October 21, 2014
Amazon closes a contract with one major book publisher (not that one, though)
by Alex Shephard
Yesterday afternoon, Business Insider‘s Jilian D’Onofro reported that Amazon had signed a multi-year contract with Simon & Schuster, a Big 5 publisher that is not Hachette.
Information is still trickling out about the deal itself, but here’s what we do know.
It impacts the sales of both physical and digital books: Not quite a bombshell, but still interesting considering that the dispute between Amazon and Hachette largely seems to revolve around ebook sales.
It’s a multi-year deal: This is somewhat surprising, and seems like something of a concession from Amazon. Amazon doesn’t like long-term deals, as it likes to maintain flexibility. It’s unclear exactly how long this deal is, however.
Agency pricing is back, mostly: Agency pricing, which allows publishers to set the prices of books, has been a huge issue in the book world over the past several years and played a crucial role in U.S. v. Apple, an antitrust suit brought against Apple and five major publishers, including Simon & Schuster. Back in 2012, The Wall Street Journal provided this useful explanation:
[Agency pricing is] a term for a new way of setting e-book prices that came about as Apple prepared to introduce its iPad in 2010. Under the traditional “wholesale” pricing model, publishers had long charged booksellers around half the cover price of a book, leaving booksellers to discount the books if they wanted.
To sell more of its Kindle e-readers, Amazon offered many titles below cost, including best sellers at $9.99. Publishers disliked the strategy, fearing it would make it harder for them to sell hardcovers at higher prices. They also worried that Amazon, which at the time had an estimated 90% share of the e-book market, would gain too much bargaining power.
When Apple entered the fray, it offered publishers the ability to set their own prices. Under the Apple arrangement, known as “agency pricing,” publishers received 70% of the retail price and Apple took a 30% commission. But Apple also insisted that publishers couldn’t sell more cheaply to any of its rivals. The publishers then were able to impose the same model on Amazon.
Controls were placed on Simon & Schuster when they settled the antitrust charges brought against them in February of 2012—that settlement blocked the publisher from returning to agency for two years. That, of course, means that Simon & Schuster only recently gained the ability to return to agency pricing; the fact that they would do so immediately shows how important agency pricing is to publishers.
Publishers Weekly reports that Amazon will retain the ability to discount, though it’s unclear to what extent. It’s worth noting that the blog Dear Author more or less predicted that outcome last spring in a sharp post. That post also referenced this enlightening quote from Macmillan‘s John Sargent:
[W]hen Random House agreed to be bound by the Penguin settlement, it became clear that all five of the other big six publishers would be allowing the whole agent’s commission to be used as discount, and Macmillan’s stand-alone selling at full agency price would have no impact on the overall marketplace.
As Dear Author noted at the time, “agency pricing is only worthwhile if every one is doing it.”
The talks were short and seemingly sweet: Simon & Schuster was the second major publisher to engage in talks with Amazon and, if preliminary reports are to be believed, the negotiations between the two companies appear to have been the polar opposite of Amazon’s negotiations with Hachette. Those negotiations have dragged on for months and have been marred by nasty public flare-ups.
Amazon and Simon & Schuster had preliminary conversations in July. No one knows exactly what those were about, but signs at the time suggested they were working to avoid a drawn out dispute. It’s possible that those informal conversations helped make the deal mutually satisfactory.
By all accounts, the deal seems mutually satisfactory. According to Business Insider, “Simon & Schuster made its original offer and an agreement was reached after only a few tweaks by Amazon.” The Wall Street Journal talked to someone who said that the deal is “is good for both companies.”
It’s clear that what this means for Hachette is unclear: Judging by Sargent’s logic, the move to agency may be a good thing for Hachette. Or, at least, it is a good thing if Hachette also wants agency—judging by its involvement in what became U.S. v. Apple, it’s safe to say it probably does.
Still, this doesn’t necessarily give it leverage: it gives Amazon a deal to hang over Hachette’s head. The fact that the deal has been widely-reported as mutually satisfactory doesn’t do anything to discredit the narrative that Amazon has used nasty and brutal tactics against Hachette, but it doesn’t do anything to help it either.
As Andrew Rhomberg noted on Twitter, a “benchmark has been set” and that’s probably not great for Hachette’s position. In the pre-antitrust violation days, Rhomberg wrote, Hachette could have quietly talked to Simon & Schuster about the terms of its deal. That’s not possible anymore: now Amazon “divides and conquers.”
Meanwhile, rumors on the floor of the recent Frankfurt Book Fair of a deal between Amazon and the European publisher it was feuding with in a similar stand-off to that of Hachette, Bonnier, have been confirmed in reports such as this one.
Alex Shephard is the director of digital media for Melville House, and a former bookseller.