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Amazon vs Hachette: Who should win the battle?

The relationship between Amazon and Hachette Book Group started

out as mutually beneficial. In the past, both businesses relied on an

established book distribution process in which Hachette would wholesale

their titles to Amazon, who would then sell the physical copies of books

to potential customers. In this traditional process, costs were essentially

higher because printed books need to be produced, transported, stored, and

distributed. It was a win-win situation for both businesses. When Amazon

introduced e-books and brought Hachette into the digital age, the publisher

was happy to provide the content in return for a new revenue stream. However,

as e-books became the fastest growing area of book sales, brick-and-mortar

businesses began to struggle, and the business dynamics between Amazon

and publisher changed. Hachette in particular, after being stimulated by

Amazon’s investment and innovation, are uncomfortably reliant on the

ecommerce site and looking for ways to maintain a grip on an evolving

industry. However, they continue to find none. At the beginning of this

spring in 2014, the dispute between the online retailer and the publishing

conglomerate began. Their discussion revolves around the pricing of e-books

and contract details for distributing Hachette’s books. Much of it remained

private, as most contract negotiations between giant corporations do, until

Amazon purposely interfered with the sales of Hachette books, making

some unavailable to purchase, delaying deliveries of others by weeks and

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months, and advertising alongside some titles with a banner of “similar

items at a lower price” (Yuhas, 2014).

That being said, in this paper I will begin by exploring Amazon’s

reasons behind their argument. Following that, I will analyze and question

its plans and ways of business tactic to finally argue that, although Amazon

poses lower e-book prices are better for everyone in the market for books,

that includes the authors, publishers, customers, and Amazon itself, the

truth is, Amazon does not care about the parties involved. Amazon’s main

goal is to use its market power to become the dominant player in the book

industry and to establish a new benchmark that would eventually diminish

the roles of publishers like Hachette. Hachette needs to win the dispute for

not giving Amazon all the power, for it is not only securing its own business

but also helping bricks and mortars to survive while maintaining a balanced

ecosystem within the publishing industry, book readers to continue to have

access to a varieties of books, and most importantly, to maintain the values

of authors’ work.

Amazon claims their fight with Hachette is about helping everyone

in the book market, and that their plan would actually make customers happy

as well as help authors make more money which will in turn benefit the

publishers. Amazon gives three main arguments. Firstly, many e-books are

released at $14.99 and even $19.99. Amazon believes that it is unjustifiability

high for an e-book, for there is no printing, no returns, no lost sales due to

out-of-stock, no warehousing, or transportation costs required (Masnick, 2014)

E-books can be and should be sold at the price of $9.99. Secondly, Amazon

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argues that e-books are highly price elastic, which means that, when the

price goes up, customers will buy much less. To prove its point, Amazon

quantified the price elasticity of e-books from repeated measurements on

many titles. For instance, according to Amazon (as quoted from Masnick

2014, ¶3) for every copy an e-book would sell at $14.99, it would sell 1.74

copies if priced at $9.99. In other words, if customers buy 100,000 copies of

a particular e-book at $14.99, then customers would buy 174,000 copies of

that same e-book at $9.99. The total revenue at $14.99 would be $1,499,000

whereas the total revenue at $9.99 is $1,738,000. For this, Amazon claims that

lower e-book pricing is good for all parties involved. Customers are happier

because they are paying way less. Author is getting a larger royalty check

and their book is being read by way more audience. Likewise, the higher total

revenue generated at $9.99 is good for both the publisher and the retailer,

for the total pie is bigger and therefore is more to share amongst parties.

Finally, Amazon argues that it is also very important to keep in mind that

books don’t just compete against books. Today, books are also competing

against other products like video games, movies, Facebook, free news sites and

more. If prices of e-books remain high, customers will choose other cheaper

or free route for information, therefore making it impossible to maintain a

healthy reading culture. With all that said, Amazon also proposed its plan

on how the pie should be split in order for all parties to be benefitted from

setting e-book prices at $9.99. Amazon proposes that it will send 70% of

the total revenue to Hachette while 30% of the total revenue remains with

them. Hachette can then decided on how they want to split the 70% with

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their author. However, Amazon believes that 35% should go to the author

and 35% to Hachette because it believes that Hachette is sharing too little

with the author today. While the publisher contribute plenty toward the

production of books, it doesn’t make sense for them to deserve 60 to 70

percent profits on e-books when they are virtually free to distribute (Dent,

2014) Amazon arguably deserves its larger share of the e-book market, since

it was the one who created it in the first place with the Kindle.

