Nobody Likes a Bully – Strategic Implications of the Amazon-Hachette e-Book Pricing Dispute

“Negotiating with suppliers for equitable terms and making stocking and assortment decisions based on those terms is one of a bookseller’s, or any retailer’s, most important jobs. Suppliers get to decide the terms under which they are willing to sell to a retailer. It’s reciprocally the right of a retailer to determine whether the terms on offer are acceptable and to stock items accordingly. … When we negotiate with suppliers, we are doing so on behalf of customers. Negotiating for acceptable terms is an essential business practice that is critical to keeping service and value high for customers in the medium and long term.”

– Amazon statement on web site, 05/27/14

“Authors, with whom we at Hachette have been partners for nearly two centuries, engage in a complex and difficult mission to communicate with readers. In addition to royalties, they are concerned with audience, career, culture, education, art, entertainment, and connection. By preventing its customers from connecting with these authors’ books, Amazon indicates that it considers books to be like any other consumer good. They are not. … We will spare no effort to resume normal business relations with Amazon—which has been a great partner for years—but under terms that value appropriately for the years ahead the author’s unique role in creating books, and the publisher’s role in editing, marketing, and distributing them, at the same time that it recognizes Amazon’s importance as a retailer and innovator.”

– Hachette official statement, 05/28/14

My last post explored the topic of companies should think and act if they intend to build power in their category and target markets. This new post assesses what Amazon, today’s dominant e-retail giant, needs to do to avoid abusing its power and consequently suffering the inevitable blowback from the market as well as from regulators. I’ll leave to others the task of litigating the case for or against either party. Instead I want to glean some insights from what we’ve heard from the protagonists in this latest soap opera.

In their formal statements, both Amazon and Hachette use their “most esteemed” stakeholders – customers in Amazon’s case, and authors in Hachette’s case – as pawns in the defense of their respective negotiating postures. We shouldn’t be taken in by this demagoguery even if it is commonplace in corporate warfare. Each side is fighting for its own profit-related interests above all. Not that there’s anything wrong with this, just that they should own up to it. Thus we should not be fooled into thinking that one side necessarily has a more noble cause than the other.

As for other actors in this drama, here’s what a media industry expert said on the subject:

“This is a monumental game of chicken. We’ve seen it before with CBS and cable stations, and other instances where the public has been disadvantaged because of a battle of titans where both of the titans seem to put the consumer last. … The minute some question your motive, your ubiquity, you’re cracking your facade. I wonder how good a strategy it is for your customer relations, especially since the core audience of Amazon started around books and a reverence for books.”

– Davia Temin, media strategist at Temin & Co. NYC, interviewed by Washington Post (owned by Jeff Bezos via Nash Holdings since October 2013), 05/28/14

The hyperbolic analogy about the “monumental” nature of this “game of chicken” has a serious side to it. In part, Temin is referring to the fact that as a result of a 2013 court order following the Apple-publisher price-fixing case, Hachette was instructed to be first in line to renegotiate its e-book pricing with Amazon. The other four major U.S. publishers today – Simon & Schuster, HarperCollins, Random House, and Penguin Group (all belonging to large media conglomerates) – are currently lined up behind Hachette to renegotiate their e-book pricing with Amazon. The widespread expectation is that whatever deal is agreed with Hachette is likely to be used as a model for the other four, who together make up 85% of U.S. book sales. No doubt, the outcome of these negotiations will also have an impact on worldwide e-book pricing, especially in Western European countries. Temin is also questioning Amazon’s strategy in light of how it is coming across to its customers since it actually appears to be putting them last.

How about what we’ve heard from authors? Here is what three big-selling authors had to say in recent days:

“What’s ultimately at stake is whether Amazon is going to be able to freely and permanently bully publishers into eventual nonexistence.”

– Author John Green, currently Amazon’s No. 1 bestseller with “The Fault in Our Stars” (not published by Hachette), 06/02/14

“It’s sort of heartbreaking when your partner turns on you. Over the past 15 years, I have sold millions of dollars’ worth of books on Amazon, which means I have made millions of dollars for Amazon. I would have thought I was one of their best assets. I thought we were partners in a business that has done well. This seems an odd way to treat someone who has made you millions of dollars.”

– Malcolm Gladwell, bestselling author for Hachette, interviewed by the New York Times, 06/01/14

“Right now bookstores, libraries, authors, publishers and books themselves are caught in the crossfire of an economic war between publishers and online providers. To be a teeny, tiny bit more specific, Amazon seems to be out to control shopping in this country. This will ultimately have an effect on every grocery- and department-store chain, on every big-box store, and ultimately it will put thousands of mom-and-pop stores out of business. It just will, and I don’t see anybody writing about it, but that certainly sounds like the beginning of a monopoly to me. Amazon also, as you know, wants to control book selling, book buying and even book publishing, and that is a national tragedy.”

