Sunday, February 7, 2010

Spats: Macmillian vs. Amazon

Amazon waited nearly a week, finally returning the "Buy" buttons to Macmillan books on its site on Friday evening. I'm afraid that we haven't heard the last of the arguing between publishers and booksellers as houses try to position themselves for success in digital markets.

What I didn't understand in class, and still don't really, is how Macmillan could put the smack-down on Amazon. Here's my understanding of producers and sellers: a business has a product that they want to sell for a certain price. Another business wants to buy said items, increase the cost, and make a profit selling to an end user. This is how retail business works, am I right? As long as a producer is getting the price they want for their items, who cares how much of an increase or decrease the seller charges the end user?

Apparently, Macmillan cares. With Amazon buying e-books in the range of $12-14 and then reselling them for a loss, Macmillan feels that their books are being under-valued by consumers. I can sort of see their point, as a fixed price point of $9.99 will soon be the expectation rather than a special deal, but it ISN'T THEIR RIGHT TO TELL AMAZON HOW TO CONDUCT BUSINESS. Sorry, I got a little loud there.

Add to that the fact that Amazon has been in the internet book-selling trade for quite a long time now. Who better understands what consumers are willing to pay? David Pakman's blog post "Weighing in on Amazon/Macmillan Pricing Debate" discusses price point:
Remembering your Econ class, you also know that most goods are elastic; as price lowers, demand increases. An optimum point exist that maximizes profit. I am pretty sure that the book industry, like the music industry before it, has not maximized profit by finding the optimum price. This is generally because the book publishers are not retailers — they have never forged a relationship directly with a customer. To optimize pricing (particularly on a per title basis), you need to conduct lots of tests and analyze lots of data. Amazon does this in near-real time and, I am told, is constantly optimizing pricing, page layout, merchandising, bundling, shopping cart path, and many other ecommerce variables.
Pakman also notes that consumers should not be responsible for legacy costs that include Manhattan high-rises, and other outdated operating costs. He points to the music industry that was slow in adapting to digital sources and hints that this might happen to the publishing industry if they aren't careful.

Are Macmillan's assertions regarding consumer expectation true? What about hardcover book prices? Doesn't Costco's low low price undermine consumer expectation? J.D. Robb's Fantasy in Death will be released next month. The list price is $26.95, but Costco and Barnes & Noble are offering it for $14.45, or 46% off! Gee, my expectation is that I will never ever pay $26 for a book. I expect to receive about 50% off of the cover price, maybe even more if I'm a B&N member. Is Macmillan going to step in and tell Costco what sort of discount to apply? I don't think so.

I have to side with Dave Pakman on this whole argument, even though I may be lynched by my friends in publishing, and say that Macmillan may be making a big mistake. Amazon, world-wide bookseller, might be trying to position itself to take over the world, but they are hardly the only company with aspirations of world domination. Amazon is better positioned to understand consumer expectation and they want to sell as many e-books as possible. If consumers feel that the price is too high for e-books, it may slow down sales of the Kindle.

Macmillan and the "agency model" may be forcing Amazon into the publishing biz by taking away Amazon's power to determine pricing for what essentially become their own products upon purchase. Publishing is certainly an avenue that Amazon could further explore, in the same way that Netflix produces some of their own movies. Agents and authors may be enticed to publish with Amazon. After all, they play host to millions of consumers every day and are ahead of the curve when it comes to digital publishing. They could do very well bundling traditional books with digital copies, and offer more money to authors because of their more decentralized business model.

1 comment:

  1. These are all really good points. I agree with you that Amazon (or any other bookseller) should be allowed to lose money on a product or a product line if they choose to so. It takes a lot of gall for a manufacturer to dictate pricing to the degree that Macmillan is attempting with e-books and Amazon.

    I think the crux of the problem here is that "big publishing" is really not in the business of digital content delivery. They are in the business of manufacturing physical objects. While they may recognize the need to change the model, and will be the first to bemoan the inefficiencies of their industry, the existing infrastructure is in place and won't go away overnight.

    A friend of mine just remodeled his garage. It would have been a lot faster and cheaper for him to tear down the garage and build a new one, but for reasons having to do with bureaucracy and building codes, he had to work within the exiting structure.

    This could work as an analogy for where the publishing industry stands in relation to e-books. A new business built around the delivery of digital content could quite possibly be profitable selling e-books that list for $9.99, without fear of cannibalizing hardcover sales. But a business built around the sale of hardcover books cannot survive on the relatively small trickle of revenue generated by e-books, while simultaneously driving down the market value of its main revenue-producing product lines. If Big Publishing stopped publishing hardcover books and went completely digital tomorrow, they would not be around next week to benefit from the explosive growth of e-book sales we all anticipate.

    Also, a lot of publishers got badly burned in the 1980's when they invested prematurely in CD-ROM publishing. The bad aftertaste left them skeptical and slow to respond to e-books.

    In all likelihood, big publishers will end up exactly where the big music labels ended up. Macmillan may be making a mistake, but then again, I'm not sure what else they can do.

    I understand the argument about legacy costs, but I don't see a way around it. Soon, there will be publishers with infrastructures built around digital delivery, who will be able to maximize profits with optimal pricing. In the meantime, we have legacy publishers with legacy systems, where less-than-optimal pricing allows them to achieve less-than-optimal profit margins of 5-10%. At the moment, they are the ones who own the rights to publish what the market is demanding, and they have a reasonable expectation to earn a profit from it.

    It's quite a conundrum, isn't it?

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