Amazon, Macmillan Start E-Book Price War, and Amazon Loses -- for Now

If you were on Amazon (AMZN) late Friday evening, shopping for Atul Gawande's Checklist Manifesto, Hilary Mantel's Man Booker–winning Wolf Hall, or the latest Stephanie Plum novel by Janet Evanovich, you might have noticed something fishy. The books were listed, but they didn't have pricetags. You could buy them, but only from third-party or used-book sites. That's because these books are all published by Macmillan, one of publishing's Big Six and the first company to fight Amazon's pricing of e-books. Amazon lost this battle, but it's going to be a long and costly war.Macmillan CEO John Sargent explained the publishing company's side in a missive to "all Macmillan authors/illustrators and the literary agent community," as a paid advertisement in Saturday's Publishers Lunch. In a meeting on Thursday at Amazon's Seattle headquarters, Sargent outlined Macmillan's new proposal for terms of sale, to take effect in early March: Either sign on with the so-called "agency model," by which Macmillan sets prices for its digital editions, and retailers like Apple (AAPL) take a 30% commission, or stick with the wholesale model, by which retailers buy stock at 50% of the list price -- at a severe cost.

Seven-Month Delay on E-Books

"Our plan," Sargent wrote, "is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time." But by sticking with the wholesale model, and more importantly, the $9.99 price, "this would involve extensive and deep windowing of titles" -- i.e., a delay, according to The New York Times, of as long as seven months after the initial hardcover release.

Amazon did not return repeated requests for comment last weekend, but on Sunday released a statement that it would "have to capitulate and accept Macmillan's terms" for higher-priced e-books under the agency model, because, Amazon said, "Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books."

But Sargent responded in a statement, "We are in discussions with Amazon on how best to resolve our differences. They are now, have been, and I suspect always will be one of our most valued customers." Kindle editions of Macmillan titles were still not available for sale on Monday morning.

Amazon Corners E-Book Market -- for Now

This wasn't the first time Amazon has removed sales links to a publisher's books. In 2004, Amazon's German site de-listed an array of titles from prominent German publisher Diogenes Verlag in a dispute over discounting terms. Two years ago, two deep-discounting disputes led to several books published by Bloombsbury (BMYUK) and Hachette's (LGDDY) U.K. arm to be briefly locked out of Amazon's British site. (The Hachette dispute was not resolved until June 2009.)

But the Macmillan standoff raises the stakes, for several reasons. Amazon's incredible fourth-quarter performance -- sales rose 42%, to $9.52 billion, and net income jumped 71%, to $384 million -- shows the massive profit it's drawing from Kindle and e-book sales. Though still loath to use real numbers, Amazon CEO Jeff Bezos said in the earnings release that, when both print and digital editions are available, "We sell six Kindle books for every 10 physical books. This is year-to-date and includes only paid books -- free Kindle books would make the number even higher."

Amazon's 10-K filing revealed further details, like a change in accounting standards that results in "approximately $508 million of deferred revenue from shipments from last year," deferred to 2010 and 2011. In other words, the math delivers a rough estimate of about 2 million Kindles sold in 2009. E-books make up only about 4% of the market, but Amazon has a near-monopoly on those sales. And Amazon's 10% to 15% share of the book market means that locking out Macmillan would have cost the publisher a significant revenue stream.

Authors Caught in the Crossfire

Sargent also argued that an agency model "would allow Amazon to make more money selling our books, not less," because instead of paying 50% of the wholesale price ($12.50 for every e-book listed as a $25 hardcover) and then taking at least a $2 loss on each e-book, the 30% commission under the agency model would put each e-book sale in the black.

But in persisting with the wholesale model -- and more importantly, the $9.99 price take -- Amazon clearly believes its booming sales and customer brand-loyalty will make it the ultimate winner of this war, as long as readers express anger about "higher" e-book prices in the form of boycotts and one-star reviews. That will leave authors caught in the middle.

But the other reason for Amazon's drastic weekend action is, of course, Apple's iPad. Five of the six major publishing houses, save Random House, are onboard to provide e-books for Apple's iBookstore -- using the agency model. Steve Jobs made his Amazon-targeting position clear to the The Wall Street Journal's Walt Mossberg, who wondered why anyone would pay $14.99 for an e-book when it's offered on the Kindle for $9.99: "Publishers will actually withhold their [e-]books from Amazon," Jobs said, "because they are not happy with the price."

Amazon may have blinked first this time, but it's unclear whether its response encourages publishers' to stare it down, or if bigger calamities lie ahead. There's plenty at stake. Random House, sitting out on signing with Apple, may further cement its cozy relationship with Amazon. But the other top houses must decide whether to follow Macmillan's lead as their annual Amazon contracts come up for renegotiation -- and given that Hachette, CBS's (CBS) Simon & Schuster, and News Corp.'s (NWS) HarperCollins are all on board with delaying e-book releases to circumvent Amazon's $9.99 standard pricetag, each of them seem positioned to convince Amazon that the agency model benefits all parties -- and makes more money not just in the long run, but right away.

Do Consumers 'Feel Good?'

Readers, so far, are clearly on the side of the cheapest price -- and seem impatient with publishers who want to save their business model rather than sacrifice it on the altar for $9.99. One attendee at the many meetings Amazon conducted with New York–based literary agents in January says an Amazon representative crowed: "We've gotten our customers to feel good about paying $10 for an e-book."

But Amazon's ceasing to sell Macmillan titles came with a couple of extra stings, and likely contributed to its alleged capitulation. Not only were customers prevented from buying print and digital editions, but Macmillan books also disappeared from customers' wish lists, and sample chapters downloaded into Kindles vanished.

The deletion of Macmillan titles benefited other book retailers. Barnes & Noble (BKS) saw the benefit -- both for print and digital editions on its competing e-reader, the Nook -- with zooming sales on BN.com. And independent bookstores saw the opportunity to reach out to the newly disgruntled.

But as the countdown to the iPad's launch continues, and the e-book price war wages on, it's ever clearer that, as Digital Book World's Guy LeCharles Gonzalez put it, "Everything you thought you knew about the business is going to be upended."

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