Macmillan CEO Fires First Shot in eBook War Against Amazon.com

Th eBook War has begun.

On January 30, Macmillan CEO John Sargent took the unusual step of going public in his company’s dispute with Amazon.com. To explain why Macmillan’s books were taken off of the Kindle and Amazon.com, Sargent took out an advertisement in Publishers Lunch, an increasingly influential blog that covers the publishing industry.

The heart of the war is increasing tensions between publishers and Internet retailers such as Apple and Amazon over the pricing of books in the digital age, an issue that I focused on in my BusinessWeek feature, eBooks: Averting a Digital Horror Story. Amazon has deeply discounted ebooks, typically charging $9.99, and sometime going as low as $7.99. However, publishers don’t take a loss. They are typically paid about half the hardcover’s retail price, whether a digital book or hardcover is sold. But Amazon has been pushing to pay them less, and many publishers think cheap digital books undervalue their product and will open the door to lower industry revenues in the future.

That’s the problem that Sargent tackled in his note. In the ad, Sargent proposes moving to a different business model in which publishers set the price of ebooks and split the revenue with retailer, with the publisher keeping 70%, and 30% going to the retailer.

This is precisely the type of business model and revenue split that Apple is reportedly offering publishers who offer ebooks on its new iPad tablet computer. The growing battle between Amazon and Apple over digital content distribution is going to be one of the most important tussles of the Digital Age. It will shape the future of electronic culture. This is just the beginning.

And publishers should be careful what they they wish for. Many publishers are worried that Amazon will end up with the same kind of pricing power in books that Apple has in music, and that the book industry will suffer the same kind of bruising decline. Now, with the iPad, they are clearly trying to use Apple as a wedge in that fight. But as Tim O’Reilly told me, Apple could very well end up being the dominant player in ebooks.

One reason: More than 50 million people have the company’s iPhone or iPod Touch, which can be used to read digital books, compared with just four million who have electronic book readers. O’Reilly says his company is generating far more sales from Apple customers than Kindle users. O’Reilly currently offers 500 books on the iPhone, compared with 350 Kindle titles. Another 500 iPhone titles are in the works. the iTunes/App store and the iPad.

Whether one company will end up benefiting content providers more than another over the long run is the big question.

Check out Sargent’s letter:
Editors’ note: This message ran as a paid advertisement in a special Saturday edition of Publishers Lunch

To: All Macmillan authors/illustrators and the literary agent community
From: John Sargent

This past Thursday I met with Amazon in Seattle. I gave them our proposal for new terms of sale for e books under the agency model which will become effective in early March. In addition, I told them they could stay with their old terms of sale, but that this would involve extensive and deep windowing of titles. By the time I arrived back in New York late yesterday afternoon they informed me that they were taking all our books off the Kindle site, and off Amazon. The books will continue to be available on Amazon.com through third parties.

I regret that we have reached this impasse. Amazon has been a valuable customer for a long time, and it is my great hope that they will continue to be in the very near future. They have been a great innovator in our industry, and I suspect they will continue to be for decades to come.

It is those decades that concern me now, as I am sure they concern you. In the ink-on-paper world we sell books to retailers far and wide on a business model that provides a level playing field, and allows all retailers the possibility of selling books profitably. Looking to the future and to a growing digital business, we need to establish the same sort of business model, one that encourages new devices and new stores. One that encourages healthy competition. One that is stable and rational. It also needs to insure that intellectual property can be widely available digitally at a price that is both fair to the consumer and allows those who create it and publish it to be fairly compensated.

Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digital media businesses). The price will be set the price for each book individually. Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time.

The agency model would allow Amazon to make more money selling our books, not less. We would make less money in our dealings with Amazon under the new model. Our disagreement is not about short-term profitability but rather about the long-term viability and stability of the digital book market.

Amazon and Macmillan both want a healthy and vibrant future for books. We clearly do not agree on how to get there. Meanwhile, the action they chose to take last night clearly defines the importance they attribute to their view. We hold our view equally strongly. I hope you agree with us.

You are a vast and wonderful crew. It is impossible to reach you all in the very limited timeframe we are working under, so I have sent this message in unorthodox form. I hope it reaches you all, and quickly. Monday morning I will fully brief all of our editors, and they will be able to answer your questions. I hope to speak to many of you over the coming days.

Thanks for all the support you have shown in the last few hours; it is much appreciated.

All best,
John

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2 Responses to “Macmillan CEO Fires First Shot in eBook War Against Amazon.com”

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