Who’s Wearing the Black Hat, Amazon or the Book Publishers?

24/7 Wall St.

In a dispute that pits Amazon.com Inc. (AMZN) against Paris-based publisher Hachette Book Group, Amazon is being portrayed as the villain for adopting some hard-ball tactics in a game to determine how much Amazon will pay Hachette for e-books that Amazon will then sell through its online store. Amazon is not allowing its customers to preorder books published by Hachette.

It is worth remembering the background to this dispute. In mid-2012 the U.S. Department of Justice was preparing a suit against five publishers, including Hachette, for colluding with Apple Inc. (AAPL) in a price-fixing scheme that the publishers and Apple called an "agency" model for book selling. Under the model, first negotiated in 2010 between publishers and the late Steve Jobs, the publishers would set the retail price for e-books and Apple would take a straight 30% cut. The deal also included a requirement that none of the publishers sell e-books to any other company at a price lower than the publishers charged Apple.

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Amazon had always operated under the "wholesale" model, under which the online retailer would negotiate a wholesale price with the publishers and then sell the book at whatever discount price Amazon wanted. The publishers believed that such discounting would lead to a severe loss of revenue, in much the same way that Apple had chopped the revenue of the music companies.

The publishers hated the wholesale model because Amazon charged just $9.99 for an e-book. In the deal with Apple, publishers set the retail price at as much as $14.99.

Hachette; Simon & Schuster, which is owned by CBS Corp. (CBS); and HarperCollins, which is owned by News Corp. (NWSA), all settled before the Justice Department case was brought to trial. The other publishers settled later, but Apple went to trial and lost in a decision handed down late last summer.

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It is a little tricky piecing together the current dispute, but The Wall Street Journal reports that Amazon is seeking a higher percentage split of the price that publishers charge for e-books. That sounds as though the publishers are clinging to the agency model without the price guarantee that got Apple in trouble.

Amazon would naturally reject that model, instead seeking to negotiate downward the price it pays for e-books in an effort to beef up its cut of the steep discounts it offers to its customers. Amazon wants nothing to do with anything that remotely resembles the agency model and, probably, believes it is on solid legal ground given last year's ruling.

Most press reports have portrayed Amazon's tactics in the dispute as some kind of attack on freedom of the press, now that the online retailer virtually controls book sales in the United States. Whether that is fair is arguable.

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What is not arguable is that Amazon is feeling pressure to show profitability. The company is now collecting sales taxes for many states, which is driving up its costs and prices. Shipping costs are also rising, and the company has been forced to raise the price for its Amazon Prime shipping program from $79 a year to $99 a year.

If publishers succeed in forcing the company to accept some sort of agency model, Amazon’s profits from book sales may disappear altogether. That may not be so good for the publishing business, though, because Amazon's low prices to consumers have propped up book sales. Even though publishers make less per sale, they enjoy larger sales.

The other aspect of the dispute that is worth noting is that Amazon is going against its own policy of making customer satisfaction its primary goal. That decision may come back to haunt Amazon if this dispute drags on and customers are unable to get Hachette's latest books.

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Putting the black hat on Amazon has been easy because the famously secretive company has declined to say anything in public about the dispute. The story, however, is not quite that simple.

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