Amazon Vs. Macmillan Is Just the Start of Publishers Twisting Arms

Last Updated Feb 2, 2010 9:40 AM EST

There's been a wrestling match between technology and content companies for years, but it's coming to a head, and the outcome is going to reshape the way high tech works.

The quick recap is that late last week, sites like VentureBeat noticed that Amazon.com (AMZN) had pulled from its site books published by Macmillan. The reason was that Macmillan had been pushing hard over the price of e-books.

Publishers haven't liked Amazon's drumbeat of $9.99 because the electronic versions only save a little money per copy in printing and inventory costs. The vast bulk of the expenses in writing, editing, production, and marketing remain. However, Amazon has found that e-books move well under $10 and hasn't wanted to shift pricing. You also have to assume that Macmillan's partnering with Apple (AAPL) during the iPad launch had something to do with this. The 30 percent of sales price that Apple wants to take is less than half of the 70 percent that Amazon has demanded.

Reports suggest that Amazon pulled the listings to teach Macmillan a lesson. Only as I've been saying for a while regarding tensions between News Corp. (NWS) and Google (GOOG), pay walls, and others, the tech companies may actually have a much weaker hand than they've been thinking.

The problem they face is two-fold. On one hand, such tech companies as Google, Amazon, and Apple increasingly need content. It becomes a distinguishing feature and, after all, the real reason people are using computers. Whether you call it data, videos, or articles, content is absolutely necessary. However, the publishers have been flailing about, trying to understand how to make money. More are going out of business or struggling to keep afloat.

Another way of saying this is that publishers are business animals with their backs up against the wall and little to lose. If an Amazon threatens to pull a company off its listings, the company might well say, "Go right ahead." Ultimately, it's Amazon that feels the pain when it cannot sell popular items that its customers want to buy. The perception of universal access to any media becomes one of its major selling points.

How do I know that this isn't just wishful thinking? Because Amazon, whose management is generally very smart, just folded. Pulling the Macmillan books off the system was a bluff, only this time a publisher called.
We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan's terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books. Amazon customers will at that point decide for themselves whether they believe it's reasonable to pay $14.99 for a bestselling e-book. We don't believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative.
Make no mistake, this was a huge loss for Amazon and the talk of other publishers staying the course is bravado. All these companies are hurting for revenue and profits. Seeing a competitor get a few more dollars on the top end while giving less up to the retailer means they'll be asking for, and getting, the same. Independents will realize that if the big names can get more, the dynamics of what is "customary" for the industry has just shifted. The fact that they could get a better deal from Apple only helped clinch the deal. According to author Charles Stross, Amazon is already trying to match Apple's 30 percent take, but with a few strings:
Just before Apple announced the iPad and the agency deal for ebooks, Amazon pre-empted by announcing an option for publishing ebooks in which they would graciously reduce their cut from 70% to 30%, "same as Apple". From a distance this looks competitive, but the devil is in the small print; to get the 30% rate, you have to agree that Amazon is a publisher, license your rights to Amazon to publish through the Kindle platform, guarantee that you will not allow other ebook editions to sell for less than the Kindle price, and let Amazon set that price, with a ceiling of $9.99. In other words, Amazon choose how much to pay you, while using your books to undercut any possible rivals (including the paper editions you still sell). It shouldn't surprise anyone that the major publishers don't think very highly of this offer ...
It sounds like the type of deal that the Department of Justice or Federal Trade Commission could view as price fixing, making Amazon potentially vulnerable on another front and scaring off publishers.

This isn't just about books, and signs of a shift in power are popping up in other places. AP has signed a deal with Yahoo (YHOO). No matter what the financial conditions, it is using this as a negotiating tool with Google and Microsoft (MSFT). And Rupert Murdoch has already said that he's ready to walk News Corp. away from Google. That might seem like posturing, but he's too experienced and smart a negotiator to raise a threat that he can't and won't carry through. Although the search engine sites like to claim that they don't need the content producers, they do, and the producers are starting to realize it.

Everyone on the content end feels the pinch. Movie studios face danger from falling DVD sales because they, not box office receipts, are what drive profit. Music studios were taking to suing users, trying to reduce file sharing. They are all going to demand more, and the tech companies that depend on content may find themselves unable to say no. After all, for every Amazon there is an Apple, and no one can afford being the odd one out.

Image via stock.xchng user bigevil600, site standard license.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.