The Antitrust Settlement’s Legacy

While this dispute has been playing out in the public eye since May, its underpinnings go back to the widely publicized antitrust lawsuit against Apple over its proposals to set up an agency model for ebook sales. Under this model, the publishers would dictate pricing to vendors such as Apple as “agents” of the publisher. The target of the proposals was Amazon’s then-$9.99 ebook price standard, which publishers felt was too low. The proposals also required the publishers to enter into similar agreements with Amazon, and as a result, ebook prices increased substantially on Apple, Amazon, and other ebook platforms. The proposal ran afoul of state and federal antitrust laws, which found that Apple had colluded with the publishers to obtain the agreements. The resulting settlement required both Apple and Amazon to cancel the agency model agreements and negotiate new agreements with the publishers. The dispute arises out of these negotiations.

Negotiations usually occur quietly between publisher and retailer. In the hard-copy world, such agreements might set up wholesale price points, including promotional pricing and discounts, marketing support, return policies, etc. One factor in the hard-copy world is that notwithstanding the wholesale price paid, once the retailer “purchases” the book from the publisher, copyright law’s first sale doctrine applies and the retailer can sell the book at whatever price it feels is best, whether as a “loss leader” or at full price for high-demand items.

In the ebook world, however, the first sale doctrine has generally been found not to apply. Consequently, the retailer has less flexibility in its sales practices and is more reliant on the agreement it reaches with the publisher. In the past, the publishers have generally been in the stronger position in those negotiations, although the rise of bookstore chains such as Borders and Barnes & Noble did balance matters out.

Amazon changed everything. According to the Los Angeles Times, Amazon accounts for 41% of new book sales, giving it unprecedented clout in the book sales industry. With Amazon’s Kindle ebook reader estimated at having 55% of the market share, Amazon clearly also dominates the ebook marketplace.

Amazon’s Comments on Ebook Pricing

Amazon clearly decided to bring that clout to the negotiation table. What’s going on behind the scenes is not known, but several public tactics in its negotiations have drawn great scrutiny and criticism. The details started to come out in May in The New York Times. It reported that Amazon was engaging in several practices that appeared to be targeted at discouraging readers from purchasing Hachette books. These tactics included delaying shipping: Books that would normally have 2–3 day delivery times were being advertised as 2–3 weeks. Amazon was no longer discounting Hachette books at the same level, offering zero to 10% discounts rather than the expected 20% to 40% discounts. Amazon was also reported to be encouraging buyers to consider other books.

Authors, who found their sales and Amazon rankings were suffering, took to Twitter and other forums to express their disappointment with Amazon’s practices. A search under the Twitter hashtag #Hachette includes comments such as “… being kneecapped by Amazon,” “Amazon.com delays shipping my #Hachette book by 3-5 wks,” and “Amazon pulled preorders …” Even Steven Colbert covered the issue on The Colbert Report. Others, however, remained silent, fearing retaliation from either (or both?) Amazon or Hachette.                                               

While most of the media and public attention has been focused on Amazon’s throttling of Hachette’s print books, many observers suggest that the battle is primarily focused on the ebook market. A recent Nielsen study reported on by Publisher’s Weekly indicates that ebooks make up 31% of the adult fiction and nonfiction market and 40% of the adult fiction market alone. Notably, the same report indicates that only 15% of dollars spent on adult fiction and nonfiction books are on ebooks. The pricing of ebooks was at the center of the Apple antitrust lawsuit and came up in a recent congressional hearing on digital first sale. Rep. Robert Goodlatte (R-Va.) commented that when he sees lower prices on ebooks, he might not expect to get the same rights (particularly resale rights) as he might expect when pricing is the same as for the hard copy.

In a July 29 posting on its Kindle discussion forum, Amazon argues that “E-books can be and should be less expensive” than print books, noting that there is “no over-printing … no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and no secondary market—e-books cannot be resold as used books.” Amazon suggests that the $9.99 price point for most ebooks would generate enough revenue through increased sales to offset the lower price, projecting that there would be a 74% increase in sales when compared to a $14.99 price point. The revenue from the increased sales would more than offset the reduced price per book and increase profits for publisher, retailer, and author. Amazon also projected a distribution of 30% of revenue to itself as the retailer and 70% to the publisher—with that revenue being split 50-50 between publisher and author.

Competition in the Marketplace

Amazon’s history of deep discounting has been a double-edged sword. In many respects, it has driven Amazon’s phenomenal growth, first as a bookseller, then in the broader marketplaces it has expanded to. However, it has also created customer expectations and concerns on Wall Street. Notwithstanding Amazon’s market domination, competition is increasing in the ebook marketplace. Some of that competition is coming from an increasingly robust self-publishing industry. The Nielsen study in Publisher’s Weekly notes that 10% of fiction ebook purchasing is for self-published books with prices lower than $3. Good traffic, but little revenue. Wall Street recently expressed its concern when Amazon’s second-quarter financial results showed a substantial loss, leading to a nearly 10% drop in its stock price.

While some commentators and Twitter comments suggest that Amazon is following Apple in violation of antitrust laws, an antitrust lawsuit is not probable. Unlike the Apple situation, Amazon is not colluding with others—either retailers or publishers—to dictate pricing terms or conditions. It’s simply playing hardball with one particular publisher. Whether that strategy will result in a favorable deal that will transition to other publishers remains to be seen. But both Amazon and Hachette are clearly battling to win.