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Untangling the Amazon/Hachette Dispute

There’s a special place reserved in literary hell for those who misunderstand George Orwell, as Amazon just did (and as I’ll explain shortly). At 1:30 AM Eastern Time on Saturday, Amazon sent email to authors registered in its Kindle Direct Publishing program with the Subject line, “Important Kindle request.” Rather than being related to account matters, the missive instead detailed Amazon’s dispute with Hachette, and urged bizarre action by KDP participants. Amazon also published the letter on a dedicated Web site.

Although only the latest salvo in the Hachette dispute, the letter is part of a larger battle between Amazon and the “Big Five” publishing houses in America. Hachette Book Group may be the smallest of the Big Five, but it’s part of a much larger international conglomerate, Lagardère. In 2012, Hachette and the other big publishers settled a lawsuit with the Department of Justice that maintained the companies had colluded with Apple in 2010 to fix ebook prices. (See “Explaining the Apple Ebook Price Fixing Suit,” 10 July 2013, for all the details.) Apple lost in court, is pursuing an appeal, and has agreed to a conditional $450 million settlement pending the outcome of the appeal.

Hachette’s contract with Amazon was apparently the first to come up for renewal, with Simon & Schuster and HarperCollins coming next (so we can likely expect to see more news as those companies move into the hot seat currently occupied by Hachette). In May 2014, presumably to increase negotiating pressure on Hachette, Amazon removed pre-order buttons on Hachette books, eliminated discounts on Hachette books, and delayed shipments of Hachette books to purchasers. Amazon did the same with Warner Brothers DVDs around the same time for several weeks, and a few days ago pulled pre-orders for physical versions of Disney movies. Amazon is also engaged in a similar action against Bonnier Media in Germany, where antitrust laws are stronger and more strictly enforced.

The precise details of why Amazon and Hachette are at loggerheads remain unknown, although it appears the primary disagreement — at least according to insiders and public statements by both companies — is that Amazon wants to price all ebooks at no more than $9.99 while still making a profit from them, and Hachette is resisting. Under the antitrust consent degree to which Hachette agreed, Amazon was free to set retail prices for two years. That period is over, and Hachette now wants to set the retail price for ebooks, offering Amazon a percentage of the retail price. In essence, Hachette is looking to use the agency model, which gives pricing control to the publisher, whereas Amazon wants to stick with the wholesale model, in which resellers pay a fixed wholesale price and set whatever retail price they want. In many cases, the agency model provides a higher profit to a bookseller.

Another piece of the background is a public letter that appeared in a recent Sunday New York Times. The letter, signed by over 900 authors, most of whom don’t even write for Hachette, and reportedly paid for by the wealthiest among them, criticized Amazon for harming authors by messing with sales. The text is available at another dedicated Web site at

Amazon’s letter opens by misstating publishing history, asserting that publishers rejected and fought against cheap paperback editions when they were first introduced, and drawing a connection between paperbacks and ebook editions. In fact, paperbacks were initially ignored, became absurdly successful, and were then adopted by the big firms as a way to extend revenue into new outlets (outside bookstores) and reach a new audience. Paperbacks were and remain part of the diversification of the publishing market, which Amazon should know because it, well, sells print books. (Huffington Post has a good summary of accounts from this period.)

Amazon’s letter then contains the odd statement:

The famous author George Orwell came out publicly and said about the new paperback format, if “publishers had any sense, they would combine against them and suppress them.” Yes, George Orwell was suggesting collusion.

One might think the Amazon Books Team, the nominal signatory of the letter, had become unhinged. In the actual event, Orwell loved paperbacks, was committing an act of irony and hyperbole in suggesting a combined effort (impossible in any case), and went on to state that the low price of paperbacks could destroy the economic basis on which authors, booksellers, and publishers functioned.

This open letter contains escalated and abbreviated versions of previous economic claims by Amazon, and advises bizarrely that KDP authors (the email) and average readers (the Web site) should send nastygrams to the head of Hachette accusing him of collusion, among other slightly off-kilter talking points. This may be because the ad paid for by authors suggests people email Jeff Bezos directly. It smacks of a temper tantrum.

