Priceless publisher Lynn Price, of Behler Publications and the inestimable Behler Blog, recently drew my attention to an interesting bit of trade news: the six biggest U.S. publishers are neglecting to renew their contracts with Amazon.
On the face of it, it sounds like madness. Amazon, the single biggest bookseller in the world? The online bookstore that has forced enough actual bookstores off the market to make Greece look like an interesting investment opportunity? They actually don’t want to sell their books through Amazon? Why?
The simple explanation is money. Amazon upped the prices. That is, not the prices to consumers (which have instead been slashed, in order precisely to force the above-mentioned physical stores off the market, which is exactly how a market economy operates), but the money that the publishers will have to pay Amazon to have their books promoted. (As opposed to published. The publishers do that by themselves. But Amazon charges money to show book covers on the front page, to place them high in search results, whatever. That’s the promotion.)
But one level deeper down, it’s about an illness that’s spreading all over modern capitalism. It’s known as monopsony, a situation where one actor has been allowed—through regular free market mechanisms—to gain a monopoly on buying, so that it’s very strictly a buyer’s market. (There’s a similar situation in the publishing industry as regards publishers and authors. Although there, the imbalance is more driven by the extreme amount of producers, many of them of suboptimal quality.) Classical examples of monopsonies are public healthcare, schools and defense industries, all for what is generally perceived to be good reasons: in order to maintain a very high minimum level of service, we’re allowing governments to have a market share big enough to seriously imbalance the markets. (If you’re reading this in the U.S., healthcare is exempt from that list. And lo and behold: the U.S. healthcare lacks precisely that high minimum level that I mentioned, with an estimated 20% of the population having no coverage for conditions which are not immediately life-threatening. And one of the imbalances that are created is that the monopsony can keep buying costs artificially low, which goes a long way towards explaining why the U.S. citizens pay twice as much as citizens of other countries for comparable health care.)
The mistake that Amazon made was to neglect that, as opposed to Departments of Health, Education or Defense, they are not the ultimate consumers. There are actual book readers out there. Ordinary people who buy books. Amazon are, in fact, in the same situation as a food store chain that manages to obtain a monopoly and then slashes the prices they pay to the actual farmers. If the farmers refuse to sell at that price, the food shops will be empty. People will become hungry, and eventually (at some time between the first missed meal and the complete breakdown of civilisation, which is normally estimated to be no more than two missed meals later), they will go straight to the producers. (Who will have to hire extra hands to handle the actual transactions, which is unlikely to happen in an ordered fashion between the missed lunch and the missed dinner, whereas there is no reason to believe there would be a breakdown of public order if the next Dan Brown book misses to hit the shelves by six hours, but I never said the analogy would not break down at some point.)
There’s a psychological level to this, too. I have myself witnessed, at more or less close range, several companies which have become overrun by sales people. Many of these believe, contrary to all evidence, that they are the ones who determine the success of a company; if not for them, nothing that the company produces would ever be sold. Intriguingly, many of the producing people also come to believe this, especially once the sales people come to dominate upper management. In extreme cases, companies which experience a downturn in sales will start making the producers and product designers redundant, and hire hordes of sales people, in an effort to turn the tide. This has never been known to work.
Actually, the companies I’ve encountered which have done best, no matter how this is defined, have been the ones with no dedicated sales staff at all. They’ve spent all their energy on perfecting their products and services instead. They got so good at it that their customers would recommend their products and services, which is all the sales effort anyone needs.
I’m not saying that sales people don’t fill a function, of course. Often, they add value for both the producer and the buyer, by successfully matching the buyer’s needs and desires to a certain product or service. But this is the key: in order to have any reason for their continued employment, they will have to be of benefit to both the buyer and the producer.
In a monopsony, this fails to happen.
And I can imagine how the discussion went as Amazon talked to the publishers...
Amazon: We’ve decided to raise the promotional fees.
Publisher: Again? By how much?
Amazon: By a factor of 30.
Publisher: Wait a moment. You mean that if it cost us one dollar last year, it will cost us thirty this year?
Publisher: Look, this is unreasonable. Yes good promotion is vital, but you’re making money by the wheelbarrow and publishers are going out of business daily.
Amazon (snarling): Yeah, and where would you be without us to sell your books?
Publisher: Well, the thought did occur to us that we would, in that event, be able to sell our books at a lower price than you can, since we don’t have to support all your staff.
Publisher: Who are quite unable to write books, edit them, design covers, or, in fact, do anything that goes into the finished product.
This is, really, the level where capitalism is unhealthy. It is increasingly run by people who honestly believe that selling is more important than producing. People who believe that the producers would be utterly lost without salespeople to promote their goods on the market.
They never seem to stop to consider where they would be without any goods to promote.