Regular readers will know that I have been following the dispute between Hachette, the French-owned publishing house and Amazon.  The two companies have now signed a deal to end their long-running price dispute.

According to the Daily Telegraph: the two firms had disagreed about the price of ebooks which can be read on Amazon’s market-leading Kindle device.  Amazon believed most new ebooks should be $9.99, which many in the traditional publishing industry said was not financially sustainable.  It also wanted to restructure the way revenues were split between the publisher, author and  itself.  Hachette refused to back down on lowering prices.  The dispute gained public attention earlier this year when hundreds of authors supported Hachette.  They argued that  Amazon’s pricing tactics were damaging writers and high streets around the world. The online retailer responded by increasing shipping times on Hachette books, blocking pre-orders, and redirecting customers to other publishers.  In August a group of 900 writers paid for a full page advert in The New York Times criticising Amazon’s actions: “These sanctions have driven down Hachette’s authors’ sales on Amazon by at least 50%.  Amazon has other negotiating tools at its disposal; it does not need to inflict harm on some of the very authors who have helped it to become one of the largest retailers in the world.”

Under the agreement which has been reached between the two companies, Hachette will have responsibility for setting prices of its ebooks, and “will benefit from better terms when it delivers lower prices for readers,” according to a joint press release.

Hachette said: “This is great news for writers.  The agreement will benefit Hachette authors for years to come.”

David Naggar, vice president of Kindle, said, “We are pleased with this new agreement as it includes specific financial incentives for Hachette to deliver  lower prices, which we believe will be a great win for readers and authors alike.”

How can all three of the statements in quotation marks, above, be true at the same time?

The short answer is, I don’t know.  But I have a theory.  Suppose under the old deal at $9.99, Amazon got 40% and Hachette got 60%: $4 for Amazon and $6 for Hachette, and suppose that Hachette pays its authors a one third royalty from its revenue: $2 per copy.  And suppose, under the new deal, Hachette prices its ebooks at $15 per copy and gets 55% of the selling price, while Amazon gets 45%.  This would give Hachette income of $8.25 per copy, and the author would get $2.75 per copy: a better deal for all three parties assuming that the volume of the ebook is not price sensitive.  But, if for example, only half as many copies are sold at $15 as at $10, everybody is worse off.  This is where Amazon’s obsession comes in: the lower the price the more you sell!  I’ll bet that the deal is structured so that Hachette’s share of the sale increases as the price is lowered.  In this example, for each dollar reduction in price, Hachette would get one percent more of the selling price.

So:

Statement no. 1 is true: Hachette gets better terms as it lowers its price (not better revenue, but better terms)

Statement no. 2 is true: Hachette authors will benefit ($2.75 vs $2 assuming that the volume of sales are not particularly affected at the higher price)

Statement no. 3 is true: lower prices are a win for authors and readers alike (assuming lower prices mean greater sales volumes)

It seems to me that this dispute boils down to different views on the price elasticity of books.  Amazon believes that price is very elastic: the higher the price, the less you sell and the lower the price the more you sell.  Amazon apparently has some data which supports this theory.

Hachette believes that, within a certain price band, the price is inelastic: volume is largely unaffected by price.

My own view is that Hachette is probably right.  They have experience with their authors and their genres to be able to predict volume, and they have a pretty good idea of where the price band should be.  They will be quite sure that if they price a book at a third of its normal price band, it won’t sell four times as many.

Creating a cover design is a difficult process.

I always start with a cover concept in mind.  My latest novel is a thriller which has as its theme how conflicting priorities can change who we are: our identity.  One of the characters is a international, freelance journalist, who has found that long-term relationships don’t work very well when one is working in a country like Afghanistan.  She has therefore decided to focus on her career in journalism, and, in doing so, she has won a Pulitzer prize.  But, she is lonely and longs for a loving relationship – a relationship which will make her the person she wants to be.

Given this theme, I asked the cover designer to produce a graphic which included a transparent human head inside of which are toy soldiers engaged in combat.

