Amazon vs. Macmillan

Since I made this decision to pursue publishing a couple of years ago in the midst of writing my book, I’ve been adding all kinds of industry blogs to my daily reading to learn all I can about every aspect — I read blogs and journals by authors, agents, editors, writers’ guilds, and power readers. I follow publisher and writers’ guild sites. I try to stay up on the latest trends and controversies in the publishing world. I spend almost as much time reading about the industry as I do writing. Oftentimes more.

*Power readers is my term for readers who have popular blogs about books, and thus have Important Thoughts Worth Knowing, as an author understanding the reading public. My two favorite sites for this purpose are Smart Bitches, Trashy Books and Dear Author, both of which focus on romance. Not a genre I’m interested in, but their astute observations and insight have been invaluable in helping me understand my ultimate audience: the reader. (And I’ve certainly gained a better understanding of — and respect for — the romance genre as an unanticipated side benefit.)

Some of the biggest topics in the last couple of years: the GLBT Amazonfail, RaceFail ‘09, the Google Book Settlement, the dying publishing model, the Hanchette affair, the Harlequin vanity press, CoverFail, copyright evolution vs. Creative Commons, and the George Orwell Kindle deletion. But hands down the biggest conversation happening in the industry involves ebooks. I’ve read more about ebooks and the various related topics than I have about any other aspect of the industry. What ebook pricing should be, whether or not DRM should be used, book piracy, the changing publisher model, the pros and cons of every ereading device on the market, the pros and cons of striking out as an independent author online and/or offering your books for free. Ebooks have been a part of every one of the controversies in that list above, and there’s not a single person involved in the industry who doesn’t have an opinion on it, or a stake in the outcome.

Well yesterday, the bomb dropped.

In response to a dispute with Macmillan — whose imprints include Tor Books, St. Martin’s Press, and many others, including many international imprints — about the pricing model for ebooks, Amazon has pulled the “Buy it Now” link from every Macmillan-related book on its site. Not just the link for ebooks, but for print books as well. That means that you currently cannot purchase a book like Robert Jordan’s The Wheel of Time, one of the most popular epic fantasy books ever, in any form from Amazon. (You can still purchase from second-hand sellers via their site.)

[Macmillan’s statement here. Amazon’s statement here.]

Needless to say, the internet has exploded in the past day and a half. I’ve spent the better part of last night and this morning reading up on it. Two of the best explanations I’ve read about what’s going on here are from Jane of Dear Author and Cory Doctorow of Boing Boing. (Others worth reading on this subject: John Scalzi, Charlie Stross, and especially Tobias Buckell, who takes the time to explain where the costs of publishing come from and how that impacts ebook pricing.)

There is no “right” party in this current dispute, just a less wrong one, and which one that is depends on a couple of factors and how important they are to the particular person discussing it. But Jane and Cory both make the point — and I think pretty much all of us on the sidelines agree — that the victims here are the authors and the readers. And though most of you aren’t authors, I know most of you are avid readers, which is why I’m taking the time to bring this whole thing to your attention even though others have analyzed it far better and far longer than I’ll be able to do here, in a single post.

You would think that it goes without saying that the publishers’ customer is you, the reader. But it’s important to understand that in actuality, you the reader are entirely irrelevant to publishers. This is probably the hardest thing to understand, and something that I don’t think even the publishers quite realize. But once you accept that fact, then the rest makes a lot more sense, inasfar as it makes sense to understand why this fucked up industry is so fucked up.

So if you aren’t the publishers’ customer, who is?

Wholesalers and retailers. There are lots of reasons why this is so, and there’s a whole historical setup for how this came about that I could bore you with but won’t. (And you obviously don’t have to take my word for it, there’s plenty of reading out there for you. I just won’t spending time proving that point here, since that’s not really the reason for this post.) The point is, the fact that you purchase the publishers’ product is largely irrelevant. I mean, that’s not quite accurate, since what you purchase drives the sales of those retailers and wholesalers, and thus you do have an impact on the publishers in an indirect and ultimate way. But unlike most other free market enterprises, where the consumer’s choices and preferences and demands have an immediate impact on the manufacturer/supplier, the demand in the publishing world doesn’t come from the consumer, it comes from, in effect, the reseller.

