Amazon and Macmillan Go to War


Sometime Friday, Amazon stopped directly selling all books put out by the publisher Macmillan, due to a disagreement over future pricing of e-books.  Let’s be clear, it’s not just that Amazon wasn’t selling Macmillan books on the Kindle.  Amazon was no longer directly selling any books from this publisher, though one can still buy them new and used on the website through third-party vendors.  While Amazon has just announced that they will eventually “have to capitulate and accept Macmillan’s terms,” Macmillan titles remain unavailable on Amazon at the time of this posting.

Some background:  Macmillan is a large publisher, whose imprints include Farrar, Straus & Giroux, St. Martins Press, Henry Holt, and many others.  Let’s say you wanted to buy Hilary Mantel‘s 2009 Man Booker Prize winner Wolf Hall from Amazon.  (And you should want to buy it.)  Because Macmillan imprint Henry Holt and Co. publishes Wolf Hall, when you go to the book’s Amazon page, there is (at the moment) no large “Buy Now” button.  Instead, there is a link that says “Available from these sellers” that leads to roughly seventy copies of the book, new and used, being sold on Amazon by third-party vendors.  Macmillan will make money off of those books sold new by third-party vendors, but not a penny off of those sold used.  

This temporary blockade will cost Macmillan a lot of money, though it’s not beneficial for Amazon either.  So why did both companies find themselves in this mutually destructive game of chicken?  As The New York Times noted in its initial Bits Blog post on this subject, Amazon currently sells e-books under the wholesale model, where it pays the publisher 50% of the hardcover price for every e-book sold, but can sell the e-book at any price it wants, usually at $9.99.  This means that Amazon is losing money on each e-book it sells that is currently out in hardcover.  While this is not ideal for Amazon, having price-setting power is worthwhile in keeping the Kindle competitive.  Macmillan’s proposal would shift the price-setting power away from Amazon and back to the publisher.

It’s been a busy two weeks for Amazon.  On Thursday, Amazon reported strong fourth-quarter earnings, beating analyst expectations.  The day before, Apple announced the iPad and its iBooks store to compete with the Kindle.  iBooks is far more publisher-friendly than Amazon, and allows publishers to set the prices for their e-books, though Steve Jobs presciently said that prices on Kindle and iBooks “will be the same.”  Five of the six major publishing houses (including Macmillan) have already signed on with iBooks.  Ten days ago, Amazon announced plans to offer a 70% royalty to authors or publishers whose e-books are sold on Kindle, provided that, among other restrictions, they never charge more than $9.99 for the e-book.  This is the sort of deal that could ultimately cut out publishers, since a self-published author would make more money from this arrangement than an author with a publisher.

Funnily enough, Macmillan’s proposal to Amazon, offered last Thursday, one day before Amazon initiated the publishing equivalent of the Soviet 1948 Berlin Blockade, also featured a 70% royalty to the publisher.  The key difference is that Macmillan would have pricing power over its e-books sold on Amazon.  As Macmillan CEO John Sargent described it in a paid advertisement in a special Saturday edition of the Publisher’s Lunch blast email (the only way he could quickly inform everyone in publishing of what was going on): 

Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digital media businesses). The price will be set the price for each book individually. Our plan 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.

The agency model would allow Amazon to make more money selling our books, not less. We would make less money in our dealings with Amazon under the new model. Our disagreement is not about short-term profitability but rather about the long-term viability and stability of the digital book market.

Sargent also offered to let Amazon continue with its current wholesale model, with the caveat that books would not be available in the Kindle store for many, many months after their first publication.  These are unhappy terms for Amazon, which is not convinced that consumers will pay more than $10 for a digital book right now.  Galleycat, which has been doing yeoman work this weekend covering the whole story, notes the many, many commenters on the Amazon discussion forums who are boycotting any Kindle book that sells more for than $9.99. Amazon wants to build and maintain its Kindle customer base and crush all other e-reader competition before it can think about raising prices at the Kindle store.

Let’s also note the timing: these issues have been simmering for quite a while, so why did we suddenly go to the brink now?   I believe that this crisis was precipitated by Apple’s announcement of the iPad and iBooks on Wednesday.  Amazon needs to hold the line on pricing now, before the Apple tablet is a viable competitor.  Since the iPad will do more than the Kindle, Amazon needs to offer a product that is better suited to book reading (and buying), both with its incorporation of E Ink, and with lower prices.  As for the specific timing, John Scalzi points out that Fridays are a good day to do or announce things that will get less press coverage, and that Amazon does less business on the weekend, so they won’t really be taking much of a financial hit on this if they resume sales tomorrow.

At 2:22 PM Pacific Standard Time today, Amazon’s Kindle team posted this announcement to an Amazon discussion forum:

Dear Customers:

Macmillan, one of the “big six” publishers, has clearly communicated to us that, regardless of our viewpoint, they are committed to switching to an agency model and charging $12.99 to $14.99 for e-book versions of bestsellers and most hardcover releases.

We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because 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. Amazon customers will at that point decide for themselves whether they believe it’s reasonable to pay $14.99 for a bestselling e-book. We don’t believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative.

Kindle is a business for Amazon, and it is also a mission. We never expected it to be easy!

Thank you for being a customer.

It’s not clear how long Amazon will continue this temporary boycott of Macmillan.  When it’s over, Amazon will finally make money selling Macmillan e-books that are currently in hardback. Nevertheless, it will have ceded control over pricing, which means that e-books will almost certainly cost the same whether they are on the Kindle or the iPad.  Macmillan very well might sell fewer e-books than it used to, but it’s regained its price-setting ability.  Besides, Macmillan is probably just as interested in eliminating a cheaper replacement good for its profitable hardbacks as it is for making more money off of e-books.  However, in setting its own e-book prices, the publishing house will need to take care not to charge so much that it drives more consumers into choosing pirated materials.

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