A Few Thoughts on the Ongoing Debate Between Hachette and Amazon

You've probably heard of the ongoing debate between Hachette and Amazon, so I'm not going to give you the blow-by-blow. Suffice it to say that these two behemoths have been wrangling over terms for several months, and a long list of authors have been caught in the crosshairs. Tensions flared this week when Douglas Preston started circulating this open letter to readers and a group of self-published authors responded with a petition of their own.

Before I go any further, I should point out that while I'm not a Hachette author, I have sold books to two traditional publishers, so if I do have sympathies, they probably lie on Hachette's side. That said, I've tried to tackle this topic as fairly as I can (but I AM a writer, so sometimes I get a little carried away--consider yourself warned).

Amazon's MO

Contrary to popular opinions, I don't think Amazon is either the savior of the publishing industry or the greasy-haired conman they're sometimes made out to be. They're a business, so they're out to make money however they can. One way they make money is by selling books, and they sell LOTS of them. They sell so many books--and TVs, hot pads, and jet packs--that they can afford to sell books for not very much money. Sometimes they even sell books for less than they paid for them.

If a seller does this with the specific intent to drive other sellers out of business, it's called predatory pricing, and it's illegal under most countries' antitrust laws. Now, of course, I can't speak to Amazon's intent, but from the outside looking in, it does seem like there might be a case.

The Thing About Royalty Rates

One of the first points raised by the petition in question has to do with royalty rates. To quote directly from that petition:

New York Publishing once controlled the book industry. They decided which stories you were allowed to read. They decided which authors were allowed to publish. They charged high prices while withholding less expensive formats. They paid authors as little as possible, usually between 2% and 12.5% of the list price of a book.

Amazon, in contrast, trusts you to decide what to read, and they strive to keep the price you pay low. They allow all writers to publish on their platform, and they pay authors between 35% and 70% of the list price of the book.

Though the facts themselves are right, I disagree with the way that they've slanted these facts. A traditional publisher--and Amazon runs several of these--pays for everything upfront, including the editors, the designers, the sales reps, the publicists, and the author himself or herself. From a monetary perspective, the author risks NOTHING. Any money he or she makes at this point is pure profit, since he or she has incurred no costs. (Okay, okay, the author has incurred SOME costs, but they're opportunity costs at this point, and accountants never take those into account.) The royalty rate that the publisher pays reflects this balance of risk.

(Is it the right royalty rate? I don't know. But the economist in me has to believe that if publishers were unnecessarily dinging authors, there would be room in the market for another publisher to come in and pay better rates to produce the same product. Smaller presses attempt to do this--and some offer rates that are significantly better than the ones you can get at a larger house--but their resources are often more limited. For instance, while you can buy a HarperCollins or Penguin Random House title in virtually any bookstore in the country, you can't always find books from a randomly chosen small press.)

By contrast, Amazon invests very little in the self-published titles they offer for sale. They provide a virtual storefront from which self-published authors can peddle their wares (and perhaps some free advertising), but these services cost little to no money on their end. From a monetary perspective, Amazon risks NOTHING. Any money they make at this point is pure profit, since they haven't incurred any costs. When you think about it that way, it's kind of surprising that they find reason to keep anywhere from 30% to 65% of the list price.

Amazon's Position in the Market

It's undeniable that the rise of Amazon was the major contributing factor to the rise of the e-book. Someone was going to develop the technology sooner or later, so why not Amazon? We're dreamers, believers, so even though I still don't own a smartphone, I support innovation.

I wasn't really plugged into the industry when Amazon first came to power, but it seems like most publishers welcomed Amazon--at first. They were going to single-handedly save the publishing industry, give book lovers greater access, and woo new readers with their cheap wares and quality customer service. But what started as a snowball quickly morphed into an avalanche, and as Amazon's market share soared, publishers started to see the writing on the wall.

Is it great to have a seller who can cheaply and efficiently get your goods into the hands of consumers? Absolutely. Is it great to have ONE seller who's forced its competitors out of the market? Not so much. And that's where we're headed. Borders has already fallen. Barnes & Noble isn't looking so great. Independent booksellers have made up some ground in the very recent past, but they'll never be able to compete on price or distribution (so they'll have to find other ways to market themselves--and in many cases, they have, which is why they've been doing better lately).

The Power of Price

Which brings me to the next issue: price. Prices do lots of great things in the market. They ration scarce resources and act as signals to consumers. I've already addressed Amazon's reasoning for keeping the price of books low, so why do traditional publishers want to keep the price of books high (or at least higher)?

The truth is, I don't know. Some people would have you believe they don't want you to have easy access to books--or, in other words, that they're using prices to ration scarce resources (which, in some ways, they are)--but I suspect it has more to do with the fact that they can't pay everyone who needs to be paid to produce the caliber of books that they're used to producing for $2.99 (or even $4.99). Also, as I mentioned above, prices act as signals to consumers, who are confronted with literally tens of thousands of books to choose from. With so many choices (and I'm not bashing on choices), price is one way that traditional publishers can set their books apart.

The End

I won't address the rest of the petition's assertions, since they're less about facts and more about feelings. The writers offer explanations for Amazon's actions regarding Hachette titles, so I'll let you decide what you want to believe. But I do think it's important to have these conversations, because they WILL shape the future of the publishing industry, and I think we can all agree that we want it to be around for a very long time.