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Amazon Ignores Lessons in Piracy from Online Music


Why caving to Macmillan means higher prices, fewer buyers, and more piracy.

Of all the recent stories of content providers bullying well-liked brands, this might be the most egregious.

Last week, Amazon (AMZN) was in a pricing war with Macmillan -- one of the six largest publishing houses in the country -- over the cost of its bestsellers in the e-book market. The publisher demanded that Amazon charge $15 for Kindle customers rather than the typical $9.99. Briefly showing some backbone, Amazon stood fast in its pricing policy and removed the "Buy" buttons from Macmillan titles on its website and Kindle market. Those titles were then only available through third parties.

In short, Amazon defended the customers' best interests.

But after a weekend of discussion -- and a smoke-blowing open letter from Macmillan CEO John Sargent -- Amazon agreed to the terms and will allow the publisher to price its e-books beginning in March. The company released a statement on the matter and showed its disapproval:

Macmillan, one of the "big six" publishers, has clearly communicated to us that, regardless of our viewpoint, they are committed to switching to an agency model and charging $12.99 to $14.99 for e-book versions of bestsellers and most hardcover releases.

We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, 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. Amazon customers will at that point decide for themselves whether they believe it's reasonable to pay $14.99 for a bestselling e-book. We don't believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative.

Despite the stern words and symbolic arm folding, Amazon has screwed over the customer and given credence to downloading a PDF of a bestseller illegally rather than adhering to an undeniably inflated price tag. And it's not the first company to do so in recent months.

Early this year, Netflix (NFLX) kowtowed to Warner Bros. (TWX) after the studio demanded to place a 28-day hold on new releases from the company's rental service. (See Piracy Wins From Netflix Caving to Warner Bros.) Warner Bros. has the notion -- a particularly foolish one -- that the move will influence customers to buy discs rather than rent them. Because of Netflix's agreement to the measure, Warner Bros. will soon discover how wrong it is.

Back in October, the fate of free video streaming website Hulu came under question when News Corp (NWS) deputy chairman Chase Carey posed doubt upon whether a free ad-supported model is feasible in the long run. (See How News Corp Could Kill Hulu) Since then, it's becoming more likely that Hulu will adopt a paid subscription service, pushing viewers of Fox, NBC (GE), and ABC (DIS) content to the BitTorrent tracker sites.

Have these publishers and studios learned absolutely nothing from the greedy and ailing music industry? Answer: Apparently not.

Before the Macmillan debacle, Amazon had been pricing the e-books itself -- often at a loss. The online retailer typically spent $12.50 to $17.50 for new e-books and sold them to the customer for $9.99. But under the new model, Amazon will collect a 30% commission on most general fiction and nonfiction titles priced between $12.99 and $14.99.

While it appears Macmillan stands to lose money on the new deal, the cost is negligible compared to the overhead of publishing old fashioned hardcovers.

It's clear that Amazon's decision was made to maintain ground among the growing number of competitors it's facing. The Sony Reader (SNE), Barnes & Noble Nook (BKS), and soon the Apple iPad (AAPL) will all fight tooth and nail to unseat the Kindle from its e-book reading perch. If Amazon and Macmillan severed ties, the publisher might make up for the loss quite easily via the other e-book retailers.

But what about the loss resulting from deserting readers? Folks who have already dealt with the inflated costs placed by the RIAA and MPAA? Is there any chance they'll put up with it again? Sargent's bleeding heart open letter claiming that the publisher will crumble if they don't charge the customer more is tiresome and familiar. It only serves to fuel cynicism against another institution that boosts retail prices, pays little to the creator, and reaps all the benefits.

Many will argue that, faced with the consequences of a departing publisher, Amazon's hands were tied. However, it -- and Macmillan -- may soon become familiar with a similar effect, but on a much larger scale.
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