Amazon and Macmillan Clash on E-Book Pricing

February 3, 2010. The Macmillan publishing company released a statement on Sunday, January 31, 2010, by its CEO, John Sargent, regarding ongoing negotiations with Amazon regarding the sale, and pricing, of digital books. Amazon stopped selling Macmillan books, both physical and digital.

Amazon stated in a release on January 20, 2010, regarding its Kindle Digital Text Platform, that "The author or publisher-supplied list price must be between $2.99 and $9.99". Macmillan insists on a different pricing system.

Sargent stated that "This past Thursday I met with Amazon in Seattle. I gave them our proposal for new terms of sale for e books under the agency model which will become effective in early March. In addition, I told them they could stay with their old terms of sale, but that this would involve extensive and deep windowing of titles. By the time I arrived back in New York late yesterday afternoon they informed me that they were taking all our books off the Kindle site, and off Amazon."

Windowing means delaying the release of cheaper editions of books during a window of time in which a higher priced edition are sold -- for example, by withholding paperbacks for a time while only hardbacks are sold.

Sargent continued that "In the ink-on-paper world we sell books to retailers far and wide on a business model that provides a level playing field, and allows all retailers the possibility of selling books profitably. Looking to the future and to a growing digital business, we need to establish the same sort of business model, one that encourages new devices and new stores. One that encourages healthy competition. One that is stable and rational. It also needs to insure that intellectual property can be widely available digitally at a price that is both fair to the consumer and allows those who create it and publish it to be fairly compensated."

He elaborated that "Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digtal media businesses). The price will be set for each book individually. Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time." (Parentheses in original.)

The Authors Guild (AG) published a comment on Tuesday, February 2, 2010, in support of Macmillan.

It stated that "Amazon quickly and pre-emptively escalated matters by removing the buy buttons from all Macmillan titles (with some exceptions for scholarly and educational books), in all editions, including all physical book editions. Thousands of authors and titles are affected; hardest and most unfairly hit are authors with new books published by Macmillan that are in their prime sales period." (Parentheses in original.)

"Yet if Macmillan prevails", the AG wrote, "the eventual payoff for its authors (and all authors, if a successful result ripples through the industry) is likely to be significant and lasting." (Parentheses in original.)

The AG stated that "Amazon has a well-deserved reputation for playing hardball. When it doesn't get its way with publishers, Amazon tends to start removing ``buy buttons´´ from the publisher's titles. It's a harsh tactic, by which Amazon uses its dominance of online bookselling to punish publishers who fail to fall in line with Amazon's business plans."

It continued that "Generally, the ending is not a good one for the publisher or its authors -- Amazon's hold on the industry, controlling an estimated 75% of online trade book print sales in the U.S., is too strong for a publisher to withstand. The publisher caves, and yet more industry revenues are diverted to Amazon. This isn't good for those who care about books."

The AG added that "This is a direct attempt to use its clout in the physical book industry to enforce its business model in the e-book industry."

Although, the AG stopped short of alleging anticompetitive conduct in violation of Sherman or Clayton Acts. See for example, 15 U.S.C. § 1, 15 U.S.C. § 2, and 15 U.S.C. § 14.

TLJ searched the Amazon web site on February 3, 2010, for several physical books published by Macmillan. They were listed, but there was no mechanism for purchasing the books from Amazon. Amazon's "Add to Shopping Cart" and "Add to Wish List" buttons, and Kindle links, were absent. However, an Amazon user could still purchase second hand copies from third party sellers who use the Amazon web site.

Macmillan's decision to stand firm against Amazon on pricing came almost immediately after Apple's January 27, 2010, announcement of the introduction of its iPad, a device that can, among many other things, download and display e-books. Apple named its e-book service "iBooks".

The Apple web site states that "The iBooks app is a great new way to read and buy books. Download the free app from the App Store and buy everything from classics to best sellers from the built-in iBookstore. Once you’ve bought a book, it’s displayed on your Bookshelf. Just tap it to start reading. The high-resolution, LED-backlit screen displays everything in sharp, rich color, so it’s easy to read, even in low light." (Footnote omitted.)

Apple's iPad/iBooks is now competing with Amazon's Kindle for both e-book consumers and book publishers.

Apple's approach includes taking a percentage of the book transaction price, and allow the publishers greater discretion is setting prices. Amazon's approach includes selling books cheap, but making profits out of sales of the Kindle devices.

Online sales of physical books have already affected consumers' book buying habits, and adversely impacted brick and mortar retail book sales businesses. E-books sales and readers are furthering these trends, and changing how consumers read books. Storefront book retailers are being disintermediated. However, the extent to which these new technologies and business models might disintermediate publishers is not yet certain.

There is also uncertainty regarding the long run valuation of books under a transformation to digital format. That is, physical books, once sold, are in the possession of the purchaser, durable, and subject to the first sale doctrine. See, 17 U.S.C. § 109. Used book sales can undermine new book sales, and result in low prices for both new and used books a short time after original release.

Unlike some other intellectual property assets, many physical books have short depreciation schedules. In contrast, if a book is sold only in digital format subject to digital rights management technology that precludes copying or transferring the book, there may be no secondary market to drive down prices charged by the publisher or rights holder. One can sell one's Kindle, along with the entire book collection stored on it, but one cannot sell and transfer the individual e-books.

Other intellectual property based industries have maintained the value of their assets in part by periodically changing the formats in which their products are sold, thereby rendering older copies obsolete. Consider for example, the music industry's migration from plastic records, to tapes, to CDs. Old hardback books, in contrast, remain just as accessible today as decades ago.

Prices of books, as a function of time, may turn out to be much different in a digital only world. How this might affect the incentive structures for creating new works, promote the progress of science and useful arts, and affect the public's reading of books, is not clear.