And Now A Word From Our Disintermediated Sponsor…

You can be forgiven if amid all the hoopla over Apple’s iPad last week (aka, the “Kindle Killer,” or at least the most recent device to bear that moniker), you missed an interesting story in publishing playing out between the World’s Largest Bookstore and one of the world’s largest publishing houses.

Amazon.com is a force to be reckoned with, and its dispute with Macmillan (whose imprints include the commercially-oriented St. Martins Press and the more highbrow Farrar, Straus & Giroux, among many others) shows just how much pull it has.

Or not.

The dispute came to light via Venture Beat last Friday, when the “Buy” button on all of Macmillan’s titles disappeared from Amazon.com. Buyers could still buy the books from other sellers on Amazon.com, just not from Amazon.com itself. (Note: Many of the third-party sellers are used-bookstores, and thus do not pay royalties to the publisher a seller of a new title would.)

This is the result of a pricing dispute. As a message form Macmillan CEO John Sargent explains, the publisher asked Amazon.com to sell its electronic books for up to $15, whereas Amazon.com has been charging $9.99 for all e-books on the site, primarily to promote sales of its Kindle reader. If Macmillan couldn’t charge the higher prices, it would delay releasing its new titles as e-books by several months.

Amazon’s response to Macmillan was to throw them out of the store.

And least temporarily. By now some (but not all) Macmillan titles are back in Amazon’s store, and Amazon’s been making noises about having to cave in to the publisher’s demands for more flexible pricing.

So what’s really going on here?

Well, what we’re seeing is a classic case of technological disintermediation, or cutting out the middleman. Charles Stross, a science fiction author and blogger (some of whose books are published by Tor, a Macmillan imprint), gives a good rundown of the economics here, but the shorter version is that Amazon functions as both a wholesaler and a retailer in the same way that Wal-Mart and Costco Wholesale do. Namely: Buy at wholesale discounts straight from the publisher, sell at retail markup to the consumer, pocket the difference. (Interestingly enough, in the case of Amazon, Wal-Mart, and other big-box stores, they stand accused of pricing smaller independent stores and businesses out of every market they enter into, because the small independents aren’t large enough to buy straight from the publisher but have to go through wholesalers).

In the case of books, we’re talking about a traditional (or “agency”) model of the publisher earning 70 percent of a book’s sale price from a retail outlet (with the price set to what the market will bear), compared with a 50 percent share of each sale through the current agreement with Amazon. And that’s with the book prices set artificially low.

(As a further side note, it’s the publishers that pay the authors-often through an agent, who also takes a cut-so a shrinking piece of the pie for the publisher has a ripple effect all the way down the chain until-surprise, surprise!-the writer gets screwed the most.)

This is where Apple and the iPad enters into the picture. Just as Apple quickly took over the lead position in the digital music market by simultaneously releasing the iPod in conjunction with the iTunes Music Store, so it goes with iPad and the iBooks Bookstore. Interestingly enough, Apple got a lot of traction out of holding off the music labels by charging a flat 99 cents per song for years, only recently allowing certain tracks to be sold at a premium of $1.29 (while also dropping the price on others). The difference is that in the case of the music business, the only alternative for years to Apple was piracy, and labels desperate for a solution were willing to deal. With books, Apple is entering a market crowded by Amazon, Barnes & Noble, even Powell’s down in Portland having a not-insignificant presence on the web. Apple needs an entry, so it’s willing to provide more generous terms to publishers in exchange for a listing.

Obviously, Amazon just realized that if Macmillan were completely banned, Macmillan would go to Apple. Amazon needs the publishers more than the publishers need them, now that there’s a new kid in town. Because while there are a number of e-reader devices on the market, and even though the iPad may not be an ideal device for reading (see my previous thoughts on this here), Apple is the only company that has proven it’s a better disintermediary than Amazon. They set the music industry quaking in its platform boots, they can do the same with books.

It’s just that in this case, it’s now Amazon that has become the middleman.

Postscript:

In Stross’ post, he lays out the business model of publishing this way: author -> publisher -> wholesaler -> retailer -> consumer. Amazon successfully merged the wholesaler and retailer elements of that equation. Its initial move into publishing (de facto, in that it tried to set the price of e-books, the way traditional publishers set the price of their products) has come under significant pressure. Barnes and Noble, in acquiring Sterling Publishing in 2003, now publishes upward of 5,000 titles itself, effectively giving itself a wholesale price advantage. What we might see in coming months and years is attempts by many of these players to collapse other parts of that five-element model. Amazon hasn’t given up on wresting some control away form publishers; that much is certain. Who’s to say Apple, with its strong retail focus, won’t move into the wholesaler realm, or that publishers like Macmillan (or someone else) won’t move further down the chain into distribution. When we’re talking about e-books, in particular, the barriers to entry in these marketplaces are that much lower.

UPDATE: 2/3/2010:

It seems TechCrunch has picked up on the Barnes & Noble angle: turns out The Politician, a book about former Sen. John Edwards, is the top seller over at Barnes & Noble. It’s publisher: Macmillan. Available from Amazon: Not. Amazon rank despite this: 49, from third-party sellers only.

UPDATE 2: 2/4/2010

TechCrunch again, this time fleshing out the argument of how the ground shifted under Amazon by Apple’s entry into the market. Good read.