What’s Really at Stake in the Macmillan/Amazon War

There’s been so much clutter–some good, some misinformed– about the Macmillan/Amazon dispute that, with a nod to my old biz school days, I thought I might as well weigh in with mine.

Without sounding abstract, the underlying issues of what’s involved result from two economic laws.

First, publishing is pretty much a “zero-sum” game. That means there’s no real growth from any sector of the market–new technologies included– that doesn’t basically just offset some other sector by an equal amount. Therefore, whatever weakens the market suppresses overall growth.

Next, sadly, books are inherently inelastic. Which means a reduction of price does not create a corresponding increase in demand. If the price of a certain book is lowered, say, from twenty to ten dollars, it will no doubt sell more, but not likely twice as many.  That means, lowering the transactional price of books ultimately deflates total revenue. If that weren’t so, it’s my guess publishers, retailers, authors and agents would all probably embrace a kind of 21st century P and L: one with lower margins and reduced royalty percentages, but one with a dramatic increase in sales that would ultimately raise earnings.

But that is not the case—and, as we all know, the channels of distribution are potentially narrowing. And as my agent reminds me, the ultimate determinant of how much people read isn’t in the end price—it’s time!

This “zero-sum” landscape is also pressured by the fact that Borders (roughly ten percent of the market) always seems a threat to close. Add to that the fact that books are not a core part of the sales mix for the price clubs (Costco, Sams, BJ’s) who are filling that gap–and this is the real key here– that the charter of these clubs is to offer the very best value to their customers– not to become bystanders, if not casualties, in a price war between mainstream and online booksellers in a product that’s not even central to them—and those threats are swirling around. If any one of these chains suddenly says, we’re outta here, and vacates the market, the “zero-sum” industry is weighed down that much more!

In a world where the likes of Merrill Lynch, Lehman Brothers and Circuit City are now history, it’s hardly unimaginable to think of publishers going that way too.

Yes, publishers have to adapt. They know that. And no, publishers aren’t’ trying to gorge their margins by pushing this new “agency” pricing model for books on Amazon and Apple. (For obvious reasons, Kindle downloads might already be their highest margin sales.)

But what’s crucial is to stabilize a retail market in turmoil, because the risks of any further erosion (e.g. retailers leaving the game) would be catastrophic to them and to us all. If the price of “books” continues to erode, without some unforeseen jolt in demand, we will all be the losers–readers, writers, agents and publishers. It hurts us all!

Not everything that moves forward is necessary good—especially at the pace it proceeds—or benefits the consumer. Ask newspaper readers in Denver and Seattle. Personally, I am just as distressed to learn that Laredo, Texas, a city of over 250,000, no longer has a single bookstore in it– and to buy one, a real book, you have to drive 150 miles to San Antonio—as I am at what’s going on between the Big Six and Amazon. In this kind of brave new world, we all lose!