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Amazon has been flexing its muscles in both good and bad ways in recent weeks. A few publishers, namely Hachette Livre, have been making a show of defiance in the face of Amazon’s demands for a bigger discount from publishers. Bookseller.com reported the ongoing dispute had prompted Amazon to remove the “Buy Now” button from several titles by big-name authors, including Stephen King and James Patterson.

Hachette, quite reasonably I think, points out that Amazon already gets a very generous discount, up to 60%. That’s a huge step up from what bricks and mortar booksellers command. Publishers work on pretty slim margins for books, it’s one of the reasons why they have to publish so many titles to make the general trade publishing business model work. Any additional price discount to Amazon gouges the profitability of what, for many titles, is already a marginal proposition.

The industry is watching closely. Authors may well be worried if their titles are not on sale during the dispute. They’ll be even more unhappy when it comes time to negotiate their next contract, however, if publishers offer less because they can’t make the P&L stack up.

But here’s why everyone’s so nervous about it, and why it’s so important to find a solution to “the problem of Amazon”. Wall Street Journal reports that Amazon turned a literary novel by a first-time author into a 90,000 sales sensation. In one week.

The Web retailer chose the book as one of the best books of June and aggressively hyped it, including by posting a long and enthusiastic blurb from best-selling author Stephen King. The same blurb was printed inside “early reader” copies sent to reviewers, bloggers and booksellers.

Amazon also kept “Edgar Sawtelle” on its home page for two weeks at a 40% discount before the book hit stores, and posted an essay written by the author at Amazon’s request. “We also had a preorder banner in May, which is something we do for books that we think will have significant interest for our customers,” says Tammy Hovey, an Amazon spokeswoman.

The advance word — by a site thought to account for 15% of U.S. book sales — had significant impact. Ecco initially printed 26,000 copies but went back to press three times before the book hit stores, adding another 12,000 copies.

With this kind of power over a book’s impact in the marketplace, it’s no wonder everyone gets nervous when Amazon withholds its “Buy Now” button. It’s why Hachette’s insistence on standing up to a company that is increasingly behaving like a marketplace bully is so admirable.

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