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Amazon Intensifies Battle against Hachette by Offering Sweetheart Deal to Authors

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New York City, New York – (StockNewsDesk) – 07/10/2014 — These have been interesting times for Amazon.com and its stock price, as it finds itself in a battle with Hachette, pushing the publisher for more eBook revenue and lower eBook prices.  In order to fully understand why Amazon is pushing so hard, it is instructive to examine its strategy and share price.

Jeff Bezos’ brainchild has transformed the way people shop all over the world, competing on price and service through innovative inventory management systems and brutal focus on undercutting competitors.  In recent months, the stock is down almost 20% since peaking early this year at 408.  Here is a three year weekly chart, showing its incredible ascent and weakness in 2014, as it has given back almost 50% of its gains in 2013.

AMZN

So, while the longer trend for AMZN clearly remains up, in the shorter term, the company is facing some challenges.  The crux of the matter is that for years the investor community has understood Amazon’s long term strategy of seeking out growth even at the cost of being profitable.  The thinking was that once Amazon won dominance through offering the lowest prices, eliminating the bulk of its competition, then it would be able to raise prices or have more bargaining power with suppliers depending on its market share of the specific product, with the proceeds going straight to the bottom line.

It was a testament to Jeff Bezos’ unique abilities that he was given this slack by Amazon’s investors and it is hard to imagine another company who would see its stock price rise even after quarter after quarter of losing money.  However, in recent months, investors are starting to demand tangible results from Amazon; shares are no longer being bid up on quarterly reports of rising revenue and millions in losses.  And Bezos has begun to execute the second part of his long term strategy; in areas where Amazon has dominant market share, it has started to demand better terms from suppliers. Its vicious spat with Hachette typifies this approach.

Amazon is the dominant purveyor of books and eBooks with a staggering 65% market share of eBooks.  Due to this position, it can demand very favorable concessions from publishers, because without Amazon’s sales, most publishers would simply be out of business.  For example, Random House gives Amazon more than a 50% discount on its titles and 60% if you count the marketing costs charged by Amazon.  But when companies don’t play by the rules, Amazon has the ability to bury these titles.

However, Hachette has decided to fight back, not accepting Amazon’s terms, specifically the division of revenue and pricing.  Amazon has fought back by halting orders for existing books and future books and even slowing delivery time for customers, seemingly in an effort to dissuade them from purchasing Hachette books.  Amazon caught tons of negative publicity from these moves, especially with authors decrying these practices and rallying their readers to complain about these bullying tactics.

In an effort to deal with this PR storm, Amazon came up with an interesting counter to assuage the authors, while intensifying the pressure on Hachette.  They offered Hachette authors 100% of eBook revenues, clearly an attempt to drive a stake between Hachette authors and Hachette. While it is a sweetheart deal for authors, it would be devastating for the publisher.  Not surprisingly, Hachette quickly rejected the offer, stating it would be suicide to accept such an offer.

Amazon countered in a statement, “We call baloney.  Hachette is part of $10 billion global conglomerate.  It wouldn’t be ‘suicide’.  They can afford it.  What they’re really making clear is that they absolutely want their authors caught in the middle of this negotiation because they believe it increases their leverage.  All the while, they are stalling and refusing to negotiate, despite the pain caused to authors.  Our offer is sincere.  They should take us up on it.”

With this move, Amazon has tightened the noose on Hachette, increasing its leverage, while chipping away at Hachette’s support from authors.  This is a manifestation of Bezos’ long term strategy of turning the ubiquity of Amazon’s platform and market share into profits, by squeezing the suppliers.  Although the daily machinations of this battle remain fascinating, the most important issue for shareholders is whether Bezos will be able to realize his long term strategy.

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