Thursday, June 5, 2014

The Amazon-Hachette Saga

Everyone seems to have an opinion about the unfolding of the Amazon-Hachette saga, but do these opinions bring us any closer to a healthier economic environment to write, publish and sell or buy books? As usual time will tell, but let's first explain briefly what seems to be going on. The French publihser Hachette, with its imprint Little, Brown among the top five trade publishers in the U.S., has been in negotiations with Amazon about new terms selling eBooks. As these negotiations continued, disagreements have reached a level that Amazon started delaying shipments of Hachette's books including by some of its leading authors such as James Patterson, JK Rowling, and Malcolm Gladwell.  Let's have a look at the 'official" statements by both protagonists:

Amazon made this statement:

"We are currently buying less (print) inventory and "safety stock" on titles from the publisher, Hachette, than we ordinarily do, and are no longer taking pre-orders on titles whose publication dates are in the future. Instead, customers can order new titles when their publication date arrives. For titles with no stock on hand, customers can still place an order at which time we order the inventory from Hachette -- availability on those titles is dependent on how long it takes Hachette to fill the orders we place. Once the inventory arrives, we ship it to the customer promptly. These changes are related to the contract and terms between Hachette and Amazon.

At Amazon, we do business with more than 70,000 suppliers, including thousands of publishers. One of our important suppliers is Hachette, which is part of a $10 billion media conglomerate. Unfortunately, despite much work from both sides, we have been unable to reach mutually-acceptable agreement on terms. Hachette has operated in good faith and we admire the company and its executives. Nevertheless, the two companies have so far failed to find a solution. Even more unfortunate, though we remain hopeful and are working hard to come to a resolution as soon as possible, we are not optimistic that this will be resolved soon......."

Hachette in turn said the following:

"It is good to see Amazon acknowledge that its business decisions significantly affect authors’ lives. For reasons of their own, Amazon has limited its customers’ ability to buy more than 5,000 Hachette titles. Authors, with whom we at Hachette have been partners for nearly two centuries, engage in a complex and difficult mission to communicate with readers. In addition to royalties, they are concerned with audience, career, culture, education, art, entertainment, and connection. By preventing its customers from connecting with these authors’ books, Amazon indicates that it considers books to be like any other consumer good. They are not.

We will spare no effort to resume normal business relations with Amazon—which has been a great partner for years—but under terms that value appropriately for the years ahead the author’s unique role in creating books, and the publisher’s role in editing, marketing, and distributing them, at the same time that it recognizes Amazon’s importance as a retailer and innovator. Once we have reached such an agreement, we will be happy to discuss with Amazon its ideas about compensating authors for the damage its demand for improved terms may have done them, and to pass along any payments it considers appropriate.In the meantime, we are extremely grateful for the spontaneous outpouring of support we have received both privately and publicly from authors and agents. We will continue to communicate with them promptly as this situation develops."

In the meanwhile, many pundits, newspapers, magazines, social media started commenting. Following is just a small sample of those opinions.

The New York Times of May 23, As Publishers Fight Amazon, Books Disappear, said:

" Amazon’s power over the publishing and bookselling industries is unrivaled in the modern era. Now it has started wielding its might in a more brazen way than ever before. Seeking ever-higher payments from publishers to bolster its anemic bottom line, Amazon is holding books and authors hostage on two continents by delaying shipments and raising prices. The literary community is fearful and outraged — and practically begging for government intervention. 

“How is this not extortion? You know, the thing that is illegal when the Mafia does it,” asked Dennis Loy Johnson of Melville House, echoing remarks being made across social media.............

..........The Authors Guild accused the retailer of acting illegally. “Amazon clearly has substantial market power and is abusing that market power to maintain and increase its dominance, which likely violates Section 2 of the Sherman Antitrust Act,” said Jan Constantine, the Guild’s general counsel..........

.............James Patterson, one of the country’s best-selling writers, described the confrontation between Amazon and Hachette as “a war.” “Bookstores, libraries, authors, and books themselves are caught in the crossfire of an economic war,” he wrote on Facebook. “If this is the new American way, then maybe it has to be changed — by law, if necessary — immediately, if not sooner.”

A few days later New York Times business columnist, Joe Nocera stated in  Amazon's "Bullying" Tactics,

".........But (Amazon's) goal is not to raise prices, which is contrary to Amazon’s pro-consumer culture. Instead, it is trying to upend the economic model that has long sustained book publishers. No wonder the stakes feel so high, and the fear and loathing so palpable............

.........The way I hear it, what Amazon is insisting upon is a deal where it would no longer have to bear the full brunt of its discounting — the publisher would have to bear some of it, in the form of tighter margins, or even losses. Hachette, meanwhile, contends that it needs to be compensated for the important things publishers do: editing, marketing, and curating.

