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Amazon is doing the world a favor by crushing book publishers

There's a reason he's so smug
There's a reason he's so smug
Steve Jurvetson

News broke Thursday morning that Amazon has settled its long-running dispute with the book publisher Hachette. This brings months of sniping to an end, but the structural conflict between publishers and the retail giant isn't going away. And here's a little real talk about the book publishing industry — it adds almost no value, it is going to be wiped off the face of the earth soon, and writers and readers will be better off for it.

The fundamental uselessness of book publishers is why I thought it was dumb of the Department of Justice to even bother prosecuting them for their flagrantly illegal cartel behavior a couple of years back, and it's why I'm deaf to the argument that Amazon's ongoing efforts to crush Hachette are evidence of a public policy problem that needs remedy. Franklin Foer's recent efforts to label Amazon a monopolist are unconvincing, and Paul Krugman's narrower argument that they have some form of monopsony power in the book industry is equally wrongheaded.

What is indisputably true is that Amazon is on track to destroy the businesses of incumbent book publishers. But the many authors and intellectuals who've been convinced that their interests — or the interests of literary culture writ large — are identical with those of the publishers are simply mistaken.

Books are published by giant conglomerates

The CEO of Simon & Schuster's parent company earned $67 million in 2013 (David Shankbone)

Wisdom on this subject begins with the observation that the book publishing industry is not a cuddly craft affair. It's dominated by a Big Four of publishers, who are themselves subsidiaries of much larger conglomerates. Simon & Schuster is owned by CBS, HarperCollins is owned by NewsCorp, Penguin and RandomHouse are jointly owned by Pearson and Bertelsmann, and Hachette is part of an enormous French company called Lagadère.

These are not tiny, helpless enterprises. Were their owners interested in the future of books and publishing, they could invest the money necessary to make their own e-reading apps and e-book store and render Amazon entirely superfluous. But the managers of these conglomerates don't really care. If they can get famous authors to lobby the government to stop Amazon from killing them for free, then they're happy to take the free labor.

But they don't want to invest actual money and energy in competing with Amazon, they'd rather wring whatever remaining profit there is out of book publishing and dedicate the money to dividends or other industries they're also involved in.

Amazon faces lots of competition

It is undeniably true that Amazon has a very large share of the market for e-books. What is not true is that Amazon faces a lack of competition in the digital book market. Barnes & Noble — a company that knows something about books — sells e-books, and does so in partnership with a small outfit called Microsoft. Apple sells e-books and so does Google.

These are not obscure companies. It is not inconvenient for customers to access their products. And since these are companies that are actually much bigger and more profitable than Amazon, there is absolutely no way Jeff Bezos can drive them out of business with predatory pricing.

Amazon's e-book product is much more popular than its rivals because Amazon got there first, and the competition has not succeeded in producing anything better. But consumers who prefer to buy a digital book from a non-Amazon outlet have several easy options available, and thus a book publisher who chooses to eschew Amazon will not actually be unable to reach customers.

Publishers are superfluous

In the traditional book purchasing paradigm, when a reader bought a book at the store there were two separate layers of middlemen taking a cut of the cash before money reached the author: a retailer and a publisher. The publisher, in this paradigm, was doing very real work as part of the value-chain. A typed and printed book manuscript looks nothing like a book. Transforming the manuscript into a book and then arranging for it to be shipped in appropriate quantities to physical stores around the country is a non-trivial task. What's more, neither bookstore owners nor authors have any expertise in this field.

Digital publishing is not like that. Transforming a writer's words into a readable e-book product can be done with a combination of software and a minimal amount of training. Book publishers do not have any substantial expertise in software development, but Amazon and its key competitors (Apple, Google, and the B&N/Microsoft partnership) do.

Publishers would like writers to believe that the pressure they are feeling from Amazon will trickle down and hurt authors as well. But there is a big difference. Even in the brave new world of e-publishing, authors are still making a crucial contribution to the industry by writing the books. Publishers are getting squeezed out because they don't contribute anything of value.

Book publishers are terrible at marketing

Who will get you to read these things? (Shutterstock)

When I was a kid, my father was a novelist as were both of my grandparents. So I heard a lot of stories about how useless publishers are at marketing books. Then I got to know other people who wrote books and they had the same complaints. Then I wrote a book, and their complaints became my complaints. But it's easy to whine that other people aren't marketing your product effectively. It took the Amazon/Hachette dispute to conclusively prove that the whiners are correct.

