Sunday, July 13, 2014

Amazon-Hachette: The Sounds of Silence - A Guest Post by William Ockham

Everybody's talking about Amazon's latest move in the Amazon-Hachette kerfuffle and the reactions have been pretty predictable. Lots of confirmation bias going around. While the public broadsides, grand offers, and nasty anonymous leaks are full of sound and fury, I'm fond of looking for the truth in the silence. What the companies aren't saying is as important to understanding the situation as what they are saying. I'm not sure if anyone has noticed, but neither side has denied any of the specific factual claims the other has made. In fact, if we read between the lines, we can cut through the noise and see what's really happening. I have learned* the best way to do that is to make a timeline. Our brains have a tendency to remember the order in which we learned a set of facts and it has a hard to reassembling the chronological order of how things actually happened. We should be continually re-evaluating our understanding of this situation based on new information. 

Recent statements from both sides have provided a lot more information about how this dispute got to this point. To avoid turning Joe's blog into an academic article, I'm not going to footnote all of these events. If you want the source for a particular claim, just ask in the comments. My primary sources are the most recent Amazon-Hachette exchange and Michael J. Sullivan's account of his interactions with Amazon and Hachette this year. If I have left off any significant events and gotten any of this wrong, please let me know if the comments. I'm far more interesting in getting this right than being right.

Early Jan 2014

Amazon makes the first move, sending an offer to Hachette. Based on Hachette leaks, we know that Amazon is offering a return to wholesale pricing.

7 Feb 2014

Amazon stops discounting Hachette titles.

9 Mar 2014

Amazon starts widespread reducing inventory of Hachette print titles. (Some folks noticed occasional short inventory of Hachette titles much earlier.)

Mar 2014

Amazon  extends the Hachette contract into April.

Mar-Apr 2014

Sullivan and his business manager are in frequent contact with Hachette and Amazon.  Neither Amazon or Hachette mention to Sullivan that they have no contract to sell his books on Amazon. 

Early April 2014
Hachette responds to Amazon with counter-offer. Amazon rejects offer sometime in April. 
Mid-Apr 2014
Hachette begins serious negotiations to buy the publishing arm of Perseus in a complex three-way deal with Ingram (which wanted the distribution half of Perseus). 
7 May 2014
Sullivan and his business manager start reaching out to other Hachette-published authors. 
8 May 2014
Hachette emails Sullivan's business manager about the contacts with other authors. 
New York Times writer and Hachette transcriber David Streitfeld publishes story quoting Hachette about the shipping delays, but no other details. 
9 May 2014
David Streitfeld "breaks the story". Here is what he wrote:

Amazon’s secret campaign to discourage customers from buying books by Hachette, one of the big New York publishers, burst into the open on Friday
May 2014 
Hachette makes another offer to Amazon. 

23 May 2014

Hachette finally reaches out to its authors with a letter from Michael Pietsch, CEO of Hachette Book Group (HBG).
27 May 2014
Amazon makes its first public statement about the dispute with a low-key posting buried in its forums. The Amazon statement includes an offer to join with Hachette to fund a hold-harmless pool of money for Hachette published authors. 
28 May 2014

Hachette's Investor Day publication reveals its strategic goal to gain control of its titles ebook prices. CEO Arnaud Nourry says the discounting of ebooks ends at the end of 2014. Nourry says he is traveling to the U.S. to negotiate the Amazon deal. 

4 Jun 2014

Stephen Colbert makes an issue of the dispute on his show. 

5 Jun 2014

Amazon counters Hachette's May offer. 

20 Jun 2014

More Hachette leaks to the NYT revealing Amazon's negotiating positions. 

I spoke to someone involved on the Hachette side of the negotiations, who is under orders not to discuss them and asked not to be named. This person said that Amazon has been demanding payments for a range of services, including the pre-order button, personalized recommendations and a dedicated employee at Amazon for Hachette books. This is similar to so-called co-op arrangements with traditional retailers, like paying Barnes & Noble for placing a book in the front of the store.

Amazon “is very inventive about what we’d call standard service,” this person said. “They’re teasing out all these layers and saying, ‘If you want that service, you’ll have to pay for it.’ In the end, it’s very hard to know what you’d be paying. Hachette has refused, and so bit by bit, they’ve been taking away these services, like the pre-order button, to teach Hachette a lesson.”

