October 22, 2014

What’s the real story behind the Amazon-S&S deal?



Conspiracy theories about the surprising deal between Simon & Schuster and Amazon ran rampant in the publishing industry yesterday.

They started with the announcement of the deal itself—because the news broke in a story on BusinessInsider, a publication whose most significant investor is, well, Jeff Bezos. Even to those not prone to conspiracy theories, it was a pretty obvious leak from Amazon. And who was rewarded with the big scoop? A staffer who had earlier written BusinessInsider’s key report on the Hachette-Amazon fracas—a filing so mis-reported and so misleading (in Amazon’s favor) as to seem deliberately so.

Washington Post readers take note.

But that was just the obvious stuff. After that it gets complicated.

The main question, of course, is why the deal happened and what it might signify. Also, was it the same deal being offered to Hachette?

Popular thinking is it was not the same deal offered to Hachette. Why? What little information has been released about the details of both negotiations seems to indicate otherwise. In particular, S&S seems not to have taken the kind of agency splits—the percentages divided between authors, Amazon, and publishers—that Amazon is reportedly demanding of Hachette; the S&S deal is said to be more generous to the publisher than to Amazon. Whether or not that’s true, it should be: S&S is reportedly the architect of the deal. Initial reports indicate that an offer made by the publisher three weeks ago was accepted with only a “few changes.”

Amazon is not particularly well-known for generosity towards suppliers. The company has a reputation for getting exactly what it wants when it negotiates, whatever the cost. But it took this deal without a fuss. Why?

One reason may be that Amazon believed—sensibly—that it could not have withstood a second stand-off with a major publisher. Simply, the company has never gotten the level of non-stop, withering, mainstream criticism, nor the increased attention from lawmakers, that it’s gotten since it started delaying and disappearing Hachette’s books this spring. Yesterday started, after all, with a damning column in the New York Times from Nobel Prize-wining economist Paul Krugman, one of the most influential people so far to call for an antitrust investigation of Amazon. (Despite late-afternoon distraction of the news of the S&S deal, Krugman’s column was nonetheless the Times’ most emailed story of the day.)

So did Amazon finally blink? Did it simply give S&S a reasonable deal?

It should be noted that not many think this is possible. Amazon has always seemed like a company with no eyelids.

Well, what about the other half of the negotiation—did a terrified Simon & Schuster blink? Did it hurriedly accept one of Amazon’s typically draconian deals out of fear that if the company stood up against Amazon like Hachette did, the Department of Justice would prosecute it again for collusion? (After all, the DOJ sent letters to the Big Five publishers only four months ago warning that it would be closely watching them for any behavior smacking of collusion against Amazon.) There is no way to understate how paranoid the Big Five are of being prosecuted by the government again.

Or did S&S blink out of fear of something else, such as having to absorb the kind of losses Hachette is absorbing right now in its stand-off with Amazon? Like Penguin being sold down the river by Pearson before it, S&S is often rumored to be on the verge of being sold by the giant media conglomerate that owns it, CBS. Those giants like better margins than you get out of books.

Either way, it should be noted that many think the likelihood of S&S blinking is far more likely than the notion of Amazon blinking.

But let’s say S&S really did get at least a slightly better deal than is being offered to Hachette. So will Amazon now go back and offer the same terms to Hachette and finally end that stand-off?

Well … wouldn’t Amazon have done that already? Assuming Amazon would offer these “generous” terms to Hachette seems to misread the grudge match that dispute has become.

And meanwhile there are three remaining big publishers who haven’t yet come to terms with Amazon. Has Amazon now given them an opportunity to avoid the huge economic impact of what happened to Hachette, not to mention the opportunity to avoid the appearance of collusion, by letting them be able to say they struck a better deal? And wouldn’t signing those other publishers put Hachette in what would be for Amazon an enjoyable crunch?

My own theory is that S&S’s paranoia about the DOJ probably led the company to blow it, and thereby blow a golden opportunity for the entire industry to collude without actually colluding. It had Amazon between a rock and a hard place, under an avalanche of criticism and steadily intensifying scrutiny by both the media and lawmakers. There’s no way Amazon could disappear another major publisher’s books as with Hachette and not face much, much more serious consequences.

But in any event there’s one other theory that so far no one has mentioned, and it may be the one that explains everything: On Thursday, Amazon announces its quarterly numbers, and by all accounts they’re going to be bad. Really bad. Like, maybe their worst ever.

Last quarter was fairly disastrous for the company, but nothing compared to the predicted losses for this quarter—which it says could be as much as $810 million. If the losses are even close to that, the increasing pressure from Wall Street for the company to finally make some money—or at least staunch the blood flow—is only going to intensify. Amazon has never made an annual profit in the twenty years of its existence. Investors are starting to get antsier and antsier. It’s a textbook example of a bubble. If investors start to judge the company based on profit, instead of growth, the bubble could burst.

So maybe Amazon simply felt driven to show Wall Street that, while it may be losing money hand over fist, at least it’s not a pariah on a fast track to an antitrust investigation … the thing that could cause Wall Street to finally stop propping them up, and cause the bubble to burst.

So who knows? Maybe Amazon really did give S&S an offer it could live with … as opposed to its usual: an offer you can’t refuse.


Dennis Johnson is the founder of MobyLives, and the co-founder and co-publisher of Melville House.