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In the past, before the digital book era, publishers sold physical books to retailers at a mutually agreed upon price. Retailers then sold those books to the public at whatever price they deemed profitable. This is known as the wholesale model. (BTW, the use of loss leaders, in order to increase market share, is a common, and legal, marketing tool.)

Amazon singlehandedly created the market for ebooks. The Kindle, although expensive, became the most popular ebook reader with the widest selection of titles available. Part of the reason that consumers, like myself, purchased an early Kindle was the promise of New York Times bestsellers for $9.99 or less.

The big six publishers were very unhappy with this promise, fearing that it would depress the sale of their hardcover editions. They also feared the growing market share that Amazon enjoyed. So, five of them got together, meeting in private rooms at exclusive restaurants and via email and phone, and colluded with Apple to fix the prices of ebooks. No longer would Amazon be allowed to sell bestsellers for $9.99.

The publishers and Apple decided that the way to force Amazon to increase its prices was to change the way books were sold from a wholesale to an agency model. No longer would the publisher sell books to a retailer at a mutually agreed upon price, leaving the retailer the ability to determine the price to charge customers. No, now, with the assist from Apple's new iBookstore providing a cudgel, Amazon would be forced to allow publishers to determine the final product price and would take a 30% commission.

Over three days in January, 2010, the publishers all signed agency model agreements with Apple. They then went to Amazon and demanded the same business model or they would refuse to sell any books to Amazon. Amazon signed the contracts and consumers paid more for ebooks, which was the intent of the conspiracy.

"We'll go to [an] agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway."
-Steve Jobs


From the DOJ Civil Complaint (pdf file)

The Department of Justice brought suit against the publishers and Apple for restraint of trade. The publishers all settled out of court, and Apple lost its case last summer. Part of the settlement between the DOJ and Hachette (as well as other publishers) was that for two years the ebook retailers were allowed to discount ebook prices by as much as 30%. The settlements, reached in 2012, are now expiring.

(A companion suit, brought by State Attorneys General and Class Action Plaintiffs, was also settled and resulted in credits to consumers who purchased ebooks. See eBooks: About that Credit You Got From Amazon for further details.)

Hatchett is the first publishing house negotiating contract terms with Amazon since the Apple case was decided. It is unknown if Hachette is trying to once again impose an agency model, whereby Amazon would not be allowed to set the price for the ebooks it sells, or there is some other sticking point in the negotiations; neither side is releasing any details.

This background is essential to placing the current contract dispute between Hachette and Amazon into its proper context. As the first publishing house to negotiate sales terms after the restraint of trade suit, a lot is riding on the outcome. And it does not just involve Amazon as the bully who needs to be kept in line for the greater good.

Although admittedly, a simple finger pointing would be easiest, the reality is, as always, more nuanced than a bumper sticker.

Before you jump on the "I hate the evil bully Amazon" bandwagon, remember that Hachette is one of the publishers responsible for the ridiculous artificially inflated prices that we pay for ebooks. They forced the prices up, not because ebooks required more dollars to make them profitable, but so that consumers would not be able to find a more attractive and affordable alternative to the hardcover editions of the same books.

Also keep in mind that the increase in prices via the use of the agency model did not enrich the writers. According to JA Konrath, the agency model actually hurts the authors. At the very top, they may be getting as much as a 25% royalty, although generally it is around 12.5%. The publishers are pocketing the rest.

So, Hachette and Amazon are trying to hammer out a contract that may very well determine how all books are sold online. This is simply because Amazon sells 41% of all new books units and the Hachette terms will likely be used by other publishers when it is their turn to re-negotiate their contracts with Amazon.

During the negotiations, there has been a noticeable delay in shipping books published by Hachette and purchased on the Amazon website. Many of the books that are being offered are being offered at the publisher's suggested retail price without discount. Amazon no longer offers pre-orders on any Hachette book. On May 27, 2014, Amazon explained the situation to its customers:

We are currently buying less (print) inventory and "safety stock" on titles from the publisher, Hachette, than we ordinarily do, and are no longer taking pre-orders on titles whose publication dates are in the future. Instead, customers can order new titles when their publication date arrives. For titles with no stock on hand, customers can still place an order at which time we order the inventory from Hachette -- availability on those titles is dependent on how long it takes Hachette to fill the orders we place. Once the inventory arrives, we ship it to the customer promptly. These changes are related to the contract and terms between Hachette and Amazon.
Amazon also included the following message:
If you do need one of the affected titles quickly, we regret the inconvenience and encourage you to purchase a new or used version from one of our third-party sellers or from one of our competitors.

