June 24, 2014
What does Amazon want from Hachette? Pretty much everything.
by Alex Shephard
Amazon and Hachette have been squaring off for months now, but with neither company saying much to the press, the details of their dispute have been difficult to discern. Nearly two months after David Streitfeld first broke the story in the New York Times, that’s finally started to change.
Last week, The Future Book‘s Philip Jones revealed that Amazon was seeking a “dramatic shift” in the terms of its contract with Hachette. Specifically, Amazon wanted to “shift its agency commission from 30% to 50%,” which “would have the impact of reducing the publisher’s revenue from each sale by $2.40, from $8.40 to $6, or by 30%” on a $12 ebook. This would reduce Hachette’s yearly revenue by between between $16.5 million and $33 million. (You can read our full report here.)
Increasing the agency commission by 20% is certainly a big ask, even for Amazon, but the company has always been about thinking big—especially when it comes to squeezing suppliers. And Amazon has a lot more than ebooks on its mind at the moment—over the past few days, what Amazon wants has begun to come into focus and, man, they want it all. If reports from the New York Times and The Bookseller are to be believed, Amazon, King of the Andals and the First Men, reigning disruptor in chief, is dusting off its disrupting boots.
On Friday, the New York Times James B. Stewart published an excellent piece about the ways in which independent bookstores have taken advantage of the Amazon-Hachette dispute. While the entire piece is worth a read—especially because it highlights the excellent Third Place Books—it also contains these two illuminating paragraphs:
I spoke to someone involved on the Hachette side of the negotiations, who is under orders not to discuss them and asked not to be named. This person said that Amazon has been demanding payments for a range of services, including the pre-order button, personalized recommendations and a dedicated employee at Amazon for Hachette books. This is similar to so-called co-op arrangements with traditional retailers, like paying Barnes & Noble for placing a book in the front of the store.
Stewart’s source at Hachette was unequivocal, telling Stewart that Amazon “is very inventive about what we’d call standard service… they’re teasing out all these layers and saying, ‘If you want that service, you’ll have to pay for it.’ In the end, it’s very hard to know what you’d be paying. Hachette has refused, and so bit by bit, they’ve been taking away these services, like the pre-order button, to teach Hachette a lesson.” “Inventive” is certainly a kind way to put that—“extortion” is another.
Of course, negotiations are delicate, tricky, often acrimonious processes—the negotiation between Hachette and Amazon certainly is all three—and one would expect a number of Amazon’s demands to be there for the sole purpose of being bargaining chips. As the negotiation proceeds, Amazon can take one option off the table (the “dedicated employee at Amazon for Hachette books” seems a particularly likely candidate) to get something else that they want.
But, even taken with that particular grain of salt, these are startling demands. Amazon doesn’t just want to reduce publishers’ margins on ebooks (which the company feels are too high), they want publishers to pay for the privilege of selling their books on Amazon, which it’s worth noting is the largest retailer for books in the country. When the company that controls roughly half of the book market in the country says “Fuck you, pay me,” you have to pay attention, even if what they’re asking for is unheard of—at least digitally.
Stewart is right to bring up the fact that co-op has a precedent in the book world—major book retailers, of which wheezy Barnes & Noble is the lone survivor, have had co-op arrangements with publishers for decades. Amazon, too, has regularly pressed for greater co-op in negotiations, as this hilariously, agonizingly familiar paragraph from a 2011 Publishers Weekly dispatch reveals:
Publishers and distributors have called the latest negotiations with Amazon the most adversarial to date, and many have noted that, for the first time, the retailer is outlining co-op costs for digital, as well as print. Amazon has, as some sources explained, long been pressuring publishers to provide ancillary content on the pages where their books are sold, from videos and q&a’s to links to similar books. That content has always been something publishers have had to both pay for and provide. In the latest negotiations with Amazon, sources told PW, the price of providing that content has jumped to what sources say are astronomical percentages (but those sources would not provide specific numbers).
If Stewart’s source is to believed, Amazon is now asking for co-op provisions once again. Presumably, however, co-op was just a bargaining chip in 2011—it doesn’t seem to have made its way into any final contracts—and it very well may be now, as well. But this is something that Amazon has been pressing for for years and in a post-Borders, post-U.S. v. Apple world, they have more leverage than ever. And, while Amazon is a wily negotiator, co-op payments are clearly not just a tactic—they’re something high on the Amazon wish list. That’s not entirely surprising, especially considering that Amazon is remarkably unprofitable, to the growing ire of its investors (though the new Kindle Fire Phone may satisfy them for a little while), but they are drastic—and they’d also cut into Hachette’s profits yet again. While they may not cost the $16-33 million that the change in ebook terms would, they’d definitely have an effect on the company, particularly its hiring and firing decisions, and its acquisition of new works—as we’ve noted before, debut and midlist authors would presumably be hit hard.
