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In Bid To Expand Margins, Amazon Risks Reputation

In Bid To Expand Margins, Amazon Risks Reputation

There seems to be no end in sight to Amazon.com, Inc.’s (AMZN) tiff with Hachette Book Group USA, and its detractors are ratcheting up their pitch.

The Seattle-based online retail giant has already been accused of using its upper hand to pressure publishers into giving in to its demands, which include increasing book prices and slashing discounts to maximize profits. Last week, Hachette also accused Amazon of deliberately delaying shipments and manipulating the recommendations it offers buyers on its website in a bid to drive them away from titles published by Hachette as it refuses to toe Amazon’s line. Hachette claims Amazon is also using tactics like keeping lower-than-normal inventories of Hachette books to limit pre-order sales of popular titles.

Amazon hit back in a statement released Tuesday night, claiming it wants to negotiate terms in order to serve its customers better and benefit them by eventually lowering prices. “When we negotiate with suppliers, we are doing so on behalf of customers,” the company said.

Amazon also turned the tables on Hachette’s claims that it is acting like an arrogant, too-large-to-challenge corporation by pointing out that Hachette itself is a part of the Lagardère Group, a $10-billion French mass media giant.

It further said it does not expect the issue to be resolved soon, making it clear that it has provisioned for a full-blown war where one party may eventually end up losing out.

The fight revolves mainly around a disagreement over the pricing of e-books, which contribute around 30% of Hachette’s sales in the US. Amazon is by far the largest retailer of e-books in the country, with around 60% of US e-book titles going through its website. E-books command higher margins for both retailers and publishers due to the lower cost of publishing them.

Amazon currently charges a 30% commission on titles sold on its website, but bears the discounts given to customers by itself. In order to expand its thin margins, Amazon is pushing the publisher to bear a portion of the cost of discounts, but Hachette has made it clear that it will not accommodate its demands.

 

It has instead sought government intervention, asking the Department of Justice and the Federal Trade Commission to investigate Amazon like they did Apple Inc. (AAPL) in 2010, when the consumer electronics giant had tried to force publishers to set higher prices for e-books meant for the iPad.

Amazon was up 1.23% in early hours of trading on the Nasdaq.

Publishing Industry Hits Back

In the midst of the ongoing feud, writers and authors find themselves marooned. The royalties they receive from publishers on book sales are likely to fall considerably if Amazon’s embargo continues.

That has triggered wide uproar, and agents, authors and even long-time customers are calling for a boycott of Amazon’s services until the issue is resolved and affected parties are compensated. Even the journalistic community has come out against the company for its uncompromising stance, and in the process stifling authors’ commissions. Widely-read authors like JK Rowling, James Patterson, and Malcolm Gladwell are among those who have existing deals with Hachette.

The barrage of criticism from multiple fronts has led a number of analysts to note that Amazon’s greatest threat right now is not government intervention, but the damage to its reputation from the negative publicity it is receiving. Authors who have long depended on Amazon for a large chunk of their royalties could push for a large boycott, and publishers and customers could join in for a sweeping movement against what are widely being seen as ‘high-handed’ tactics.

In recent years, publishers have made an effort to improve their negotiating position in such scenarios. HarperCollins, one of the Big Five publishers in the US and a subsidiary of News Corp. (NWSA), announced earlier this year that it had reached a $415 million deal to acquire Toronto-based Harlequin, a major publisher of books targeted mainly at female readers. Last year, Penguin Group had merged with Random House in a bid to create a player that could throw its weight around in the publishing industry.

 

On its part, Amazon has moved to appease authors by proposing that it set up a fund to compensate those affected by the feud, like it did during a tussle with publisher Macmillan in 2010. Amazon said it is willing to split costs with Hachette to ease author’s woes, but Hachette wants Amazon to resolve the pricing issue before the matter of authors’ compensations is dealt with.

 

Who do you side with in the tussle between Amazon and book publishers? Leave your thoughts below and our analyst will join the discussion shortly.

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