The trouble is that in this and previous efforts, Amazon misstates and misleads on the numbers. Two weeks ago, the same Amazon Books Team posted a note on its Kindle forums that tried to establish why a $9.99 book price made more sense than $14.99: the same ebook priced lower supposedly sells 1.74 times as many copies. Amazon claims it has done this analysis across many titles, even though that makes little sense since it’s in a position to know that no arbitrary book will automatically sell more copies because it is priced lower. Many particular books may exhibit changes, but in order to test this, Amazon must have engaged in presenting different prices to different customers, changing prices for periods of time, and so forth. No two books are identical, so their testing had to be using the same book and exposing different prices. This yields some broad information, but isn’t applicable in every case.

More broadly, Amazon’s erratic response ignores most of the realities of publishing. The publishers in question, and most publishers, continue to print books as well as issue them in ebook editions. TidBITS Publishing, with its Take Control series, is one of a relatively small number of publishers (across fiction, non-fiction, textbooks, and more) that delivers books solely in electronic form.

As a result, publishers have to deal with the cost of production across multiple media: ebooks are not magically free to make once you have a print book. (I’ve experienced this first hand, as have many other Take Control authors.) Plus, any potential profit from a single book has to be spread across the various formats in which it appears. Conventional publishers who produce hardcover editions want to keep the initial ebook price high — though low relative to the print equivalent — to avoid eroding the lucrative margins on hardcover sales. When hardcover sales ebb, publishers then typically produce a paperback edition, and cut the ebook price, often to below $10, if it was above that price to begin with. Over time, ebook prices for the same title tend to drop as demand lags.

The science-fiction author John Scalzi offers some first-hand insight across his many titles, which are issued in hardcover, paperback, and ebook versions, and points out that the $14.99 and $19.99 ebook prices that Amazon claims are demanded by publishers are rare in practice.

Publishers aren’t all happiness and light: the big ones are following the money to varying degrees of success. But it is abundantly true that most books from most publishers make very little profit after overhead, production costs, and author royalties are subtracted. A number of books lose money, but hopefully not too many, lest the publisher perish. Importantly, a handful of books each season are blockbusters that, combined with evergreen titles that recouped their costs in previous years, account for the majority of whatever profits are recorded. One shouldn’t pity the poor Big Five publishers, but it’s not all peaches and cream even at the top of the market.

Hachette’s CEO responded to people who followed Amazon’s advice to write him, and the details he provided are more in line with what is publicly observable and which those of us in publishing know to be true. Among other things he notes that 80 percent of Hachette’s titles are priced at $9.99 or less; most of its more expensive books are $11.99 or $12.99; and the publisher's cost differential for print books is about $2 to $3. That last point is disarming: by admitting the actual difference, he also reveals the economics of pricing across both formats and time.

So it’s not really about pricing in general, but timing. To be more precise, it seems that Amazon is proposing that readers don’t need to wait for the market to reflect the price Amazon wants to charge immediately. What Hachette is saying (and is the truth) is that pricing is based on demand: some people are willing to pay more to have a book sooner. Readers know that a paperback costing 40 to 60 percent of the hardcover price will eventually appear, and that used copies will eventually become available (on Amazon, no less) at 5 to 20 percent of the new hardcover price. And yet people persist in buying expensive hardcover editions to be able to read the latest and greatest right away. That, my friends, is the market: publishers are not delivering penicillin to the Arctic; buyers are not heroin addicts who have no control over their actions.

Amazon wants to brand this all as beneficial to the book buyer: a $9.99 ebook is cheaper than one that costs more. It’s also trying to pretend to be the authors’ friend by suggesting that publishers are cheating authors by not giving them a bigger split of the proceeds. (That latter point may be true, but see above: only some books make money, and better-known authors who have reliable sales already get percentages closer to what Amazon suggests every author should receive. It’s more reasonable to say that most publishers are inefficient, and that better use of money could produce more sales or a greater share to authors.)

Shouldn’t we applaud lower prices? After all, as consumers shouldn’t we want to pay the lowest possible price for any fungible item: all ebooks being exact digital copies, price is the only differentiation. However, Amazon wouldn’t actually be lowering the price of many books and, for all we know, it would set $9.99 as a new target to which it would push formerly cheaper books. Meeting the demands of a firm that already has a dominant share of the market in a way that cedes it more control and likely market share is a great way to put it in the position of becoming a monopsony (the only or primary buyer in a market) and monopolist. Historically speaking, that’s unlikely to benefit consumers.

