The Fox, the Hawk, and the Keepers of the Chicken Coop
On January 27, 2010, Macmillan CEO John Sargent schlepped to the airport and flew across the country to meet with the company responsible for an estimated 15% of Macmillan’s annual sales. He probably drew the short stick in a lottery among the CEOs of Simon & Schuster, HarperCollins, Hachette, and Penguin to see who would have to make the trip. Sargent is a deeply committed family man and arrives at his office on the 18th Floor of New York’s Flatiron building pre-dawn, so that he can do his work early and make it home at a reasonable hour. It was no small matter that he’d planned to stay in Seattle until Saturday the 29th. After landing at Sea-Tac, Sargent made his way to 1200 12th avenue to meet with Russ Grandinetti, Amazon.com’s Vice President and head of Kindle content.
Meanwhile, a critical mass of media elite listened to piped in Bob Dylan tunes while waiting in San Francisco’s Yerba Buena Center for the Arts. While John Sargent met with Amazon, Steve Jobs was about to announce the latest innovation from Apple, the iPad.
It was well known that Jobs was not enamored with the book publishing business. Famous for his 2008 quote “It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore,” he saw books as a dying medium.
So why was he now entering the dusty marketplace? To sell his new piece of hardware…
“Amazon has done a great job… We’re going to stand on their shoulders and go a little bit farther.” Jobs went on to announce that five of the top six U.S. publishers (Random House being the holdout) had agreed to place their titles in Apple’s brand new iBookstore. He then demonstrated the elegance of the Apple experience and clicked through a hypothetical transaction.
Walter Mossberg, a reporter for The Wall Street Journal watched as Jobs “bought” one of that day’s bestsellers—Ted Kennedy’s TRUE COMPASS for $14.99. After the presentation, Mossberg asked Jobs how he thought he could compete in the eBook market when Apple was charging $14.99 for the same book that a reader could buy at Amazon for $9.99.
“That won’t be the case,” said Jobs.
Nearby stood Carolyn Reidy, CEO of Simon and Schuster, testing the iPad with glee. From Ken Auletta’s piece about the hullabaloo in the New Yorker:
“Smiling broadly, Reidy said, “It’s fabulous! I want one!” The new device, she hoped, would “put digital books in front of one hundred and twenty-five million people.” It would also “create a competitor” for Amazon, she said—and provides publishers with leverage as they tried to raise the price of books above ten dollars.
While Reidy was hanging with the cool crowd in San Francisco, Sargent was explaining the new “Agency” terms of sale model that Apple had agreed to honor to Amazon. Instead of the wholesale 50% off the retail cover price of a physical book with the retailer ultimately deciding the final cost to the consumer, book publishers were now going to offer eBook retailers a 30% commission for every eBook sold.
But in order to get this generous commission, book publishers would require the e-retailer (Amazon, Barnes and Noble.com, Kobo, iBookstore etc.) to now abide by the price the publisher set. The unstated subtext here was that publishers would no longer abide retailer discounting to consumers.
Making a deal with Apple to fend of a threat from Amazon is a bit like going to a hawk for advice about how to safeguard your chicken coop from a fox. The hawk is going to tell you to move your chickens to higher ground where he can keep an eye on them.
And that is exactly the advice Apple gave. Bring us into the equation, and we’ll sell your books at the price you tell us to. Then you can leverage our commitment to get all of the other e-retailers to play ball. The agency model gave the iBookstore the opportunity to launch without having to compete with Amazon on price. As is Apple’s style, it had confidence that consumers would rather read a book on an iPad than a Kindle. Especially if the price was the same.
(What’s important to remember is that Apple and Amazon do not rely on book sales as their sole sources of revenue. Not even close. It’s easy to criticize book publishers…they are not hotbeds of innovation and they have been extremely arrogant gatekeepers…but their lifeblood is the written word. If we lose them, a book could end up being just another thing for sale.)
John Sargent also told Amazon that they could choose not to accept the new terms. Macmillan would keep selling Amazon eBooks in the old “wholesale” model. But if Amazon chose to continue that way, Macmillan would withhold release of the eBook (windowing) for several months. That window would not apply to Apple, who could offer the eBook at the publisher’s designated price the second the book was published in hardcover.
So if Amazon refused to play by the “agency” terms of sale, the only format that would be available on Amazon for initial releases (the hottest titles) would be the higher priced hardcover edition. Sargent, despite his very even-tempered and cordial manner, was playing hardball. And Jobs’ disclosure a thousand miles away that five of the six top publishers were on board with the same model only added to Amazon’s dilemma.
If Amazon agreed to the Agency model, it was Kowtowing to big publishing and would lose eBook market share, but if it didn’t, Apple would get a major advantage selling eBooks and could seize an even greater share of the eBook market.
So why would publishers want to stop e-retailers from competing with each other by insisting they all sell eBooks at the same price?
What I think publishers believe, and they may be right (I hope not), is that there are only about 35,000,000 people in the US who are interested in books. And that number will not change. No matter hard we try. The other 90% of the U.S. population would rather watch TV or play a video game.
There is a reason they believe this. Annual book sales have been about or close to the same for years. The dollars have increased as prices rise (ever notice publishers price their books at the same level?), but the unit sales (even though they move around in terms of format preferences) have been pretty consistent.
What would happen if you have an unlimited and easily reproducible product (eBook) available to a consistent, but finite market? Infinite supply for a finite demand?