........This is an argument that may appeal to the cultural elite, but it is unlikely to move Jeff Bezos, Amazon’s founder and chief executive............No matter what you think of Amazon’s tactics, they surely don’t violate any laws. It is acting the way hardheaded companies usually act — inflicting some pain on the party in a dispute to move it toward resolution."

While Nocera just sees tough business tactics and nothing illegal on the part of Amazon, Bob Kohn, a lawyer disagrees in his op-ed article on the same page of the New York Times.  He describes Amazon's behavior as that of a monopsony:

"Unlike a monopoly, which occurs when a seller of goods has the power to unlawfully raise prices of what it sells, a monopsony occurs when a buyer of goods has the power to unlawfully lower the prices of what it buys. Each violates antitrust laws: As the Supreme Court has long recognized, they both result in a misallocation of resources that harms consumers and distorts markets.........

How did Amazon attain such monopsony power? By providing valuable services? Perhaps, to some extent. But consider that from the moment it introduced its Kindle product, Amazon sold e-books at prices far below what it was buying them for. If Amazon bought an e-book from Hachette for $13, it resold it to a consumer for $9.99, losing $3.01 per e-book. It should come as no surprise that under these circumstances, e-book buyers flocked to Amazon. But there was a problem. When a company has dominant market power and sells goods for below marginal cost, it is engaging in predatory pricing, a violation of federal antitrust laws........

 .......So far, Hachette, to its credit, has been unbending. But Amazon still has its nuclear option (of deleting the "buy" buttons for all the Hachette books.) It would appear that unless Amazon backs down — through public pressure or government intervention — publishers will have no choice but to employ their own nuclear option: pull all their books from Amazon and throw their weight behind a law-abiding alternative. Perhaps the best solution would be an online marketplace controlled by the publishers."

An interesting piece especially from a legal perspective, but it seems a far stretch to expect publishers to come up with a competitive e-commerce solution. Still see Amazon vs. Hachette - Sherman Alexie: where writer Sherman Alexie explains on the Colbert Report how Amazon's battle with Hachette is harmful to authors.

For some different perspectives, see what Evan Hughes writes in his article Bringing Down the Hachette in Slate, blaming the publishers who could have avoided this fight by being less greedy and having shared more with their authors, rather than give Amazon the opportunity to capture this margin. And then there is an op-ed in the Financial Times, Amazon helps small publishers survive the giants, by independent publisher  Martin Shepard, who takes the side of Amazon against the "powerful incumbents" (i.e. Hachette and the other large publishers.)

"....From an independent publisher’s point of view, Amazon is a forest in which a thousand flowers bloom. The company offers better terms than other retailers. We used to have to print enough copies to stock every bookshop, knowing that many of them would end up being returned unsold. But Amazon, which holds stock only in a few central warehouses, almost never makes returns.........
.......In business, size is power and in the markets that is sometimes pompously called the "literary community" , the biggest publishers were for too long the only players who had either. Amazon has changed that, and the old giants are miffed. Those who love literature would be doing themselves an injury if they sided with the old guard."

Lastly. for quite a complete, although critical overview of Amazon, read George Packer's article Cheap Words in The New Yorker last February. All together, quite an overwhelming cacophony of views: from this is just business as usual to describing Amazon's behavior as possibly illegal; from blaming Amazon to blaming the big  publishers. However, within these opinions, no one seems to ask how come the book business - mostly the publishers and book chains-  have been handing over their business to an outsider, and why even in an economy increasingly controlled by mega companies (for example in the U.S.: three leading US car companies with many international competitors; five leading US banks; four leading US pharmaceutical companies; etc.) book selling is nearly controlled by one single operator?  The question is why this happened and how is this going to end?

Is this a sign of what is to come: Hachette lays off 3% of staff amid book prices row with Amazon ?
or this: in a recent Consumer Reports survey Walmart, the largest U.S. supermarket chain, was ranked dead last by consumers asked to evaluate the top 55 U.S. supermarket chains?

Or maybe this economics joke in the Microsoft antitrust case sheds some light on how this saga will end:

Three prisoners were sitting in a U.S. jail, found guilty of "economic crimes" and were comparing stories. The first one said, "I charged higher prices than my competitors, and I was found guilty of profiteering, monopolizing and exploiting consumers." The second one said, "I charged lower prices than my competitors, and I was found guilty of predatory pricing, cutthroat competing and under-charging." The third prisoner said, "I charged the same prices as my competitors, and I was found guilty of collusion, price leadership and cartelization."

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