• Most authors seem to be coming down on the side of Macmillan on this. A lot of readers seem surprised in their comments that this would be so. I roll my eyes at this. Macmillan is asking for higher prices on their behalf for stuff. And Amazon has cut off money for them. People respond to incentives, and they generally vote with their pocketbook. Readers should not assume that an author’s interests are equal to their own interests.
• Many readers (though I have no idea what the percentage is) seem to be siding with Amazon. A lot of authors seem surprised that this would be so. I roll my eyes at this. Amazon is selling items to them at lower prices. Macmillan is asking them to either pay more money or wait longer. People respond to incentives, and they generally vote with their pocketbook. The increased money they might get comes out of the readers wallets, even if a billion people along the supply chain take their cut.
• Capitalism does not mean you sell at the cost of production plus a fair markup. I read an ostensible economist assert that readers who say they should get books at a price they are willing to pay is not capitalism. No, that’s exactly what capitalism is, if you add in that the seller has to agree to the price too. Cost of production has an impact on whether the producer agrees to the price, but even then it’s not determinative. If I spent $10 to make something but can only get $5, I may sell it at $5 just because it’s better than not selling it and getting $0.
• Because of the latter, I tend to skip all the scribblings about how much it costs to produce an ebook. I’m not basing whether I will pay $X for a book based on whether someone else makes a profit. I’m basing it on the utility to me.

• An ebook’s utility is very different than a regular book’s utility. I get the same story. I think, I’ve never compared any of the ebooks I’ve acquired with the paper copies. I get space saving and portability. But there’s a lot I don’t get: the ability to loan, sell or give away the book. I don’t get protection from book loss, computer problems being much more common than fires, floods. I don’t get the ability to signal like a paper book gives me. When you step into my apartment, you know I am a reader as well as whatever you can glean from my collection. There’s no equivalent with ebooks. I also don’t get to be a collector. I’m not as much a books as fetish object kind of guy as many, but I still like to have a few signed copies and I keep a few books around just for their artwork. What I’m willing to pay depends on what priorities I give to each of these utilities, not how much it cost someone else to make the damn thing.
• I give a lot more importance to the change in retailing models than most others do. I don’t know a single retailer that has achieved dominance in a market when they are unable to set their own prices, unless they’ve done it through means that are unavailable to Amazon. Tobias Buckell countered with Apple is an agent in their iPhone app market, where they are dominant. But that’s because they are a true monopoly there at the moment. Amazon can’t do that with ebooks.
• A lot of people, including myself, have been reading tea leaves inappropriately. So far, we have a couple of statements from Macmillan and a buried post from Amazon. Both of these entities have strong incentives to lie to us.
• Amazon is a recognized place for books. Every other place plays second fiddle to them. I include Powells links in my reviews, but I’ve seen less than 5 clicks and no sales from them. People reading my backwater blog click through to Amazon on the order of one or two hundred every month, and I usually see one or two purchases from every month.
• The user experience and blogging tools for Amazon put every other site to shame. For book information, really only LibraryThing even comes close. Only Amazon offers product previews for bloggers (if you don’t have Adblock, hover over an Amazon link on my site to see). Only Amazon offers detailed reporting. Only Amazon offers Site Stripe for bloggers. Only Amazon offers quality recommendations for users.
• Authors and anti-Amazon people pushing alternative sites to link to should coalesce around one alternative. Places I’ve seen pushed include The Book Depository, bn.com, Indiebound, and Powells as well as a slew of local bookstores. The promotion is too spread out to get any of them critical mass to be a viable alternative for bloggers linking.
• Why the hell hasn’t any of these sites or others offered extra incentives to sign up as affiliates right now? Seems like a huge missed opportunity to me.
• A lot of author commentary comes across like celebrities who work all their lives to be famous and well recognized and then complain about how they don’t have any privacy. Authors work hard to get Amazon to sell lots of their books, and now complain that Amazon is so dominant.
• Amazon is not a monopoly. They have no more than 43% of the book market. They are dominant.
• To tea leaf this, I wonder if the solution will result in something along the lines of Macmillan’s pricing model but Amazon’s retailing model. Merchant model is kept so Amazon can price as they want generally. But they also agree to limitations on pricing items, particularly a time-based price lowering.