In the past, that’s been the big and small bookstores. Amazon is a slightly different animal, since it acts as both wholesaler and retailer, which is why they can offer such big discounts to you, their customers. They purchase directly from the manufacturer/supplier (publishers), getting the wholesale price, and sell directly to you, passing along some of the savings. (Warehousing price clubs like Costco, Sam’s Club, and Price Club, and large retailers like Walmart do something similar.)

Another thing worth understanding is the practice of returns. This is, as far as I can tell, a practice entirely unique to the publishing industry, and it is, in my opinion, one of the main culprits for the industry’s decline. Again, I’m not going to go into all the ins and outs of returns per se, but to simplify it for our purposes here: when a bookseller purchases an order of books, they have a guarantee that any books left unsold after a certain period can be returned to the publisher for a refund of that portion of what they outlaid on the initial order. This is why, if you’ve ever worked in a bookstore, part of your job is to tear off the covers and throw away the now coverless book. The covers are sent back as proof that the book didn’t sell, and the bookseller gets a refund for it. This is also why it’s illegal to sell or even give away those books. Yes, I know, it’s a goddamn shameful waste, I’m just saying, that’s why. No other industry does this, and it’s completely cracktastic. Welcome to the world of publishing.

(Oh, and just to add an extra degree of wtf: those returns are also counted against an author’s ultimate sales. There’s an entire art of negotiations devoted to whether or not to take an advance and how much it should be, for this reason. While an author doesn’t have to pay the publisher back for those copies that didn’t sell, they are counted against the author’s “earn out” balance. Which means that if, after all the pluses and minuses are added up, the author failed to make back the amount expended on their book and their advance, then they “failed to earn out”. Not earning out is discouragingly common, and depending on the size of the advance and marketing campaign invested, can have a severely negative impact on whether or not the publisher will contract for a future book from that author. It’s complicated.)

Note, however, that Amazon doesn’t participate in the returns system. Their entire business model is centered around warehousing, so there’s no problem for them to store books indefinitely (as there is with others, which is why the returns system started in the first place) because the chances are very, very good that eventually, they’ll sell those books no matter how old they are. (Hello, wonders of the internet.) This sets Amazon on entirely different terms with publishers, because from Amazon’s perspective, it’s a straight across transaction of the sale of widgets. Books are largely the same no matter what, as far as Amazon is concerned, whereas from everyone else’s perspective (publisher, author, and reader), books are decidely not the same. As Jane of Dear Author points out:

Of course, books are a unique product in that each book is its own tiny monopoly. No one else can produce and publish a Stephen King book. There are other mystery books and other horror books but there is no other Stephen King.

Which isn’t to say that books can’t generally be treated the same from a business perspective in a broad sense — indeed, they have been for decades — but merely to point out that there’s good reason from the publishers’ side of treating books somewhat differently, i.e., to have some flexibilty in pricing. It does not, mind you, justify the truly insane* pricing models that some/most engage in for ebooks (which I’ll get to in a second), but there’s a perfectly sound and legitimate reason to have a pricing scale that slides downward over time. (Hence the higher price paid when a book first comes out, regardless of whether it comes out as a trade paperback or hardcover, then a reduction in pricing, then the release of the mass market paperback at a lower price still, then a reduction in pricing again as more time has passed. This practice is called “windowing”.) And this is, in a very simplistic summary, what Macmillen was proposing to Amazon with ebook pricing that caused Amazon to flip their proverbial shit.

*[Publishers’ cracktastical idea that ebooks should cost the same as, or only slightly less than (or in some cases more than!), print books is truly crazy and illogical. After the intial cost of getting the book published (pay the author, editors, artists, layout designers, copyeditors, marketers) and processed into the fifty gajillion formats you want to make available to your reader (because you are a smart publisher and recognize that you should make it as easy as possible for your readers to buy what you’re selling), you have no other costs.  (caveat: website, bandwidth, yada yada) Which isn’t to say it means ebooks only cost pennies, especially when you can only count on selling a few thousand copies AT MOST for the vast, vast majority of books. But ebooks are inherently more profitable if/when they achieve parity with print books, simply because there is no incremental cost associated with them.]

