by wjw on July 26, 2014

Amazon has admitted to a second quarter loss of $126 million.  Which is not a lot on revenues of over $19 billion, but nevertheless it’s bad news for Hachette and any other Amazon suppliers, because it means Amazon is going to be squeezing every last little penny out of their suppliers, and coming up with every-more-ingenious “services” they can charge their suppliers for.

Amazon’s announced that they’ll lose even more money in the third quarter, but that doesn’t mean that Amazon’s doing badly.   Income is up 34% over last year, better than ever, but that income is being invested in more markets that Amazon feels it can dominate.  It’s just launched Fire TV and the Fire Phone, it’s putting over $100 million into original content to stream over these devices, along with the Prime Music audio streaming service and the Kindle Unlimited readers’ buffet of novels.

There’s also Amazon Web Services that provides computer services and storage (including some rented to sort-of-rival Netflix), and the Dash grocery scanner, a kind of magic wand with barcode reading capability that will enable Amazon customers to buy groceries from Amazon food warehouses.  (Currently in select cities only.  And I really don’t know why Dash isn’t available as an app for smartphones, because that would sorta make more sense.)

The Fire Phone has been getting mediocre reviews (partly because of the modest number of apps available), but I expect improvements over time.  The Kindle Fire tablet wasn’t that well reviewed at first, but now seems to be pretty much on a par with the competition.

The problem I see is that Amazon isn’t breaking new ground here, but charging into fields where there is already strong competition.  There are plenty of people making smart phones, tons of companies delivering entertainment,   lots of cloud storage available for your data.  It’s not like the days when Amazon was the only online book warehouse, and Kindle the only portable e-reader (barring the Sony Reader, which never really broke into the marketplace).  Amazon’s going to have to fight for share in these new markets, against companies like Google and Apple and Netflix that are already entrenched.  And, frankly, the Dash magic grocery wand is too reminiscent of Webvan, the world’s most catastrophic dotcom startup.  So profits may be constrained for a while.

Which is bad for publishers and authors.  Because in search of these lost profits Amazon will try to wring money from their suppliers, Amazon’s strong-arm tactics against publishers are far more damaging to writers than they would ever be to a multinational company like Hachette.

Various Hachette authors got up a petition asking Amazon for relief, which the president of SFWA signed, and then (as might be predicted by anyone familiar with the pugnacious, argumentative nature of SF writers) a heated controversy arose, in which it was claimed that SFWA unfairly chose sides, and that Hachette, too, was mean to authors.

Well yes, Hachette is mean to authors, if by mean you mean that Hachette, and other publishers, try to get authors to sign contracts that favor the publisher over the writer.  Horrors!

Well, duh.  It’s a business, and that’s what businesses do.   They try to do business on terms favorable to themselves. In traditional publishing, it’s the publisher who takes the risk, by giving advances to authors, paying for editing and publishing costs, paying for marketing, paying for cover art— and the publishers want to recoup their investment as much as possible, and that’s why they offer authors contract boilerplate that might as well have been dictated by Ebenezer Scrooge.

And that, in turn, is why there’s this whole class of being called “literary agents” whose job is to negotiate contract terms more favorable to the writers.

And in fact literary contracts are nowadays meaner and meaner, and publishers are less willing now than ever to negotiate the boilerplate.  And why is this? you may ask.  Because they’re feeling the pinch from the loss of nearly 50% of the US market when Borders collapsed, and because of competition from Amazon.  So, in a way, that’s all Amazon’s fault.

Except that I don’t fault Amazon.  Amazon, too, is a business, and it acts in concert with its interests.  It attempts not only to dominate its competition, but to crush them.  Its business plan is to be the last retailer standing and— dare I say it?—  to Rule the World.  (And that was Borders’ plan, too, and Barnes & Noble’s, and the plan of a lot of other people.)

Now it should be said that I like Amazon.  It’s convenient, it’s efficient, it’s there when I need it.  And I earn a fair deal of money publishing my backlist on Amazon— in fact, I just got my biggest payment from Amazon ever, and I’m very happy that Amazon pioneered the online market and let me find readers for books that had been out of print for decades.

But one mistake I don’t make is to assume that Amazon loves me.  And that’s a mistake that a lot of people seem to be making.

When Richard Patterson and Stephen King and the President of SFWA weighed in during the Amazon-Hachette battle, I saw a lot of eye-rolling.  “Oh, those literary dinosaurs, don’t they understand that the paradigms have totally shifted and now it’s all online, all Amazon, all the time!  Me and my equally cool friends are hip to the Good News, and Richard Patterson is so over, it’s pathetic.”

And the thing is, with very few exceptions, I’d never heard of any of the authors that were saying stuff like this.  They were hip and they were all like The Future Is Now, but where were the colossal sales that might point to the success of their business model?  I wasn’t seeing it.

And also to suggest that Patterson and King and Rowling and all those others don’t understand their own business is just a bit de trop, don’t you think?  They’re among the most successful authors in the world, and one thing they’re not is stupid.  And to suggest that they should throw over the business model that made them household words is just a little presumptuous.

I’d like to see an actual household word say that, not a buncha guys I never heard of.

