Amazon spat with publishers escalates as contracts end

Amazon.com Inc.'s sales contracts with some of the world's biggest publishers, Simon & Schuster and HarperCollins, are next up for renewal, signaling that skirmishes over e-book pricing are set to spread.

The world's largest online retailer is already feuding with Hachette Book Group and Bonnier Media. CBS Corp.'s Simon & Schuster and News Corp.'s HarperCollins will soon come up for renegotiation, according to people familiar with the matter, who asked not to be named because the contracts are private. That means best-selling authors such as HarperCollins' Veronica Roth, writer of the Divergent trilogy, and Simon & Schuster's Stephen King could be entangled in the controversy.

Hachette's tussle will determine whether publishers can gain leverage against Amazon, the biggest seller of e-books, at a time when demand for digital tomes is surging and physical books are losing ground. Amazon is seeking a bigger cut of the retail price of a title so it can continue discounting e-books and boost margins, three people said. To ratchet up the pressure on Hachette, Amazon started blocking some book preorders and delaying shipments — affecting titles such as “The Silkworm,” J.K. Rowling's new novel written under a pseudonym.

“It's a measure of their confidence that they are doing this,” Roxana Robinson, head of the Authors Guild, a New York- based nonprofit that represents writers, said of Amazon. “It demonstrates that they feel they have the dominant market position.”

E-Books Market

Amazon commands 60 percent of the e-books market, according to Forrester Research Inc. While physical book sales in the U.S. are projected to fall to $19.5 billion this year from $26 billion in 2010, e-book sales are expected to jump more than eightfold to $8.7 billion, Forrester estimates.

Amazon and Hachette started negotiating as early as January, one person said. The disagreement spilled into public view last month when Amazon tried to dissuade its customers from buying Hachette titles on its website, removing discounts from some books or delaying shipments by as much as five weeks when items typically ship within three to five days. By refusing to buckle under the pressure, Hachette is leading the charge for publishers' fight against Amazon.

Amazon has said it's acting “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 said in an online post last week.

James Patterson

The tactics have hurt Hachette, the publisher of mass- market powerhouses like James Patterson and literary heavyweights like Donna Tartt. A few weeks into Amazon's campaign, Hachette relinquished its No. 1 spot on the Digital Book World best-seller list, a palpable sign of Amazon's dominance in the publishing industry.

Authors have been caught in the middle.

Amazon, for its part, made an offer to Hachette to fund 50 percent of an author pool to mitigate the impact on writer royalties. Authors typically receive 25 percent of the publisher's take on sales. If Amazon succeeds in getting a larger percentage of the retail price, that could mean lower fees for authors.

Douglas Preston, a Santa Fe, New Mexico-based author of best-selling thrillers such as “White Fire,” said he feels “betrayed” by Amazon after having supported the online retailer even as its growing power raised alarm bells. Some of his books now face shipment delays and higher prices because they are published by Hachette.

‘Betrayed' Author

“I've supported Amazon from the time it was a struggling startup,” Preston said in an interview. “I feel betrayed personally by this company now that it's become one of the largest corporations in the world that it would do this to me.”

Separately, Hachette said it eliminated about two dozen positions, less than 3 percent of its workforce of about 950 people. The job cuts were unrelated to its dispute with Amazon, the company said.

Amazon is pushing for a bigger piece of e-book revenue amid pressure from investors to boost profit margins. For every dollar in revenue, Amazon makes less than a penny as Chief Executive Officer Jeff Bezos invests in fulfillment warehouses, same-day shipping and new gadgets like its Fire TV Internet streaming set-top box.

Other retailers, meanwhile, are seeking to take advantage of the spat by winning over publishers and book buyers. Wal-Mart Stores Inc. said last week that its physical book sales on Walmart.com have climbed 70 percent. The website has been running a promotion at the top of the page for 40 percent off select books from Patterson and Nicholas Sparks.

Changing Pricing

The dispute stems from a U.S. Justice Department investigation into Hachette and four other U.S. book publishers that was settled in 2012 and 2013. The government charged the publishers with colluding with Apple Inc. to set prices of e- books, thus stifling competition.

Hachette, HarperCollins, Simon & Schuster, Verlagsgruppe Georg von Holtzbrinck GmbH's Macmillan unit and Pearson PLC's Penguin Group all consented to change their pricing policies as part of the settlement.

Also as part of the settlement, Hachette, like the other publishers, had to tear up its contract with Amazon and create a new agreement giving the retailer the right to discount book prices, a core element of the government's case.

The length of Hachette's contract with Amazon, negotiated at the end of 2012, was for 18 months, according to two people familiar with the matter. Hachette's agreement is the first to expire, with Simon & Schuster and HarperCollins following soon thereafter, the people said.

Agency Model

Random House, owned by German media conglomerate Bertelsmann SE, wasn't part of the suit and had been operating under a different arrangement with Amazon. Since then, Penguin has merged with Random House, and the new company is called Penguin Random House.

Representatives for Amazon, Hachette, Simon & Schuster, HarperCollins, Penguin Random House and Macmillan declined to comment on their contracts with Amazon.

Books were traditionally sold under what is known as the wholesale model, with retailers buying at wholesale and setting their own price to consumers, typically double the wholesale cost.

Amazon then began selling books at far below the usual retail price — and in some cases even below wholesale — to draw in more customers. After Amazon effectively created the e- book market, publishers were concerned about being under the thumb of a single retailer.

In an effort to boost sales with other partners, a few of the major publishers started using what is known as the agency model, where they set their own retail price and negotiated a percentage, or commission, that went to the booksellers. Discounting wasn't allowed.

Apple Collusion

Apple, which already employed a similar pricing scheme for its online music sales and apps, took a 30 percent cut of each e-book sold through iTunes.

After the Justice Department determined Apple and the publishers had colluded, publishers were forced to revise the agency model. They can still set their own retail price and negotiate a percentage to booksellers, but they have to allow retailers to discount.

In a concession to the publishers, the discount altogether can't exceed the retailer's commission across all the titles it sells from a particular publisher.

Retribution Fear

That's partly what's causing Amazon to seek new terms with Hachette, three of the people said. By getting a bigger cut of the retail price, Amazon can discount more while also retaining a higher profit.

With Amazon vying for more of the revenue in the book business, publishers may be less likely to take risks on new authors and less conventional titles, said Preston, the author.

As he's been trying to draft a statement to help articulate Amazon's effect on authors, only about half of the writers he's contacted have agreed to help — a sign of Amazon's power, he said.
“Quite a few authors say, ‘I totally agree with you, but I'm terrified going against Amazon,'” Preston said.