– James Patterson, bestselling author for Hachette, at a major address at last week’s Book Expo, the annual publishing conference last week (late May, 2014).

Among other things, these comments by Messrs. Green, Gladwell and Patterson reflect (a) a mix of valid arguments and inaccurate claims, and (b) a lot of pent-up emotion, since like other authors they see the dispute also as hugely significant for their future earnings as well as the survival of the book publishing industry. Patterson’s mention of “the beginning of a monopoly” is actually quite moderate. By most definitions Amazon’s massive share of all book sales in the U.S. and other countries looks awfully like a monopoly, or more accurately a monopsony. In case, like me, you haven’t heard of the term “monopsony” before and are curious about the difference, Sonia Sotomayor, today a Supreme Court justice, described monopsony as the mirror image of a monopoly while she was sitting on a lower court. As reported in an excellent NYT column by lawyer Bob Kohn, “unlike a monopoly, which occurs when a seller of goods has the power to unlawfully raise prices of what it sells, a monopsony occurs when a buyer of goods has the power to unlawfully lower the prices of what it buys. Each violates anti-trust laws: As the Supreme Court has long recognized, they both result in a misallocation of resources that harms consumers and distorts markets.” Today Amazon buys 80% or so of all e-books sold in the U.S. Thus the monopsony power of Amazon which, Kohn tells us, has a 65% market share of all online book sales (combining digital and print) is not just theoretical: it is real and formidable. And Amazon has in the recent past exercised what has been described as its nuclear option: in a dispute with MacMillan, the fifth largest book publisher, in 2010 it promptly deleted the “Buy” buttons in the Amazon e-store for all of MacMillan’s books, placing MacMillan’s entire business in jeopardy.

Perhaps not surprisingly, there is a palpable concern among all participants in the business network of book publishing – authors, agents, publishers, old-line booksellers, (other) online booksellers, customers and investors – regarding the fundamental importance of books to everyone, and the need to find a solution for providing digital and print books at a reasonable price without disregarding the genuine complexities of producing a quality product. Undoubtedly, there are considerable inefficiencies in the book production supply chain. For one thing publishers have an uneasy relationship with publishers, who among other sins promise to market their books then do little to nothing of any value in this area except for sometimes attending to the 1% of major authors who least need their assistance. But no one with their head screwed on seems to want the industry to be pummeled into submission or, worse, by a concentrator (or monopsonist) such as Amazon.

Most importantly for the purposes of this article, independently of who’s right and who’s wrong, at least for the time being Amazon has lost control of the public narrative, and now looks like an arrogant playground bully throwing its weight around. This may be more about perception than reality, but in a public dispute like this one, perception is reality – unless and until the established perception is replaced by a new one in the minds of the reading public. Right now Hachette’s major competitors are silent because none seem disposed to “upset the monkey”, to cite Kramer’s comic predicament in the Seinfeld TV comedy series. But authors are increasingly on the warpath and consumers are beginning to express their distaste for Amazon’s tactics of extending the shipping schedule for Hachette books, eliminating discounts on the publisher’s titles, and keeping new books off its warehouse shelves.

Consumers admire successful, powerful vendors because at their best they provide reassurance – about the quality of their products they sell and the transparency of the prices they charge. Consequently, they reward the most successful and powerful companies with a large share, if not the majority, of their business. Most of them even turn a blind eye to hardball tactics that seem a little over the top, as long as their self-interest in terms of quality, convenience and/or price, is being well served.

But no one likes a bully, not on the school playground, not in geo-politics, and not in business. In the recent case where Google, Apple, Intel, and Adobe were found guilty of collusion not to poach each others’ engineers, resulting in salaries and career opportunities for engineers being somewhat constrained, it was hard to empathize with the defendants. It seems that, when companies achieve massive market power, the intoxication in the air seems to erode the judgment of otherwise smart, respected executives, and when they collude it makes the problem even worse. Collusion was also the issue when Apple got together with book publishers in 2010 to “fix” the price of e-books. This eventually resulted in a Justice Department lawsuit in which Apple was found guilty last July, and instructed to cancel its contracts with all five major publishers. Unfortunately, for whatever reason that lawsuit completely ignored the gorilla in the room – none other than Amazon – and so made no progress to regulate the possibility of monopolistic (or monopsonistic) behavior by Amazon when it became their turn to agree pricing with the publishers.

