Amazon wins, Macmillan loses, and more

The outlines of the conventional wisdom on last week's Amazon-Macmillan contretemps are already taking shape: most commentary I've seen falls somewhere along the lines of "Amazon had to be stopped; Macmillan took a huge risk and drew a line in the sand; Amazon blinked; Macmillan stuck to its guns and won."

I love a good David-defeats-Goliath story as much as anyone. This isn't one. And the winners and losers don't fall neatly along those lines. Here's my take on how everyone affected by this little dust-up comes out:

John Sargent. It's been a tough stretch for the Macmillan chief. Several months ago, he announced that Macmillan would lower the royalty rate on e-books, and was roundly booed by agents, authors, and the blogosphere. He has been quoted frequently enough about piracy to sound mildly obsessed; he sent Brian Napack to Digital Book World to deliver a disastrous, Ahab-like screed against pirates, calling for an industry-wide jihad, and was met with silence, about the only thing worse than boos. And then a little over a week ago he found himself in Seattle, making what he had to have assumed was merely the first overture in a renegotiation of Macmillan's e-book terms, expecting Amazon to reject his overture, sure, but to engage in a conversation...and not to hit the nuclear launch button as its first response. Yet faced with some really frightening news--its most important account gone missing, very publicly, without warning!--Sargent was absolutely masterful at working the press release war over the next week. His open letters in Publishers Lunch hit exactly the right notes with agents, authors, and other publishers, while seeming conciliatory toward (yet not humbled by) Amazon. And now that it appears Amazon will indeed concede a new agency relationship on Macmillan's e-books, Sargent is being hailed as the savior of the industry. Quite a coup.

Macmillan. So Sargent won last week. Did his company? Not that I can see. What Macmillan reportedly won was a new 70-30 agency relationship on e-books, replacing (for e-books) the traditional split for print books that's been in place for decades. (Remember: Amazon's $9.99 price point on new releases frequently means that Amazon takes a loss on each unit sold--publishers are being paid off the hardcover retail price, not the $9.99 price Amazon established.) When I first heard what Macmillan wanted I thought it sounded like an obviously better deal, but I've run a few scenarios on spreadsheets, and more often than not Macmillan actually nets less per unit in the end under the agency model than the company nets now. That's right: Macmillan has fought this fight in order to make less on each sale! This doesn't hold true at every price point; it doesn't hold true for every kind of book; and I don't know the structure of any actual Macmillan contract, just their public, "standard" deal. But it appears to be true often enough and at a wide enough range of price points that it's hard not to say that, in the short term at least, Macmillan has made a pretty major error, and is costing itself (and likely many of its authors) a significant amount of money.

Ah, you are saying, but under an agency model Macmillan controls pricing, and can tell Amazon that the price of an e-book must be higher than $9.99. Well, two problems with that. First, I'm extremely skeptical that Amazon will accept any limitation on its ability to discount. Second, Macmillan can try to control e-book pricing all it wants, but in the end the market is going to settle on an e-book pricing range that may or may not resemble the scheme Macmillan has in mind--consumers collectively will decide what they are going to pay, not Macmillan's marketing department. This entire strategy may look like a romantic "we must save our industry" notion in New York. To me, it just looks like a lot of money left on the table in the short term.

Macmillan's authors. This is an easy one: Macmillan's authors got hosed.

First, the buy buttons were gone for a week.

How'd you like to be Andrew Young? What a weird couple of years it's been for this guy: he was one of John Edwards's most trusted campaign aides, so trusted that Edwards chose him to keep the wraps on the ongoing affair Edwards was having during the campaign--holding the secret cell phone Edwards used to talk with her, coordinating their trysts, even at one point having the other woman move in with his own wife and kids for a spell. Young does what every American today would apparently do: he writes a tell-all account. Spends a year writing, editing, working with the marketers and publicists, planning the big launch, the talk show circuit, the cable political show appearances--gotta get that launch right, only happens once, can't screw it up...so The Politician comes out...Young does everything perfectly, the book shoots to the top ten on the bestseller lists...and then, WHAM! gone from Amazon, just like that. Can you just imagine Young's call to his agent last Saturday morning? "Well, yeah, I know, apparently the CEO of the publishing house had a little argument with Amazon last night." D'oh!

Or Hillary Mantel. Wolf Hall, substantial book, wins the Man Booker, great stuff. OOPS!: can't buy it on Amazon, sorry, don't know when it will be back up, well, maybe you could try The Other Boleyn Girl instead while we're waiting for it to go back up...

Second, authors are probably going to make less under the agency model.

The reaction from Macmillan authors (and authors in general) across the blogosphere has largely been hilarious (John Scalzi's great blog especially) but weirdly forgiving of Macmillan and overwhelmingly critical of Amazon. Not surprising: authors aren't usually great with a spreadsheet, but ARE really good with finding the storyline, and as I wrote above this story seems so much like a David-slew-Goliath thing that most authors aren't getting to the facts. Which are: a lot of authors lost a lot of money in this dust-up, and (if my financial assumptions are right) many will continue to lose money in the near future from the switch to the agency model. It's extremely complicated, with many factors and variables, so some authors are going to come out better--but just as many, especially authors of extremely timely or topical books that won't have much of a shelf life, will lose out.