And another thing I was hearing: “The mean ol’ Big Five publishers lacked the vision to publish my work, but now there’s Kindle Direct, AND MY GENIUS IS NOW AVAILABLE TO ALL  THE WORLD!  It’s clear that only Amazon recognizes my worth, and AMAZON LOVES ME.  ME!!!  MEEEEEEEE!”

No, you halfwit, Amazon does not love you.  And I can prove it by asking a simple question:

Have you read your Amazon contract?”  You know, the boilerplate that you have to sign to be published on Kindle Direct.  The boilerplate that Amazon won’t negotiate.  The take-it-or-leave it boilerplate they foist on every single one of their authors.  Have you read it?

Here’s what it says:

2 Agreement Amendment. The Program will change over time and the terms of this Agreement will need to change over time as well. We reserve the right to change the terms of this Agreement at any time in our sole discretion.

It goes on to say that when Amazon changes the agreement, they don’t have to tell you, all they have to do is make an annotated version of the agreement available somewhere for you to read and agree to.  Because disagreeing with the contract means that your books leave the program.

Now the Big Five publishers may be a bunch of ol’ meanies, but you know what?  When they sign a contract, it’s law, they can’t change it, and they can be sued if they don’t live up to its terms.  They don’t get to say, Hey, we’ll change this stuff whenever we want, and there’s nothing the other party can do about it.

What Amazon’s Clause 2 above tells you is that Amazon doesn’t love you, Amazon finds you useful.  You generate income for them, and if you’re on KDP Select you provide content that no other vendor has, and that’s useful, too.

With indiepub, you take all the risk yourself.  The author pays all expenses: editing, formatting, cover art, promotion, etc.  Rewards are higher, sure, but most Kindle books sell under 25 copies, so for most epub authors, whatever money they spent is pretty well lost.

Now I’d like to pose the question: Why is that feature in the contract?

Now remember that Amazon’s business plan is to Conquer the World.  And once they’ve succeeded— once they’re a monopoly or monopsony or whatever— you won’t be nearly as useful, because they won’t need you as much.  They could chop your royalty from 70% to 35% (which they’ve already done in Japan and India), or go on to 25% or 15% and there won’t be anything you can do, because (1) they told you ahead of time this would happen, and (2) they’re really gonna need to pay their investors one of these days, really, and (3) there won’t be any other markets for your product.  Plus of course they could charge you for display space and for buy buttons and all the little nickel-and-dime crap they charge the Big Five for.

Now I’m not going to say you shouldn’t indiepub— I do, after all— or that all is sweetness and light with the Big Five, because it’s not.  Some people do really well with indiepub, but most don’t.  Some do really well with traditional publishing, but most people don’t even make it past the first gate.

I’m just saying that if you’re in the writing business, you should be aware that it’s a business.  Amazon doesn’t love you any more than Macmillan or Hachette or HarperCollins.  They’re in business to make money for stockholders, or to Rule the World, or for some other reason that seems logical to them.

So it behooves us to make ourselves useful to as many publishing titans as possible.  I want there to be more and more publishers and more and more avenues of distribution, because the more ways there are to be published, the more people there will be to compete for my work.  Variety is good, options are good, competition is good.  And our decisions on which options to take should be as ruthless and rational as those of  anyone else in the business, because that’s in our interest, not in theirs.

And whatever you do, don’t think some huge, impersonal business entity loves you.  Because they don’t.  And if you think they do, you’re in for a very sad surprise.




David Turnbull July 26, 2014 at 11:45 am

One small note. Amazon basically *is* the cloud–they’re not entering a market there. They have pioneered it over the last decade. I deal with them on this basis daily and they seem much more pro-consumer than in their other fields.

Paul Weimer (@PrinceJvstin) July 26, 2014 at 12:14 pm

And once they’ve succeeded— once they’re a monopoly or monopsony or whatever— you won’t be nearly as useful, because they won’t need you as much.

A counterargument I see is that if this happens, another company will just come along, like magic, and Amazon will have competition for ebooks.

TRX July 26, 2014 at 5:51 pm

After reading an introduction to accounting textbook a few years ago, and seeing what kind of perfectly legal games the GAAP allows an accountant to do with financial data… any claim a company makes about making or losing money is essentially meaningless noise.

When I got the part about where you can change accounting methods whenever you want, I realized that “accounting” as practiced by large corporate entities is almost entirely unrelated to the “accounting” done by individuals or small businesses. If you’re, all the Fed really cares about is that you pay an amount of tax they can agree with; you’re free to manipulate the rest of your financial reporting as you wish.

wjw July 26, 2014 at 8:24 pm

Yeah. Who said accounting was dull and unimaginative?

Paul, big Internet companies don’t appear “just by magic.” Particularly big Internet companies whose business plan is to go up against the industry leader.

Apple might have a shot at knocking Amazon off its perch, because it’s got that whole mystique thing going for it, but they’re going to have to take iBooks a lot more seriously than they do, and create a much more visitor-friendly gateway. I have a hard time finding my =own= work on iBooks, let alone the works of anyone else.