Here is what they came up with initially:

Not surprisingly, I didn’t like it at all.  My wife said it looked like the cover for some kind of a cult book.  I objected to the spirals; I was told that they are watermarks which will be removed when the head image is purchased.  I didn’t like the iridescent blue: that had to go.  The dozens of small images in the background just added confusion.  The soldiers (which one can barely see in this image) were too small and didn’t look as though they were fighting.  After some discussion, I sent the designer copies of the images below:

I found these images on the internet, and the only problem was that they weren’t high resolution.  The designer worked on the images to sharpen them.

Then, rather than have a transparent, three-dimensional head, I opted for a simple, two-dimensional outline of a head.  I asked that the colour scheme be simplified: red, blue and black only.

Then we got into a lengthy back-and-forth about the fonts on the original cover, which I didn’t particularly like.  My wife and I were in Rome a couple of weeks ago, and at the check-out counter of a local supermarket, she spotted the cover of Paulo Coelho’s latest novel which appeared to have an embossed font.  Very stylish!  I sent a picture of the cover to the designer, but it turned out that if ‘Hidden Battlefields’ were to be in that font, it would have to be on two lines rather than one.  So we compromised on the font.

So, here, at last, is the cover:

 The book itself should be available in a week to ten days.

In this Monday’s Daily Telegraph there was an article ‘Book Minnow Opens New Chapter in Publishing’, written by Andrew Cave.  What particularly caught my eye was the graphic below.  (Sorry that the graphic isn’t very clear, but it wasn’t included in the online version of the Telegraph, so I had to scan it.)  You may be able to make out that the source of the graphic is ‘PwC’, which I assume means Price Waterhouse Coopers.  This chart looks rather suspicious to me for several reasons.  First of all the total volume in dollars remains pretty constant over the ten year period: $16 billion.  The total value should be increasing with inflation and with the number of readers, worldwide.  Secondly, the value of Ebooks & Print and Audio books will be equal in three year’s time; since Ebooks are less expensive than physical books, the implication is that Ebooks will be out-selling physical books by about 50% in volume terms.  If this is the case, it’s the first time I’ve heard of it.  And third, the individual plots are both pretty much straight lines.  While this may be true for physical book sales, the growth of Ebooks has been anything but linear.  Strangely, this graph was not referred to in the article itself.

The article itself was about the self-publishing house, Blurb, founded by Eileen Gittens in San Francisco in 2006.   The company has a turnover of $90 million this year.  The article says that Blurb has published 3 million books.  Does Mr Cave mean 3 million copies of books?.  And it says that “a new title comes over the servers every 2.1 seconds”.  This would literally mean that Blurb is publishing nearly 15 million new titles every year.  I find this difficult to believe, given the turnover of $90 million.

But, let’s set the numbers aside.

Blurb is a software-based company which allows the author to choose Ebook or print copy formats.  The minimum order size for printed books is 750.  Blurb’s online platform gives the author tools to choose layouts.

Naturally, Gittens sees many advantages her company has over traditional publisher.  Not the least of these advantages is getting published at all.  Blurb’s price includes its mark-up.  “If the price of printing your book is £5 because you’re going to order a few thousand,” Gittens says, “and you’re going to sell that book for £25, we would literally send you £20 every time somebody buys a copy.”  (This must be if you happen to have one of the titles that Blurb has for sale on its website.)  Blurb also sells through Apple and Amazon.

I can imagine what my publisher (a co-op publisher) would say about Blurb.  “They don’t produce their books professionally.  They can look homemade, unedited, without concise layout or a professionally designed cover.  Besides, they offer no marketing help, which we offer at extra cost.”

Perhaps the most interesting point in this article is this: Gittins believes many people could one day have their own book, as well as their own Facebook page.  “It’s part of  your personal brand,” she says.  I think this is true.  Many people would like to leave a record of what they have achieved in life.  The only problem is: would anybody want to read it?

There was an article in the Daily Telegraph recently with the above title. It said:

“More than $15 bn was wiped off the value of Amazon last night, after the online retail giant reported the biggest loss in its history. The company increased sales by a fifth to £20.58 bn in the three months to October, but plunged $437 m (£273 m) into the red as it spent heavily on new projects. That figure is more than 10 times the $41 m loss Amazon reported in the same period a year earlier.

The business has been ploughing money into myriad new schemes as it battles to gobble up market share and tries to compete with rivals such as Apple that are increasingly treading on its turf. Jeff Bezos, Amazon’s chief executive and founder, has authorised the company to spend tens of millions of dollars developing drones and much more on new servers for its online data storage business.

