Amazon has knocked a hole in the book publisher's barricade, agreeing a new contract with Simon and Schuster, a CBS-owned company. A settlement of the row between Hachette and the e-retailer over book pricing cannot be far off. Yet, in political terms, the jury is still out as battle rages between Amazon's enemies who accuse it of predatory pricing and of killing off bookstores and its supporters who say Amazon's disruptive business model supports a community of self-publishers and offers consumers cheaper books.
Hachette refused to agree to a new contract with Amazon when the retailer insisted on selling e-books at $9.99. Hachette thinks that is too little and wants to retain control of minimum prices and because the publisher had the temerity to refuse Amazon's terms, the retailer has been relegating Hachette titles in its lists.
A thousand authors (not all of them with Hachette, and notably, Stephen King) protested that writers were being held hostage by Amazon and, oddly, the American political Left has taken up the cause of big publishing. Paul Krugman, the New York Times columnist, accuses Amazon of behaving like Rockefeller's Standard Oil – bullying suppliers and competitors by cutting prices. Franklin Foer, editor of New Republic magazine, calls for government and regulatory action to stop a new golden age of monopoly led by Amazon, Google and Wal-Mart.
It is difficult to feel sorry for big publishers. They have been digging their own graves for decades, ignoring new technology, relying on antiquated marketing and a small cabal of blockbuster authors to support a lifestyle business that employs college arts graduates from nice families.
That a community of established authors supports the big publishers is hardly surprising; the writers' deepest fear is loss of the cash advance, a payment by a publisher that allows a trusted author to spend a year writing a book without the need of a day job to pay the bills. Amazon promises the radical low-budget, self-publishing solution to the untested, untried new author and Jeff Bezos, Amazon's founder and chairman, has proposed a deal that splits the cover price thus: 35 per cent each to the author and to the publisher and 30 per cent to Amazon.
Needless to say it doesn't appeal to Hachette, which would doubtless prefer not to hand over a third of publishing income to authors compared with the usual maximum royalty of 10 per cent. But the real fear is that the Amazon model, pushed to its logical conclusion, would remove entirely the cost of publishers from the equation, replacing them simply with an agent or manager or nothing.
Left outside the smoke-filled tent where the row is taking place is the gentle reader. Even after a visit to a neighbourhood bookstore (one that has still not been shuttered by the digital onslaught), she is often tempted by the Amazon price and the opportunity to download cheaply on her e-reader. For such consumers, the issue is quite simple: would the extinction of publisher power mean fewer new authors and less choice?
To put it another way, can you have an Amazon without the rain forest? Do we need mechanisms such as retail price maintenance to ensure that the flow of goods down the river is of sufficient variety and of high quality. Do we need to use regulation to protect the ecological niche of vulnerable suppliers/authors and is there a danger, as some allege, that Amazon will commoditize the book trade, limiting diversity in the quest for the huge volumes that boost Amazon's cash flow.
Make no mistake, Amazon has perfected the business of managing its cash to a fine art and it is the strength of that mounting cash flow that allows the company to raise its investment in the business by billions each year. It also gives Amazon huge power in its commercial relationships. Tellingly, Amazon notes in its annual report that "our high inventory velocity means we generally collect from consumers before our payments to suppliers come due."
In other words, Amazon's suppliers are financing the growth of the business. It is a huge advantage that not only gives Amazon the financial power to invest in new technology and products but also gives it pricing power and the ability to tolerate levels of profitability that would cripple competitors.
There is no doubt that Amazon is killing retail competitors on Main Street. The question is not just whether their loss is a significant damage to the competitive environment but whether the things we want from our economy can survive when distribution is dominated by a single channel. There are risks in its dominance; Amazon has been accused of favouring politically-friendly material in its book lists and its tax arrangements in Europe are being probed by the European Commission.
But the fundamental question is whether we think fair competition is just about consumers getting a good price or whether we think that diversity of supply is a good in itself, something that we experience in healthy economies. If we think that more and better books are written when authors have financial backing, then we may need well-capitalized publishers. Better still would be a new model for the writing business, a new kind of Amazon that is prepared to risk capital on human creativity and not just suck the cash flow out of a river of cheap goods.