It was a surprising weekend for those of us who had naively imagined that after crossing the River iPad, we might actually get some Elysian rest. But, alas, the fates conspired against us and handed us the curious case of Amazon (NSDQ: AMZN) vs. Macmillan. Or Macmillan vs. Amazon?
For those who actually took the weekend off, let me summarize what happened. John Sargeant, the CEO of Macmillan Books, gave Amazon a wee-bit of an ultimatum: switch from a wholesale sell-through model, where Amazon buys digital books at a fixed wholesale rate and then can choose to sell those books at whatever price it deems appropriate (even at a loss, as it does with $9.99 bestsellers), to an agency model, where Amazon agrees to sell at a price set by the publisher in exchange for a 30% agency fee.
Sargeant explained to Amazon that if it did not agree to the switch, Macmillan Books would make its e-books subject to significant “windowing” wherein new books are held back from the digital store for some period, say six months, while hardback books are sold in stores and possibly, digital copies are sold through the iPad at $14.99.
This is more detail than we usually know about a negotiation like this because of what happened next. Sargeant got off of a plane on Friday only to discover that Amazon had responded by pulling all Macmillan books from the Kindle store as well as from Amazon.com. He then decided to make it clear to the industry (and his authors) that this drastic action was Amazon’s fault, in a paid advertisement in a special Saturday edition of Publishers Lunch.
That was enough of a surprise, but was quickly followed the next day when Amazon reversed itself and posted a slightly snippy explanation of its actions that can best be summarized as a way for Amazon to blame Macmillan for making it raise its prices. While I believe Amazon is sincere in its belief that $9.99 is a good price for books (especially for people who have spent $259 or more on a Kindle), Amazon is secretly pinching itself right now, because:
1. Amazon will now make money selling Macmillan e-books. Currently, Amazon eats a few dollars on most of the e-books it sells at $9.99. By capitulating to Macmillan (and any others that might jump on this bandwagon), Amazon will now make more money than before on each of these books, because they’ll get a whopping 30% of $14.99, or nearly $5 a book.
2. Publishers will ultimately be compelled to bring e-book prices down. If Macmillan is the only publisher to move to an agency model, its e-books will be at a disadvantage compared to other publishers in the Kindle store, which is a bad place to be when you’re trying to sell to the more than 5 million people who will own a Kindle by year-end 2010. But even if the other publishers move to the same model, they’ll suddenly realize that with great (pricing) power, comes great (pricing) responsibility, and some will start to lower prices, promotionally at first and then on a more lasting basis. Because there is always a publisher who is hungrier than the rest.
3. In that future, Amazon will make more money than it does now. At that point, even if prices come back down to $9.99, Amazon will be making $3.30 from each book sold. Amazon wins in the short run and the long run. And publishers will make less money than before on each book sold.
There are many variables being bandied about that are actually irrelevant: iPad, ePub, or piracy, to name just a few. None of these are really in a position to change the basics of the 1-2-3 punch I describe above. The iPad is not a particularly good e-reader, at least not in its current version, and Apple (NSDQ: AAPL) will never have the power to shut off the sale of physical books to make a point the way Amazon just did.
Some are saying this whole fight would go away if people just adopted a common e-book format, like ePub. But most are unaware that DRM is still possible in ePub format, and that most ePub DRM schemes are not interoperable, at least not yet. So you can’t buy a cheaper e-book from one store and use it on the device of your choice. Just like you can’t buy Halo for the Xbox 360 and play it on the PS3. And piracy is not going to change (up or down) just because a few books on Amazon.com go up in price. Instead, people will use near-term substitution, favoring cheaper books (readers always have a list of five books they want to read, they’ll just go down the list until they find one that is available at a reasonable price).
In fact, the pricing mess is only going to get messier. Our surveys have found that people are willing to pay as much as $17.81 for a new e-book, but only if the hardback costs $25. That’s the rub. People expect to pay less for digital books, compared to the price of the physical book in the market. But books don’t cost that much. Today I can buy a hardback copy of Elizabeth Gilbert’s Committed on Amazon for $12, a discount of $14.95 from the list price. And the book was just published four weeks ago. So spending $14.99 for the digital version is a bit silly.
One result of this riff: If publishers make less off of e-books (and Amazon makes more), even at $14.99, then publishers have less to give to authors, who are increasingly reconsidering their contracts (especially authors with big followings like Steven R. Covey and Paul Coelho) in light of new promises from Amazon to offer dramatically higher royalties for authors who work directly with Amazon. Hmm, smells like round two of this fight may also go to Amazon as well.
This article originally appeared in Forrester Research.