Saturday, January 30, 2010

Amazon and Publishers: Playing "Chicken" Over eBook Prices?

According to The New York Times and other sources, Amazon has stopped selling all of Macmillan's books and eBooks, including imprints such as Farrar, Straus & Giroux, St. Martins Press and Henry Holt. The problem, which has not been officially confirmed by either Macmillan or Amazon, is that Macmillan wants Amazon to raise the eBook price of its bestsellers from $9.99 to $14.99. My wild speculation is that Macmillan threatened to delay or stop sending eBook files to Amazon altogether, and that Amazon retaliated by pulling all of Macmillan's titles, both print and electronic, out of its store.

This is a very dangerous game of "chicken" for both companies, and it may establish who has the real pricing power in the book distribution channel, publishers or resellers. For Macmillan and the other major trade publishers, Amazon is one of their biggest resellers in the U.S. Losing Amazon's revenue would be a huge blow. On the other hand, customers expect to be able to buy books from every publisher when they go to a bookstore. Losing the Macmillan catalog means that Amazon will be less attractive to customers.

Amazon's Jeff Bezos said this week that for every 10 copies of a print title with an eBook version available, six copies of eBooks are sold. Simple arithmetic shows that only 37.5% of the unit sales for those titles comes from eBooks. Given Amazon's pricing structure, it needs the sales of those print copies to help subsidize its eBook pricing model.

Both Macmillan and Amazon have valid arguments: For Macmillan, lowering the price of its bestsellers to $9.99 cheapens the value of those titles and builds customer expectations not to pay more than that, even for the print versions of titles. Given its deal with Apple, it appears to accept that eBooks should cost less than their print equivalents, but not so much less than they completely devalue its print versions.

I don't know what's in Amazon's distribution agreements with publishers, but I suspect that it says that Amazon has the right to sell titles for whatever it wants, independent of what it pays the publishers. What's not clear is whether the publishers are obligated to supply Amazon with copies of all their titles in eBook format, or whether they have to supply the eBooks at the same time as they supply print versions. It's very common for eBooks not to be available "day and date" with the street date of print titles, and few people have had a serious problem with that.

If one or more of the other major publishing houses join Macmillan's position, Amazon will have some very difficult choices to make: Pull all of their titles out of its store, agree to the publishers' demands, or negotiate a middle ground that works for both it and the publishers. There are also antitrust considerations, on both sides of the fence: Publishers could be seen as colluding or fixing prices, and Amazon could be charged with using monopoly power in both the print and eBook distribution businesses to force book publishers to agree to its eBook pricing model.

My opinion is that Amazon's decision to pull all of Macmillan's titles off its shelves may, in the short term, force Macmillan to capitulate, but it will strengthen the resolve of the trade publishing industry to wrest control over eBook pricing from Amazon. My suspicion is that Amazon has thrown the first brick in this war, but it may find that it's the one living in the glass house.

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