Why Is Amazon Squeezing Hachette? Maybe It Really Needs the Money

Why Is Amazon Squeezing Hachette? Maybe It Really Needs the Money

By DAVID STREITFELD and MELISSA EDDY

MAY 30, 2014 7:00 AM 1 Comments

Over the course of nearly two decades, Amazon has hewed to a consistent philosophy: It’s all about the customer. The retailer is so devoted to its customers that it takes the profits that would normally go to shareholders and gives them to shoppers in the form of faster delivery and lower prices. It was a brilliant strategy that has propelled the company to the top ranks of American businesses.

So when Amazon took the rare step of explaining why it decided to hold 5,000 Hachette books hostage when contract negotiations with the publisher failed, it once again said it was all about the customer.

“When we negotiate with suppliers, we are doing so on behalf of customers,” the retailer said in an unusual statement.“Negotiating for acceptable terms is an essential business practice that is critical to keeping service and value high for customers in the medium and long term.” Amazon suggested that anyone who really wanted a Hachette book go elsewhere.

In other words, Amazon is willing to alienate those customers it usually lavishes so much attention on. And it is willing to be vilified on the Internet for undermining writers, further denting its reputation.

To make all that trouble worthwhile, the goal must be pretty tempting.

Amazon hasn’t really explained what it is after, but here’s one compelling theory: The company just doesn’t have enough money to finance everything it wants to do. Rather than trim its ambitions, it is putting one side of its business through the wringer to pay for another.

It’s no coincidence that the confrontation with Hachette in the United States — and Bonnier in Germany — comes as Wall Street is getting a little restless with Amazon. The retailer has been doing its best to tighten its business, including raising the cost of its Prime membership program. It chopped the royalty rate for self-published audio books. And publishers and customers say books on the site are getting more expensive. (Amazon has hotly denied this.)

At the same time, however, Amazon is restlessly expanding. It is paying HBO $300 million for the rights to stream shows like “The Sopranos” for free to Prime customers. It was reported on Thursday to be introducing a streaming music service this summer. There are new warehouses galore. An Amazon phone is a persistent rumor. All of this development takes money, so even with the tightening, Amazon is barely making a profit.

Amazon has issued no statement about how it is working for its customers in Germany. It could not pass on to them any savings it achieved in negotiations even if it wanted to. Books have fixed prices in Germany.

There seems a bit of confusion over what is happening in Germany. In its statement, Amazon recommended a blog that makes a strident defense for the company; it’s from a Long Island outfit, the Permanent Press. The blog post says Bonnier is “known primarily for publishing magazines throughout the Western world and far fewer books.”

Surely Amazon knows better than this, even if the Permanent Press does not. Bonnier Media Germany belongs to the Bonnier Media Group, which is based in Sweden. It includes nine German-language publishers of fiction, nonfiction, children’s literature and comics. Bonnier is the third-largest publishing group in Germany, after Random House and Holtzbrinck. Internationally known authors published by Bonnier Germany include Isabel Allende, John le Carré, J.K. Rowling, Malcolm Gladwell, Elizabeth Gilbert and William Boyd.

Price negotiations between Amazon and German publishers take place annually and normally last only a month. Bonnier and Amazon started negotiating late last year but have not been able to agree on how to divide the take from e-books. Sources in the German publishing world believe Amazon focused on Bonnier because it is big enough to set a precedent but not one of the two heavyweights.

The German pricing law exists to prevent any bookseller from undercutting their rivals. The law is rooted in the country’s belief that books are a necessity to a free-thinking, pluralistic society; one of the most moving monuments to the Nazi-era terror is a white room full of empty bookshelves recalling the volumes burned in 1933. The law is also considered a measure to ensure the survival of smaller bookshops and publishers.

This does not sound like hospitable territory for Amazon, but the company is selling a lot of books there. That must further increase the ire of small booksellers and independent publishers. They view the online giant’s tactics against Bonnier as a political statement against their way of life.

“The use of its market position to purposely delay delivery of books from selected publishers in order to pressure them to accept their demands for conditions is not only a threatening sign for the book industry, but a clear affront to those who read and buy books,” wrote a group of some 880 independent booksellers and publishers, members of a loose organization that calls itself the Booksellersmeeting in protest against Amazon’s action.

Amazon, which has the further problem of labor troubles in Germany, does not seem worried. Perhaps it is confident the complaints will blow over. And perhaps it really needs the money.

An Amazon spokesman declined to comment.