• I’m not so sure that cheap ebooks will cannibalize physical copy sales early on. The price conscious already have the option of waiting and getting the books used or in paperback. The price conscious folks aren’t generally buying the expensive early editions.
• The primary value to a reader from a publisher is in signalling. The publisher communicates to the reader that this book is worth reading because they’ve sunk money into it. I seriously doubt a self-publishing model will be generally workable even in a world of cheaper production for everyone. If nothing else, the publisher of quality work will command bigger prices for their time, and won’t work for less. So their books will cost more.
• In an ebook world, I wonder if a stock exchange marketplace model would work or is where the agency model would end up. Purchasers won’t want to go to different destinations for each publisher for their books. They want to go to one place to purchase multiple books. The retailer and their web site acts much like a broker does for stocks. The retailer places orders for their customers on ebook exchanges, of which there really are only a handful. People can sell their used ebooks there too. And publishers can control the price by releasing copies into the market at the going rate. (i.e., the distribution right in copyright law becomes the right to release new copies into the exchange) Just musing…
• Really only tangentially related to all of this but I’m gonna throw this out there too in this post. I don’t owe independent stores my money just because they are local or independent. I shop at stores that provide services that are of value to me. Either they have good prices, or good selection (broad or focused both are possibilities), or other amenities to make it worth my time, money and effort. I don’t owe an author, publisher, or retailer money or allegiance either.

I’m not really siding with Amazon in the whole matter, though I have taken somewhat of an anti-Macmillan tone. Basically in my mind, it’s all a business dispute and not really about morals or fairness so much as a negotiation about who gets what. Authors took risks by getting into the business, and there’s no guarantee that they succeed. There’s not even a promise that their work not be held hostage to outside interests. That’s just the way business works. On the other hand I think they should rail against Amazon for business reasons (even using the language of fairness). It would be dumb not to. It would be dumb to send traffic to Amazon when Amazon ain’t selling the authors’ product. Amazon has no right to continue to make money either, or to continue to be a dominant player. I’ll shed no tears for Amazon should they lose this battle. Nor does Macmillan have any hold on me either. There’s no right or wrong, just the market. Now I sound like a goddamn libertarian.

Here’s the quote from the Macmillan letter:

I gave them our proposal for new terms of sale for e books under the agency model which will become effective in early March.

And then later a couple more paragraphs:

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 digital media businesses). The price will be set the price 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.

The agency model would allow Amazon to make more money selling our books, not less. We would make less money in our dealings with Amazon under the new model. Our disagreement is not about short-term profitability but rather about the long-term viability and stability of the digital book market.

What do you see in that letter? Almost everyone commenting on this seems to be focusing in on the pricing. And while it’s ultimately about pricing, there’s something very important in there. The term agency model. That’s very important.

Currently most booksellers operate under a merchant model. Macmillan’s letter rhetorically leaves this little bit out while extolling how great the agency model is for a retailer. As a retailer, the agency model could be very very ugly. Macmillan has left that part out. (Not surprising, they are interested in their own P.R., not providing accurate analysis and facts. Amazon won’t do any better.)

Under the agency model, the manufacturer (in this case Macmillan) owns the inventory that a retailer sells. It determines the pricing, as well as a whole lot of other things like which items will be sold by which retailers. The retailer makes money get getting a percentage of sales. Perhaps it has some complications like higher percentages with higher sales, but that’s the basic idea.

