Amazon vs. Apple And The Agency 5: Let’s Get The Facts Straight

Given that anyone who reads my blog is an author, publisher, or otherwise involved in the book business, I don’t think I need to trouble myself with recounting every detail of how the U.S. Department of Justice came to charge Apple, Inc. and publishers Macmillan, Penguin, Hachette Group, Simon and Schuster and HarperCollins with collusion to fix ebook prices. But judging by the many hysterical, righteous articles and editorials I’m reading in the wake of antitrust charges being filed and three of the five named publishers promptly settling out of court, there’s plenty of inaccuracy and flawed logic out there that needs to be addressed.

1. Before Apple and the Agency 5 publishers established their Agency Pricing plan, Amazon was hurting publishers’ bottom lines by offering their Kindle-format bestsellers at a discount price. Publishers had to do something to stop Amazon from doing this, so they could earn enough money to cover their expenses and still earn a modest profit.


Prior to Agency pricing, publishers sold their Kindle-format books to Amazon under the same basic wholesale terms they used to sell their hard-copy books to Amazon. Publishers set a suggested retail price for the public, but sold each copy to Amazon at a lower, wholesale price that generally constituted 60% of the suggested retail price. That percentage is standard across the industry for all booksellers, and is fixed regardless of the price at which a given book, digital or hardcopy, actually sells.

This means that if the publisher set a suggested retail price of $20 for a given Kindle book, Amazon had to pay the publisher $12 per copy sold. Even if Amazon elected to sell those books at a discounted retail price of say, $9.99, it still had to pay the publisher $12 per copy sold. Most of the mainstream Kindle bestsellers Amazon was selling at $9.99 were being sold at a loss to Amazon, but publishers still earned the same cut as they would if Amazon hadn’t discounted.


2. If Amazon is allowed to offer mainstream bestsellers as a “loss leader” product, it will soon have a monopoly over ebook sales in general and will then demand that publishers accept a lower cut on each copy sold—and in fact, they are already starting to do this with their 2012 vendor contracts with publishers.


While it’s true that Amazon’s 2012 vendor contracts do charge higher prices for on-site promotion than in prior years (though specific details of the new contracts have not been publicly disclosed), no one is claiming Amazon is demanding any decrease in the publishers’ usual 60% cut. It’s unclear whether publishers can opt out of the on-site promotion, but still offer their books for sale on the site.


3. Amazon has already driven most of its competition out of business through predatory pricing tactics.


While it’s true that Amazon operated at an annual, multimillion dollar loss for its first five years in business (as detailed in the documentary film series, Nerds 2.01: A Brief History of the Internet, 1998), during which time it was primarily a bookseller, the primary reason for its losses had to do with the usual business startup expenses, plus Jeff Bezos’ very ambitious growth and expansion plans for the burgeoning e-tailer. Amazon spent immense quantities of cash on advertising and setting up a nationwide network of fulfillment centers in those early years.

Amazon also invested heavily in making its customers’ buying experience the best it could be. Recall that Amazon launched at a time when online shopping was far from typical, and most consumers viewed online stores with suspicion, fearful that their credit card and other personal information couldn’t possibly be kept secure online. A second obstacle to overcome was consumers’ habit of instant gratification: why buy online, which is essentially no different from mail-ordering, a product one could buy in any local store? Amazon had an answer to both issues.

First, it could afford to offer products at a lower retail price because its overhead costs were much lower than those of a brick-and-mortar store. Warehouse space is cheaper to buy or rent than retail space, and fewer workers are needed to run a fulfillment center than to staff a retail store; much of its processes could be automated.

Of course, a lower retail price is meaningless if the difference is made up in shipping expense, and the customer has to wait for his purchase to arrive in the mail to boot. Amazon’s answer to these two problems was to frequently offer free shipping, and (for its first couple of years in business) to ship every domestic order out via Federal Express, regardless of whether or not the customer opted to pay for expedited shipping, as a standard practice. Remember that?

These were strategic moves aimed at establishing the internet as a safe place to shop, and Amazon as a trusted retailer in the minds of consumers. Of course Amazon also wanted to become a preferred retailer in the minds of consumers, but that’s true of any retailer. If its mail-order business model is simply more financially efficient and convenient for customers than brick-and-mortar shopping, that’s more the natural outcome of a major technological and cultural shift than the result of any targeted, purposeful attempt to drive all competitors out of the marketplace. As plenty of others have observed, I’m sure the buggy whip manufacturers were pretty angry when automobiles became the standard mode of transportation, too.


4. Amazon is now in a position where it can strong-arm publishers into whatever pricing and sales terms it wants, slowly bleeding those publishers to the point where they can no longer survive.


Publishers are no more dependent on Amazon for their survival than computer manufacturers are dependent on Best Buy for theirs. Publishers are free to enter into direct competition with Amazon by pulling all their titles from the site and selling them exclusively through their own online stores and selected brick and mortar outlets, such as Barnes and Noble, Target and airport stores. Computer and other manufacturers have long offered direct sales to consumers through their websites, and there’s nothing stopping publishers from following suit, other than a reluctance to alter their failing, bricks-and-mortar-centric business model.

