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iPad Rattles the e-Bookshelves

But Amazon’s e-book dominance may be hard to change.
February 2, 2010

Over the weekend, a massive disappearing act took place on the virtual shelves of Amazon.com. In a dispute over e-book pricing, the online retailer blocked customers from buying titles–e-book or print–from Macmillan, a publisher whose imprints include Nature Publishing Group, the literary line of Farrar, Straus, and Giroux, and the science fiction and fantasy line Tor.

Bestseller: The iPad features iBook, an application for buying and reading books.

Amazon’s extreme reaction to Macmillan’s pricing demands reflects, in part, the seriousness with which it views Apple’s impending move into the e-book business. By launching the iPad and a new application for buying and reading books, called iBook, Apple is offering publishers an attractive new way to sell and deliver their titles online. Shortly before the launch of the iPad last week, Apple’s CEO, Steve Jobs, also cut a deal with several major publishers–including Macmillan–to give them far greater say in e-books pricing than Amazon offers.

On Sunday, Amazon agreed to accept Macmillan’s new pricing model and said it would once again make the publisher’s titles available through its site. However, some analysts believe that it will ultimately be difficult for Apple, or anyone else, to challenge Amazon’s long-term dominance of the e-book market.

With every major Kindle release, Amazon CEO Jeff Bezos has emphasized that bestsellers are available on the device for $9.99. Under its existing model, Amazon buys books from publishers for a set fee in bulk. It reportedly often pays publishers more than $9.99 for some books, selling them at a discount in order to drive up adoption of the Kindle. But many publishers worry that this loss-leading strategy will make e-books less profitable for them in the long run.

Apple has negotiated a different deal with publishers, called the “agency model.” For its e-book store, publishers can set their own prices, giving Apple a percentage. According to a statement by Macmillan CEO John Sargent, the dispute began when the publisher asked Amazon to adopt the same model. “The agency model would allow Amazon to make more money selling our books, not less,” Sargent said, noting that Macmillan would also make slightly less. “Our disagreement is not about short-term profitability but rather about the long-term viability and stability of the digital book market.”

Some see Amazon’s response as a sign of its trepidation over the prospect of competing with Apple. “The way in which Amazon was willing to engage with the nuclear option to lock in what it has right now indicates that it thinks the iPad is an extraordinarily serious threat,” says Tobias Buckell, a science fiction author whose books were temporarily removed from Amazon.com in the dispute. Buckell notes that e-books don’t typically sell in high volumes, so it makes sense to publishers to start with a higher price and lower it over time.

Venting obvious frustration, Amazon issued a statement on Sunday that said “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 never removed the option to buy Macmillan books from third-party sellers).

James McQuivey, a principal analyst with Forrester Research, says that pressure from the iPad “is precisely the reason” why the dispute happened. But, even though Amazon backed down, McQuivey believes the company still has a strong hold over publishers.

“Amazon demonstrated very clearly that it has the power to cut off the lifeblood from a publisher if it really wants to, because it doesn’t just control e-book sales,” McQuivey says. “Apple has no leverage in this market, because it doesn’t even control e-books at this point, much less paper sales. Amazon has both.”

Other e-book makers may have an even more difficult job competing with Amazon, McQuivey says, since they lack the reputation and distribution channel of Apple.

Authors, meanwhile, felt the weight of Amazon’s decision keenly. “Most of my books are sold online because I have a prominent blog, and that really hit me where it hurt,” says Buckell. “No bookstore has ever yanked books in a publishing dispute; it never occurred to me that Amazon would turn to this as an option.”

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