A bookseller slashes prices on bestsellers by as much as 40% over the publisher’s suggested retail price. It starts doing a brisk business, and as a result is able to stock more backlist titles that move more slowly. Competitors cry foul. Some go under. Publishers are driven out of business, or need to consolidate with other publishers to survive.

Am I talking about Amazon, whose $9.99 e-books drove publishers into a conspiracy, or the recent consolidation of Random House and Penguin? Actually, no—I’m talking about Barnes & Noble in 1974. Futurebook is carrying an essay by Tim Coutis, from its recent competition, pointing out that the loss leading strategy in books by no means began with Amazon.

In introducing a loss leader strategy, Barnes & Noble essentially sowed the longer-term seeds of its own destruction, Coutis writes—because Amazon was able to expand upon that strategy and out-discount the discounter, especially when e-books came along.

It’s an interesting and insightful essay. My one quibble with it is that Coutis implies Amazon was discounting all or most books it sold below publisher wholesale price. But according to Amazon’s testimony and the DoJ’s investigation, it was doing exactly the same thing Coutis says Barnes & Noble did: discounting just the bestsellers, a very small fraction of its overall catalog, while charging more reasonable prices for backlist titles.


  1. If memory serves me right, there was a lawsuit by other bookstores and B&N was forced to end that policy based on a 1930s-era law. And I believe it had something to do with B&N forcing publishers to give it a lower wholesale prices that could be justified as anything other than, “We’re big. Do what we say.” That then let them sell lower too.

    That’s also true of Amazon where the real issue at this moment isn’t at the retail end. All my ebooks, for instance, sell at the same price through every retailer. The crimes, or so I regard them, are with the supply side (as with B&N).

    A large company–in Amazon’s case one with about 70% of the ebook market–can pressure suppliers to accept less per item than a small one. That’s mixing near monopoly power with wholesale price fixing. And it’s just as effective at keeping profits high and weakening competition as retail price fixing–the alleged charge against Apple and the major publishers. And it has the advantage of getting the result of higher retail prices–larger profits–with higher retail prices.

    That’s precisely what Amazon is doing. You don’t even need access to in-house communications to demonstrate that. Apple and others have price-independent royalty rates–a flat 70% at all prices under $200 in the case of Apple with no other charges.

    Amazon rates vary with the price, being 35% for ebooks priced below $2.99 or above $9.99. It only technically pays the industry-standard 70% for ebooks priced from $2.99 to $9.99. In practice, to ebooks priced above $2.99, it also adds a ridiculously high download fee (some $0.15 per megabyte). That reduces the effective royalty rate for my two picture-rich hospital books to about 50%. Most companies would die to up their profits by 3%. Amazon is upping theirs by 20%.

    The issue is more complex than I can go into here, although I have elsewhere, but the net effect of Amazon’s royalty policies is to force prices up at both ends of the market. That hurts consumers and is what the DOJ should be looking into. Those policies also allow Amazon to profit much more from each ebook sale than someone like Apple, enriching itself while impoverishing authors. Those royalty policies are, in effect, Amazon forcing ebook publishers and authors to wholesale ebooks to them for from about 20% to 35% below the wholesale prices that other ebook retailers are paying. If that isn’t a crime, it should be.

    That’s the reality behind my remarks, here and elsewhere, that the lawyers at the DOJ who’ve been prosecuting Apple and the major book publishers but not even investigating Amazon are either remarkably stupid or hideously corrupt.

    Given that both motivations seem to be the signature trademarks of this administration, it’s not easy to decide which it is in this case.

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