With the merchant model, the retailer owns what they have and gets to make the decisions, particularly the pricing decisions. The retailer pays the manufacturer whatever price the two parties can agree on. In some industries, this is a standard price (wholesale) but in Amazon’s case they are pretty big so they have a lot of influence in dictating what prices they want to pay. After paying wholesale and receiving their merchandise, it’s the merchant who sets the prices. They can sell at a retail price that is more or less than the wholesale price, and they do not have to price uniformly with respect to other retailers.

The agency model would be horrible for a large retailer like Amazon. Horrible. Let me give you some scenarios:

It’s summer time. There’s a new blockbuster movie out starring some pretty young Hollywood star (think Brad Pitt or Jennifer Aniston). That celebrity wrote a memoir several years ago that Amazon has in stock. They could use the opportunity to offer those books at a discount in order to move them or as an incentive to sell the official movie novelization and other movie crap (“three for the price of two!”). Except under the agency model, they can’t do this. They would have to sell at the price set by the publisher.

Or try this. An Amazon competitor has a book selling at $1 less than theirs. They cannot price match under the agency model.

Or even the example that’s at the heart of the current dispute: publisher wants to sell at $15.99 and reduce the price over three years from that price to $5.99. After Christmas, the hardcover version (sold under the merchant model) of the book goes into the bargain bins and is selling for $7, but the publisher is stuck on their three year schedule for the ebook version (under the agency model). Amazon is now selling the ebook for more than the hardcover.

Basically, the problem is who controls the pricing, not the specific prices. It’s not that the pricing under agency would be monolithic exactly. Agency model eliminates loss leaders. It’s all about different interests. As a seller of books from different publishers, as well as millions of other products, Amazon’s interests differ from the publishers’ interests. The agency model means that Amazon’s interests would be lower than the publisher interests. All the commentary touches on this part a bit. Amazon is interested in establishing the Kindle as the dominant ereader platform. Macmillan is not. Amazon want the flexibility to set prices for that, irrespective of whatever wholesale price they negotiated.

If it was specific prices, Amazon would never have used their nuclear option. I’m pretty sure of that. They’d just haggle away until they came to an agreement. But to switch to agency model? They have to nip that in the bud. If they’d agreed to the agency model, publishers would have pushed to switch everything to agency model, killing Amazon’s business.

Why am I sure of that? Way back when, I used to work at Expedia as a developer. I didn’t make the business decisions, but I had to understand them pretty well to implement the web site to carry those decisions out. Some of the things that Expedia sells are agency model (a lot of flights, but not all), and some are merchant model (a lot of hotels, but not all). Agency model is why all the online travel agents started charging $5 to book a flight in the early 2000s. The manufacturers, the airlines, cut the commission down to nothing in a lot of cases. Since Expedia couldn’t be flexible on price, they tacked their own charge on top so they could cover costs. That’s also why customers didn’t pay the $5 booking fee when they bought a flight in conjunction with a hotel. Expedia bought hotel room-nights up in bulk and then set their own prices. The company set their own prices and it didn’t need the booking fee to make money.

I spent my entire time at Expedia watching the business side try to switch from the agency model to the merchant model. Travel was dominated by the agency model for its entire existence. Expedia was trying (and sometimes failing) to convert to a merchant model, because that’s where the money would be for them. It allowed them to create packages that airlines and hotels couldn’t or wouldn’t at prices that weren’t available under agency rules.

Now, whether this is good for the consumer (the reader in the case of books), remains to be seen. In some ways it’s two behemoths on one end of the supply chain duking it out over who gets to pillage the consumer. But I am pretty sure I don’t want my neighborhood bookseller to work under the agency model. So if this keeps publishers from adopting that way of selling universally, then I have to side with Amazon. Saving the neighborhood bookstore is not their goal, but as a side effect it helps.

Edited to add: Charles Stross’ take on Amazon vs. Macmillan covers a lot of the same ground as my post. So I’m not the only one focusing on agency model. He doesn’t talk about packaging and price matching that a merchant could do, but covers some other things.