Certainly, a considerable amount of effort and capital investment would be required to set up an online sales outlet where none exists today for most publishers, but the realities of remaining competitive in a changing marketplace are what they are. The fact that publishers dragged their feet and dug in their heels rather than adapt to changing market forces can hardly be blamed on Amazon. The internet moved their cheese, not Amazon.

As to slowly killing off publishers, it behooves Amazon NOT to bleed its primary suppliers dry. Amazon has been launching its own publishing initiatives, but unless it succeeds in luring most major authors away from every major publisher, unless it starts buying up competing presses (a mistake the major publishers have made in spades and have probably now come to regret), it will always be one among numerous publishers.

Finally, consider the digital music example set by Apple with its iPod and iTunes. Apple undoubtedly dominates the digital music market, but it has not bled any labels dry or begun gouging the music-loving public. Tower Records, Licorice Pizza and The Wherehouse have disappeared from the music retail landscape, but I don’t recall anyone accusing Apple of any kind of orchestrated campaign to cause their demise. Again, it’s a simple case of consumers voting with their wallets.


5. Publishers have to play ball with Amazon if they want to offer their books in digital form, because the Kindle is the dominant e-reader platform.


The Kindle is the dominant e-reader platform, but it can read formats other than Amazon’s own proprietary .azw file type. It can read .mobi files natively, for example. Publishers are free to sell non-.azw format ebooks directly through their own websites, and Kindle owners would still be able to read those books on their Kindle devices. It wouldn’t be as convenient for customers as downloading books directly to their Kindles from Amazon, but this is the same situation as loading digital music files that weren’t purchased from iTunes onto an iPod: it can be done pretty easily, though it does require transferring files to the device.

Furthermore, if publishers really wanted to ensure the Kindle couldn’t dominate the e-reader landscape they could do so, by offering customers the one thing the ebook reading public has most wanted from the beginning that they aren’t already getting from Amazon: a cross-platform, DRM-free ebook format that can be read across multiple devices. They could invest in the development of cross-platform e-reader software users could run on devices they already own rather than having to buy a Kindle, Kobo Reader, Sony Reader or Nook, but here again, there’s a reluctance on the part of publishers to take risks, expand their business model, innovate and compete.


BOTTOM LINE: Amazon has achieved a dominant position in bookselling and e-tailing through aggressive, risky and costly startup efforts. Unlike most CEOs who hold the title today, Jeff Bezos took and held the long view through some very lean and nerve-wracking years. If his ultimate goal for Amazon is to become and remain the #1 company in its sector, then all he’s guilty of is the same thing that can be said of ALL CEOs. 

Perhaps if publishers and competing retailers had been a little more forward-thinking, and willing to take the same risks, they would now be reaping similar rewards. Since they weren’t, they are reaping a bitter harvest of resentment and fading market share instead. It’s still not too late for publishers to turn the situation around, but their time, money and effort would be better spent on R&D than M&C*.  

*(moaning and complaining)

This is a reprint of an editorial from April L. Hamilton’s Indie Author Blog. UPDATE, 4/15/12 – The author adds:

It’s time for publishers to shift their focus away from Amazon, and toward consumers (the people who buy books) and authors (the people who write books). In fact, this shift is long, long overdue.

Railing against Amazon isn’t winning any hearts or minds among consumers, who generally have a positive opinion of the e-tailing behemoth. Telling consumers they owe it to the publishing establishment to tolerate arbitrary delays for paperback and ebook releases, to keep subsidizing publishers’ dated and unsustainable business model, and to pay ebook retail prices that FAR exceed those books’ production and distribution costs, isn’t endearing publishers to the book-buying public.

And when top authors have the power to pack up their fanbase and go Pottermore, it’s time for publishers to face the cold, hard, devastating truth: Amazon is the least of their worries if publishers lose the geese who lay their golden eggs. Once an author comes to feel her publisher isn’t adding any value, and is actually putting obstacles between herself and her fanbase, that author is prone to jump ship. No top authors means no reliable bestsellers, and no reliable bestsellers means bankruptcy. But not every author wants to run his own mini-empire; hmmm, might there be some value publishers could add in this area, perhaps by redefining their corporate mission, setting up and overseeing a whole bunch of Pottermores for their authors?

A scary proposition for publishers, to be sure. But if competition were effortless and risk-free, it wouldn’t be called competition. Right now publishers are losing with authors, the ones who create their product, and consumers, the ones who buy it. Worse yet, it’s all too easy for those two factions to deal directly with one another, and cut publishers out of the equation entirely. If the Big 6 publishers can’t justify their inclusion in the book feeding chain, if they can’t give authors a reason to stay and consumers a reason to buy, then they have no business being in business.