Amazon really does make it easier for the customer to buy their product, and that’s why they’re the industry leader. It’s amazing how many companies haven’t figured that out.

Chris Mills July 27, 2014 at 1:11 am

One potential route around Amazon and other publishers would be to use Kickstarter to fund a book. Do not under estimate the vanity of your most adoring fans to pay good money to see their own name as a character or product placement in your next book.

Teresa Frohock July 27, 2014 at 2:37 pm

Chris, Just FYI, but Kickstarter runs through Amazon.

Teresa Frohock July 27, 2014 at 2:44 pm

I forgot to add: This is one of the most balanced posts that I’ve read on the subject, Walter. Thank you.

JR Holmes July 27, 2014 at 5:23 pm

You might stress that in order for Amazon to erase last quarter’s loss, it would require adding less than a penny to every $10 of sales. Even the much larger forecast losses for the next quarter (which max out at $800 million) are still less than 1% of sales.

Amazon could “turn on the tap” of profits nearly at will. Thus far they have been putting those profits back into expansion, but it wouldn’t take much to change that and still be growing greatly.

Part of the real question is how long Amazon stockholders will put up with it making so little profit for them. Based on the behavior after this last quarter’s earnings and the forecast for next quarter, that may be changing.

Steinar Bang July 27, 2014 at 7:23 pm

FWIW I’m glad you publish your backlog on smashwords, so that I can purchase them in a hazzle free manner, and read them on my SONY reader (…which may never have broken into the market place, but still performs a useful service for me, letting me read epubs in a lightweight device, that doesn’t get hot and needs to be recharged once a month).

Stephanie Caruana July 28, 2014 at 9:45 pm

Thanks, Walter, for your very pertinent and above-all sane. comments I buy all my books from Amazon, and hope they don’t grow themselves to death.

DensityDuck July 29, 2014 at 8:58 pm

“where were the colossal sales that might point to the success of their business model?”

Where are the colossal sales that point to the success of the legacy business model? The vast majority of authors barely make any money at all. Saying “oh well, you’re not Stephen King, who cares what you think” is a brush that tars 95% of the writing world.

“2 Agreement Amendment. The Program will change over time and the terms of this Agreement will need to change over time as well. We reserve the right to change the terms of this Agreement at any time in our sole discretion.”

This sounds like those EULA agreements that read “opening the package constitutes full acceptance of these terms and conditions” and the general consensus of courts has been that these things are meaningless and unenforceable.

Jon Marcus July 30, 2014 at 4:23 pm

@Density Duck: Contracts that are sprung on you after you’ve completed a transaction have been frowned upon by courts. (Our agreement is on a form inside the package, and opening the package indicates you consent to the agreement.)

But I’d like a cite for anything like paragraph 2 being found unenforceable. Either by a court or by an arbiter, as I’m fairly sure Amazon’s agreement requires arbitration. (Oops, can’t find a cite for an previous arbitration agreements? Because they’re usually not made public, so you’re totally on your own? Too bad!)

wjw July 30, 2014 at 7:12 pm

DD: In signing the Amazon contract, you forfeit the option of taking Amazon to court. (Section 10.1). That is unenforceable, as I’m sure we all know, but it’s a far distance from getting the court to overturn the contract entirely.

There are winners and losers in every system. I worked out the statistics once, and your odds of being struck by lightning are greater than your odds of appearing on the NYT bestseller list. I’m sure the Amazon bestseller list has similar long odds— much longer odds, I suspect, since there are so many more Amazon writers than have published with the Big Five.

In any case, the Amazon bestseller model tends to favor those writers who can crank out, say, 20 books every year, and who are really good at social media. Which leaves me out, pretty much.

Kris Overstreet July 30, 2014 at 7:57 pm

Actually the forced arbitration thing in the contract IS enforcable, as per a Supreme Court ruling from a few weeks back. Seems you can sign away your inalienable right to trial by jury.

Graeme Ing July 30, 2014 at 8:38 pm

Great post and well-balanced. The best thing about KDP and iBooks, Smashwords et al are that they provide choice for an upcoming author. I may be Indie, but I truly hope the Big5 can figure out a way to remain in business with fairer contracts, so that choice can continue. As you say Mr. Williams, it’s a tough business either way. The only thing that matters is writing compelling books. Lots of them.

Mary Pax July 30, 2014 at 9:02 pm

I confess that Amazon’s whims make me nervous. I make most of my $ from them, but refuse to sell exclusively with them… so far. I’d love to see more publishers/outlets/opportunities [viable ones] come along. It can only be good for authors.

PhilRM August 1, 2014 at 10:55 pm

Kris Overstreet – yep. Here’s a good write-up:

Pretty unbelievable.

DensityDuck August 11, 2014 at 12:19 am

Still don’t see a case where a private individual with a legitemate case–i.e. a major change for the worse in compensation–got shut down because of binding arbitration. I see a lot of “oh we can’t form a class to assuage our butthurt” along with some classwar garbage (I like how they invent a case where binding arbitration would have prevented any fines being issued over the subprime mortgage mess. It’s the same sort of thinking that gives us the Time Bomb Torture Test.)

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