Sunday, May 25, 2014

Amazon v Hachette: Is Amazon really to blame?

Unless you're living on the moon you will know that virtually everyone in the book trade has been in a lather for the past two weeks about the way Amazon has been punishing one of the big five global trade publishers, Hachette, by not displaying their books for sale, withholding purchasing options and slowing down deliveries.

Everybody is blaming Amazon. Its actions are those of a 'bully', and Hachette is being urged to resist in the interests of the whole trade. Authors are universally outraged, particularly when it comes to the possible royalty flow from ebooks if Amazon has its way.

Unlike for print books royalties on ebooks are calculated on a net price, rather than list price, basis. Authors get a percentage, usually 25%, of whatever the publisher gets in revenues after discounts or commissions to retailers are applied. The authors fear that if Amazon is successful in forcing Hachette and other publishers to grant it better trading terms, then publisher net revenues will be lower and so therefore will the royalty flows.

The situation is not quite as simple as this however. The dispute is fundamentally about the Agency Model of ebook supply, something I've been aggressively opposed to ever since it was invented by Apple and thrust onto the book trade just prior to the release of the iPad in early 2010. 

The large trade publishers all fell over themselves to embrace this model because it supposedly offered them a solution to Amazon's discounting and retail dominance. It gives pricing power totally to the publisher and prohibits any retailer discounting. 

The US Department of Justice put an end to Agency as it deemed it was brought about by publisher collusion. But the model itself is not illegal under US law as it is in Australia. So the eventual consent decree with each publisher only required the publisher to abandon the non-discounting policy for two years. Agency was stunned not killed.

Hachette's two year term is the first to expire later this year. So the argument with Amazon, we presume, is over Hachette's probable intention to resume the full Agency model, removing any discounting ability from Amazon.

Andrew Albanese from the US trade journal Publishers Weekly, easily the best journalist writing on book trade matters in the world today - he never succumbs to the luvvie sentimentality that infects so much trade commentary - has a terrific piece on this here.

The key point is that Apple has been granted by the court the ability to discount way beyond the two year term afforded other retailers under publishers' modified supply contracts (commonly referred to as 'Agency Lite').

If Hachette, the first publisher to have its court-imposed 'discounting-allowed' (Agency-Lite) contract expire, succeeds in hamstringing Amazon in this way - effectively forcing them to be unfriendly to consumers - then Amazon will be caught in a pincer movement with its biggest competitor being allowed to discount by court decree on one side and suppliers contractually forbidding it from offering competing discounts on the other.

And you think Amazon would just sit back and cop this? Really? 

No, it has decided to fight back like all retailers denied trading terms that fall far short of their needs and aspirations. And Amazon's needs in this case are entirely reasonable. It just wants to be able to offer a very competitive value proposition to its customers. This is Amazon's very identity. (And authors would not suffer by the way. Their 25% net royalty should always have been closer to 35% and now would be a good time for them to push for that.)

But the big problem in this whole war is that Amazon has decided to harm its customers by denying them Hachette's products. Worse, it is in fact lying to them - about availability. Surely Amazon is acutely aware how dangerous to their brand this sort of tactic is. And to not even issue a statement to the public clarifying their position and its rationale is beyond belief. 

My guess is Amazon will very soon retreat. It will resume normal supply of Hachette's products, just as it did with Macmillan four years ago under very similar circumstances. Effectively, it will have lost this battle, and it will lose the whole Agency war. 

Which mean that publishers will control ebook pricing well into the future. The books will be over-priced and all retailers denied their ability to be price competitive. Regrettably most ebook retailers will welcome this. They see it as restricting Amazon and allowing themselves some space in the market. What will the biggies Kobo and Barnes and Noble's Nook do? They will agree to full Agency as it's the easy option: 'shackle Amazon to help us compete'.

I personally find all this very distressing. Agency is a supply model that is pro-producer and anti-consumer, and no long term economic good ever comes from that.

All this simply could not happen in Australia. Our trade practices law clearly outlaws 'retail price maintenance' where suppliers prohibit retailers from discounting. 

We do some things right and this is one of them.