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Deal took nearly a year, but was kept private in contrast to Amazon's very public rancorous dispute with Hatchette

While no one can say exactly what went on behind closed doors, from a public perspective internet bookselling giant Amazon.com, Inc. (AMZN) and News Corp.'s (NWS) HarperCollins came relatively quickly and with little public animus.  The amicable agreement will invariably be scrutinized due to Amazon's protracted battle with the Lagardère SCA's (EPA:MMB) flagship publishing imprint Hachette Livre.

I. Lessons Learned From Hatchette vs. Amazon

Hatchette and HarperCollins are both members of the so-called "Big Five" of American publishing.  HarperCollins is America's second largest publisher in some rankings and Hatchette is the third largest. Alternatively, they're ranked third and fourth if you consider commonly owned Random House and Penguin separate entities.

Hatchette's spat with Amazon stretched over much of 2014 and shook the market.  The roots of the dispute lie in Amazon's dominance of the digital books market and reoccurring claims that publishers were making collusive and illegal attempts to find a way to break that monopoly.

Such claims were given legs in a 2013 eBooks antitrust lawsuit brought by the U.S. Department of Justice.  The antitrust lawsuit alleged that Apple, Inc. (AAPL) conspired with the ebook market's top publishers (including Hatchette) prior to the launch of the iPad.  The goal, it was claimed, was to fix the price of ebooks upwards and to hobble the dominance of Amazon -- a key opponent of price increases.

In their response publishers seemed to offer a mea culpa to the allegation that they engaged in a collusive arrangement with Apple in order to try to pump up prices and break the grip of Amazon on the eBook market.  They all settled, except for Apple, which fought and was eventually found guilty.  It would later settle.  The net result was a weakening of iTunes and iBooks' momentum in the ebooks industry and a consolidation of Amazon's hegemony.


iTunes -- ebooks

A common counterargument was that Amazon didn't deserve such protections against unfavorable agreements, given allegations that it published aggressive tactics of its own to punish publishers who looked to challenge its hegemony.  Amazon, in turn, responded to such arguments, by noting it was a crusader for lower ebook prices and was effectively representing the consumer interest.

Such back and forth arguments were revived when talks to renew Amazon's publishing deal with Hatchette temporarily collapsed last Spring.  Both sides took steps to lessen the damage authors felt from the dispute, but such provisions could only do so much.  During the spat Amazon continued to sell Hatchette books under and interim arrangement, however, it declined to take preorders on hot upcoming titles from the publisher and often "ran out of stock" of Hatchette's top titles.

Amazon -- New Yorker
[Image Source: Redux]

The battle was damaging to both firms' reputations.  Hatchette was implicated with trying to force higher book prices at the expense of consumers.  Amazon, meanwhile was made to look like an abusive monopolist.

With both sides losing money and reputation and with authors increasingly outraged, Amazon and Hatchette eventually both compromised somewhat on their positions in order to reach a multi-year digital and print publishing agreement.

II. HarperCollins and Amazon Avoid Costly War

HarperCollins faced the potential to see a similar public spat after its contract with Amazon reportedly expired in Sept. 2014.  Both sides worked for over a year, according to some accounts, to quietly reach a deal.  As of last month there'd been no rancorous public battle as in the Hatchette case, but both sides also appeared no closer to a deal.  In fact, some sources indicated that the two sides were far apart and that the talks had soured.  Some following the issue offered up some rather sensational takes, such as LitReactor's summary: "HarperCollins at War with Amazon."

HarperCollins
[Image Source: Microsoft Azure]

An Amazon rep reportedly told BusinessInsider in response to those allegations:

I can't comment on that rumor. I can say that we have offered Harper the same terms for a contract that Simon & Schuster, Hachette, and Macmillan have all recently agreed to.

Despite the claims that the deal was falling apart, just weeks later, it was sealed to the surprise of many on Monday.  The Wall Street Journal -- also owned by News Corp. -- was the first to report on the breakthrough.  On Monday it quoted a HarperCollins spokesperson as confirming:

HarperCollins has reached an agreement with Amazon. Our books will continue to be available on the Amazon print and digital platforms.

So what does the deal involve.  What was won or lost?  The best insight we have comes from the reporter who broke the news of the deal -- WSJ contributor Jeffrey A. Trachtenberg.

He writes that "a person familiar with the situation" indicated that as a concession to Amazon HarperCollins agreed to embrace an incentives structure for selling books at lower pricers to consumers.  He added that the exact financial terms of the deal -- which will take hold next week -- were "unavailable", however he later adds:

Under the so-called agency pricing model, publishers keep roughly 70% of the revenue from each individual sale, with retailers receiving an estimated 30% as their fee. Discounting is done only with approval of the publisher.

In addition to signing Hatchette -- and now Harper Collins -- to multi-year deals, Amazon in October came to terms with CBS Corp.'s (CBS) flagship imprint Simon & Schuster and in December completed an agreement with MacMillan -- a subsidiary of privately held German conglomerate Verlagsgruppe Georg von Holtzbrinck GmbH.  Simon & Schuster are America's fourth and fifth largest publishers.

Publishing -- big five
And then there were five: an infographic shows slightly dated revenue data from 2011, show the market share of various publishers at the time. [Image Source: Quartz]

America's largest book publisher (or pair of publishers) is Penguin Random House -- an imprint coowned by privately held German conglomerate Bertelsmann SE & Co. KGaA and the UK's Pearson plc (LON:PSON).

The imprint was formed via the 2012-2013 merger of the Random House (then solely owned by Bertelsmann) and the Penguin Group (then solely owned by Pearson).  After the pair HarperCollins is America's second largest publisher (or third largest if you count Penguin and Random House individually).  It has been doing some dealings of its own, acquiring romance novel publisher Harlequin in early 2014.  Hatchette also explored a potential deal with Simon & Schuster, but it fell through.

With the quartet of fresh multi-year publishing deals signed over the last several months, Amazon has once more ensured peace in the publishing market.  The cost, inevitably, is both sides grumbling over what they gave up.

Sources: WSJ, via Reuters





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