May 28th, 2014

On Monopsony

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2399575

Paper by John B. Kirkwood, Seattle University School of Law (hey, I attended someone's law school graduation there about a decade-ish ago). It's about the antitrust action against Apple in conjunction with the agency pricing price fix conspiracy. It's pretty good, and the last section presents an interesting set of criteria for when sellers might be justified (that is, procompetitive) in colluding against a monopsony. Too long, don't want to read? Surprise! The publishers didn't meet any of the criteria. And they would have had to meet all.

This isn't a decision -- it's an academic paper. So you know, just one man's opinion and he's not a judge so it doesn't set a precedent.

Along these lines, one of the indicators that a monopsony is being anticompetitive is if suppliers (publishers/writers in this case) decide to quit supplying because the price they are being paid is too low. With that in mind, contemplate this, from Hugh Howey (h/t PassiveVoice):

http://authorearnings.com/the-tenured-vs-debut-author-report/

"It’s easy to see that, for the past 4 years, and even taking lost print sales into consideration, far more Indie authors than Big-5 authors are earning a living wage from their writing."

Kirkwood argued for other reasons that Amazon _is_ exercising power in its relationship with publisher-suppliers -- but that power is countervailing at most. Howey presents evidence (which has real limits) that when Amazon created a new market for selling books to customers, it enabled a group of authors to make a living wage who were marginal in the pre-existing world of trad pub, and still more authors who never made it into that world at all to make some money, sometimes a living wage or better. This is not a monopsony pushing _authors_ too far out on the curve (altho it might be a monopsony pushing editors/publishers out of business).

Driverless taxis

http://www.washingtonpost.com/news/morning-mix/wp/2014/05/28/googles-new-driverless-car-has-no-brakes-or-steering-wheel/

"The study was led by Google consultant Lawrence D. Burns, the former vice president for research and development at General Motors. It found that Manhattan’s 13,000 taxis made 470,000 trips a day, transporting 1.4 passengers at an average speed of 10 to 11 mph, with an average wait time of five minutes.

The report suggested that a fleet of 9,000 automated vehicles hailed by smartphone could carry as many people with a wait time of less than one minute. It would be cheaper, too, an estimated 50 cents per mile compared to a current cost of $4 per mile, a calculation that assumes a 15 percent profit."

A Few Remarks on the present falling out between Hachette and Amazon

My regular readers know that "A Few Remarks" from me is weaponized understatement, my primary form of humor suitable for public consumption. Feel free to TL;DR.

Our Story So Far

Not too long ago, Hachette and other large publishers settled with the DoJ and others who were suing them for colluding to fix prices via something called the "agency model". Under the agency model, a retailer does not purchase a product from a supplier, but sells it sort of on a consignment basis, keeping a percentage of the sales price for themselves and paying the rest to the supplier. The effect of agency pricing was interesting, in that it led to smaller amounts of money to publishers, a higher price to customers and a larger margin for retailers such as Amazon. Importantly, from the perspective of the conspiracy, it slowed e-book adoption and raised margins on e-books enough to encourage more sellers to enter the field thus reducing Amazon's market share.

As a part of the settlement, Hachette and other large publishers agreed to refrain from engaging in an agency model form of business for a period of time. The group of publishers did not have precisely the same time frame when they could begin to demand that retailers accept the agency model -- Hachette came up first and this is likely to be the cause of the current, ongoing dispute with Amazon. So while most coverage asserts without evidence that Amazon is demanding more from Hachette than they have historically gotten, this history suggests that something else is going on. Hachette is attempting to change the deal. This history also suggests that an important component of the negotiations likely involves the price paid by the consumer, and that Amazon is attempting to retain flexibility and the ability to set very low prices, and Hachette is probably trying to raise prices.

From April 2012:

http://www.publishersweekly.com/pw/by-topic/industry-news/publisher-news/article/51469-the-broad-strokes-of-the-hachette-harpercollins-and-s-s-price-fixing-settlement.html

"Going forward, the Settling Publishers can still use the agency model if they choose, but for a period of two years they cannot dictate final consumer prices, which was the allure of the agency model to begin with."

Here is the agreement:

http://www.justice.gov/atr/cases/f286800/286808.pdf

Because the nature of publishing contracts and copyright law gives Hachette a monopoly on selling the books that they sell, and because Amazon has something like a 2/3rds share for online book purchases, print and digital, both Amazon and Hachette perceive a strong need for each other -- and a great deal of power to threaten to walk away from any deal.

Codex Group research referred to here:

http://www.publishersweekly.com/pw/by-topic/industry-news/bea/article/62520-bea-2014-can-anyone-compete-with-amazon.html

Analyzing the Conflict

We could model this as a bilateral monopoly. While Hachette could abandon Amazon as a market for its products, it would be extremely expensive for Hachette to meaningfully replace the sales it would thus lose, if, indeed, it is possible at all. On the other hand, Amazon customers are used to expecting to be able to buy just about any book in existence and have it delivered in a small number of days if not minutes; Amazon could reasonably expect a very high cost in terms of customer satisfaction if it is unable, over the long term, to make Hachette's products available to its customers.

There are other (indirect) participants in this negotiation, particularly since it has gone on for a while without resolution. Authors are aware, because their sales are being impacted. Over time, if Hachette is unable to come to an agreement with Amazon, and as more and more authors see a negative impact on their sales as a result, we can reasonably expect to see authors apply pressure (moral suasion, leaving at the end of contract, deciding not to sign a contract with Hachette) to Hachette to come to an agreement to restore this very large sales channel. If Amazon is unable to come to an agreement with Hachette, we can reasonably expect to see readers apply pressure (complaining, shopping at other stores whether print or digital) to Amazon to come to agreement with Hachette to supply product.

