For publishers, negotiating terms of sale with Amazon has always been difficult. But reports last week of Amazon’s hardball tactics with the Hachette Book Group suggest that this year’s negotiations could be among the most brutal yet.
One likely reason is that when the publishers' 2012 consent decrees in the e-book price-fixing case begin to expire this fall, so too will Amazon’s ability to discount e-books. The parties don't comment on specific negotiations (and neither Hachette or Amazon will comment directly on the current dispute or ongoing talks). But it is fair to say that Amazon officials likely see the current negotiations as their best chance to push for the end of agency pricing for e-books, and are apparently prepared to bring to bear all the pressure they can on publishers—whether on the Kindle side, or print. The question is, will the major publishers stick together to keep agency pricing for e-books?
The answer to that question is far from certain, and, for the publishers, Amazon negotiations are complicated by a host of legal and market developments.
Complicating things on the legal side is Judge Denise Cote’s 2013 final order against Apple. After finding Apple liable last year, Cote issued a final injunction that requires Apple to retain the power to discount e-books for an extended period. The injunction also prevents Apple from simultaneously negotiating new no-discounting agency deals with the major houses, instead forcing the tech giant to negotiate with each publisher separately, in exclusive windows, staggered six months apart. Under the injunction, Hachette will be first in line to cut a new deal with Apple, sometime in the fall of 2015.
What does Apple’s injunction have to do with Hachette’s current Amazon negotiations? In the immediate term, it gives Amazon added leverage. After all, if you were Amazon, would you sign a deal knowing that your competitor has the exclusive power to underprice you in the e-book market? At the very least, Amazon is sure to demand the same power to discount as its rival Apple is required to retain—even though Apple will likely not use its court-ordered discounting power. Apple has long insisted that it will not be a low-price competitor. In addition, the settlements bar the use of Most Favored Nation clauses for five years, thus that mechanism is not available to ensure pricing parity.
In objecting to the proposed Apple injunction in 2013, the publishers called it a punitive, “thinly veiled” attempt to rewrite the terms of their settlements. But Cote was not seeking to be punitive. Rather, she explained, her order was designed to restart price competition in the e-book market and at the same time test the bonds of the alleged publisher cartel.
Whether you believe the 2010 agency switch was a product of illegal collusion or just a shrewd business move, the plan worked because it enabled the publishers to present a united front to Amazon, thereby mitigating Amazon’s ability to retaliate against individual publishers. By extending Apple’s power to discount and staggering the publishers’ first post-settlement Apple negotiations, the injunction keeps the publishers from immediately falling back to what Cote views as their illegally gained position of collective strength once the settlements expire. Instead, each publisher must strike new deals with Amazon without knowing what competing publishers will do.
Of course, if the publishers still believe in a no-discount, straight agency model for e-books, they can keep it. And they have some leverage. Despite the pain of the lawsuits, the 2010 agency switch succeeded in bringing a major new competitor, Apple, into the e-book game. And, the agency model also enjoys support from other retailers who are not eager to return to a permanent price war with Amazon—Barnes & Noble, Kobo, and Google are either happy with agency pricing or at least indifferent to it.
Unless one believes Amazon is prepared to dump each of the Big Five publishers, all the publishers have to do, in theory, is maintain their resolve, take whatever short-term pain may come, and, one by one, hold the agency line.
But will they? The short-term pain could be considerable, given Amazon’s share of both digital and print sales. And, at the same time, much has changed since 2009, when the agency switch was first conceived. In 2009, the e-book market we know today was just two years old, Amazon controlled over 90% of e-book sales, and there were concerns and unknowns common to each publisher: how will e-book sales affect print? What about profit margins? Future competition? Innovation? Will $9.99 devalue the book? Will bricks-and-mortar bookstores close? Will publishers be disintermediated?
Five years later, those questions linger. But publishers are no longer in a panic. There is marginally more competition; profit margins are solid; and each publisher now has significantly more data with which to negotiate their deals.
Perhaps the biggest market development since 2009, however, and the biggest wild card, is consolidation. With the merger of Penguin and Random House, one “mega-publisher” now controls as much as 50% of the bestseller lists. Could Amazon break the publishers’ united front by making Penguin Random House a non-agency offer it can’t refuse?
Remember, Random House resisted the agency switch in 2010, and, according to court filings, relented only after Steve Jobs personally appealed to CEO Markus Dohle, and Apple threatened to lock Random out of the App Store.
Thus far, the publishing community has rallied to support Hachette, and has decried Amazon’s harsh tactics. “Every nickel more we give Amazon will help them accelerate their efforts to put another independent out of business,” a publisher told PW. In a letter to Amazon, agent Gail Hochman, on behalf of the Association of Authors’ Representatives, called Amazon’s tactics “brutal and manipulative,” and compared them to “hostage-taking.”
Only time will tell whether there is enough industry-wide resolve to back up those words. For now, Hachette is a bellwether: potentially the first publisher to decide, post-settlement, whether to hold the line on e-book agency pricing, and to endure the stick of Amazon’s retaliation, without knowing whether the other publishers will reach for the carrot.