We also take seriously the impact it has when, however infrequently, such a business interruption affects authors. We've offered to Hachette to fund 50% of an author pool - to be allocated by Hachette - to mitigate the impact of this dispute on author royalties, if Hachette funds the other 50%. We did this with the publisher Macmillan some years ago. We hope Hachette takes us up on it.

Yes, the terrible monopolist-in-waiting is suggesting that its customers turn to its competitors to buy the books that Amazon is unable to provide.

Hugh Howey has suggested a sound reason for the delay in shipping of Hachette books by Amazon. Until the contract is negotiated, Amazon does not know for certain that it will be allowed to continue to market Hachette books, so perhaps they have decided not to stock books they may not be able to legally sell. That means that Hachette must ship books that are ordered to Amazon for shipment to customers. Hachette is known within the book selling industry as being very slow to deliver books and until recently required bookstore owners to telephone their orders in to an order taker by individual ISBN numbers and were only able at the time of the order placement, to learn whether or not the book was in stock.

For Amazon to intentionally delay shipment of specific books published by a single publishing house would be to throw a monkey wrench into its own assembly line process of filling orders. Yes, it could do so digitally, but it would hardly make any sense to disrupt its order processing when it is much easier to allow Hachette to be responsible for shipping any books that are ordered. This would also serve to remind Hachette, as well as the consumer, of the service that Amazon is providing.

Why are some authors beating up on Amazon? Why are James Patterson, Malcolm Gladwell, Scott Turow and Stephen Colbert piling on, while still allowing Amazon to sell their books? If Amazon is the evil malignant force that will destroy literature, according to James Patterson, why is he not refusing to have anything to do with the e-tailer? (He did write thirteen books last year, all available at Amazon.)

These are questions posed by Barry Eisler in an opinion piece that appeared in the Guardian on June 4. He points out that when Barnes & Noble participated in a similar dispute with Simon & Schuster in January of 2013, there was hardly any notice taken, much less the pile on that we have seen against Amazon.

He also notes that while Amazon is considered evil and malignant for apparently refusing to stock Hachette books, no one seems upset that books published by Amazon, or books that are self-published, are not stocked at Barnes & Noble or other brick and mortar stores. No one is claiming that Amazon writers are being treated unfairly through this boycott, although they are.

He writes:

I imagine, for example, that James Patterson really does care passionately about books. But then he conflates an important function – publishing books – with the entity currently providing that function (the legacy industry run by New York's "Big Five" publishing houses). Whatever challenges he then sees facing the legacy industry (no bookstores! no libraries!) then become challenges to literature itself (no books!). That's a logical falsehood, of course – akin to believing a challenge to the horse-and-buggy industry is a challenge to transportation itself – but it's a scary thought and therefore produces an extreme defensive response (government, do something!).

But none of this really makes sense. Literature was being written long before the Big Five began running the industry like a cartel (there's a reason they're referred to collectively – it's how they function). And it will go on being written long after the Big Five either have evolved or been displaced by something better. Why? Because literature isn't "produced by publishers", as Patterson claims. Rather, it is written by authors.

Then there's the human instinct to grapple with impersonal forces (here, digital book distribution) by putting a human face on them (that of Jeff Bezos). I came across this reflex most recently in an article in the current issue of the Economist, which parroted the zombie meme that "Amazon put many bookstores out of business". This isn't so much a simplification as it is an outright distortion. Because what's happening to bookstores – and to the publishing business overall – isn't Amazon; it's technology. Arguing otherwise, to extend my previous metaphor, is like accusing Henry Ford of disrupting the horse-and-buggy industry while ignoring the advent of the internal combustion engine.

The introduction of digital books was revolutionary. Unfortunately, the only revolution that the legacy publishers appear to recognize happened in 1776. Sooner or later they are going to have to come to terms with the fact that the public wants to read books in an electronic format. And that a book reading public is likely to be able to figure out that ebooks are much cheaper to publish than are paper books and should be priced accordingly. You know, you teach people to read and there is no telling where that will take them.

Clearly, I do not buy into the argument that many have made that Hachette is fighting the good fight on behalf of the publishing industry against a super-sized e-retailer who is trying to destroy the publishing industry and take over the world. Amazon is providing competition to the big five publishing houses, but not all writers, including Kossack PaulLev, are dissatisfied with that, nor should the legacy publishers be allowed to stifle competition.

In the words of Hugh Howey

Why show support for a corporation that may lower royalties to 30% in the future when you can celebrate a corporation that pays 17.5% today? Why show support for a corporation that may raise prices in the future when you can champion a corporation that colludes to raise them today? The groupthink and absence of reason is baffling.
It is possible that Amazon is attempting to take over the world; the way to stop that from happening is to refuse to allow Amazon to sell your product. But to demand they only sell your product on your terms, still allows them to take over the world, although, conveniently, it does protect your profit margin.

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