Posts Tagged ‘Macmillan’

Publishing’s Ecosystem on the Brink: The Backstory

Posted: Tuesday, January 31st, 2012
authors_guildAuthors GuildReposted from The Authors Guild.


Sub­tlety is out. Bloomberg Businessweek’s Jan­u­ary 25th cover shows a book engulfed in flames. The book’s title? “Ama­zon Wants to Burn the Book Busi­ness.” A tow­er­ing pile of books dom­i­nates the front page of Sunday’s NYT Busi­ness Sec­tion. The pile starts well below the fold (print edi­tion), breaks through the sec­tion header at the top of the page, and leans pre­car­i­ously. Books are start­ing to tum­ble off. “The Bookstore’s Last Stand,” reads the headline.

These sto­ries cap­ture pretty well the state of book pub­lish­ing: this appears to be no ordi­nary, cycli­cal cri­sis that future authors and pub­lish­ers will shrug off. To under­stand how the book indus­try got into this predica­ment, how­ever, a broader per­spec­tive may be needed. The cover story of February’s Harper’s Mag­a­zine pro­vides that, dis­cussing a fun­da­men­tal shift in the fed­eral approach to antitrust law that’s affected book­selling and count­less other indus­tries. It’s a story that hasn’t pre­vi­ously been told in a major peri­od­i­cal, to our knowledge.

We’ll get to that in a moment. First, let’s set the stage with the other two stories.

Burn­ing Down the Houses

Brad Stone’s Busi­ness­week story dis­cusses Amazon’s cam­paign to pre­vent other book­sellers from secur­ing a foothold in the boom­ing e-book mar­ket and the company’s furi­ous reac­tion to Ran­dom House’s deci­sion last March to adopt agency pric­ing for e-books, just as five of the other “Big Six” trade pub­lish­ers had the pre­vi­ous year. (Before agency pric­ing, Ama­zon could sell e-books from Big Six pub­lish­ers at deep dis­counts, tak­ing losses at a rate that Barnes & Noble could never afford to match. See How Apple Saved Barnes & Noble, Prob­a­bly for more.)

Mr. Stone writes that after Ran­dom House’s March 2011 agency-pricing announcement,

Ama­zon could no longer run the best play out of its play­book – slash prices and sus­tain losses in the short term to gain mar­ket share over the long term. … “For the first time, a level play­ing field was going to get forced on Ama­zon,” says James Gray [of UK book­seller John Smith & Son and for­merly of Ingram Con­tent Group]. Ama­zon execs “were basi­cally spit­ting blood and nails.”

Amazon’s response to Ran­dom House’s move was stun­ning and swift:

The next month, an Ama­zon recruiter sent an e-mail to sev­eral edi­tors at big pub­lish­ing houses, look­ing for some­one to launch a new New York-based pub­lish­ing imprint. “The imprint will be sup­ported with a large bud­get, and its suc­cess will directly impact the suc­cess of Amazon’s over­all busi­ness,” read the e-mail, which was obtained by Bloomberg Businessweek.

Even with a large bud­get, directly affect­ing the suc­cess of Amazon’s over­all busi­ness is a tall order for a new pub­lish­ing imprint. Ama­zon pulled in well north of $40 bil­lion in rev­enue last year (final num­bers aren’t yet in), dwarf­ing the com­bined rev­enues of the Big Six publishers.

Lur­ing a sub­stan­tial con­tin­gent of best­selling authors away from the Big Six seems the only plau­si­ble route for an imprint to affect Amazon’s over­all busi­ness. Ama­zon needed some­one with a sub­stan­tial indus­try pedi­gree to pull this off. Ama­zon quickly – in time for last spring’s Book Expo Amer­ica — landed just the man for the job: Larry Kir­sh­baum, for­merly of Warner Books.

Just three months after Ran­dom House’s announce­ment, Ama­zon had all but declared war on the six unruly mem­bers of its book sup­ply chain. Jeff Bezos had $6 bil­lion in cash, the patience to absorb losses for years, and a for­mer Big Six chief to lead the fight. The long-running behind-the-scenes bat­tle for con­trol of the pub­lish­ing indus­try had finally bro­ken into full pub­lic view.

Barnes & Noble’s New Role: The Contender

While Ama­zon directly threat­ens tra­di­tional pub­lish­ers with its new imprint, it con­tin­ues to under­mine the ecosys­tem on which book pub­lish­ers, and most new authors, depend. Julie Bosman describes this well in her NYT arti­cle, focus­ing on the last remain­ing brick-and-mortar book­seller with nation­wide clout:

With­out Barnes & Noble, the pub­lish­ers’ mar­ket­ing propo­si­tion crum­bles. The idea that pub­lish­ers can spot, mold and pub­li­cize new tal­ent, then get some­one to buy books at prices that actu­ally makes eco­nomic sense sud­denly seems a reach. …

What pub­lish­ers count on from book­stores is the brows­ing effect. Sur­veys indi­cate that only a third of the peo­ple who step into a book­store and walk out with a book actu­ally arrived with the spe­cific desire to buy one.