Amazon remains mostly concerned about Amazon, a reflexive behavior engaged in by most businesses. The trouble is that, as a market, ebooks took off thanks to the introduction of the Kindle, and Amazon grabbed a large share of the market. But growth in ebooks as a percentage of revenue has slowed very quickly — probably much more quickly than Amazon had anticipated.

Ebooks were once a negligible part of book sales, but in 2013, they comprised about 27 percent of the roughly $15 billion of American adult consumer book sales (fiction and non-fiction). Across all categories, the U.S. book industry grossed about $27 billion in 2013. As a percentage of children’s book sales, the ebook share actually dropped because a Hunger Games book was released in 2012, and no similar blockbuster appeared in 2013.

While ebooks now represent billions in sales, the stagnation in growth means that the majority of profit for most books remains in print editions, which is bad for Amazon, which heavily discounts mass-market print books to drive a high volume of sales. Amazon was betting in part on a greater shift to selling Kindle ebooks — typically with digital rights management (DRM) that locks readers to its Kindle ecosystem — to drive increases in profit, and steal both revenue and profit from remaining brick-and-mortar bookstores.

Amazon has already hit bumps in the road on its strategy to trade profit for growth, something it has pursued for its entire 20-year history, and which investors were willing to buy into until recently. Amazon lost $127 million in the last quarter, and projects a loss of $800 million in the current one. It has only sporadically been mildly profitable. But you can’t be a startup forever. Amazon’s business problems and stock market drop (about $320 per share now, down 20 percent from over $400 at the start of 2014) have also likely emboldened publishers to take a stronger stance.

Publishers could pursue a more sensible strategy that would reduce Amazon’s power by taking a page from the music industry. When Apple dominated digital song downloads, the industry broke the power of iTunes by removing DRM. This had previously been seen as inconceivable, but books are even easier to copy (through retyping, OCR, or simple encryption breaking) than music. Amazon was one of the main firms to leap into the fray and sell music at competitive prices; Apple was forced to rejigger its pricing scheme, and it lost ownership of the digital music market, though it still maintains a huge share thanks to its early dominance and insanely popular hardware ecosystem.

To break Amazon’s lock on ebooks, publishers could insist that DRM-free EPUB become the format of choice, eliminating the connection between reading on a Kindle and purchasing from Amazon. (It’s possible, but not easy, to read EPUBs on at least some Kindle models; see “How to Download EPUB, PDF, and Mobipocket to the Kindle Fire,” 22 April 2012.) Amazon would likely be able to update Kindles to use EPUB easily, as the KF8 format it uses for devices released in the last few years is already essentially EPUB. Since all other ebook reading devices and apps already support EPUB, readers would be free to choose from whom to buy and on what device to read without Amazon’s DRM-bolstered link between its store and Kindle ecosystem.

By switching to a model in which any ebook could be purchased from any reseller and read on any device, publishers wouldn’t find themselves beholden to Amazon as they are today, and the bully pulpit that Amazon uses to spread its message (and bully authors) would disappear.


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Comments about Untangling the Amazon/Hachette Dispute
(Comments are closed.)

M. Perry  2014-08-11 15:27
This from Michael Shatzkin is helpful:

"One other aspect of this whole discussion which is mystifying (or revealing) is Amazon’s success getting indie authors to cheer them on as they pound the publishers to lower prices. (The new Amazon statement is made in a letter sent to KDP authors.) This is absolutely indisputably against the interests of the self-published authors themselves, who are much better off if the branded books have higher prices and leave the lower price tiers to them.
A two-tier market allows the giants to differentiate the new titles in which they have so much invested and, at the same time, offers space at the bottom for independent authors and small publishers.