24 Jun 2014

Hachette closes Perseus deal. 

1 Jul 2014

The New York Public Library hosts a hastily put together public forum stacked with 5 Hachette shills balanced by the inestimable David Vandagriff (affectionately known as Passive Guy by his internet friends).

8 Jul 2014

Amazon's "100% of ebooks receipts offer" becomes public. 

What does the timeline tell us?

1. Hachette did not negotiate in good faith before the end of the contract. 

They didn't negotiate at all. Amazon and Hachette agree on this crucial point. The first Hachette offer was in April.  Amazon says the original contract ran out in March and Hachette hasn't denied it. In my view, the party that makes no attempt to negotiate during the term of the original contract is the instigator of the stand-off.

2. Hachette knew for months that their authors were being harmed and they did nothing. 

Sullivan noticed that the usual Amazon discounts on his titles were gone on February 7. He saw the inventory issues on March 9. He let Hachette know about both issues. At that point Hachette had let their contract expire without so much as a counter-offer. 

3. We can't know for sure, but it looks like Sullivan was the catalyst for the issues becoming public. 

Look closely at the timeline. 

4. Hachette was able to pull off a complex, multi-million dollar acquisition of a smaller publisher, but unwilling to fund either of Amazon's offers to help the affected authors. 

The publishing half of Perseus was estimated to have revenues in the $100 million range. That's a pretty big deal in the publishing world.

5. Since the dispute became public, Hachette has essentially abandoned the negotiations in favor of a concerted public relations campaign. 

Hachette's last offer was in May around the time the affair became public. Amazon sent them another offer on June 5. Hachette has orchestrated a high-profile publicity campaign with big name authors, a popular TV host, and the publishing industry press taking up Hachette's cause. Hachette has even enlisted the New York Times to play stenographer for them.

6. Hachette has a powerful incentive to drag this out.

To achieve its goal, Hachette needs to delay the final agreement until late 2014 or early 2015. That is the earliest time they will be able to conclude an agreement with Amazon that restricts Amazon's ability to discount ebooks. Moreover, developments in Apple's ongoing appeal could substantially impact Hachette's negotiating position. An Apple loss or settlement would make reaching an agency deal (with no discounting) almost impossible because Amazon is not going to agree to let Apple underprice them on ebooks.

*I learned to make timelines like this from Marcy Wheeler, who is so smart Barry Eisler named a character in his John Rain series after her.

Joe sez: All great points and conclusions, William. 

As per your call that the NYT has become Hachette's stenographer, what appears to be a level-headed post in the NYT today gets several things wrong. It mentions Amazon offers 35% e-royalties compared to legacy publishing's 25%, but doesn't mention that's gross, not net. It doesn't mention the letter signed by over 7000 people--authors and readers--supporting Amazon. It assumes this battle is about Amazon taking money from Hachette, but misses the whole point that Hachette wants to control ebook prices. And it ends on a note of paranoia.

There is fear here. It's somewhat odd, considering the record profits publishers are making and boasting about, but when you think about the long run the fear is warranted. Publishers once ruled the roost. They had the key to the gate, and control over price and distribution. Readers and writers were at their mercy.

And now, suddenly, we're not. 

Publishers and their pundits (I'm looking at you Mike Shatzkin and Digital Book Word) refuse to believe or even acknowledge the data on, and most of them believe that ebook sales are plateauing. In fact, they are continuing to grow at a rapid pace, because of indies. But no survey or data collection shows how big the self-pub shadow industry is, so the legacy world remains clueless as to many sales they are actually losing.

This is a slippery slope, because more and more authors are figuring it out.

Readers want ebooks, and they want to shop on Amazon. Most writers, even those who cling to their legacy masters with Stockholm Syndrome allegiance, know the royalty difference between what their publishers pays them and what they can get on their own. As bookstores close (hello Barnes & Noble) and the paper midlist becomes unsustainable, even those steadfast legacy authors are going to have to self-publish. Publishing will be relegated to managing backlists (at least until authors begin hiring lawyers) and their major bestsellers, who are eventually going to leave as paper sales become a niche market. 

No matter whose side you're on in this current dispute, the future is already written. Hachette and the Big 5 won't be able to sustain their business model; protecting their paper oligopoly. And the mistakes they're making right now are only bringing this future to bear even faster.