike Amazon, prefers to position itself as a high-end, almost luxury supplier, and is not interested in bare-bottom prices. And so their model was crafted to appeal to publishers -- so it could gather more suppliers to its platform and model quickly -- in opposition to Amazon's model.

Macmillan, working from Apple's model -- and rejecting Amazon's new model, which had some features apparently in common with the Apple model but was quite different (Stross is very good at dissecting those differences, by the way) -- gave Amazon their ultimatum on Friday. (Macmillan CEO John Sargent's open letter about that ultimatum, and its aftermath, is available on Publishers Lunch, though PL's newsletter commentary and reporting is not at that link.)

Amazon, like so many of us do, didn't react well to an ultimatum, and took a precipitous action of their own.

From Amazon's point of view, Macmillan is trying to fix prices, and constrain Amazon's ability to react to the market. They're strongly opposed to that; retailers typically want the freedom to price products at the level they think best. Amazon thinks they know how best to price e-books, and can point to the success of the Kindle as evidence. (Though that's slightly tarnished by the fact that Amazon has never released clear figures as to the actual success of the Kindle -- and that's in character for Amazon, which has a long history of creative number-juggling when speaking to the public.)

On Macmillan's side, they see themselves losing the ability to price e-books at a level which will cover the costs of creating those books, and the price slide spreading to print books -- or, in the worst, e-books Uber Alles, case, they see the Kindle being the iPod of books, and print books disappearing as quickly as the Discman has.

So I partially disagree with Stross here; pricing, and the control of pricing, is of central importance in this dispute. Bluntly, Amazon wants much lower prices much faster than Macmillan does (and has been willing to give up margin or take losses to subsidize those prices so far).

3. The Internet killing middlemen.

This is very much a side point to Stross's argument, but it's a common belief: that the Internet inherently destroys the power of middlemen and connects consumers directly with producers.

It may be true in some cases, but think about the biggest success of the Internet Age: Google.

What is Google but a middleman? They connect searchers to websites (and deliver those searchers to advertisers), they provide other platforms for individuals to connect (YouTube, Gmail, etc.).

Come to think of it, the social web is entirely made up of middlemen, and they've been the biggest recent successes. So the common wisdom has some flaws, at the very minimum: the Internet, like any business transition, can be very hard on complacent and entrenched companies, but it's not taking away the need for economic players whose role is to connect people and businesses to each other.

4. Amazon's cut of the pie

As some of Stross's commentors pointed out, Amazon has not used its "buy wholesale, sell retail" model to increase its own profits -- at least, not immediately -- but instead leveraged its lower costs to lower prices to consumers in order to buy market share.

And this is, of course, a time-tested method of competition, one which was used extensively by brick-and-mortar bookstores in the '90s during the dueling expansions of B&N and Borders. Each chain competed with the other on price, and tweaked its discounts -- with loyalty programs, by giving greater discounts to national or chain bestsellers, and so on -- as part of that battle.

5. What publishers do

Stross covered this well in his comments, but some of his commentors have the too-common pie-in-the-sky "why don't you just publish it yourself and make all the money?" arguments. Aside from the fact that e-books are still a small piece of the market -- and self-publishing a physical book isn't an activity for anyone but a ridiculously energetic self-promoter -- I do have to ask them one question:

Why do you think an individual author would have more leverage, or control, when dealing with retailers like Amazon than a large, diversified publisher like Macmillan?

6. What happens next

Someone blinks. In the case of Amazon UK vs. Hachette, it took a long time, and it appears that Hachette blinked the most. This case is more extensive than that one -- Amazon has "delisted" every Macmillan book, not just a selection of bestselling titles -- and I don't expect it will last the year-plus the UK action did.

As in the UK, it might not be immediately clear who blinked, or how much. But someone will blink.

Update, 6:25 PM EST on Jan 31st: Amazon has posted a notice stating that "ultimately, however, we will have to capitulate and accept Macmillan's terms" on their forums. "Ultimately," though, doesn't seem to mean "now," since the buy buttons have not been reinstated yet.