Amazon's bullying may be going against what could actually be a healthy high/low split in ebook prices.
Glenn Fleishman  An apple icon for a TidBITS Staffer 2014-08-11 15:30
Yes, if pricing were a giant determinant as Amazon asserts, that should leave room for smaller publishers to capture more of the market. With less leverage, smaller publishers should be more willing to meet Amazon's demands. If that isn't happening, after a period in which Amazon could set whatever prices it wanted for many mass-market books, it would argue against Amazon's current strategy!
Andrew Allison  2014-08-11 17:41
Some evidence in support of, "Orwell loved paperbacks, was committing an act of irony and hyperbole in suggesting a combined effort (impossible in any case), and went on to state that the low price of paperbacks could destroy the economic basis on which authors, booksellers, and publishers functioned." would be in order.
Michael E. Cohen  An apple icon for a TidBITS Staffer 2014-08-11 17:52
Paul Corr  2014-08-12 00:04
Maybe Amazon is still annoyed that they got so much grief when they erased "1984" from folks' Kindles, which many saw as incredibly ironic. Now, mention Orwell and Jeff's crew gets a twitch.
This is by far the best and clearest writeup I've seen of this conflict. Thanks.
JohnB (SciFiOne)   2014-08-12 09:11
Dennis B. Swaney  2014-08-11 20:07
From what I've seen purchasing books over the last 40+ years is that paperbacks cost approximately 25% - 33% of the hardback release price. Therefore, e-books should be a maximum of 10% of the hardback price. The bigger problem is that most author's royalties are less that 5% of the hardback price (and probably lower for paperbacks) since the bookstores, distributors, and various departments of the publishers all get a cut before the author. Therefore for e-book sales, I think authors should get a 95% royalty if the title has been previously published, or 70% if it has not been previously published.
Glenn Fleishman  An apple icon for a TidBITS Staffer 2014-08-11 21:19
No, that's absurd. The overall cost of producing a book involve many more factors than distribution and physical format. And most publishers have distribute overhead and risk across multiple titles, because most books don't make much money, if any.

Same with royalties. There's no way to produce books on a regular basis with any quality with those numbers.

Authors are paid too little, on average, but not uniformly so.
Glenn, I have to disagree with this:

"When Apple dominated digital song downloads, the industry broke the power of iTunes by removing DRM. This had previously been seen as inconceivable, but books are even easier to copy (through retyping, OCR, or simple encryption breaking) than music."

Music was (with very few exceptions that weren't around for long) always sold without DRM in the form of CDs. It was much easier to rip a CD and obtain DRM-free copies than it is to re-type, scan or crack the encryption of an ebook. Music, since the CD, has been a product sold in digital form without DRM, and anyone with a CD drive and a computer could create digital copies in minutes.

Glenn Fleishman  An apple icon for a TidBITS Staffer 2014-08-12 07:50
Note that I said "digital song downloads," not songs in digital form.

And I meant by "easier," there is a greater number of methods by which books can be copied exactly than music. For real fidelity, a digital music file has to be copied; text can be reconstructed in multiple ways.

I wouldn't argue (and wasn't) that it was hard to copy music before the labels stripped DRM. Rather, that it seemed impossible the labels would get rid of it, because they swore it was the only way they could prevent piracy, which we all knew was ridiculous. Then they got rid of DRM, bowing to the inevitable.

The same is true with books. There's a charade by publishers, many of whom are run by people who get their technical advice from — I don't know whom; reading old books? — that DRM actually prevents book piracy. We both know it doesn't. It may deter some, but the ease of extracting text makes it even more futile than music. Even if books were wrapped with ridiculously strong DRM that no one could crack, they have to be read. Buying one copy and re-typing it or OCRing it from a print copy produces a version that would have nearly perfect fidelity.
But DRM on music was flawed from the beginning, for the very reason that the music industry sold CDs, digital music that was easily convertible to files. Re-typeing or scanning books is beyond the ken of most people; ripping CDs is banal.

But I agree that DRM on books doesn't prevent piracy, though it may be slightly more effective than DRM on music. You can't just copy a book to give a copy to a friend; you can do that with CDs. So casual piracy of books is certainly lesser than it is with CDs (and even DVDs).

On the other hand, since we don't read books as often as we listen to CDs, you can just lend someone your book when you've finished reading it; that's not piracy at all.

I think it's a bit risky to compare the two; the mechanisms are very different, and the way people "share" them is different as well.
Jeff Hecht  2014-08-12 05:55
Great analysis of a messy conflict. Your observation "you can't be a startup forever" nails Amazon's fundamental problem. They can't squeeze the profit they need out of low-priced retail, so they have to squeeze their suppliers. I suspect they're trying to prove something to Wall Street. And that puzzling late-night missive suggests they're getting desperate.

