The iPad and Publishers (New Yorker)

The industry’s great hope was that the iPad would bring electronic books to the masses—and help make them profitable. E-books are booming. Although they account for only an estimated three to five per cent of the market, their sales increased a hundred and seventy-seven per cent in 2009, and it was projected that they would eventually account for between twenty-five and fifty per cent of all books sold. But publishers were concerned that lower prices would decimate their profits. Amazon had been buying many e-books from publishers for about thirteen dollars and selling them for $9.99, taking a loss on each book in order to gain market share and encourage sales of its electronic reading device, the Kindle. By the end of last year, Amazon accounted for an estimated eighty per cent of all electronic-book sales, and $9.99 seemed to be established as the price of an e-book. Publishers were panicked. David Young, the chairman and C.E.O. of Hachette Book Group USA, said, “The big concern—and it’s a massive concern—is the $9.99 pricing point. If it’s allowed to take hold in the consumer’s mind that a book is worth ten bucks, to my mind it’s game over for this business.”

At the Yerba Buena Center, it took a while for Jobs to mention books, and when he did he said that “Amazon has done a great job” with its Kindle. “We’re going to stand on their shoulders and go a little bit farther.” It would probably have been more accurate to say that Jobs planned to stand on Amazon’s neck and press down hard, with publishers applauding. The decision to enter publishing was a reversal for Jobs, who two years ago said that the book business was unsalvageable. “It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore,” he said. “Forty per cent of the people in the U.S. read one book or less last year.” But if reading books was low on the list of things that the iPad could do, it was nonetheless on the list, which meant that Amazon had become a competitor. “There’s a lot of heat between Apple and Amazon and Google,” an adviser to Jobs said. “Steve expresses contempt for everyone—unless he’s controlling them.” An Apple insider said, “He thinks Amazon is stupid, and made a terrible mistake insisting that books should be priced at $9.99.”

The next day, a Friday, John Sargent, the C.E.O. of Macmillan, a publishing conglomerate that includes Farrar, Straus & Giroux and St. Martin’s Press, flew from New York to Seattle to meet with Amazon. Macmillan is the smallest of the big-six publishers, which produce sixty per cent of all books sold in the U.S. Like its peers, Macmillan relies heavily on Amazon, which sells about fourteen per cent of its trade books and the vast majority of its e-books. But Sargent was determined to force Amazon to change the way it does business.

Traditionally, publishers have sold books to stores, with the wholesale price for hardcovers set at fifty per cent of the cover price. Authors are paid royalties at a rate of about fifteen per cent of the cover price. A simplified version of a publisher’s costs might run as follows. On a new, twenty-six-dollar hardcover, the publisher typically receives thirteen dollars. Authors are paid royalties at a rate of about fifteen per cent of the cover price; this accounts for $3.90. Perhaps $1.80 goes to the costs of paper, printing, and binding, a dollar to marketing, and $1.70 to distribution. The remaining $4.60 must pay for rent, editors, a sales force, and any write-offs of unearned author advances. Bookstores return about thirty-five per cent of the hardcovers they buy, and publishers write off the cost of producing those books. Profit margins are slim .*
Though this situation is less than ideal, it has persisted, more or less unchanged, for decades. E-books called the whole system into question. If there was no physical book, what would determine the price? Most publishers agreed, with some uncertainty, to give authors a royalty of twenty-five per cent, and began a long series of negotiations with Amazon over pricing. For months before Sargent’s visit, the publishers had talked about imposing an “agency model” for e-books. Under such a model, the publisher would be considered the seller, and an online vender like Amazon would act as an “agent,” in exchange for a thirty-per-cent fee. Yet none of the publishers seemed to think that they could act alone, and if they presented a unified demand to Amazon they risked being charged with price-fixing and collusion.
In Seattle, Sargent met with Russ Grandinetti, the vice-president in charge of Kindle Content, and told him that if Amazon would not accept the agency model Macmillan would restrict the publication of its e-books. Sargent was giving an ultimatum: Amazon had built its business on comprehensiveness, and if Macmillan withdrew its books it could no longer claim to be the world’s best-stocked bookstore.
Amazon did not react as Sargent had hoped. Before he stepped off the plane, back in New York, that Friday evening, it had stopped selling all of Macmillan’s titles. But, as Jobs hinted, four other major publishers—Simon & Schuster, HarperCollins, Penguin, and Hachette—were quietly planning to follow Sargent’s lead. On Sunday afternoon, Amazon reversed course and announced on its Web site, “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.”