He has also led a spending spree on film and television rights, so that Amazon can compete with the like of Netflix and Hulu, and has reportedly been selling gadgets such as its Kindle Fire e-reader as a loss, in order to build up its base of loyal users.

‘We’ve been for several years now, in an investment mode because of the opportunity in front of us,’ Thomas Szkutak, chief financial officer said.

Shares in the company fell more than 11 pc in after-hours trading in New York, to $278.62, their lowest point in over a year.”

As those of you who have read by blog will know, I have mixed feelings about Amazon. When there is something I need for the house or a book I want to buy, I will invariably turn to Amazon for service and price. But, at the same time, I think that Amazon has done a lot a damage to authors and to bookstores.

But, if I set my personal feelings aside, and think about the above announcement with my ex-corporate executive’s hat on, my impression is that Amazon is headed for disaster.

No one has ever built a giant, diversified company on market share alone. The key words in that statement are: giant, diversified and market share alone.

If one thinks of giant, diversified companies which are successful, there is General Electric (which I know reasonably well as I used to compete against them). They are an enormously successful, profit-driven company. Their businesses are mostly ranked among the top three in market share, but they are all profitable. They are all managed by top-flight executives who know their respective businesses very well. They are paid and motivated to increase earnings per share (profit) and the value of GE’s stock.

I think that Amazon could have been quite successful if it had confined its activities to books. It could have sustained a top market share in this sector and worked to make it profitable. But now, it is trying to enter a lot of other businesses and trying to get the top market share, using price as the weapon. This is a doomed strategy. Why? Three reasons:

1. Price is not a sustainable weapon. Somebody else will always find a way to do it cheaper, if that’s what the customer wants. Meanwhile, the business is bleeding money.
2. Focus. Executives can pay good attention to only so many things. The more things an executive has to watch, the higher the likelihood that one of those things will go wrong. The secret of diversification is to serve one market. In GE’s case it is the industrial market. What do online data storage, books and drones have in common? Since 1997. When Amazon was first floated, the company has bought about 60 businesses.
3. Experience. Jeff Immelt has many years’ experience managing huge industrial businesses. Jeff Bezos has no general management experience before he founded Amazon. He worked in computer science, international trade, finance, and internet enabled businesses, but I could find no evidence he had profit responsibility at a high level before Amazon. Information on the rest of the executive team is apparently available only on the proxy report to shareholders. How’s that for transparency?

What do I think will happen?

Well, if Amazon continues to experience losses of this magnitude, shareholders will revolt, and the attitude of Wall Street will turn hostile. As a result, several possibilities emerge:

• There is shake-up of the executive team (except Bezos)
• Subsidiaries will be sold to raise cash and to narrow the focus
• More emphasis will be placed on profit over sales

There is an article in the August 2014 issue of Independent, the journal of the Independent Book Publishers Association that I’d like to share with you.   It is written by Karen Christensen, who is a publisher, author, journalist and blogger.  She wrote:

“Amazon doesn’t just take orders.  It is used to barking orders at publishers and getting us to salute.  But bullying only goes so far, and I’m thankful that a single large publisher, Hachette, stood up to it and that the New York Times ran an editorial about its strong arm tactics.

“I’ve been sitting on my own Amazon story for a while after receiving a threatening phone call from its legal department when I refused to agree to a unilateral change of terms.  But with all the publicity and debate about Hachette, I thought other publishers, as well as Berkshire Publishing’s (the author’s publishing company) friends, colleagues and customers might like to know about our experiences and why I believe that Amazon is destroying healthy competition in the publishing world.

“I am and academic publisher as well as an environmental author (with one book publisher by Hachette, in fact).  My company is very small. Amazon has a market cap of $US 141 billion.  “They have infinite resources,” said a friend when I told him that I had received an angry phone call from Amazon.com’s legal department.  The telephone call wasn’t to discuss terms, but to threaten me for “telling lies about Amazon”.  What I had written was that if we had to stop supplying Amazon I would have to write to all my customers, authors and colleagues to tell them why.

“My fight with Amazon began when it decided to go after traditional “short discount” publishers (academic presses as well as presses like Berkshire Publishing) with a unilaterally imposed change in business terms announced only in a “case note” within their order processing platform.  This platform is normally used to inquire about the availability of certain books and is used by customer service staff.