But then as one of the signers of the New York Times letter, I may be biased.
JohnB (SciFiOne)   2014-08-12 09:17
I read this article from BBC news a few days ago. It seemed quite good to me.

BTW - As the owner of roughly 1000 used paperback novels, I consider $10 high. Oh well - I rarely buy anymore one way or the other.
I'm still scratching my head over the Justice Department suing "Apple" over anticompetitive practices in the book space. I mean, I understand the charges of collusion, but going after them flies in the face of the practical reality that Amazon is the 800-pound gorilla in e-publishing and needs competition.
Adam Engst  An apple icon for a TidBITS Staffer 2014-08-12 09:45
I explained that fully in the article that Glenn referenced.

In short, the DoJ litigates based on the law, which Apple and the publisher broke by colluding, not on the possibility that allowing collusion would somehow be better for that particular industry (there are only a very few exemptions from antitrust law, as I understand it, mostly professional sports leagues).

Even Judge Cote acknowledged that Amazon's actions were problematic, but the case wasn't about Amazon, it was about what Apple and the publishers did.
Glenn Fleishman  An apple icon for a TidBITS Staffer 2014-08-12 09:51
Even now, I'm baffled, after reviewing the decision recently. In the purest terms, the behavior was wrong as presented. Did it harm consumers? If lower prices, rather than market economics, is the only consideration, then for the specific books in question, yes! But in the broader space, it gave Amazon room to engage in the kinds of predicted actions it has now, in fact, taken to remove competition.
Adam Engst  An apple icon for a TidBITS Staffer 2014-08-12 10:09
Yes, the behavior was wrong in the purest terms, since it was price-fixing at a basic level. It would also have removed Amazon from its dominant position and prevented it from regaining that position, but at the risk of putting a cabal of Apple and the publishers in Amazon's place. And it would have prevented any newcomer from entering the space and competing on price, since there was no way to charge less than what the publishers specified and survive.

Personally, I'm not troubled by Apple's loss in that case, but I do think that the DoJ should be looking into Amazon's actions as well, given Amazon's aggressiveness in driving competitive resellers out of business and then using that power to dictate terms to suppliers (the publishers).
Glenn Fleishman  An apple icon for a TidBITS Staffer 2014-08-12 12:01
I would have preferred everyone involved paid fines, but that the publishers were just enjoined to be more transparent and document what they were doing, rather than be obligated to give Amazon everything!
Adam Engst  An apple icon for a TidBITS Staffer 2014-08-12 10:36
The problem with that was that the structural results of Apple's deal meant that there was no alternative to the agency model. So it could be as transparent as desired, but it would still result in higher prices and the impossibility of competition based on price.

Read the subhead in the referenced article entitled "Isn't Amazon really the bad guy in this case?" Everyone agrees on that; the question is how it will be addressed.
Glenn Fleishman  An apple icon for a TidBITS Staffer 2014-08-12 11:09
I see. But other publishers (large and small) weren't enjoined from using the agency model because they weren't sued. So just some of the big six (at the time) were limited.
JohnB (SciFiOne)   2014-08-12 10:55
Thought I'd throw some whimsy in here.
CAMILLE MINICHINO  2014-08-12 11:49
I'd like clarification of the word "bully." Isn't bullying the process that got us down to only five "Big" ones?
To me, this debate is between Bully #1 and Bully #2.
Glenn Fleishman  An apple icon for a TidBITS Staffer 2014-08-12 12:00
Sure: a bully tries to use force instead of negotiation and consensus to achieve results.

In my specific use here, Amazon is trying to use its market position to bully authors; its interactions with Hachette seem unnecessary, but we don't know what is going on behind closed doors.

However, Amazon is economically harming authors directly through its actions during Hachette's negotiations while pretending to hold out its hand. Most authors don't have the resources to absorb these losses. The actual matter at hand between Hachette and Amazon may be of vital importance to those two companies, but Hachette didn't pull its books from sale while it negotiated new terms. Amazon pulled them to try to use authors as leverage.

