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Amazon vs. Hachette and the Future of Book Publishing

20/08/2014 17:07 BST | Updated 20/10/2014 10:59 BST

Amazon's dispute with Hachette could have consequences none of us ever dreamed of. As a society, we must be careful we do not sleepwalk into a situation we later come to regret - a world where publishers are marginalised and authors simply self-publish on Amazon. Readers will despair: lower quality books and a dearth of new, original creative writing.

Amazon is trying to control the price of eBooks. Hachette believes that is the publisher's prerogative. Since May 2014, Amazon has forced the issue by using underhand negotiating tactics - it stands accused of deliberately disadvantaging Hachette books by removing the pre-order button, by disqualifying Hachette books from Amazon's normal discount rates and so on. The outcome of this dispute will ultimately shape the future of publishing.

Technology companies always market themselves as the good guys

When it comes to technology companies like Amazon, there is often a presumption of innocence. They stand on the side of the consumer, lowering prices and changing our lives for the better. To a large extent that is true. But disruptive technologies always come at a cost - whether it's lower quality, lower security, greater invasion of privacy or something else.

Take VoIP (voice over internet protocol). Internet voice calls are now the norm. VoIP technology is cheaper than the old circuit-switched technology they replaced but the sound quality is inferior, the connection is less reliable, eavesdropping is more commonplace and emergency calls are not guaranteed.

Take mobile banking. It has transformed our lives in terms of ease of use. But what are the risks? If the UK's banking system is crippled by a large-scale cyber-attack the result could be a run on banks. Or worse, total economic collapse. Living standards may fall much faster and further than they did in the aftermath of the 2007/8 financial crash.

Disruptive technologies often replace something great with something cheaper. But, often, there are unintended side effects. Suddenly, when you assess the potential downside of a disruptive technology, the whole cost/benefit equation changes. We may come to regret a technology that we found so useful only months earlier.

The book publishing industry is going through just such a technological disruption with eBooks.

Amazon is leading the charge. The end outcome is hard to predict because technology is moving so fast.

EBooks themselves have only been around for ten years. Today they represent almost 15% of the global book market estimated to be worth $110bn, the remainder being print books. Yet print book sales are falling and eBooks are taking over.

With a 60% market share in eBooks, Amazon is poised to re-shape the book publishing industry in its own image, almost certainly destroying the traditional publisher's business model in the process.

To survive, Hachette and other traditional publishers are going to have to learn to live with Amazon. The eBook market and Amazon's dominance of it is here to stay. The question is what the rules under which this new market operates are.

Do Amazon and Hachette operate on a level playing field?

Amazon portrays itself as a consumer-friendly corporation dedicated to lowering book prices. Its real aim, of course, is to grab a larger share of the profits from the global book publishing industry for itself.

Commercially, this aim is laudable. There is nothing wrong with negotiating hard with one's suppliers. But it's one thing to apply pressure on your suppliers to secure a better outcome in a negotiation. And quite another to manipulate the market in order to achieve your aims.

If Amazon is able to suck out the lion's share of the profits from the book industry on fair commercial terms it should be allowed to do so.

The question is whether Amazon is operating on a level playing field with opponents like Hachette.

Some of Amazon's alleged tactics come close to what I would call market manipulation. Discriminatory pricing of Hachette books is one example. In the financial services industry, market manipulation is a criminal offence punishable with a prison term. Yet, internet companies like Amazon rarely seem to face the full wrath of regulators.

Regulators can fix this problem

Regulators by definition are a backward looking beast.

When it comes to disruptive technologies like digital publishing platforms, regulators are always behind the curve. They can take years to figure out how to regulate a newly created market like eBooks. By the time they finally get a grip on the issue it could be game over for the traditional publishers.

Moreover, regulators are loathe to be seen to be tampering with internet business models lest they be accused of clamping down on innovation or freedom of speech or the usual defences espoused by technology evangelists.

The real issue is that regulators are incapable of keeping pace with technological change. The result is that internet companies are getting away with murder.

Here are four examples of how internet companies have long been running rings around regulators.

First, there is the tax avoidance issue. Internet companies aggressively avoid both sales taxes and corporation taxes by creating complex corporate structures with tentacles in tax havens. Amazon, Apple, Google and Facebook all fall in this category.

