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Wednesday, July 02, 2008 3:36 PM ET
Publishers worry big, bad Amazon could huff, puff and blow the industry down
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A monthly column focusing on all things printed, including newspapers, magazines, circulars and publishers. The column focuses on the negative pressures currently affecting these traditional mediums, including competition from television and the Internet, changes in consumer consumption habits and the rising costs of resources and production.

For many years, the book publishing industry regarded Inc. as a gentle giant that exposed throngs of customers to books from both large and small publishers.

But recently, Amazon has begun to flex its muscles and some publishers are starting to feel as though the giant has become a bully.

"It's definitely a situation where some of the smaller publishers are starting to believe that Amazon is throwing its weight around a little bit too much," Michael Cairns, a blogger at PersonaNonData, said in a June 30 interview with SNL Kagan.

Several recent events have contributed to this feeling, Cairns added, including Amazon's continued efforts to secure larger and larger discounts from publishers. The breaking point came in June when one U.K. publisher in particular — Hachette Livre's British unit — refused to drop its prices any lower and Amazon reportedly responded by disabling its "buy now with 1 click" button on Hachette titles.

Amazon, Cairns said, is "a very, very aggressive negotiator," as the removal of the icon carries the threat of leading to lower book sales as shoppers could opt to avoid the lengthier check-out process.

Following Amazon's move, The New York Times reported June 16 that Tim Hely Hutchinson, CEO of Hachette's U.K. unit, sent a letter to Hachette authors arguing against Amazon's demands for larger discounts, as well as its negotiating tactics. He warned that Amazon wanted to eventually monopolize "all of the revenue that is presently shared between author, publisher, retailer, printer and other parties."

Evidence that Amazon is trying to help itself to a much larger slice of the book-selling revenue pie can also be seen in the retailer's recent decision to push its print-on-demand publishing unit, BookSurge. In March, the online retailer notified publishers that they must use BookSurge to print their on-demand books that were being sold directly on the Amazon site.

Amazon said in a March 31 letter to publishers that the mandate was aimed at better serving customers.

"We can provide a better, more timely customer experience if the POD titles are printed inside our own fulfillment centers," the company said, adding that the move also saves on transportation and fuel costs.

Amazon emphasized that the requirement was not exclusive and that publishers could still use other on-demand services for those books that they sold in brick-and-mortar stores or through Web sites.

But Cairns said this concession does not do much good for many of the smallest publishers.

"That means they may be in a position of having to deal with two differing POD suppliers," he said. "For a small publisher that doesn't have a lot of resources, that becomes a bit of an obligation that they would potentially have difficulties meeting because of the administrative costs."

Although many small publishers protested against the move, Cairns said, "Amazon didn't back down. ... They have pretty much stuck to their guns."

Meanwhile, one new source of friction between publishers and Amazon could be the price at which the online retailer sells digital books for its portable reader, the Kindle. Amazon currently sells many of its Kindle titles for $9.99.

Mike Shatzkin, founder and CEO of the publishing advisory firm The Idea Logical Co., said in a June 26 interview with SNL Kagan that Amazon is likely not getting those titles from publishers for under $9.99 and is probably taking a loss on those books. But Shatzkin added that situation could change if Amazon succeeds in establishing the Kindle as the dominant e-book platform.

"If the Kindle reaches a critical mass, Amazon will have the ability to tell publishers that if they want their books available on the Kindle, they will have to sell them to Amazon for $6 or less," Shatzkin said. "That's going to be pretty rough."

One reason it is so hard for publishers to meet Amazon's demand for increasingly lower prices, Cairns said, is because they must continue to offer their authors competitive advances and royalty packages to ensure they get the best titles.

"Particularly for the brandname authors, publishers have to pay a very high price for that content," Cairns said. "It would be difficult for publishers to go back to their authors and say 'Give me a better price for your books.'"

As a result, when Amazon asks for steeper discounts on titles, publishers are left trying to maintain their margins in other ways — such as by cutting their marketing and distribution expenses.

"And in this day and age, many of the larger publishers have already sweated out as much expense out of those cost areas as they possibly can, so there's not very much room left at all for them to do that," Cairns said. "It's very tight."

Despite the strained relationship between Amazon and the publishing community, neither Cairns nor Shatzkin believe publishers will decide to stop dealing with Amazon altogether.

"I wouldn't say it's a love-hate relationship; it's more of need and fear relationship," Shatzkin said. "They need Amazon because it's probably every publisher's first or second largest client. But they fear Amazon because it's every publisher's first or second biggest client."

For the big publishers, Cairns added, maintaining a relationship with Amazon is important because the online retailer allows them to feel more secure about large first printings.

"They can afford to have big print runs mainly because they know that Amazon's going to be responsible for selling a lot of that stock," Cairns said.

For the smaller publishers, Terry Nathan, director of the Independent Book Publishers Association, told SNL Kagan in a June 26 interview that Amazon is important because it quickly and efficiently exposes lesser known titles to a very large audience.

"Amazon has really given a lot of these smaller publishers the opportunity to let their books be seen by the general public, so I think it's been a good thing overall," he said.

A few small publishers, though, could indeed opt to stop selling their books on Amazon. Cairns said, "When the thing was going on with [BookSurge], there were a few small publishers who were saying, 'We're not going to sell any of our books with them. We're not going to deal with them.'"

But Cairns believes such a move would likely end up hurting those publishers much more so than it would Amazon.

"The fact of the matter is that would probably only ever be a minority and it wouldn't really impact Amazon at all negatively because they are just so big," he said.

And so, with no recourse for publishers on the horizon, Cairns and Shatzkin both expect that Amazon will continue to become only more massive and more powerful — particularly if consumers take to the Kindle.

"Once someone buys a Kindle, they are an Amazon captive," said Shatzkin, who is a Kindle owner himself. "Most of my clients are publishers and so my attitude toward Amazon is weary. But I also own a Kindle and now I will never read a paper book again."

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