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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