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 suits, the 2010 agency switch
succeeded in bringing 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 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 the
short-term pain, 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 “megapublisher” 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
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 discounting power as Apple, its rival—even
though 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 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 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
Will the Agency Model Survive?
Hachette, Amazon and the future of agency pricing
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
2012 consent decrees of the publishers
involved in the e-book price-fixing case
begin to expire this fall, so too will Amazon’s ability to discount e-books. 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—whether on the
Kindle side, or print. The question is,
will the publishers remain committed to
keeping 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. (Neither
Hachette or Amazon will comment directly on the current dispute or ongoing
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
house separately (the six-month time
frames for concluding the deals are staggered). Under the injunction, Hachette
will be first in line for a new deal with