The Future of Book Publishing: The Amazon - Hachette Battle

On July 16, 2014:

The ongoing trade dispute between Amazon, the Internet giant and Hachette Book Group, a prominent publication house has brought about a vibrant debate on the repercussions of a large online retail monopoly and the preponderant influence in pricing of the books. Despite Amazon's claim to negotiate with Hachette solely for benefitting consumers with low electronic book prices, opponents have argued that Amazon appears to disallow the publishers more leeway on price-setting strategy and instead employs its massive market power demanding for unreasonable concessions. While there seems to be an increasing calcification of hostile stance on both sides, the conflict has underscored the impending need for a better assessment on appraising the publisher's role in editing and marketing of the books.

The deadlock between the two unfolded in early May with Amazon's blatant display of supreme bargaining power, thus giving rise to three primary bullying tactics. First, it deliberately increased the shipping period exclusively for the Hachette publications from about one to three weeks, despite the popular two-day free shipping program in place serving more than 20 million customers. Second, it assigned relatively low discounts compared to the alternative online book retailers, dissuading the readers to purchase Hachette books. Much worse, it further recommended that the customers purchase similar non-Hachette items at an unusually lower price and thus exhibited an outrageous control over complete access to the Hachette publications.

The current Amazon-Hachette spat appears to have a number of unforeseen ramifications, yet has an uncertain future. Hachette, one of the six dominant publishing houses today and in the business for over 150 years, puts out about 1,000 books every year and earns more than one-third of its U.S. sales through electronic books. On the other hand, Amazon is arguably the most powerful book retailer today, with a stupendous increase of almost 30% in the overall share of book sales over the last five years and a staggering e-book market share of 65%. This suggests that the Hachette authors rely heavily on Amazon to reach out to a wider reading community. Stakes are, however, equally high for Amazon, given the growing risk of losing a consumer-friendly image cultivated over the years. Market analysts have further predicted that loyal readers and authors are increasingly more likely to switch to other retailing book stores for their needs.

The confrontational face-off between the two is reported to have originated from a major disagreement on the pricing of the electronic books. While the digital format of the books has increasingly become more popular among the readers in recent years, it has been an apple of discord between the publication houses and the retailing giant. Although the electronic book sales rose by 10% in 2013, significantly low prices of the e-books led to a massive loss in revenue amounting to $ 3 billion. To add insult to injury, publishers tend to withhold select e-book editions for more than six months even after the release of hardcover version of the books.

This leads to a more pressing issue, the economics behind the strategic goal of Amazon. In the past, financial analysts have argued that the ulterior motive behind seeking a low price for electronic books involves Amazon's incentive to sell more Kindle devices. In addition, Amazon has been a strong proponent of the wholesale model, in which retailers have a say in assigning the final price of the item. On the other hand, publishing houses appear to prefer the agency pricing model that allows the publishers even to set the retail price of their digital books.

Amazon's battle with the publishing industry over book pricing isn't entirely new. In the past, it has unabashedly resorted to a threatening strategy of temporarily removing books from the site in response to a strong disagreement with the publication houses. Amazon's decision in 2010 to eliminate direct access to the printed books and their digital editions belonging to Macmillan, one of the other key U.S. players in the publishing world, is a case in point. Similarly, it abruptly stopped selling more than 4,000 books from the Independent Publishers Group in 2012 before the lengthy mutual negotiations gave rise to a higher discount for Amazon customers.

However, it is worth noting that such trade disputes are fairly common among the contentious retailing and publishing parties in the corporate sector. To exemplify, Amazon's competitor, the online book store Barnes and Noble, stopped stocking a myriad of books for eight months seeking better contractual terms last year. This further suggests the prevalence of hard-nosed negotiations on optimal profit splitting mechanism among the distributors and producers in the global markets today.

Hachette, on the other hand, is adamant about leaving no stone unturned to prevent Amazon from discounting the price of electronic books. Although it has signed confidentiality agreement as part of the negotiation to keep the particulars of the dispute secret, it is evident that Hachette wants Amazon to treat books differently from other consumption goods. Interestingly, Hachette's antitrust settlement with the government in 2012 that required Hatchet to allow Amazon to continue to discount the price of e-books for two years has recently expired. Under these circumstances, Amazon appears to take advantage of its superlative market power, partly to ameliorate the weakening financial status of the company. Unfortunately, the retailing giant's stock price is down 18% over the last twelve months, according to figures from the Wall Street.

In conclusion, Amazon is desperately seeking a stable path towards healthier profits in the bastion of the market power it constitutes. However, the enterprising authors and the consumers seem to bear the brunt of the disagreement among the parties at loggerheads. Hatchet's competitors, who are equally dependent on Amazon, need to be more vocal about the long-term implications of the current strained circumstance and launch a more vigorous discussion regarding the future of book editing, marketing and distribution. Most importantly, it behooves Amazon to reach a mutual agreement as early as possible, otherwise the grand consumer-friendly reputation fostered over the years will subsequently tarnish.