Yesterday, The Bookseller revealed that Amazon is also pressing publishers in the UK on new terms. According to The Bookseller:
In the UK a number of publishers spoken to as part of The Bookseller’s investigations into the Hachette dispute said Amazon was also now putting them under “heavy pressure”. According to the sources, new demands include adjusting terms so that e-books and physical book terms have parity; the adjustment is said to be in the direction of “p”, which traditionally attracts a higher percentage for the retailer compared with “e”. Amazon is also understood to be targeting academic terms, which have historically been more favorable to the publisher. The retailer also wants to impose a ceiling on the digital list price of e-books in preparation for 2015 when the retailer will have to begin imposing the standard 20% rate of VAT on digital titles.
New contracts are also said to include MFN [Most Favored Nation] clauses, whereby books cannot be sold for a lower price than Amazon’s anywhere, including on a publisher’s own website. Amazon is also understood to want matching terms where a publisher enters into a new business arrangement, for example with a subscription service. Publishers told The Bookseller that MFN clauses had disappeared from contracts, but were now making a reappearance.
Another clause of particular note requires publishers to guarantee they have books in stock, allowing Amazon to do print-on-demand editions to customers—with extra terms benefits—should books be out of supply. The clause has echoes of a demand made in 2008 that small publishers use its POD service, with Amazon arguing at that time that it could “provide a better, more timely customer experience if the p.o.d. titles are printed inside our own fulfillment centers”. Publishers are worried that the clause would allow Amazon to effectively take over their stock-control.
The Bookseller report is focused on the U.K., but it seems fair to assume that Amazon is asking for something very similar from Hachette and other publishers in the Untied States, especially considering that parity on electronic and print books has long been assumed to have been a major factor in the Hachette dispute. While academic terms—which have long been on Amazon’s hit list—and the ceiling on the list price of digital books are both interesting, print-on-demand and MFN have dominated the discussion surrounding The Bookseller‘s report.
Co-op and parity between print and electronic books would both affect the publishing industry, as we’ve noted, by reducing revenue and profits; print-on-demand, by contrast, would completely disrupt it. But again, Amazon has brought up print-on-demand before. A piece written by Brad Stone, author of The Everything Store in 2012 is worth quoting at length (emphasis added):
There’s a glaring anachronism at the center of most Amazon.com fulfillment centers: aisle after aisle of old-fashioned books. Amazon stocks these volumes for the many customers who still favor the tangible pleasures of reading on paper. Yet the company is relentless about increasing efficiency and has at the ready an easy way to remove some of those bookshelves: on-demand printing. With an industrial-strength printer and a digital book file from the publisher, Amazon could easily wait to print a book until after a customer clicks the yellow “place your order” button. The technology is championed by those who want to streamline the book business—and it might turn out to be a flash point in the hypertense world of publishing….
Yet executives at major New York-based book publishers, who requested anonymity because of the legal scrutiny of their business, say Amazon regularly asks them to allow print on demand for their slower-selling backlist titles. So far they’ve declined, suspecting that Amazon will use its print-on-demand ability to further tilt the economics of book publishing in its favor.Asking publishers to move to print on demand “is largely about taking control of the business,” says Mike Shatzkin, founder of Idea Logical, a consultant to book publishers on digital issues. “It adds some profit margin, but it also weakens the rest of the publishing universe.”….
One of the New York publishing chiefs says that even allowing titles to be printed on demand by Amazon when shortages occur is a bad idea, since it might encourage the company to order fewer printed books. And having a limitless inventory would give Amazon yet another edge over retailers such as Barnes & Noble, which publishers want to keep in business as a counterweight to the e-commerce juggernaut. Another top executive of a major New York publisher says there’s too little trust in Amazon to consider its print-on-demand services.
As of now, Amazon is, yet again, only asking for the ability to print-on-demand when publishers are out of stock of a title. This, as Shatzkin notes, “adds some profit margin” as customers would be buying books they might not ordinarily buy—Amazon is delaying shipment on Hachette titles (sometimes by several months) because—shocker—consumers don’t buy books if they might have to wait several months to get them. But print-on-demand, as Stone notes, incentivizes Amazon to order fewer copies of books, allowing them to run out of stock so they can sell print-on-demand books at a higher margin. Perhaps more importantly, it also gives Amazon yet another edge over Barnes & Noble—which isn’t any healthier now than it was in 2012—and its U.K. equivalents, like Waterstones. This would give Amazon even greater market share in both countries—and remember, it already controls roughly half of the book market here—which then allows it to ask for even more favorable terms at the next negotiation.