That dis­play space they have in the store is really one of the most valu­able places that exists in this coun­try for com­mu­ni­cat­ing to the con­sumer that a book is a big deal,” said Made­line McIn­tosh, pres­i­dent of sales, oper­a­tions and dig­i­tal for Ran­dom House.

Estab­lished authors, for the most part, do fine sell­ing through online book­stores. It’s new authors who lose out if brows­ing in book­stores becomes a thing of the past. Advances for unproven and non-bestselling authors have already plum­meted, by all accounts. Lit­er­ary diver­sity is at risk.

To under­stand just how pre­car­i­ous things are, real­ize that last year’s Bor­ders’ bank­ruptcy rep­re­sented an enor­mous reduc­tion in brows­ing space, shut­ter­ing 650 stores. (B&N has about 700 stores.) One ben­e­fit of the loss of Bor­ders should have been a short-term lift to B&N’s 700 stores and the 1,500 or so remain­ing inde­pen­dent book­stores. B&N’s sales were indeed up in the nine weeks before Christ­mas, Ms. Bosman reports. How much? Bor­ders’ col­lapse led to a bounce of just four per­cent, com­pared to the prior Christ­mas. That’s what’s pass­ing for good news in brick-and-mortar book­selling at the moment.

There is a bright spot, how­ever. Barnes & Noble, led by William Lynch, has exceeded all expec­ta­tions in the past two years with its launch of the Nook. B&N’s 300-member Sil­i­con Val­ley office, after giv­ing Amazon’s Kin­dle devel­op­ers a two-year head start, beat Ama­zon to the tablet mar­ket by fully twelve months, and intro­duced what’s gen­er­ally seen as the state-of-the-art e-ink reader, the Nook Sim­ple Touch, eight months ago.

B&N, in other words, has been out-engineering Ama­zon, and Ms. Bosman’s story is the best account we’ve had of B&N’s efforts. In the process, B&N has seen its e-book mar­ket share climb from zero, two Christ­mases ago, to roughly 27% today.

B&N remains vul­ner­a­ble, how­ever. The engi­neer­ing race against Ama­zon con­tin­ues, and Ama­zon has lever­age for acquir­ing con­tent for its Kin­dle (see Con­tracts on Fire: Amazon’s Lend­ing Library Mess) that B&N can’t match. And, crit­i­cally, one tool that should help B&N, our antitrust laws, is instead poised to undo it.

This brings us to an unlikely tale of books, chick­ens, beer, and a Sil­i­con Val­ley gentlemen’s agreement.

The Back­story: Ama­zon, Chicken Proces­sors & Sil­i­con Valley

Harper’s cover art rivals Businessweek’s: an enor­mous busi­ness­man wear­ing a gray pin­striped suit is prepar­ing to lit­er­ally eat the com­pe­ti­tion, a jumbo hand­ful of gray-suited men and women. In the arti­cle, “Killing the Com­pe­ti­tion: How the New Monop­o­lies Are Destroy­ing Open Mar­kets,” (key excerpts at link, full arti­cle by sub­scrip­tion) Barry Lynn views the state of book pub­lish­ing through a dif­fer­ent lens.

Mr. Lynn makes the case that Amazon’s dom­i­nance isn’t just a story of an indus­try dis­rupted by online com­merce and dig­i­tal upheaval, it’s about the aban­don­ing of New Deal era pro­tec­tions of retail­ers in 1975 (pro­moted by back­ers as a means to fight infla­tion, says Mr. Lynn) and what he por­trays as a shift in 1981 in the Jus­tice Department’s inter­pre­ta­tion of antitrust law based on “Chicago School” the­o­ries of effi­ciency and con­sumer wel­fare. The upshot appears to be that non-consumer mar­kets (business-to-business mar­kets and labor mar­kets) are often insuf­fi­ciently pro­tected from monopolies.

To a chicken grower, for exam­ple, the rel­e­vant mar­ket isn’t restau­rants or house­hold con­sumers of chicken, it’s the mar­ket of chicken proces­sors. Through a vari­ety of machi­na­tions, includ­ing long-term con­tracts and the phys­i­cal place­ment of pro­cess­ing plants (think base­ball, before free agency), chicken grow­ers now rou­tinely have a mar­ket of only one proces­sor to sell to.

Chicken grow­ers own their land, build­ings, and equip­ment, and all of the debt and risk that go with them, but these entre­pre­neurs have no real con­trol over their eco­nomic lives. Grow­ers buy their chicks and feed from their poul­try proces­sor, for exam­ple, and proces­sors often require grow­ers to make new invest­ments in build­ings and equip­ment. The proces­sors, Mr. Lynn seems to sug­gest, have some­thing much bet­ter than mere cap­i­tal: the eco­nomic power to dic­tate how oth­ers use theirs.

