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Why Amazon may have killed the golden goose

morgueFile user clarita

(MoneyWatch) COMMENTARY Amazon (AMZN) has been in a tough battle with publishers and rival Apple (AAPL). The U.S. Department of Justice has stepped in with a suit over alleged price fixing.

That could be a real help to Amazon if the government can either prove its case or get Apple and all the publishers to settle. But in the long run, the e-tailing giant may have won the battle but lost the war. Ultimately, the company needs vendors to play ball if its long-term strategy is to work. But it seems that some large publishers have started to turn their backs on Amazon. Maybe in its quest to win the retailing war and control publishing, CEO Jeff Bezos has gone too far and undermined his own efforts.

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At first glance, the DOJ suit already seems to have taken the wind out of some sails. Three publishers reportedly already have agreed to settle the case: Simon & Schuster (which is owned by CBS), Lagardere SCA's Hachette Book Group, and News Corp.'s (NWS) HarperCollins. The proposed remedies in the DOJ's competitive impact statement include the following:

  • Immediate termination of the so-called Apple agency agreements, under which publishers set a price and Apple takes a percentage of the sale (much as Apple does with apps and music)
  • No contract with a "most favored nation" pricing clause, which means Apple wouldn't be able to ensure that Amazon could not get a lower price on e-books
  • No prohibitions on retailer discounting for at least two years
  • Staggered contract dates so multiple publishers could not effectively collude in negotiations with Apple
  • Provision of e-book retailing agreements to the DOJ on a quarterly basis

That takes a very large hammer to the arrangements with Apple, because the iTunes sales system is designed to let a vendor set a price and then provide a percentage to the company. Having only three of the "Big Six" publishers already agree to the settlement puts a potentially big obstacle in front of Apple's success in selling e-books, even if it and the other publishers hold fast through a trial.

That might sound as though Amazon automatically wins, but it doesn't. According to Salon, all six big publishing houses have refused to sign Amazon's latest annual contract. (PaidContent tried to independently verify the story, but could confirm only two refusing to sign.)

That's still an enormous deal. Amazon has long since diversified beyond books into a range of media and other product categories. Yet print books and e-books remain a vital part of its business, not only in terms of revenue, but also for branding and as a way to help lock people into doing other business with the company.

Will Amazon shut off its buy buttons for these companies? It seems unlikely, though Bezos has done it before. But Amazon is now in a difficult situation. Publishers have to cooperate if the retailer is going to succeed in its long-term strategy to gain more influence as a media player.

However, the Big Six don't want to hand over that kind of power -- and  they don't have to. For example, they could set relatively low discount levels on e-books, forcing Amazon to lose even more money in discounting than it already is (and Amazon is writing off a pretty penny on the Kindles it sells). Even with that level of resources, a company with investors that want a return can't keep losing money forever.

Image courtesy of morgueFile user clarita

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