Perhaps most people would agree that Amazon argued some

reasonable points and its plan for splitting the pie is fair for all parties.

However, it seems that Amazon is taking too much of an optimistic view

for book sales in general, and their approach to lower e-book pricing to

$9.99 brings up many questions. For instance, Amazon does not discuss its

blog post on the record, but its post notes on the data based on aggregate

sales over a wide number of books in its Kindle store (Manjoo, 2014). This

suggests that price elasticity for specific titles varies widely depending on

the author, genre, length, or other factors. In other words, perhaps it may be

true that $9.99 is more appealing and better than $14.99, but those books

written by well-known authors, whose books may guarantee incredible

sales rate, say, books by Stephen King or J.K. Rowlings, wouldn’t they make

the most money at $10.99, $11.99, $12.99? (Manjoo, 2014) It does not make

much sense for those well-known authors to decrease the value of their

work when if fact their name and their work is worth more than $9.99. It also

does not make much sense to compare, say for instance, a 750-page book

by Stephen King than with a 100-pager by an unknown debut novelist. By

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devaluing the work of famous authors puts them in a somewhat awkward

position, for what exactly does being famous mean anymore? This shows

that Amazon does not care about nurturing the already established authors,

not to mention those authors who are just starting up and still need to be

nurtured to gain their fame. By pointing fingers at Hachette for sharing

too little revenue with their authors, Amazon make it seems like they are

fighting for authors when in reality it also does not think about the values

of authors’ work. Furthermore, when looking at the market for print books,

there are possibilities that some people who are willing to buy e-books

at $9.99 but not at $14.99 are from the market for print books. What if

the increased revenue that authors and publishers get from low-priced

e-books is outweighed by lowered revenue through cannibalized print sales?

(Manjoo, 2014) Amazon, which sells print books, would know whether this

is the case, but it mentions nothing about how low priced e-books might

threat or benefit the sales of print titles, which publishers and other brick

and mortars depend on as well. This again shows that Amazon does not

consider or give too much though on how the change could affect other. It

seems that Amazon is planning for something bigger. That is, to become

the dominant player with power within the book publishing industry.

It has in fact already happened when Hachette balked after Amazon

demands a larger cut of the price of Hachette books it sells, Amazon curtailed

sales of its 5,000 titles by halting pre-orders, delaying shipments, despite

plentiful supply, eliminating discounts and removing some promotional

pages entirely (Dent, 2014) What does this say about Amazon? It is obvious

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that Amazon’s is using this power as their corporate strategy to get what they

want; it’s a strategy amount to corporate bullying. Some might be tempted

to say that this is how business works, but can we believe that Amazon won’t

abuse this power in the long run? The answer is no, we can’t. According to

Krugman (2014), the Times’s Bits blog documented two Hachette books

that received very different treatment. Daniel Schulman’s Sons of Wichita

and Paul Ryan’s The way Forward are both listed as eligible for Amazon

Prime, but because Ryan was Mitt Romney’s running mate and is chairman

of the House Budget Committee, Amazon offers the free two-day delivery

whereas Schulman’s book the 2 to 3 weeks delivery. When Amazon calls

on Hachette for sharing so little revenue with their authors, knowing that

ultimately it is not its call, Amazon says it in ways that make them seem

like it is the hero to save the authors from Hachette. However, looking at the

case above, it is obvious that Amazon does not care about the authors. Its

“care” is depended on reasons in which believe could benefit them. So, how

is Amazon the hero for all authors by picking one over the other? Amazon

cannot be trusted, and giving it more power is just a risky decision.