The terms Amazon is asking for now are bad, but they’re also asking publishers to shoot themselves in the foot, so they’re hobbled the next go-round. Amazon has never been a company to use technological advantages with discretion—when they have a nuke like print-on-demand, they’re going to find a way to use it to its greatest capability. If publishers allow Amazon to print out-of-stock titles on-demand, Amazon would immediately begin angling to print as many titles as possible on-demand. And widespread use of on-demand printing by Amazon would threaten the entire industry, as Stone notes:
Publishers worry that a widespread shift to print on demand could, like the advent of e-books, disrupt their century-old business model. Companies such as Random House and Simon & Schuster have spent decades investing in their own supply chains, storing books in giant warehouses and developing the transportation infrastructure to ship those volumes to stores within days. If print on demand became widespread, publishers could cut their fixed costs and solve the perennial problem of stores returning unsold books. But that would throw into doubt almost everything else about the way big publishers conduct business, since they’re compensated based on the range of services they provide, from editorial guidance to storage and distribution. Print-on-demand technology would make it harder for the publishers to justify keeping a large majority of a book’s wholesale price.
On-demand printing is, in other words, an existential threat to the publishing industry. It’s not a disruption as much as it is a demolition and its reverberations would be felt throughout the industry. If Gutenberg’s press started the publishing industry, Bezos’s could destroy it.
But again, it’s worth noting that companies ask for all kinds of things in negotiations and the fact that Amazon is asking for print-on-demand merely suggests that it’s something they want (and why wouldn’t they?). For now, this is merely a destructive possibility and it’s far from imminent, especially given that the publishers know exactly how destructive it would be—as opposed to say, the inauguration of Amazon.com, which they initially celebrated.
The inclusion of MFN is not only fascinating for its economic implications, but also for its legal implications. MFN would give Amazon an enormous competitive advantage over its competitors—one that it doesn’t need in the digital market, which it completely dominates, but one that would certainly have a profound effect in the print market, which it merely controls. While Amazon typically has lower prices than its print competitors anyway, that isn’t always the case—competitors like Barnes & Noble have taken advantage of the e-retailer’s dispute with Hachette by discounting Hachette titles. MFN would take that weapon away from its competitors’ arsenals, which would—you guessed it—give Amazon a greater market share, which would—you guessed it—give Amazon greater leverage when negotiating with suppliers.
The fact that The Bookseller notes that “Amazon is also understood to want matching terms where a publisher enters into a new business arrangement, for example with a subscription service” is also worth pointing out, as I doubt that the example here was chosen at random. Amazon is clearly paying attention to startups like Oyster and Scribd, companies which are currently vying to become the “Netflix for books.” (Full disclosure: our books are available on Oyster.) Amazon hasn’t entered the subscription market, but the inclusion of MFN suggests it may be angling to. Amazon has a number of competitive advantages here—it’s nearly synonymous with ebooks, controlling roughly 80% of the market in the U.S., for instance—but MFN would give it an enormous advantage over its competitors. As Andrew Rhomberg noted on Twitter, “startup A has these terms and start-up B those, yet Amazon can pick and choose a la carte under MFN.” The Kindle Fire Phone will be available on July 25—I, for one, wouldn’t be shocked if a subscription service didn’t follow soon after, regardless of what happens with MFN.
The inclusion of MFN, like the dedicated Hachette representative and print-on-demand, may just be a ruse, cooked up by Amazon to gain greater leverage in its negotiations. And, even if Amazon does succeed in getting MFN added to its contracts, it will face an uphill battle in the U.S. (the Robinson-Patman Act is an obstacle) and the U.K.
In fact, according to The Bookseller, European Union authorities are already paying attention:
Meanwhile, the use of MFN clauses is thought to have come under the Brussels spotlight, with the same EU competition authorities which earlier investigated publishers over agency pricing. Within the last few weeks, it is understood that some publishers’ sales personnel have been summoned to meetings in Brussels, said to be “much more friendly” than the meetings held while agency pricing was being investigated.
The EU has investigated MFN clauses in the past, but has never ruled them illegal. However, under the terms of price-fixing settlements entered into by the five settling publishers in 2012, those publishers are forbidden until 2017 from entering into any agreement for e-books which contains a retail price MFN clause.
The fact that they were “much more friendly” suggests that the E.U. is turning its spotlight on Amazon, not the publishers—though after U.S. v. Apple world, it’s hard to be confident. Regardless, European governments are generally more skeptical of Amazon than the U.S. government is. While it seems unlikely that this would be the instance in which the E.U. would find an MFN clause illegal, the very fact that inquiries are being made slows Amazon’s momentum, if only slightly.
But that doesn’t change a simple fact: they’re able to trot out all of these disruptions because they hold nearly all of the cards—and they certainly hold more cards now than they did the last go-round, despite the fact that they appear to be asking for nearly all of the same things. Adopting any one of these changes—to agency commissions, to MFN, to print-on-demand—would dramatically alter the publishing landscape for everyone: big publishers, small publishers, self-publishers. Amazon is negotiating for greater profits and greater leverage. Publishers are negotiating for the future of the industry.
Alex Shephard is the director of digital media for Melville House, and a former bookseller.