After all, imagine a world in which publishers were good at marketing books. Then it would be almost trivial for Hachette to get what it wants out of Amazon. It could just not sell its books on Amazon! Unlike in the old days when it might have been inconvenient for someone who lived in a town with a Borders but no Barnes & Noble to go get a book that Borders didn't sell, it's trivially easy to click on some non-Amazon website to order a book. But you do need a customer who actually wants to buy the book.

In his column, Krugman compares Amazon's large market share to Standard Oil's. But books aren't undifferentiated commodities the way oil is. If you want to buy Paul Krugman's new book, then you can't just substitute some other book. Hachette, however, seems (appropriately) to have almost no confidence in its own ability to market books.

The real risk for publishers is that major authors might discover that they do have the ability to market books. When George RR Martin's next iteration of the Game of Thrones series is released, I will buy it. If I can buy it as an Amazon Kindle book, I will buy it that way. If he decides that the only way people should be able to read the book is to get Powell's to mail them a copy, then I will buy it that way. And I am not alone. Nor is Martin the only author with the clout to not worry about the terms of distribution.

But for a publisher to team up with a celebrity author in this way to bypass Amazon would merely reveal how easy it would be for a celebrity author to bypass the incumbent publishers. In the old days, even the most famous author would need a publishing partner to actually make the physical books. Today that's not the case. Martin needs a software platform to sell books, but publishers don't have one. He could easily hire one or more editors to work with him on the copy if he wants to.

Advances aren't charitable contributions

The final role of the modern book publisher is as a payer of advances. The way the money end of books work is that the person who wrote a book gets paid a royalty on each copy sold — a sum that is generally much less than half the retail price of the book, and dramatically lower than the 70% that Amazon is willing to pay to authors who bypass the publishing incumbents. In addition to royalties, a publisher will typically pay you an advance. The advance is a special kind of loan. When your book first starts selling copies, the royalties you would be owed are kept by the publisher to repay the advance. If you sell a lot of books, you'll fully repay your advance and start seeing money. If you sell very few books, you'll never repay your advance and are under no obligation to do so.

To Foer, ultimately, the case against Amazon comes down to advances, which he sees as "the economic pillar on which quality books rest, the great bulwark against dilettantism." At the same time, he believes that "no bank or investor in its right mind would extend that kind of credit to an author, save perhaps Stephen King." Thus "it won't take much for this anomalous ecosystem to collapse" if publishers are pushed too hard by Amazon.

My best guess is that this is too pessimistic about the financial logic behind giving advances. It is not, after all, just a loan that you may or may not pay back. An advance is bundled with a royalty agreement in which a majority of the sales revenue is allocated to someone other than the author of the book. In its role as venture capitalist, the publisher is effectively issuing what's called convertible debt in corporate finance circles — a risky loan that becomes an ownership stake in the project if it succeeds.

But what really matters here is that book publishers are not charities. They are for-profit business enterprises. If advances don't make financial sense, then they will die off regardless of what happens to Amazon. If they do make financial sense, then they will live on as financial products even as the rest of the industry restructures.

A bounty of affordable reading

It's fundamental (Shutterstock)

When all is said and done, the argument between Amazon and book publishers is over the rather banal question of price. Amazon's view is that since "printing" an extra copy of an e-book is really cheap, e-books should be really cheap. Publishers' view is that since "printing" an extra copy of an e-book is really cheap, e-books should offer enormous profit margins to book publishers. If you care about reading or ideas or literature, the choice between these visions is not a difficult one. The publishing incumbents have managed to get some intellectuals sufficiently tangled-up to believe that it is. But ask yourself this — do you regret the invention of the printing press? Of the paperback? Do you think public libraries devalue books and reading? The idea is absurd.

Of course a world where more people can get more books more conveniently is a better world. It is true that some individual authors may earn less in the new era, while others authors may earn more. But there is no reason to believe that authors as a whole will get less money. Indeed, as Amazon and other digital distributors gobble up some of the publishers' slice of the revenue, it's likely that authors will also get a share and see their total income rise. Beyond money, no book worth writing is undertaken for purely pecuniary motives. In the new regime it will be easier for writers to find readers and reach larger audiences. They just won't find them through the exact same set of middlemen who currently sit astride the pipeline. Tough on them.

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