It can be predicted, when in fact Amazon has already abused

the power it has, that if Amazon ends up winning the debut, all the key

players including the retailers, publishers, customers, and authors will be

greatly affected. For starters, lowering e-book prices could put more of their

competitors out of business. There is no point of selling any more print

books if no one is buying them. In addition, if publishers like Hachette

loses influence, or have less budget to nurture authors, literature could

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be ruled primarily by the forces of the economy, reducing the number of

interesting or cutting-edge books (Dent, 2014) Lower e-book prices may

sound good for consumers, but this would only mean saving a few dollars

per book; not to mention that most people don’t buy a ton of books every

year. These price savings aren’t likely to drastically improve many people’s

bottom lines. While e-book prices may drop if Amazon wins, readers could

be the losers in at least one way. They may have access to fewer new titles

and fewer new authors. According to Mulpuru-Kodali (as quoted from Hill,

2014) “Amazon has squeezed profit out of the market and is now trying to

shift the loss to their suppliers,” and “In the long run, squeezed suppliers

exit the market.” (¶9) So, with fewer publishers to produce books, consumers

may end up with less selection. Similarly, if publishers’ margins are hurt

by lower prices, they may be less willing to take risks on unproven authors,

which could result in fewer authors getting deals. Moreover, it has always

been known that the role Hachette is the producer and Amazon is the

distributor. But with today’s advanced technologies, any body can be a

producer. The only difference is that, as described by Stross (2014), “Hachette

is a value-added wholesale distributor: they supply editorial, production,

packaging, marketing, accounting, and sales services” (¶9) and pays the

author a percentage of the revenue. There is no argument that authors can’t

be producers themselves, in fact, they can all self-publish. However authors

may not have the knowledge, time, or money to go through each publishing

procedures, so they need specialists like Hachette to help them. Amazon is

not a value-added wholesale distributor; it is a retail distributor. They have

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a publishing subsidiary that allows anyone to self-publish, to use them as

a sales channel, and to even get paid quite well if they accept extremely

onerous terms, but they don’t do much else for authors. Authors would be

very vulnerable and will have exactly the same pressure that Hachette is

currently on the receiving end of, but with less recourse (Stross, 2014). If

publishers diminish, authors could be the ones suffering.

Regardless of how convincing Amazon’s proposal sound, there

are still questions around its ways of business tactic that are worth being

analyzed and thought about. Amazon’s way of business tactic could be

argued that it is not doing anything wrong, but its ways of pushing others

out of the book publishing industry is unethical. Hachette must try to seek

out ways to win the battle to save itself as well as saving book readers the

chance to have choices to access a variety of cutting-edge books. It is also

fighting to maintain a well balanced ecosystem that benefits all parties

involved, and most importantly saving the real values of authors’ work.

By analyzing, questioning, and seeing evidence of how Amazon is using

its business tactics to overpower others while abusing it power, it is quite

predictable that publishers, book readers, and authors will be at risk if

Amazon wins the battle and becomes the dominant player within book

publishing industry.

References

Dent, S. (2014, August 25). What you need to know about Amazon’s fight with e-book

publishers. Message posted to http://www.engadget.com/2014/08/25/amazon-

hachette-explainer/

Hill, C. (2014, August 17). Amazon vs. Hachette: Which side should you cheer for?

Message posted to http://www.marketwatch.com/story/amazon-vs-hachette-

which-side-should-you-cheer-for-2014-08-13

Krugman, P. (2014, October 19). Amazon’s Monopsony is Not O.K. Message posted

to http://www.nytimes.com/2014/10/20/opinion/paul-krugman-amazons-

monopsony-is-not-ok.html

Manjoo, F. (2014, August 1). Amazon wants cheaper E-Books. But should it get to enforce

prices? Message posted to http://bits.blogs.nytimes.com/2014/08/01/amazon-

wants-cheaper-ebooks-but-should-it-get-to-enforce-prices/?_php=true&_

type=blogs&_r=0

Masnick, M. (2014, July 30). Amazon To Hachette And Authors: Here, Let Us

Explain Basic Price Elasticity To You. Message posted to https://www.techdirt.

com/articles/20140729/16470728046/amazon-to-hachette-authors-here-let-us-

explain-basic-price-elasticity-to-you.shtml

Stross, C. (2014, May 26). Amazon: malignant monopoly, or just plain evil? Message

posted to http://www.antipope.org/charlie/blog-static/2014/05/amazon-

malignant-monopoly-or-j.html

Yuhas, A. (2014, August 12). Amazon vs Hachette: readers and authors take sides in

publishing dispute. Message posted to http://www.theguardian.com/books/2014/

aug/12/amazon-hachette-readers-authors-publishing-dispute