Amazon's Book Battle

Amazon.com (Nasdaq: AMZN  ) played -- and lost -- a game of chess with one of its larger publishers over the weekend.

In a tiff with Macmillan Books, the leading online retailer at one point pulled all of the publisher's titles over a pricing conflict behind a new digital agency model that Macmillan plans to implement in March.

Until a reversal yesterday, Macmillan e-books were pulled from Amazon's Kindle store. The e-tailer also stopped selling the physical books itself, leaving site availability exclusively to third-party merchants who no doubt could have taken advantage of the supply and demand shift in pricing.

It may be too early to call for a winner in this match, but Amazon isn't smelling like a champion.

Macmillan wants to dictate royalty rates and selling prices. It wants to receive 70% of e-book sales -- something that Amazon was already conceding, given certain caveats -- and have the flexibility to charge as much as $14.99 for new releases. Amazon has tried to stick closer to a $9.99 price point.

If taking down all of Macmillan's books in protest seemed overly defiant, caving in to Macmillan's wishes finds Amazon overly submissive.

"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," the Kindle team posted on its forum yesterday. "Amazon customers will at that point decide for themselves whether they believe it's reasonable to pay $14.99 for a best-selling e-book."

Macmillan's plan to ram its new agency pricing model down e-book fulfillers' throats was to create deep release windows, similar to what movie studios are trying to do now in delaying DVD releases to rental discounters Netflix (Nasdaq: NFLX  ) and Coinstar's (Nasdaq: CSTR  ) Redbox.

It's still surprising to see Amazon cave so quickly. This reminds me of Apple (Nasdaq: AAPL  ) . Major record labels wanted the freedom to bump up the $0.99 price for digital tracks through Apple's iTunes Music Store. Apple offers different price points these days, but what if it would have let Warner Music Group (NYSE: WMG  ) price its singles at $1.49 apiece? Wouldn't the other majors have followed?

Amazon will let the free market decide, apparently. It's probably confident that publishers will stick to the $9.99 price, since publishers should welcome the ability to collect a nearly $7 bounty without any printing, fulfillment, or return expenses to worry about. The rub is that authors and rival publishers will begin to wonder why their books aren't worth as much as Macmillan's catalog.

It can all go downhill fairly quickly from there. Amazon may have sold "millions" of Kindle readers, but the value proposition changes if e-books aren't discounted considerably to the physical books that can at least be resold. Even the Apple iPad will run into some resistance from bibliophiles if e-book pricing is out of whack.

So who will win then? The e-book market will dry up, and with it the potential for juicy publisher margins. Amazon, Sony (NYSE: SNE  ) , and Barnes & Noble (NYSE: BKS  ) will discontinue their readers. Consumers will also have to take an evolutionary step back, probably weaning themselves from books given the plethora of free content to consume online.

Greed can kill the e-book revolution -- and Amazon's going from one disciplinary extreme to the other isn't helping.

Can publishers kill the golden goose of commercial e-books? Share your thoughts in the comments box below.

Apple, Netflix, and Amazon.com are Motley Fool Stock Advisor selections. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz has been shopping online for about as long as Amazon.com has been in business. He owns a Kindle. He does not own shares in any of the companies in this story, except for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 01, 2010, at 11:49 AM, XMFTom7 wrote:

    I don't know, I gotta agree with Scalzi in this link here: http://whatever.scalzi.com/2010/02/01/all-the-many-ways-amaz.... Amazon delisted 1/6th of their inventory without warning, destroyed their customer experience for days on both their website AND their customers' Kindles, alienating authors and fans alike, and then caved like a petulant child who didn't get their way, blaming the victim for making them be a bully. And yeah, if I wasn't already inclined to buy an iPad over the Kindle, this would push me further towards that rather easy decision, wondering how much more dumb Amazon will be in the future ... because as we know, this is only one small skirmish which is likely to be a HUGE war between Amazon and publishers.

    And since Amazon doesn't produce content or publish books to sell, I'm hard pressed to see how they'll come out the winner ...

  • Report this Comment On February 01, 2010, at 1:45 PM, jofallon wrote:

    Amazon was willing to take a loss at the 9.99 price point because they can sell more Kindles. Macmillan has a monopoly on their own titles - and Ford has a monopoly on Fords too. So what?

    I have a lot of favorite authors who publish under Macmillan. I prefer to deal with a bookseller that doesn't play these weird games with customers.

  • Report this Comment On February 01, 2010, at 1:46 PM, jofallon wrote:

    Amazon was willing to take a loss at the 9.99 price point because they can sell more Kindles. Macmillan has a monopoly on their own titles - and Ford has a monopoly on Fords too. So what?

    I have a lot of favorite authors who publish under Macmillan. I prefer to deal with a bookseller that doesn't play these weird games with customers.

  • Report this Comment On February 01, 2010, at 5:41 PM, stan8331 wrote:

    Macmillan appears to be showing the same sort of brilliant thinking that has led to such massive prosperity within the music industry, desperately trying to hang onto old pricing practices that just don't translate to a virtual world.

    Amazon had to cave because Macmillan is too big - Amazon probably would have ended up losing market share in the deal even if Macmillan's high-price strategy ultimately turns out to be a failure.

  • Report this Comment On February 02, 2010, at 2:16 AM, scottm1279 wrote:

    Not to split hairs, Rick, but I'd hardlhy call what Amazon's doing "a game of chess." It's not even checkers. I think they're playing a combination of a drinking game and Candyland, right now. They pulled 1/6 of the books off of their site without an explanation as to why. This would effectively confuse any customer that visits their site, who would have to assume that Amazon "broke." They let the other side communicate with the public first. When Amazon finally communicated with the public, it was through a message board, and they said they would give into MacMillan's pricing strategy. 24 hours later, the books still aren't available for sale.

    To make it worse, this will probably make any potential Kindle buyers think twice. From what I understand, the Kindle is a locked device that can't download books from other websites. By their own choice, Amazon is denying their customers access to 1/6 of the potential ebooks out there. If a book isn't available at all, customers will accept that. If a book costs a couple of dollar more, customers may or may not accept that. But to flat out deny your customers the option of purchasing an ebook (or any book) risks ticking off the very demographic that Amazon says is the future of the publishing industry, and makes people think hard about if they want to invest in a Kindle.

    How does that make any sense?

  • Report this Comment On February 02, 2010, at 6:13 AM, singlady wrote:

    I support Amazon's stand, and think MacMillan is trying to use its monopoly to wrestle its way back to pricing control. I would boycott any books from MacMillan, even if it's a bestseller. Just wont pay more than 9.99 for ebooks. If Amazon wont offer it, sure, consumers can still go to bricks and mortar booksellers to buy the hardback, so pple still have a choice.

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