From Amazon’s perspective, a single price for ebooks (the widgets in question) makes a lot of sense. So much sense that they’re currently selling most ebooks at a loss — they’re a big enough company that they can absorb it — in order to drive sales to their site by selling for less than everyone else. But the key here to understand is why. There’s only one good reason to take a loss on a product you sell, and it’s to move some other product that makes you money and/or to increase other or future sales. This is the infamous “loss leader”, a practice used to spectacularly devastating effect by Walmart.

Well, it’s no mystery what product their ebook loss leader is meant to sell more of: the Kindle, of course. They won’t release numbers, but the general consensus seems to be that they’ve sold a few million Kindles since they came out, which means that Amazon dominates the ereader market already and they’re well-positioned to expand that advantage as more people convert to ereading. More than that, though, they set the terms, since the Kindle has a proprietary platform, DRM restrictions, and an unfair licensing setup. You don’t own the ebooks you buy for the Kindle (to the surprise of several Kindle owners not too long ago when their purchased copies of 1984 vanished from their devices overnight), nor can you move them to other devices to read if you decide to switch to a different device (iPad, anyone?). You can’t sell your copy of a Kindle ebook to a used book store, or share it with a friend, or donate it to the local library.

Note that these problems are not unique to the Kindle, and aren’t only driven by Amazon. DRM in particular is a problem largely created and perpetuated by the publishers, since they can’t seem to understand that their fear of piracy that’s driving them to embrace draconian technology like DRM does nothing to actually prevent or stop piracy. In fact, the only real effect DRM has is to harm their consumers, the reader, since it punishes the reader for buying a legitimate copy, assumes that they’ll do something criminal with it, and throws up unnecessary obstacles for the reader to buy the publisher’s product. (And the actual, you know, pirates wouldn’t have legitimately bought the book anyway.) But remember what I said before that the publisher’s customer isn’t you, the reader. So I won’t get into all the whys and wherefores that DRM is not only evil and unfair, it’s a stupid business practice. At least, not today.

ANYWAY, from Amazon’s POV, having prices dictated to them by the publisher is decidedly Not Cool. And from a free market POV, it usually isn’t, either. But as with anything you learn in Econ101, assuming the simplicity of a free market is a fool’s errand because the free market always assumes rational actors operating in a purely free market, and that’s never the case. (You can always tell a person whose understanding of economics is built on what they learned in Econ101, because they’re generally the ones who believe the free market solves all ills. The first thing you learn in the second year of Econ is that everything you learned in the first year was false.) Charlie, Jane, and Cory already laid out better analysis of the pricing aspect of the dispute than I could, so read them instead.

In the time it’s taken me to write all of this, Amazon has now caved to Macmillan, pretty much exactly when and how John Scalzi (and others) predicted they would. And in the time you’ve been reading this, you probably forgot what I was originally writing about in the first place, huh? ;)

My point — and I do have one — is that the implications of this throwdown are undoubtedly going to have some serious repercussions for publishing in the not-too-distant future. Even if you don’t read books electronically and don’t ever plan to, how ebooks are handled in the coming years are going to determine the viability of most of the large publishers (and thus, the majority of authors, at least in the short term). Done well and fairly, consumers become the focus of book selling (as they should be) and they have access to a HUGE list of ebooks at a reasonable price with no restrictions on what device they can use or what format it’s in. Publishers are decoupled from the returns system and the dinosaur business model that’s been dragging them down for years, break away from their addiction to blockbusters and subsidized publishing, and maintain a healthy business structure with a rational profit expectation. Sellers (including Amazon), are able to set their prices as they wish without dictating prices up the chain to publishers, expand their share of the ereader market, and continue to make record profits. And of course authors have a new potential revenue stream that enables them to do what they do for a living, expand their audience, try different approaches to their career, and build their success.

As I said, done right, all of those things are possible. But then, I’ve always been pathologically optimistic.

In the meantime, however, I think I’ll just keep buying my books from Powell’s, online or off, and hope to god that this stuff gets sorted out by the time I (hopefully) get published.

Comments

[Jeena]

Thank you for explaining all this and sharing some insight. I didn't actually know about this until it was over, but this was a terrific explanation of why this was important!

[Writer's Cramp]

Jeena: Thank you! I'm glad I took the time to write all of this up -- it really helped me understand my own thoughts on the matter, as well. It was instructive, too, in how much things are changing so quickly that it's kind of the Wild, Wild West right now. Eep!