Government Technology
By Ulf Wolf: Citizen engagement and responsibility in the digital age.

More On Publisher Greed

June 20, 2011 By

I obviously had my attention elsewhere when the publishers vs. Amazon war broke out early last year (most likely on surveying their 15,000 + free Kindle titles), but having run across Penguin Group’s practice of increasing the Kindle price by some 30% over the paperback price (despite hardly any cost by comparison), I decided to dig a little deeper.

MacMillan Fires First

In late January 2010, John Sargent, head of MacMillan (Macmillan is one of the country's biggest publishers, through such imprints as Farrar Strauss & Giroux and Henry Holt),  returning from an unsuccessful trip to Seattle to convince Amazon to adopt the Agency Pricing Model, took out the following full page ad in Publisher’s Lunch:

To: All Macmillan authors/illustrators and the literary agent community
From: John Sargent

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 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 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 and Macmillan both want a healthy and vibrant future for books. We clearly do not agree on how to get there. Meanwhile, the action they chose to take last night clearly defines the importance they attribute to their view. We hold our view equally strongly. I hope you agree with us.

You are a vast and wonderful crew. It is impossible to reach you all in the very limited timeframe we are working under, so I have sent this message in unorthodox form. I hope it reaches you all, and quickly. Monday morning I will fully brief all of our editors, and they will be able to answer your questions. I hope to speak to many of you over the coming days.

Thanks for all the support you have shown in the last few hours; it is much appreciated.

All best,

Amazon Capitulation

On January 31, 2010 Amazon issued the following Capitulation Letter to its customer signaling defeat:

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.

War Ensues

This kicked the war between Amazon and the book publishing world into high gear.

Up till that time Amazon had bought books from publishers at normal prices ($10-$14, wholesale), and then sold them as Kindle books for $9.99, taking a loss on each one. This practice, naturally, terrified publishers who saw the digital writing on the wall: if Amazon were allowed to do this they would eventually force the publishers to cut wholesale prices and so (while making Kindle a profitable Amazon business) reducing publisher per-unit-profit.

At this point, not only MacMillan began pressuring Amazon to raise prices for Kindle books which Amazon was oath to do.  Amazon had vowed to cap any Kindle book at $9.99 for two reasons:

They wanted to make Kindle the eBook standard, and to do that they need to build up sales volume; and secondly, they saw the absurdity of charging more for an eBook than a hardcover (or paperback for that matter).

At which point Apple jumped into the game with the iPad, and on the side of the publishers, promising them that Apple will sell their eBooks for $13-$15, rather than Amazon’s $9.99. This, of course, was fuel for the publishers’ war with Amazon.

Consumers hoped that Amazon would win, but, alas, this was not to be. Even though it is one of the main US outlets for paper books as well, Amazon still only represents a small percentage of total MacMillan and other publisher sales, and so saw that a protracted war would not bode well for Amazon.

Bottom Line

Bottom line: Amazon rolled over, not only for MacMillan, but for the other publishers as well. They didn’t really have a choice, especially after Apple came to the aid of the publishers.

Or as Steven Jobs so eloquently put it, “We will stand on Amazon's shoulders and go further.”

Nice job, Jobs.

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