In today’s dispute Amazon, personified so often by its iconoclastic leader Jeff Bezos, is starting to look like a real bully. This is the danger of a Gorilla over-playing its hand due to arrogance and its first-cousin, hubris. However, once customers and industry participants see the company that they previously supported and admired start to adopt bullying tactics, the entire market has a magical way of self-organizing to curtail the gorilla’s power and if necessary penalize it. So today Amazon risks not only a measurable number of customer defections to other online/offline vendors such as Booksamillion or Barnes&Noble.com, but to the 2,000 or so smaller booksellers as part of a wholesale rebellion by its resentful victims.

After a decade or more in which Bezos and his company seem to have been able to do no wrong in the eyes of investors, they are now being called to task for essentially doubling down on profitless prosperity. This pressure may well be influencing Bezos’ unbending negotiating stance on pricing. In this episode with Hachette, it seems that he is displaying the tone-deaf attitude that is a common flaw among iconoclastic leaders. A corollary to this problem is the mindset of all business bullies: for them to win, everyone else has to lose. In the dispute with Hachette, I would argue that “winning” must go a lot farther than getting the lowest purchase price; at this point, it’s critical that Amazon goes some way to (re)conquer the hearts and minds of readers as well as authors and publishers. Otherwise, someday soon this “victory” may seem very hollow.

Thus the strategic risk to Amazon’s business is that the market will self-reorganize to reduce Amazon’s market share and buying power. Authors may find other means to publish and market their books and e-books, readers will look elsewhere for inexpensive books delivered quickly to their door, and publishers may find ways to reconfigure their businesses for an Amazon-less channel strategy. Over the long haul, I believe that publishers have little choice but to do as Bob Kohn suggests and deploy their own nuclear option against Amazon: pull all their books from Amazon and throw their weight behind a viable alternative. One possibility would be an online marketplace controlled by the publishers, with commissions being split with authors to augment their royalties, or alternatively with publishers committing to provide greater marketing and promotional support in exchange for earning their commission.

A move such as this would definitely impact Amazon and possibly benefit readers and others such as traditional bookstores. Lost sales, lost customers, lost publishers, online competitors getting stronger, a rediscovery by readers of the joys of browsing and buying in a physical book store, the appearance of new startups focused on marketing and selling books using customer intimacy instead of just price and convenience as their strong suits. Who knows, Barnes & Noble may be invigorated by a weakened Amazon, and the market would gain in terms of choice.

So what should Amazon’s strategy be to change the public perception and avoid potentially irreversible damage to its business? Here are a few thoughts, which Amazon’s board – assuming it is not a pliant servant to Bezos’ will – and Bezos himself should consider taking before it’s too late:

1. Repair damaged public relations: Show some humility! Come out from behind your legalistic press release and explain your perspective on the dispute, why it’s important, and why it’s taking time to resolve. Tell your side of the story, making it clear that there is more to this than media sound-bites can do justice to. Go beyond disingenuous statements about defending consumers’ interests.

2. Disrupting the book publishing industry: Everyone, especially nerdy tech companies, loves disruption as long as it is happening to someone else. Avoid incendiary sentiments or language about your determination to disrupt the industry and show some respect for its importance to society, and what it has achieved for education, enlightenment, and entertainment over the centuries. The argument that you are on a noble mission to disrupt and disintermediate all inefficient industries is unlikely to impress anyone this time around.

3. Make a new contribution to the industry: Acknowledge how important the book-selling business is to Amazon, how critical it is for authors with good ideas to find ways to connect with their target readership. Explain how you see your contribution as a company to a healthy publishing industry going forward. Introduce new programs for bringing together authors, publishers, and readers. Perhaps this entails something along the lines of sponsoring book-reading communities, creative writing MOOCs, setting up a reader-publisher-Amazon advisory board that explores the future of the book publishing industry, making creative use of Facebook and other social media. Consider launching a book marketing program for independent e-book authors who don’t have a publisher or who have a publisher but no resources or ideas for marketing their work. Authors will appreciate Amazon taking initiatives like these to introduce more than just price transparency and rapid delivery into the business. Be a sponsor, but avoid doing anything to co-opt these programs otherwise you alienate the participants (again).

There’s still time for Amazon to turn the present PR disaster into a positive. The market can be very forgiving in our culture of celebrity rehab. Jeff Bezos hasn’t really experienced a serious crisis yet and even Steve Jobs and Bill Gates had to get bashed on the head a few times before they got the message.

Admittedly, in recent months Wall Street has somewhat turned on Amazon and is demanding that it button-down its business model, with more than a mere nod to profitability. But if the company now decides to pursue profits at any cost, its power – and therefore stock price – will plummet much further than the 20% or so that it has fallen already this year. There’s still time for Amazon to get out of this jam relatively unscathed, but it will require eating some humble pie and doing some fresh thinking. Is this possible, I wonder?