It’s not just chicken grow­ers who face con­strained mar­kets, Mr. Lynn writes. In free-wheeling Sil­i­con Val­ley, com­puter engi­neers and dig­i­tal ani­ma­tion work­ers employed by Apple, Google, Intel, and Pixar, among oth­ers, were sub­ject to a secret agree­ment not to bid on each oth­ers’ employ­ees, accord­ing to a Jus­tice Depart­ment law­suit filed, and set­tled, in 2010. (On Fri­day, for­mer employ­ees of some of the com­pa­nies filed an antitrust law­suit in fed­eral court in San Jose based on the Jus­tice Depart­ment investigation.)

It’s even hit beer. The 1,750 U.S. micro­brew­ers may appear to oper­ate in a com­pet­i­tive envi­ron­ment, but they nearly all sell through two dis­trib­u­tors: ABI and Miller­Coors con­trol 90% of the dis­tri­b­u­tion market.

For book pub­lish­ers, the rel­e­vant mar­ket isn’t read­ers (direct sales are few), but book­sellers, and Ama­zon has firm con­trol of bookselling’s online future as it works to under­mine bookselling’s remain­ing brick-and-mortar infra­struc­ture. Ama­zon con­trols every grow­ing seg­ment of the indus­try: online phys­i­cal books, down­load­able audio books, online used books, and e-books. Ama­zon com­mands about 75% of the online mar­ket for print books, and 60% of the e-book mar­ket (a per­cent­age that decreased from Amazon’s reported 90% two years ago, as a result of agency pricing).

Mr. Lynn reports on a con­ver­sa­tion with the head of one of the largest pub­lish­ing houses in the U.S.:

He explained that Ama­zon was once a “won­der­ful cus­tomer with whom to do busi­ness.” As Jeff Bezos’s com­pany became more pow­er­ful, how­ever, it changed. “The ques­tion is, do you wear your power lightly? … Mr. Bezos has not. He is reck­less. He is dangerous.”

The head of a small pub­lish­ing house in Man­hat­tan, Mr. Lynn reports, was even more blunt:

Ama­zon is a bully,” he said, his voice ris­ing, his cheeks flush­ing. “Any­one who gets that pow­er­ful can push peo­ple around, and Ama­zon pushes peo­ple around. They do not exer­cise their power responsibly.”

Nei­ther man allowed me to use his name. Ama­zon, they made clear, had long since accu­mu­lated suf­fi­cient influ­ence over their busi­ness to ensure that even these most ded­i­cated defend­ers of the book – and of the First Amend­ment – dare not speak openly of the company’s predations.

Mr. Lynn then turns to Amazon’s black­out of Macmillan’s buy but­tons, two years ago this week:

At the time, Ama­zon and Macmil­lan were scrap­ping over which firm would set the price for Macmillan’s e-books. Ama­zon wanted to price every Macmil­lan e-book, and indeed every e-book of every pub­lisher, at $9.99 or less. This scorched-earth tac­tic, which guar­an­teed that Ama­zon lost money on many of the e-books it sold, was designed to cement the online retailer’s dom­i­nance in the nascent mar­ket. It also had the effect of per­suad­ing cus­tomers that this deeply dis­counted price, which pub­lish­ers con­sid­ered ruinously low, was the “nat­ural” one for an e-book.

In Jan­u­ary 2010, Macmil­lan at last claimed the right to set the price for each of its own prod­ucts as it alone saw fit. Ama­zon resisted this arrange­ment, known in pub­lish­ing as the “agency model.” When the two com­pa­nies dead­locked, Ama­zon sim­ply turned off the but­tons that allowed cus­tomers to order Macmil­lan titles, in both their print and their e-book ver­sions. The rea­son­ing was obvi­ous: the sud­den loss of sales, which could amount to a siz­able frac­tion of Macmillan’s total rev­enue, would soon bring the pub­lisher to heel.

This was not the first time Ama­zon had used this strat­a­gem. The retailer’s exec­u­tives had pre­vi­ously cut off small firms such as Ten Speed Press and Melville House Pub­lish­ing for buck­ing their will. But the fight with Macmil­lan was by far the most pub­lic of these showdowns.

In the late 1970s, when a sin­gle book retailer first cap­tured a 10 per­cent share of the U.S. mar­ket, Con­gress and the reg­u­la­tory agen­cies were swift to react. As the head of the Fed­eral Trade Com­mis­sion put it: “The First Amend­ment pro­tects us from the chill­ing shadow of gov­ern­ment inter­fer­ence with the media. But are there com­pa­ra­ble dan­gers if other pow­er­ful eco­nomic or polit­i­cal insti­tu­tions assume control…?”


Today, … a sin­gle pri­vate com­pany has cap­tured the abil­ity to dic­tate terms to the peo­ple who pub­lish our books, and hence to the peo­ple who write and read our books. It does so by employ­ing the most bla­tant forms of preda­tory pric­ing to destroy its retail com­peti­tors. … [It] jus­ti­fies its exer­cise of raw power in the same way our eco­nomic auto­crats always do: it claims that the result­ing “effi­cien­cies” will serve the inter­ests of the consumer.

The book indus­try is in play, and has been for a while. The good news is that peo­ple are finally start­ing to pay attention.