[seen, like all of the other important news in this story, from Publishers Lunch]
Listening to: The Deathray Davies - Dear In The Headlights
via FoxyTunes


Crotchety Old Fan said...

I think your including Google is a bit off here: Google is an advertising operation that presumably (seems to be) cutting out the middleman in the advertising industry and allowing producers direct access to consumers and vice versa.

I also think that one thing that is being largely overlooked in this discussion is that MacMillan has obviously decided that the business they do with physical stores and sellers of non-electronic offerings is more beneficial to them than Amazon is. I believe the pressure on Mac is coming from the 'how can we sell hardbacks for $25 when the "same thing" can be had online for under ten bucks?"; this is one group of retail sellers who sees a direct threat to their business from Amazon.

Andrew Wheeler said...

Crotchety: We may have to disagree on Google; from where I sit (as someone paying Google invoices pretty regularly), it's very similar to any other advertising broker -- particularly with its programs to run ads on sites that it doesn't run, host, or own. That's as pure a middleman position as you can get, and it's the core of Google's profits: delivering customers to advertisers. I don't go straight to consumers with my advertising; I go through Google.

On your other point, I very much doubt Macmillan thought Amazon would get rid of every single one of their print products over this e-book negotiation. Perhaps they should have anticipated that, since Amazon wields the delisting hammer quite often these days, but I don't believe they did anticipate it.

Ran said...

I don't think Amazon is going to give authors better terms to individual authors than publishers, but the 70-30 split they're offering sounds pretty good for authors and independents, doesn't it? Obviously the concern is that Amazon corners the market and then is in position to dictate terms...

But at present, they're offering a decent deal. If Stross decided to publish a novel exclusively in e-book format, I'd guess that he could make a good deal of money on the venture at $7 revenue per sale.

Crotchety Old Fan said...


the problem is your entire take: "at the present" it looks like a good deal. After everyone goes for the short term gain, suddenly they find themselves without a good deal...

Crotchety Old Fan said...

Follow-up: I can't possibly begin to list the companies I've watched solve their short-term problems with short term solutions, only to go out of business because they confused dollars with strategy.

Andrew Wheeler said...

Ran: Well, the author could potentially make almost as much as $7 on each unit; you have to remember that $9.99 is the hard upper end of Amazon's price range. And remember that Amazon reserves the right to set the price, at any time, at whatever they want, as long as it's no higher than that point. And that they've said explicitly that the point is to keep their price as low as possible. And that the bestsellers for Kindle are currently predominantly free.

Given that, and that an author would only be able to sell electronic rights to Amazon for a work that didn't have a print edition from any major publisher -- since those publishers demand the inclusion of electronic rights in all deals -- and that e-books currently sell, at best, at about 10% of what a print book does. And Stross's books typically sell first as hardcovers, with retail prices around $25 and royalty rates of at least 10% -- so, yes, Stross could potentially sell 10% of the quantity of a book for an unpredictable sum on each unit sold and no promotion, and at the same time screw his relationship with his print publishers. Oh, and he'd get no advance, either -- so that unpredictable money would be coming much later (and so the time-value of that money is severely reduced, on top of everything else.)

But I really doubt he will any time soon.

Anonymous said...

I think the term for what Google is is something in the realm of terms such as "portal" or "aggregator". Google gets revenue from ads and particularly click-through ads [I despise the implementation, I don't object to ads and link, I object to ten thousand mouse clicks and script after script after script each popping up a notice, and every instance of attempt to infest my computer with tracking tag tryign to spy on me for the financial benefit of the likes of and doubleclick an adclick and and etc. with no benefit and no income to ME,, but my own damn computer SPYING on me?!!!], the Google visitor gets aggregating portal access pointing to information caches, retailers, etc.

Andrew Wheeler said...

Anonymous: To a consumer, Google is a portal (among other things).

To an advertiser, it's an ad broker (also among other things).

This is not new: Time has been delivering content to readers and eyeballs to advertisers for seventy-some years now. Being a content provider does not preclude selling advertising -- on the contrary, it's usually the prerequisite for it.

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