Second, there is the issue of adherence to public broadcasting rules. Restrictions on broadcasting sex and violence apply to traditional broadcasters like television and radio, but not to internet companies. Even where online companies are clearly breaking the law - say with child pornography - law enforcement agencies tend to be slow to act.

Third, there is data privacy. Technology companies like Facebook and Google regularly breach Europe's data privacy rules with almost total impunity, judging by the size of their fines.

Finally, there are a host of new online products that appear, at first sight, to be illegal - such as Bitcoin or Aereo - to which regulators are often slow to respond. Consumer protection suffers as a result.

When it comes to the book market, there are also growing signs that regulators have lost control. As a result, technology companies like Amazon are getting away with things that we would normally expect regulators to stop.

Here are three examples where regulators seem to have acted in a counter-intuitive manner:

First, there is the battle between Hachette and Amazon: Whilst Amazon is free to negotiate, there are clear signs that the technology company is engaging in abuse of market power. Regulators should be in a position to stop this.

Second, there is the case brought by the US Dept. of Justice against Apple for colluding with publishers to keep book prices high. Yet, Apple's market share in eBooks was negligible at the time the case was brought. So why did the authorities not wait until Apple was a significant market power before launching the case?

Third, there is the issue of copyright infringement by Google. Google Books has been blatantly infringing copyright for a number of years by copying books with a view to profiting from their part-publication without author approval. This is theft (or piracy) by any legal definition. Yet regulators seem both powerless and reluctant to stop it.

By contrast, regulators often apply the full force of the law to the traditional publishers.

The sensible response from the Big Five publishers -- Penguin Random House, Macmillan, HarperCollins, Hachette and Simon & Schuster -- to the threat from Amazon would be to jointly develop their own competing digital platform and then to set wholesale prices for their books. Amazon would be free to purchase at that price or not. Consumers would have a choice of where to buy their books from.

But the problem with this kind of response is that it would almost certainly fall foul of the anti-competition authorities.

That's a shame because there are tried and tested models for regulating industries undergoing root and branch re-structuring in other sectors.

In the UK telecoms sector, for example, BT held an effective monopoly on fixed broadband infrastructure, partly a legacy of privatisation. But the regulator agreed with BT a structure whereby BT can still own 100% of its assets in an autonomously run company called Openreach. BT Retail, together with rivals like Vodafone, TalkTalk and others then rent out BT Openreach's infrastructure at wholesale rates agreed with the regulator.

Given our experience with the telecom industry, it does not appear beyond the capability of regulators to devise a similar system for the eBook market. That would allow the publishers to set up a rival platform to Amazon without being deemed to be acting in an anti-competitive manner.

What does it all mean for authors if Amazon wins?

In the short term, this is bad for Hachette authors like me who are being discriminated against by Amazon's alleged dirty tactics.

In the longer term, everyone will lose.

Authors will lose as Amazon squeezes publishers' profit margins. Squeezing them too hard will mean publishers may reduce author royalties and may be less inclined to take a risk on new authors. Ultimately there will be a loss of author talent and the reward for writing creative original content rapidly diminishes.

Readers will lose because they will see lower quality books, less original content and the loss of talented authors from the profession.

Amazon's argument is that the opposite will happen. Amazon's ecosystem makes it easier for anyone to become an author - they are heavily promoting self-published authors - giving everyone a voice. Traditional publishers are no longer required, argue Amazon, because they are just overpaid middlemen in an era when authors can simply publish directly online with Amazon. But Amazon's argument merely validates my thesis that the quality of books will fall.

Anyone buying a book on Amazon can see the difference in quality between a book published by a traditional publisher and a self-published book. Authors at traditional publishers go through five or six gruelling editing rounds. Each time the book is improved. Publishers act as a gateway to quality reading.

But while publishers' reputations depend on quality, Amazon's focus is on volumes.

Regulators need to ensure a book industry which has a healthy dose of both quality and quantity by ensuring that all players operate on a level playing field.

Time is ticking buy. Regulators are in danger of missing the boat. By the time they finally get a grip on the issue, there may be no publishing industry to regulate.