10 Comments

Summary:

Amazon has given in to book publisher Macmillan in a fight over e-book prices, in part because of the threat of competition from Apple’s iPad, but will actually make more money from e-books in the short term – even as it loses in the longer term.

Amazon’s battle with book publisher Macmillan was a valiant attempt to retain control over pricing in the rapidly changing world of e-books, but its weekend display of brinksmanship was short-lived. The online retailer yanked Macmillan books from its virtual shelves — both e-books and regular books — on Friday, triggering an online flame war with Macmillan authors and many of their supporters, but by Sunday night Amazon had capitulated and agreed to accept Macmillan’s new pricing model.

Update: According to a research note from J.P. Morgan, the Amazon/Macmillan dispute isn’t quite over yet. The brokerage firm said that as of 5 p.m. ET on Monday, “many best-selling Macmillan titles appear to still not be available on Amazon, suggesting the situation is still not fully settled.”

The unseen actor in this little mini-drama, of course, is Apple. With the launch of the iPad, the consumer electronics giant tilted the balance of power in the e-book market decisively away from former leader Amazon, even though Apple’s device isn’t shipping yet. The company also negotiated a new payment structure with publishers like Macmillan, which is being referred to as the “agency model.”

In a nutshell, instead of Amazon or Apple behaving like a retailer of e-books — someone who should get to set the ultimate price of the product, as I argued in this post about Amazon’s duel with Macmillan — they would instead be treated as an agent of the publisher, and receive 30 percent of the list price of the book in question. The surprising thing about this arrangement, as Brad Stone notes in the NYT’s Bits blog, is that this gives publishers exactly the kind of pricing flexibility music labels wanted from Apple but were repeatedly denied (they eventually struck a deal late last year).

So Amazon has lost and Macmillan has won, right? Not exactly. One of the ironic things about the battle is that the pricing model Amazon was resisting will pay the retailer more than the model it favored, which would have seen all e-books priced at $9.99. Under that system, Amazon actually loses money on each book, since it has to pay publishers about $15 for them. Under the “agency model,” Amazon will be paying publishers about $10 per book, and selling them at between $12 and $15 apiece (under the arrangement described by Macmillan, prices will decline over time).

While it may make more money in the short term, however, Amazon still loses, because it has to give up pricing control to publishers, and a rise in e-book prices won’t help move more Kindles, either. The retailer’s exercise in brinksmanship also made it look bad: Author John Scalzi does a good job of rounding up the mistakes Amazon made, including the fact that its unilateral removal of Macmillan books (print and electronic) turned both authors and their fans against the company. Amazon also didn’t respond when the battle broke out, letting Macmillan win the high ground.

In the long run, of course, Amazon’s biggest fight isn’t going to be with Macmillan, or even with the book industry as a whole. Its true nemesis is now Apple (Michael at The Apple Blog has his own take on the Amazon/Macmillan brouhaha).

Post and thumbnail image courtesy of Flickr user Frederic della Faille.

  1. No, we, the long suffering Consumers, are the ones who have ‘lost’.

    Encrypting content to only work with specific proprietary hardware is a horrifying enough, made worse with these latest developments.

    iPad, Kindel and the Nook, along with the associated misery of DRM and publisher pay walls solve nothing, merely a quick “crack hit” of short term revenue.

    Share
  2. DistortedLoop Monday, February 1, 2010

    Irony, or not, I’m not sure your conclusions re: pricing and profit are accurate.

    Was Amazon trying to be a hardware company (selling Kindles) or an eBook retailer selling ebooks?

    Your assumption seems to be that they want to be a hardware seller and follow the Apple/iTunes model (offer cheap content to drive the sales of hardware).

    I assumed they were trying to sell a cheap reader to drive the sales of ebooks, which clearly are priced to be much more profitable to all parties involved than hardcovers and paperbacks. Kindle books, whether at $9.99 or $15.00, must surely be more lucrative for Amazon since there’s no warehousing or shipping costs involved.

    Share
    1. Having an e-reader doesn’t do the company much good unless people are buying them, and cheap e-books is the best way to drive sales of the Kindle — which I think is why Amazon has been fighting so hard to keep the prices of them down, even though it stands to make more on each book under the agency model.

      Share
      1. I think a bigger issue comes to the fore — even if the new rates allow for actually making a profit (many ebook sales were actually costing Amazon money) or a greater profit: Amazon has essentially attracted a low-end audience (that is great when you are a retailing behemoth working thin margins beautifully but not so good in the digital market when other competitors can do greater volumes at greater margins).

        Look at the top 100 Kindle sales. There are only 5 or so legitimate current topsellers. Half, if not more, are free out-of-copyright classics. And the vast remainder are $5, some $7.99, a few much cheaper — all midlist and backlist books but for an occassional exception.

        It’s similar to their music offering. On the music side, the bestsellers conform closer to other bestseller lists, but the bulk of the prices are $5 with a few at $7.99. Whereas, Apple has a similar list but most are $9.99 with many being $12.99 and up (in some cases $15 with several Deluxe editions). And yet Apple is still doing much better volume than Amazon.

        The consumers may love this, but I don’t see how Amazon’s suppliers or their shareholders can love this.

        Share
  3. Apple hasn’t sold a single iPad but they have already upended ebook publishing kicking Amazon in the groin. And naysayers say this product will fail.
    Well I am getting myself one as soon as we get them this side of the world…

    Share
  4. [...] 05, 2010 by Darrell Etherington and No one has commented Despite Amazon’s knee-jerk banishment and reinstatement of its books following a price increase of its books, publisher Macmillan isn’t the only one [...]

    Share
  5. [...] Amazon’s knee-jerk banishment and reinstatement of its books following a price increase of its books, publisher Macmillan isn’t the only one [...]

    Share
  6. [...] read the rest of this post at GigaOm [...]

    Share
  7. [...] will change the content industry in a meaningful way, by being a counterweight to Amazon. The iPad has helped open up fresh wounds between Seattle-based e-tail giant and some of its publisher partners. In short, if [...]

    Share
  8. The iPad can only run stuff from the app store. It’s pretty much a supersized iPod Touch. It’s a cool piece of technology but really there’s no point in buying it unless you have a bunch of money lying around and just think it’s cool.

    Share

Comments have been disabled for this post