If these 35,000,000 book buyers are converted into eBook only buyers and retailers continue to compete at the price point, it is only a matter of time before 25 Billion dollars a year becomes 20 Billion, then 15 Billion etc. Book pricing will race to the bottom and destroy the foundations of big book publishing. And talented, dedicated professionals who help find, market, sell and promote the best writers in the country will be out of work. The marketplace will devalue the craft. We’ll lose brilliant curators. I can’t tell you how many people I admire who work for the big publishers.
Didn’t publishers see eBooks coming? Yes, but they didn’t know when or how they would emerge and, crucially, they had no idea how fast the format would be adopted.
Since the rise of the World Wide Web in 1995, any reasonable person in book publishing could foresee the day when eBooks would enter the marketplace. If people didn’t have a problem adopting digital file conversions (MP3s) to replace the once sacrosanct record/tape/cd, chances are that a market would emerge for digital files of books. After all, the Internet is essentially a HUGE BOOK, just made up of tiny, tiny pieces of short form content.
And any person who has ever waited until the last minute to write a book report of finish a presentation and needed to buy that critical book or piece of information RIGHT NOW would embrace the eBook. An eBook is instant gratification and you don’t need to travel to get satisfaction.
But book publishing in 1995 was all about physical distribution. What made the big publishers; big publishers were their warehouses, printer relationships, sales forces, and ability to get a book into a store. It was simply crazy to start tearing down that infrastructure for some far off time when you wouldn’t need that stuff anymore.
So, nothing substantial really happened for over a decade. Sure there was the development and release of the rocket e-reader by NuvoMedia in 1998 (Bertelsmann, Random House’s parent company, even invested in NuvoMedia) and other devices but they were cumbersome, hard on the eyes, and incapable of storing more than 10-40 books.
Not having to deal with eBooks seemed like a blessing for big publishing. Sort of like when publishers in the 1920s were content with the high-end hardcover market only. Until recently, it didn’t seem like anyone really wanted to ditch the tactile and reassuring experience of physically turning pages. And even if you wanted to read on a screen, there were no real stores to buy eBooks anyway. Crisis averted.
Then in the fall of 2007, Amazon released the Kindle, and offered a solid if not comprehensive list of titles to buy and download from its Kindle eBook store. It was a big risk. Amazon believed it could single handedly create a mass market for an entirely new format. But because of the potential size of the brave new world of Internet retailing, it couldn’t take the 1930s Allen Lane approach and make one “penguincubator” to test at Charing Cross Road before diving in.
It had to go big. Amazon is not in the business of giving away information so I don’t have specific numbers, but my guess is that they initially made 100,000 Kindles—an eight figure production bet on creating a demand for something that had failed to generate any real demand before (a handheld reading device). Could you imagine making that decision?
But Amazon didn’t just make decisions based on a wing and a prayer. They had a good ten years of priceless marketing information in its digital coffers. They had a record of every sale of every book since the start of the company. They knew that you bought THE WAR OF ART…in hardcover or paperback…when you bought it…where you had it shipped…if you wanted it via express mail…and even if you were so moved by it you gave the book a review online.
And don’t you think that maybe in those ten years of data some pattern of “time demand” emerged? That is, Amazon might have found out that a lot of people were willing to pay more money to get their books faster than snail mail. And that group of customers had grown so large that Amazon began offering PRIME memberships that would guarantee you book in two days. Isn’t it reasonable to think that maybe Amazon sifted through all of that 10 years worth of marketing information with the goal of figuring out if the time was right for launching an e-reader and e-bookstore?
Amazon didn’t make the decision to create the Kindle based on “experience” or “intuition” or the “trust of the opinions of a seasoned colleague.” It looked at the numbers and figured out that the dependable 25 billion dollar a year book-buying market (twice that of all of Hollywood by the way) was ready to stop having to fill bookshelf upon bookshelf with their purchases. That it’s customers would embrace an easy to use machine that could store all of their books in one place. I suspect Amazon looked at the actual behavior of the people who bought books and concluded that the time had come to launch the Kindle.
But Amazon didn’t stop there. The price of the hardware would be a stretch for their customers ($399). They needed to incentivize them to buy the thing. And the way they did that was extremely bold. They discounted eBooks to a compelling $9.99 price point—a cup of coffee and a muffin at Starbucks. Amazon would lose $2.50 for every eBook it sold.
You couldn’t really call that “predatory pricing” because Amazon was trying to create a brand new market by itself. They weren’t undercutting anyone but themselves. Amazon was the only game in town. But the publishers didn’t get on planes and plead with Amazon not to charge $9.99 for their eBooks in 2007. What did they care? Amazon was still paying them 50% of the average hardcover retail cover price ($12.50) for the privilege of selling that same content to their customers for $9.99. And most publishing people thought that it would take years for e-readers and eBooks to catch on. The Kindle would fizz and the industry would go on as it had always gone on. Just like the rocket e-reader nine years before.
The Kindle went on sale November 19, 2007. It sold out in five and a half hours and was not back in stock until April 2008. Consumer demand was extraordinary.
Then just 25 months later, Macmillan’s John Sargent told Amazon it could no longer set the price it sold eBooks to its customers and went home. After his plane landed in New York on Saturday January 29th, Sargent probably checked on one of his company’s big titles on Amazon to see how it was selling.
When he clicked his cell phone onto Amazon, though, every “BUY” button for Macmillan’s titles had been removed. If you wanted a Macmillan book, you could no longer get it from Amazon.
The battle between Amazon and the big publishers had just begun. It’s getting more heated every day.
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