“A colleague of mine whose staff was puzzled enough to pass the “case note” along to him asked Amazon to contact him directly by telephone or email, saying that business terms were a matter for our company’s executive team.  Amazon refused to talk – communication would take place through the “case”.

“Berkshire Publishing had sold print through Amazon since 2006.  Although it originally demanded a 40% discount – four times our standard – I decided we should make books available through any major platform that individual readers and libraries use. Out authors like knowing that their books are readily available worldwide.  And we reach some people who wold never otherwise know about our titles.  In fact, I was recently at a meeting in Beijing and showed a copy of our book This is China: The first 5000 Years.  Two of the people there started whispering and giggling, and finally one spoke up, “I have that book.  I ordered it from Amazon!”

“Amazon’s demand in 2012 was for a an additional 5% bringing the discount to 45% (some academic presses had been at 25%, so the change to 45% meant a reduction of 80% in their net income from Amazon sales).  Bookstores generally get a discount of 30-40%.  Amazon has been getting 50-55% from big trade presses, and the current battles are part over further discounts that Amazon is demanding to increase its marginal profits.

“It is not only publishers who are affected (who, after all, really feels sorry for publishers?); independent bookstores cannot compete with this kind of pricing.  Amazon discounting also affects authors, because may book contracts specify a lower royalty percentage if the discount is 50% or higher.

“In the end it is readers – students, professionals and those who read for pleasure – who will suffer because innovative writers won’t get the chance they deserve and hard-working midlist authors won’t be able to afford the time they need to write.

“And who says cut-rate pricing will continue after Amazon’s market dominance is assured?  Publishers, including self-publishers love the 70% Amazon pays them on e-books now, but the split was 70% for Amazon until after agency pricing, and the contract allows Amazon to change it at any time.  There is no reason to think that the company won’t impose changes on any group of suppliers (which is what we authors and publishers are).

“Amazon, by the way, does not necessarily pass those discounts on to the customer.  Most Berkshire books are educational reference works that sell for hundreds of dollars; Amazon has generally sold them at full price, keeping that substantial “discount” as its profit, which is far greater than our profit on our own books.

“Amazon is destroying competition and innovation because it is not letting the market determine winners and losers, but is instead making the selection itself, deciding arbitrarily where to take its pound of flesh and shore up its feeble margins.  Publishers (and authors) would be fine if they were actually competing with one another for sales without Amazon sucking the life out of every transaction.

“Finally, what happened?  Are Berkshire Publishing  titles available through Amazon?  Dear reader, I capitulated after four months.  It wasn’t fair; it wasn’t good for anyone but Amazon, but I was losing sales that I needed and I gave in.  Amazon made one change, too: it hired its first small-press liaison, and I met her at BookExpo last year.  I didn’t her from her this year and have no idea if that department of one still exists, but I hope that in the future we will be able too discuss and agree on terms that make sense.  “Hurray” for Hachette and for everyone else who is now standing up to Amazon.”

I’ll cover the Hachette – Amazon dispute in a later blog, but I have some comments on Ms Christensen’s article.  Certainly, as a small publisher one has to have some real sympathy for her: she has a very tough business.  It is unconscionable that a giant purchaser like Amazon tried to slip in a major change in its terms of business without proper notice or discussion.  That is the worst kind of arrogance.   She is also correct that Amazon’s pressure for large discounts affects authors.  In my particular case, for every additional increment of discount which Amazon takes, I lose half of that increment in royalties. Who consults me about that?  No one.

It seems to me that the Amazon business model is designed to weaken, if not to destroy, independent bookstores.  Their discounting structure makes it difficult for small bookstores to compete.  I’m sure that Amazon would deny that their discounting is predatory.  They would say that they have the title that the buyer wants in stock, so that the buyer can have a copy as quickly as the following day, instead of having to wait a week, or more.  They would also point out that they don’t have the option of returning unsold books to the publisher for full credit, as bookstores do.  And, they would point to a number of value added features on their website, including descriptions, reviews, and copious author information.

Still, it’s Amazon’s apparent ‘might makes right’ attitude which is troubling.  From Ozymandias to his modern day counterparts, arrogance invariably destroys its owner.