Oh, authors, did you really think Macmillan was doing this for you? That's so...adorable.

Amazon. Let's review Amazon's path to world domination...er, domination of the e-book market. First: become the largest online book retailer. Second: create new ebook hardware, and understand what Kindle's predecessors lacked--the ability to immediately purchase any e-book from anywhere at anytime--and build that feature in to the hardware. Third: essentially CREATE a new market for e-books, by establishing a wildly attractive price point ($9.99) so far below the hardcover retail price that consumers see that they will pay for their new hardware just from the money saved on the first couple dozen book purchases. Sure, that price point is actually a loss leader--Amazon will lose money on many of those sales, and pay publishers and distributors as if those sales were of print books, not e-books--but it drives the sale of hundreds of thousands of units of expensive hardware in a very short amount of time, and locks all the users of that expensive hardware into buying from Amazon in perpetuity.

So: that brings up to perhaps six months ago. At which point a few things began to happen to threaten Amazon's e-book hegemony: a slew of new e-readers; multiple initiatives from Google; e-book outlets like Scrib'd and Smashwords; then the topper, Apple's iPad announcement. People talked openly about what would be the Kindle killer; if not the iPad, people seemed more to accept that Kindle was going to be a transition to something more. Amazon gave its first indication of knowing the jig was up when it rushed Kindle into the UK--it smacked of a company trying to squeeze the final drops out of a scheme it saw as having limited viability.

Yet Amazon had this problem. It had fought hard for the $9.99 price point for e-books. But all these other outlets--Apple's anticipated bookstore, BN.com, the smaller online retailers--were going to follow a different model: they were all going to an agency model, they were going to let the publishers set the e-book price, and there was the potential that they were going to have titles on those terms before Amazon would be allowed to have them. Along comes John Sargent, and voila!, the problem is solved: Amazon can move to an agency model one publisher at a time, maintain most titles at the same pricing level, slowly change the mix of pricing but not completely disrupt the experience until one day two years from now all of a sudden there are many books at $9.99 but just as many at a bunch of different price points--yet Amazon is not to blame for this switch by loyal Kindle users, it's the publishers that made Amazon increase the prices. Amazon gets to stop losing money on most e-book purchases, and actually MAKE money on every sale. And, oh yes, those Kindle users now have no reason to abandon Amazon--the publishers have ensured that everyone uses the same agency model and essentially prices everything exactly the same--so all the loyalty Amazon has purchased via loss leaders the past two years has not slipped away.

Amazon's handling of the PR aspects of this past week's fight seemed atrocious. But it's of a piece with their approach to e-books and their approach to individual publishers. They've already moved on--they realized six months ago that the Kindle was going to be just one of many e-readers, that their pricing probably couldn't hold, and that the agency model was probably going to prevail. This wasn't a fight to Amazon. It was a minor irritation, if that, one that didn't even merit a comment from a C-level executive. It took minutes to dump the Macmillan titles' buy buttons...and yet it took a week to restore them. That's no accident. That's a naked show of power.  If you're the head of another Big Six house, do you really want to be the next to fly up to Seattle, just, you know, for a little harmless conversation? No chance. What this means is that the transition to an agency model will be relatively slow, and it will move on Amazon's timetable.

Agents. I don't pretend to understand what agents really have been pushing the Big Six houses to do on e-books, but my guess is this: agents want certainty. Agents live on advances, and advances hinge on accurate assessment of risk, and accurate assessment of risk requires knowing each of the numbers to plug into a P&L. And the unknown number has been the e-book price. If I'm an editor but I don't know the price an e-book will sell for (that is, if I don't know what crazy Amazon is going to do with the price), I can't know the net, to the publisher or to the author--so how can I calculate an advance and make an offer? I have to be conservative. There's nothing agents hate more than conservative offers. So moving to the agency model, even if it seems that authors will take a hit in the short run rather than continue to benefit from Amazon's profligate ways, means that advances will be healthier. Which means that agents will be wealthier.

The other Big Six houses, and any other publisher not yet going to the agency model. Hachette announced late last week that they too would probably pursue the agency model with Amazon. Eventually the agency model is going to be the industry standard for e-books. It may take a year to get there, maybe two, maybe less--as I said, on Amazon's schedule. Macmillan was willing to take the hit to go first; perhaps Hachette will go second; but sooner or later this will be Amazon's deal with everyone.

So: "fighting for the future of publishing" is no longer a reason to fight Amazon's willingness to sell books for less money than they pay the publisher. And the pricing of e-books is settled--or at least it's settled enough, it has a known floor, a known lowest driver of net that can be plugged into a P&L.

If that's true, then wouldn't the savvy publisher take full advantage in the short term of Amazon's willingness to take a loss and pay the publisher more, and delay being included in the change to agency model as long as possible? To my mind, the other winner in last week's little fight is the last publisher standing, still taking advantage of the "old" model while free riding on the efforts of the other houses.


There you have it--not surprisingly me and the ol' conventional wisdom don't exactly see eye to eye...let me know where I've gone astray in my analysis...:)