Thursday, July 24, 2014

9 questions about Amazon's fight with Hachette

Look on my pricing strategies ye mighty and despair David Ryder/Getty

1. What's Hachette? What's Amazon doing to them?

Hachette is a French publishing company whose brand is not well known in the United States, but whose purchase of Time-Warner's book division in 2006 and of Disney's Hyperion book imprint make it a major American publisher. Under such brands as Little, Brown, and Company and Grand Central Publishing they publish authors ranging from David Baldacci to Rob Zombie.

Throughout the month of May they've been in an escalating battle with Amazon, which is apparently trying to punish them for failing to make concessions in future contracts. On May 8, Hachette began publicly complaining that its physical books were subject to inexplicable shipping delays on Amazon. This week, Amazon took a further step and it is now impossible to pre-order Hachette books such as J.K. Rowling's forthcoming novel (published under a pen name), removed the paperback edition of Brad Stone's book about Amazon from sale, eliminating discounts from Hachette books, and even suggesting cheaper alternatives to some Hachette titles:

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Hachette, naturally, is displeased. And thus far it seems to have its writers on its side.

James Patterson, for example, did a Facebook post he characterized as "four of the most important paragraphs I'll ever write" not only denouncing Amazon's strong-arm tactics but more broadly accusing the company of imperiling "the quality of American literature" by creating "a great deal of pain and stress" at every publishing house in America.

2. What are Amazon and Hachette fighting about?

Nobody knows the exact parameters of the dispute, but when companies fight it's usually about money. In this case the issue is likely e-book pricing.

Amazon used to have a policy of selling Kindle books for $9.99, a price publishers didn't like because they felt it undermined the economics of brick-and-mortar bookstores and would likely lead to a situation where Amazon utterly dominated the book market and would have overwhelming strength in bargaining with them. Publishers responded to this by colluding with each other and with Apple to raise prices. That got them sued, and they eventually settled with the Justice Department but the collusion succeeded in breaking the back of Amazon's flat-rate pricing model.

Publishers regained substantial ability to set prices for Kindle books (Lane Kenworthy's excellent Progress for the Poor, for example, costs over $30) and Amazon's drive against Hachette is probably the beginning of a campaign to drive prices back down again.

3. Are Amazon's tactics here legal?

Almost certainly. A number of authors have suggested that there are anti-trust issues in play here, but it's difficult to see why that would be the case. No retailer has a legal obligation to carry everyone's products or stock them in a convenient way.

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Mobilus in Mobili/Flickr

What's more, Amazon doesn't have a monopoly. If you want to buy a paperback version of Stone's book, you can get it from Barnes & Noble's website or from Powell's or from your local physical store. Apple doesn't sell physical books, but it does run a well-supplied e-book store.

Last but by no means least, Amazon stands accused of trying to use its market power to push prices down while antitrust law seeks to prevent companies from using market power to push prices up.

4. Why is Hachette in particular being targeted?

It's not entirely clear. Hachette is the fourth-largest by market share of the so-called "Big Five" houses that dominate contemporary American publishing. The sense in the industry is that now that the publishers can't collude against Amazon, Amazon is looking to take them on one at a time. If Hachette can be disadvantaged relative to other publishers, it may become more willing to make concessions. Then if Hachette makes concessions, those concessions can be used as a precedent to squeeze concessions out of the next publisher.

Hachette may have been targeted first because it is relatively small. It may have been targeted first due to something related to the timing of contracts. It may have been targeted first simply because someone had to go first.

5. This is getting long, can we take a break?

Sure, here's M.I.A. playing her song "Amazon" at the tower theater.

6. Is there any precedent for this?

Yes. A New York Times article earlier this month recounted a dispute between Amazon and the Independent Publishers Group in which 4,000 IPG titles suddenly vanished from the store until IPG made price concessions. Buy buttons briefly vanished from Macmillan ebooks in 2010 during a price dispute.

More broadly, Amazon is ruthless in its negotiations with sellers of all kinds of items — building up a strong position in the market and then demanding that goods be sold to it at a discount price. The Hachette dispute is attracting a lot of media attention primarily because authors and publishers have more cultural clout than physical goods manufacturers. Nor is Amazon unique in this regard. Charles Fishman's 2006 book The Walmart Effect documented broadly similar squeeze's on suppliers from the dominant retailer of the pre-Amazon era. Back in the book industry, during their late-nineties heyday it was Barnes & Noble and Borders who publishers tended to see as predatory giants ruining the world.

7. Is Amazon destroying literary culture?

Many authors and intellectuals seem to think that it is. That's what James Patterson said explicitly, that's what seems to be driving most Hachette authors to side with their publisher against Amazon, and it was the thesis of a long George Packer article published in the New Yorker in February.

But it's a difficult charge to prove. Were fewer good books published in 2013 than in 2003 or 1993? How would we know?

What is unquestionably true is that Amazon is seeking to — and thus far succeeding — in transforming the book industry. Amazon's vision is of a world where books are primarily transmitted digitally, and where due to the low marginal cost of digital publishing they are very cheap. This world of cheap books does not leave a lot of economic surplus left for middlemen such as publishers and the editors they employ. To the extent that you believe those middlemen are playing an invaluable role in safeguarding the culture, Amazon should make you afraid.

On the other hand, cheap and conveniently available books have some obvious advantages.

8. If Amazon wins, will consumers really see lower prices?

They might not. Amazon certainly could demand better terms from publishers and then just fatten up its profit margins. But historically Amazon has never been a very profitable company, and its main strategy really is to push prices as low as possible in order to maximize market share. In the big dispute with publishers and Apple around e-book pricing, Amazon was clearly saying it wanted prices paid by consumers to be lower than the prices the publishers favored.

One theory is that Amazon has a long-term strategy of driving everyone else out of business and then jacking up prices to make big profits. But so far there are no documented instances of Amazon employing that strategy in any industry.

9. Are there other controversies around Amazon

Amazon's relentless drive for growth has made it a lot of enemies. By all accounts, blue collar jobs at Amazon are generally unpleasant and low-paid and there is a growing body of journalism documenting hardball labor practices.

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Uwe Zucchi/DPA

These labor issues are especially high profile in Germany, which is Amazon's second-largest market and also a country with a currently low unemployment rate and a strong labor union movement that's capable of fighting. Meanwhile, parallel to its dispute with Hachette, Amazon seems to be putting a similar squeeze on the German publisher Bonnier.

Amazon has long been criticized for gaining an edge on competitors by avoiding state sales taxes, and though that issue is fading today like many multinational tech companies they stand accused of engaging in rather elaborate efforts to avoid paying corporate income taxes.

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