June 19, 2014

Amazon seeks a “dramatic shift” in terms with suppliers (like Hachette), unveils new small business-destroying phone


Uncle Jeff's got a whole lot of leverage and a brand new phone.

Uncle Jeff’s got a whole lot of leverage and a brand new phone.

Amazon and Hachette have both been quiet about their months-long contract dispute, but on Tuesday—the day before Amazon unveiled its new smartphone, Steve Jobs-style—The Future Book‘s Philip Jones published an illuminating post about the feud between the despotic retailer and the conglomerate publisher, based largely on comments made to investors and analysts by Hachette Livre CEO Arnaud Nourry on May 28. Here are a few of the most interesting takeaways from Jones’s report:

Amazon is seeking a “dramatic” shift in terms: According to Jones, there’s a “clear consensus” about what Amazon is after: they want to “shift its agency commission from 30% to 50%.” Here’s what that means for Hachette, according to Jones:

But Hachette is somewhat insulated against these changes, no matter how dramatic they are: According to Publishers Weekly, Hachette Livre made €223m in profit before interest or tax—roughly $300 million in real money. $16.5 million-$33 million would be a significant drop in revenue—one that would certainly dramatically affect authors (especially unestablished ones) and employees (one would expect Hachette to continue to drop longtime employees, who cost more than new hires, while paying new hires less). But, in a big picture sense, they probably wouldn’t affect the company in an existential sense. As Jones notes, “Hachette is insulated in shifts to trading terms by being predominately French, and strong in education and part-works.” In other words, the U.S. branch might be hit hard, but the company on the whole should persevere.

That said, Amazon is on the war path and it has all the leverage and a whole hell of a lot less to lose than Hachette: Amazon, a pathologically unprofitable company, “has said privately that it wants to go after publisher profits that it thinks have been plumped up by the shift to ebook sales,” according to Jones. Amazon has long thought of publishers as bloated “gatekeepers” that make too much from ebooks—Amazon typically loss-leads on bestselling titles, selling books to consumers at a lower price than they were bought from publishers. While Amazon, as we’ve noted, is facing pressure for the first time in its history to, you know, actually make a profit, one wonders if they would use the new terms to lower prices and gain an even larger share of the ebook market (they control about 50% of the total book market in the United States, but significantly more of the electronic market—at Melville House, for example, they hover around 90%). And, as Brad Stone noted in his book The Everything Store, lower prices are all about leverage:

“The new low price for top-selling ebooks changed everything. It tilted the playing field in the direction of the digital, putting additional pressure on physical retailers, threatening independent bookstores, and giving Amazon even more market power. The publishers had seen over many years what Amazon did with this kind of additional leverage. It exacted more concessions and passed the savings on to customers in the form of lower prices and shipping discounts, which helped it amass even greater market share—and more negotiating leverage.

Jones points to a comparison made by Lydia Depillis in the Bezos-owned Washington Post in his report that compares the Amazon/Hachette fight to the debate over the future of net neutrality: “Wanting to give consumers access to its products through the biggest single pipeline available, Hachette may relent on the price at which it sells books to Amazon, squeezing its slim profit margins even further.” Jones then goes on to argue that the fact that Amazon owns Goodreads makes this case in point: “Amazon might be a giant convenience store for some, but through Goodreads is also now a discoverability site: the de facto pipe through which large numbers of book consumers find books online.” While I’m not sure how significant Goodreads is in the upcoming contract negotiations—even 20 million+ users pale in comparison to Amazon’s market share—the overall point here is crucial: Amazon isn’t simply interested in dominating the book market (though it does), it wants to dominate every facet of the experience of buying books online. Acquiring Goodreads was part of that mission; launching Amazon Publishing, shaky as it is, was too. When it comes to discoverability, Amazon’s got nothing on a bookstore—but it has become increasingly important to publishers for online marketing purposes, not just bookselling ones.

Finally, Amazon, as Jones goes on to note by way of pro-Amazon zealot Hugh Howey, is also significantly better at shipping and distributing books than Hachette. I’m less convinced of the significance of this point, but the fact that Amazon is better at distribution than any other company on the planet certainly plays a role here. There’s no alternative to Amazon for Hachette, either in terms of market share or logistics.

Hachette is willing to go blow for blow with Amazon—for now: Nourry’s comments give the impression that the company is unscathed by the high-profile dispute—though that, of course, is what one would expect at a meeting with analysts and investors. For the most part, his tone was par for the course: neither Amazon or Hachette have said much about their fight—with the exception of that peculiar statement Amazon posted on its Kindle forums—and Nourry’s comments generally stuck to the “nothing to see here” line that both companies have adopted. For instance, when asked if he was going to “punch” Amazon when he attended BEA, Nourry responded that Hachette is “not in the business of fighting with retailers.”

But Nourry was somewhat more open on other points. He reassured his audience, saying that the dispute has had a “very limited impact” on Hachette: “It’s been in the air for three months,” he went on, “and does not show in our sales and profits as we speak.” But he also punched back a bit—though lightly. When asked why Hachette was first on line, Nourry said  that it’s “easier when you want to dramatically change terms in the business to start with one, rather than five.” Judging from Nourry’s comments—which, again, should be taken with a grain of salt, given their audience—Hachette appears to be entrenched and unwilling to yield to “dramatic changes” without a fight. But, considering all of the leverage that Amazon has, this is a siege rather than a battle: a protracted dispute heavily favors Amazon, not Hachette. This is Vicksburg, not Vienna.

(As an aside: I’ve always been under the impression that Amazon is negotiating with Hachette now not because it’s “easier… to start with one, rather than five,” but that these negotiations were directly related to the antitrust settlements made by Hachette, HarperCollins, Penguin, Macmillan, and Simon & Schuster—that Judge Denise Cote staggered the publishers’ negotiations with Amazon in order to preclude them from colluding again. If I’m wrong about that—or you know who’s next on the chopping block—send an email to alex [at] mhpbooks.com)

It’s all about the new Amazon Fire Phone: Well, maybe not all about, but the small business-destroying phone unveiled by Amazon yesterday is definitely playing a role in the negotiations, especially considering that the whole point of its new showrooming feature is to increase marketshare—and kill brick and mortar retail. Jones comments from Monday—again, a day before the phone’s unveiling—were prescient:

We assume that Amazon is so-focused on its Kindle business that print is just an after-thought. It may not be. Back in 2008 Amazon made a play for the POD business by trying to force small publishers to use its its Booksurge (now CreateSpace) POD facility, arguing at the time that it could “provide a better, more timely customer experience if the p.o.d. titles are printed inside our own fulfilment centres”. If Amazon can reduce its reliance on stock-holding, while not harming its ability to shift books quickly to customers, then it seems reasonable to assume it will want to negotiate a way of facilitating this.

All eyes on Wednesday will be on the launch of Amazon’s smart-phone. Publishers will be keen to see what part Kindle will play on the new device. They should be careful not to be distracted: the real question is how smart this phone is.

Well, this phone seems very smart—the initial reports make it seem like HAL 9000 Jr. In a New York Times report, David Streitfeld quotes Sam Hall, an Amazon executive who says, “We’re trying to remove the barrier between ‘I want that’ and ‘I have that.'” The Fire Phone may very well burn down that barrier—giving Amazon even greater market share and—you guessed it—even greater leverage.


Alex Shephard is the director of digital media for Melville House, and a former bookseller.