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Battle for the Books

Battle for the Books

Background

Amazon is arguably the largest and most powerful bookseller in town. When the Codex Group undertook research to establish just how domineering, they found that, as of March 2014, Amazon’s share of all new book unit purchases was 41% and their share of all online new books was 65%. They further hold the largest share of the e-book market at 67%.

With its industry foothold firmly cemented, Amazon declared a set price of $9.99 for all e-books in an attempt to attract the masses. Simon & Schuster, Penguin Group, Harper Collins, Hachette and Macmillan wanted to set their own prices, but found that they had few cards to play against Amazon’s powerful hand. Unable to strike a separate deal with Amazon, they instead turned to Apple, creating an ‘agency’ model which let them set their own retail prices in exchange for a 30% cut of the profits. At the same time, Apple was gearing up for the launch of their first iPad with a view to shattering Amazon’s dominance of the e-book market, and the tie up appeared mutually beneficial to all parties.

However, in a blow to all involved, the US Department of Justice (DOJ) uncovered the lucrative deal and instigated charges against Apple, as well as the publishing houses, for collusion and horizontal price-fixing in contravention of the Sherman Act. After a three-week trial, in July 2013 U.S. District Judge Denise Cote of Manhattan ruled against Apple. The five Publishing Houses settled before trial, in three separate agreements.

As part of Simon & Schuster, Harper Collins and Hachette’s settlement agreement, each of the publishers were required to terminate their contracts with Apple within a week. The judge also mandated that they terminate contracts with other e-book retailers where clauses exist that would hinder the seller’s ability to set pricing. The publishers were also now unable to form contracts with e-book retailers that would hinder the seller’s discretion to set pricing, for a fixed period of 2 years. Penguin Group and Macmillan agreed to settle in December 2012 and February 2013, respectively, on similar terms.

Further, anybody who bought an e-book from any of the five publishing groups between the 1st April 20010 and the 1st May 2012 will be eligible for a refund of $3.06 if that e-book was a New York Times (NYT) bestseller at any point in its publishing history, and $0.73 per e-book that was never a NYT bestseller.

Once re-negotiations with Amazon started, Hachette was unable to come to an agreement. Hachette wanted to set wholesale prices at 70% of retail and, out of that, pay authors whatever cut they could negotiate (typically 10%). Such a model leaves under 30% of the kitty left to line the swelling pockets of Amazon, depending on volume incentives or other discounts. This appears a pretty profound deal for the publisher, which takes much less revenues from sales of printed volumes. Amazon, on the other hand, appeared willing to keep its e-book margins at 30% and align to the previous deal struck by Apple, so long as the pre-agency rate of $9.99 was a floor applied across all unit transactions.

When Hachette refused to be ground down, Amazon curtailed sales by delaying shipments (despite ample supply), eliminating discounts on paper books, pulling pre-orders for Hachette titles, either listing them as unavailable of removing product pages outright. The underhanded tactics were similarly pulled against Macmillan in 2010 after the publisher demanded more favourable pricing from Amazon, who was eventually forced to bow down following the wider deal struck with Apple.

Both sides called for support from both authors and readers. Amazon launched Readers United, encouraging readers to contact the CEO of Hachette. The initiative was introduced through an open letter that criticised Hachette for refusing to agree to the contract terms. Meanwhile, Hachette was supported by 900 authors from Authors United, who published a letter calling on readers to send their thoughts regarding the price dispute to the CEO of Amazon.

The dispute left many caught in the crossfire, with authors losing income and customers unable to purchase certain sought-after titles.

Amazon vs Hachette

Amazon argues that reduced e-book prices actually result in higher sales and increased capital return. It further argues that high e-book prices are unjustified since publishers costs are greatly reduced compared with paper books, such as no printing, returns, re-sales or warehousing to deal with. It believes high prices are hurting the book industry, which must compete against other digital forms of entertainment such as video games, movies and television.

In an embarrassing blunder on Amazon’s part, the Amazon Books Team went on to accuse George Orwell of promoting collusion with the following 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.” In fact, the statement was in celebration of the new Penguin paperback books: “The Penguin Books are splendid value for sixpence, so splendid that if the other publishers had any sense they would combine against them and suppress them.”

On the other hand, Hachette argues that a ‘one-size-fits-all’ pricing model is unworkable.  It wants to maintain pricing control for its own books, whether higher or lower than the $9.99 mandated by Amazon. It said that it would only settle on an agreement that valued the publisher’s role in “editing, marketing and distributing” books. It further accused Amazon of harming authors with its actions, and believes Amazon should compensate them for losses once an agreement is reached.

The deal

Following the six-month stand-off that ate into Hachette’s profits, the two companies finally reached an agreement which will take effect early next year. The new terms give Hachette control over consumer prices for its e-books and will benefit from better terms when it delivers lower prices for readers. Amazon said the deal included “specific financial incentives for Hachette to deliver lower prices, which we believe will be a great win for readers and authors alike”.

Amazon and Hachette will resume normal trading, and Hachette books will be prominently featured in promotions in time for the busy Christmas season.

Michael Pietsch, Hachette Book Group CEO, said: “This is great news for writers. The new agreement will benefit Hachette authors for years to come. It gives Hachette enormous marketing capability with one of our most important bookselling partners.”

Lagardère, Hachette’s parent company, said that e-book sales had stalled in the US “due notably to Amazon’s punitive measures” contributing to an 18.5% year-on-year fall in total US book sales in the three months ending September. E-books made up 28% of Hachette’s US consumer book sales for the period, down from 31% in the same quarter of 2013. In contrast, in the UK, where Hachette and Amazon were not at loggerheads, e-books had “showed sustained growth”, Lagardère said.

The deal is similar to one struck between Amazon and Simon & Schuster two weeks ago, which gave the publisher significant control over e-book pricing when it comes into effect in January 2015.

The future of the e-book market  

On the 15th December, Apple will stand before a federal appeals court in a bid to have the price fixing judgment overturned.

Apple will argue that book prices went up, not because of price-fixing, but because of the competition its entry into the market brought, with authors able to sell through an alternative distributor and with greater negotiating capabilities as a result. Apple’s lawyers will argue that Judge Cote’s ruling ‘turns the antitrust laws upside down’ because its entry into the market ‘kick-started competition’, thereby ‘delivering higher output, lower price levels, and accelerated innovation’.

This is one more turn in a bumpy road dominated by two of the biggest multinationals pushing hard to seize control of the e-book market.

 

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