America’s most reputable company (?!) is set to report Q3 losses of between 57 to 75 cents per share, by some predictions, when the market closes today. No sweat. Amazon hasn’t turned a third quarter profit in three years. Still, for those who are paying attention, Bezos & Co. have been acting weird as hell lately.
Yesterday BusinessInsider — a Bezos investment — announced a deal between Amazon and Simon & Schuster, one of publishing’s Big 5, that appears to be somewhere in the ballpark of the exact deal that broke down between Amazon and Hachette, one of Simon & Schuster’s competitors. The takeaway: Simon and Schuster will be able to set prices on e-books in most cases.
So what gives? After all, the company’s repeated schoolyard beatdown of Hachette is now widely documented and even protested. Of course, if you follow publishing, you know that someone gets screwed in every deal, mostly because the industry is built on a monopsony (Amazon) on the buyer side, and an often collusive arrangement on the supply-side. (Apple and the Big 5 were actually prosecuted for collusion last year.) Given that such deals feature few players, they’re often awash in backroom vibes. So it’s understandable that industry speculation is running wild. Does the deal mean Amazon’s bullying days are over?
Theory 1: Hachette isn’t landing the deal, so Simon & Schuster is.
This theory is pretty simple. There is so little competition on the supply-side of publishing — those who produce books and e-books and supply them to Amazon — that one failed deal means an opportunity for the exact same deal with another supplier. This theory says that Amazon has fewer options, needs the business, and has had enough bad press. So the deal just became useful for them.
Theory 2: Coop Money
There is speculation that Simon & Schuster nailed the deal by upping the amount of “coop” money they pay to Amazon. This is basically the amount of money publishers pay to Amazon to market their books. It’s an interesting argument, especially because increasing their “coop” pay could give Simon & Schuster competitive advantage over the rest of the Big 5. And what if Amazon allows publishers to set e-book prices, but then positions them in a bidding war over marketing?
Theory 3: Simon & Schuster Avoids the Government
This theory comes from Dennis Johnson at Melville House. Johnson is one of the more astute commentators in or on the publishing industry, especially when it concerns Amazon. He speculates that Simon & Schuster simply wanted to avoid Government accusation and interference over collusion:
My own theory is that S&S’s paranoia about the DOJ probably led the company to blow it, and thereby blow a golden opportunity for the entire industry to collude without actually colluding. It had Amazon between a rock and a hard place, under an avalanche of criticism and steadily intensifying scrutiny by both the media and lawmakers. There’s no way Amazon could disappear another major publisher’s books as with Hachette and not face much, much more serious consequences.
Theory 4: Amazon’s Earnings Report
This, along with a combination of Theory 2, is the argument I support. Amazon lost a ton of money on its Fire phone. And everyone seems to have forgotten that e-book sales, the crux of these publishing deals, are increasing at a decreasing rate. In terms of growth, e-books were even edged out by print books in early 2014. Is the slowing growth of e-books pushing Amazon to be more flexible in terms of pricing? And, anyway, Amazon needs to start leveraging its weight as a marketer and advertiser if it’s ever going to become profitable.
It’s a bit early to say whether Amazon’s bullying days are over. For a company that lives by its own rules — that never has to be profitable — almost anything is possible. But if today’s earnings report is even worse than expected, Amazon’s bullying and bargaining power will be diminished. And no matter what Matt Yglesias tells you, this is a good thing.