Second, emailing KDP authors, some of whom sell exclusively through Amazon, and some of whom rely on Amazon for part or all of their living, is a bully tactic and a proxy one.

Amazon can use whatever techniques it wants to try to leverage a business partner into cutting Amazon a better deal, but these tactics involve economic coercion of weak parties.
gastropod  2014-08-12 15:31
When I buy ebooks, if I don't buy them from the original publisher, I usually get them from books-a-million (they use adobe drm). For non-fiction (science, mostly), they've usually been the same price or a tad cheaper than kindle.

As for what it costs to produce a book, a couple of decades ago at a music workshop, one of the other students had a day job of non-fiction editor. I don't remember which publisher, but every non-fiction book went at a minimum through three editors who spent several days each looking for continuity problems, missing or inadequate explanations, plus a fair bit of fact verification, and there were typically several iterations as the author fixed problems. Then it would go to the editors who looked for typos, grammar and such. I greatly appreciate this sort of effort done on my behalf, and am quite happy to pay the added cost.
JohnB (SciFiOne)   2014-08-12 19:45
The author's note at the end of Divergent mentioned all the people involved in publishing the book, thanking the individuals by name and job. There were many, many of them, not just editors. I was amazed and impressed. At the same time, according to the BBC article, publishers won't even consider many authors. The one they mentioned went the Amazon self-publication route and sold a million copies. She has quite a few books on Amazon now priced from 1 to 6 dollars.
I've written a dozen computer books on paper (and as many Take Control ebooks). In general, for print, you have the following: acquisition editor, developmental editor, tech editor, copy editor, layout person, proofreader, with occasionally some outside readers as well. That doesn't even include all those involved in the general design of a book (all my books were parts of series), the marketing and sales team, the publicists, etc... There are a lot of people involved in creating a book.

You can generally spot a self-published book that hasn't gone through an editor after a few paragraphs.
Adam Engst  An apple icon for a TidBITS Staffer 2014-08-13 07:37
Speaking as a publisher, I can offer a little explanation. Signing a book deal with an author is a little like getting married - you're committing to working closely with this person for at least the time it takes to put out the book and setting up a financial relationship that will last for many years. And many authors are complete unknowns, with no references from previous editors or publishers, so the acquisitions editor doing the evaluation is often working on minimal information.

Even if the author's submitted work is good (let's assume it's not great, because if it were there wouldn't be any hesitation) and could be much better with a lot of work, it's not an easy decision. What if the author turns out to be a prima donna who fights every edit, or the sort who needs to talk on the phone every day, or someone who disappears for weeks or months at a time? Those are the things that give editors and publishers nightmares.

(Of course, it goes the other way too, with perfectly reasonable authors ending up with inexperienced or insane editors, or publishers that don't honor their agreements, etc. etc. I just wanted to make it clear that caution is justified on all sides.)
Charlie Hartley  2014-08-14 06:38
In defense of self-publishing, sometimes you want to publish a book that you know will have a limited appeal, and self-publishing is the only way to go. Case in point: I wrote about a murder that took place locally, and I knew it would likely only appeal to those interested in the history of our area. It was too long to publish in our local historical quarterly, so I chose to publish through Amazon, both print and e-book. We've sold less than 100 copies combined, so I won't be going to the Bahamas on the profits. However, I do have the satisfaction of sharing this story, without the expense of printing multiple copies that will likely never sell. For me, it is win-win; for the writer who is more concerned with profit-loss, maybe not.
Denise Kusel  2014-08-12 21:04
What about a word from the reader? For me, Kindle is wonderful because I can make the type larger for my old eyes. You never mention that in its race to make $$, publishers have made the type smaller, so it obviously costs less to print with less pages and less leading beween the lines.
Glenn Fleishman  An apple icon for a TidBITS Staffer 2014-08-12 21:10
Holy cow, I've looked at and even bought some print books recently that were set in the tiniest type I've ever seen. Paper and shipping weight are real factors, and I agree that there is some nutty shrinking.
Like to see the big 5 book companies open their own web store and pull everything off Amazon.
Adam Engst  An apple icon for a TidBITS Staffer 2014-08-22 12:35
German authors are now entering the fray by protesting Amazon's negotiations with another publisher, Bonnier Media.