In addition to other participants in this negotiation, there are costs to the negotiation over and above the costs of an agreement (if ever arrived at) or a decision to cease doing business with each other. I think it’s worth considering who is paying a higher price on a daily basis while not coming to agreement. I mentioned in a previous post that the kind of ordering which Amazon is engaged in currently costs Hachette more per unit than the kind of ordering which Amazon previously engaged in while the relationship was less hostile. It also costs Amazon more per unit to order items in this manner. It is also possible to detect reduced sales of Hachette product because shipping times have extended, the loss of the pre-order button, etc. It is less obvious whether the loss of the pre-order button and the friction in Hachette delivery is reducing income to Amazon. This is important: there is a question of what happens if someone goes to Amazon intending to buy a product and discovering that the one they would like, from Hachette, is going to take a while to get. If they went there intending to JUST buy that book, perhaps they leave without purchasing it. Perhaps they buy it used or from a third party seller. If they went there intending to buy a book, and in more friendly circumstances, they would have bought something published by Hachette, but in these circumstances they might buy something from Random Penguin, Amazon may not be losing any money at all. While costs associated with Hachette friction exist on both sides, I’m inclined to suspect that the most serious impact is on Hachette’s authors, the next most serious impact is on Hachette itself and sometime after that would be Amazon.

It's All About ME, ME, ME!!!

What is the impact on the customer? Well I have good data on me.

Back when Macmillan had its buy button removed by Amazon, at the very beginning of the price fixing conspiracy, I did a detailed analysis of my library and purchasing history, at Amazon and elsewhere, to determine how many Macmillan books I owned and how many I might be intending to buy in the near future. I very definitely remember being affected by a standoff between Amazon and Penguin — I was waiting for _Changes_ by Jim Butcher (and after reading it, I never read another Jim Butcher book again) as well as some other series entries. Hachette, through Grand Central, used to publish the Kitty Norville series, however, Carrie Vaughn switched to Macmillan and brought Kitty with her. The biggest impact on me of Hachette not being available via Amazon would be if they didn’t carry Jemisin’s _The Fifth Season_ when it comes out in 2015 — that would suck. As near as I can tell, I’ve only bought one Hachette book so far in 2014, and I really hated it: _Love Sense_. It was truly terrible. By contrast, in 2013, I bought at least four (I’m a little uncertain how many imprints I need to search under directly): _The Org_, which was fluffy but okay, _The Everything Store_, which I liked, _The Snow Child_, a book group selection which I enjoyed, and _American Elsewhere_, which I bought for ReaderCon and disapproved of. I also bought the junior novel adaptation of _Despicable Me_, notable because it was a print book purchase.

Ironically, between Carrie Vaughn switching from Grand Central to Macmillan, and more recently I started to read Darynda Jones, if Macmillan and Amazon have a falling out, I’d be quite annoyed. And, as always, whenever Amazon has a disagreement with Penguin, I get pissed.

Obvs, YMMV: if you buy a lot of Hachette products AND you are a Prime customer who consumes kindle books AND you like to buy things right when they come out and maybe pre-order them in advance so you get that DELICIOUS email in the middle of the night saying You Have New Reading Material!!!, you are probably quite agitated right about now. If you are a Hachette author who has a book coming out, I am sorry. Your life kinda sucks. If you are a new Hachette author with your first book coming out, I am _really_ sorry because this is about the worst thing that can happen to you, from a career perspective.

What Happens Next

Amazon has already said this isn't ending soon, and if I'm right and most of the pressure from authors and customers is harder for Hachette to bear than for Amazon, time is on Amazon's side. Hachette _cannot_ collude with other publishers, and it's potentially risky for another publisher to deploy their first post-settlement agency agreement while this is going on. They'd _really_ better have developed whatever they are trying to get Amazon to agree to separately and the terms had better not look too similar or there will be trouble. In some ways, multiple publishers leaning on Amazon simultaneously for agency model creates a huge incentive for the remaining large publishers to do Business As Usual, as Random House did during the beginning of the original price fixing conspiracy: whoever is still selling books at low prices is going to sell job lots of them if the other big publishers voluntarily remove themselves from the biggest outlet of books in the US market.

ETA: I'm trying to find a term sheet and I stumbled across a list of upcoming titles. Convenient! I'm now excited about some upcoming fiction from Hachette that I can't pre-order: _The Art of Asking_ by Amanda Palmer and _Zillow Talk_ by Stan Humphries and Spencer Roscoff. And I quit reading Gail Carriger a while back altho I cannot at the moment recall why; it may have been inability to finish one of the entries due to boredom?

ETAYA: I don't know why I'm so slow at tracking this stuff down. Here is Hachette's 2014 terms under the wholesale model (we don't know what they are arguing about with Amazon, but my theory -- shared by others -- is that they are attempting to re-instate agency model):

https://www.hachettebookgroup.biz/_b2b/media/cms_media/sales_docs/termsataglance2014.pdf

Because these are wholesale terms, Amazon doesn't need to really have a contract with Hachette to sell their books; they could get them through a distributor like Ingram, for example, altho what happens with e-books is much, much less clear to me. Ingram does supply e-books, but I don't know how that would work with kindle.

Their 2013 year ended with the end of March. Here are the expired coop terms:

https://www.hachettebookgroup.biz/_b2b/media/cms_media/sales_docs/2013massmerchantmerchandisingplan.pdf

This could be a component of current negotiations (why am I saying could? We all know it is).