The part behind the cut is going to be long and somewhat arcane, but if you want to know some of how the sausage gets made — just what’s going on with ebooks and Kindles, how pricing gets determined, and why Amazon’s strategy is problematic for the industry (let alone the petulance of their tactics) — then read onward. Outside the cut, I’ll point you at the response from Macmillan’s CEO, and the more belated response from Amazon’s Kindle Team (dissected by anghara). If you read only one other thing on the topic, it should be John Scalzi’s magesterial (and highly amusing) analysis of how Amazon failed, because his post is about the tactics, and why they were such a resoundingly bad idea. The rest of this will be about the strategy, the behind-the-scenes stuff that explains why so much of the publishing industry is up in arms against Amazon.

Amazon would have you believe that they are looking out for the interests of you, the reader, by trying to achieve a more reasonable price for ebooks (which, after all, don’t have the physical production costs of print books). Macmillan are big meanies because they want to charge more, possibly because they’re afraid of a future in which ebooks destroy hardcovers.

But if you read the letter from Macmillan’s CEO, and compare it to Amazon’s strategy, you’ll notice something interesting: Macmillan actually wants to charge both more and less for ebooks. That is, they want to charge more for some of them some of the time, and less for others at other times. What Macmillan is trying to do — which is pretty innovative for the book business — is institute dynamic pricing. Higher initially, to get that first wave of energetic fans who will pay more to have the book now, and then dropping over time. Dropping, in fact, to a point below the $9.99 line Amazon’s trying to institute for everybody (except the occasional bestseller, which they price higher — surprise!).

What’s going on with this? The fact is that Amazon is selling a lot, maybe most, of those $9.99 books at a loss. But that’s okay, at least for a while, because it helps move Kindles, where Amazon does make a profit. (Known as “loss-leading.”) And more importantly in the long term, it puts the squeeze on their competitors: smaller operations who can’t afford to eat that kind of loss, because they’re not enormous corporations like Amazon. Those guys have to price their books higher, which makes it more likely readers will decide to buy from Amazon, which ultimately puts the smaller guys out of business. Pretty soon, Amazon has more or less a monopoly on ebooks — something they’ve already achieved, I’m told, with audiobooks. (We’re talking a real monopoly here, not the idiotic “Macmillan has a monopoly on the product it produces!” b.s. of that response above. Yeah, and you have a monopoly on Kindles. Come back when you understand basic economics.)

Once Amazon’s the only ebook game in town, they’re free to move on to the next step. “Monopsony” is a less-well-known term than “monopoly,” but it’s the same situation in reverse: when there’s only one buyer for your product. This is how it would look to the publishers. And if Amazon’s the only customer in town, then Amazon can dictate terms — as indeed they’ve tried to do to Macmillan, and successfully did to Hachette in the UK a couple of years ago, plus a variety of smaller presses. They can, for example, tell publishers that they must lower the price of their ebooks — not the price the reader sees, mind you, but the price Amazon sees. Readers still pay $9.99, and now Amazon pushes the loss of profit off onto the publishers. Who, for the record, may be corporations, but that =/= rolling in cash. Many of them are barely hanging onto profitability in the first place. When industry professionals say the long-term effect of this would be to shrink the supply side of the publication chain — fewer companies printing a lesser diversity of writers — they aren’t playing Chicken Little; they’re making a very well-informed forecast.

Macmillan is trying to avoid this. In their own self-interest, yes, but as it happens, that coincides with the interests of a lot of other people. If their new strategy works, it will be good for their fellow publishers (who won’t be forced to sell their books to Amazon at a deeper and deeper discount), for writers (who won’t lose their contracts or royalty percentages when their publishers find themselves with less and less money to pay them with), and for readers. In a variety of ways, in fact, starting with the fact that readers will be able to buy some books cheaper than Amazon wants to sell them (petulant rhetoric to the contrary).

If their new strategy works. Because the truth is that we don’t know if it will. But if it doesn’t, then Macmillan is in a position to adapt; they can either re-jigger their pricing — which is designed to be dynamic and respond to public demand — or go to something else entirely. Either of which is a more productive response than, oh, shutting down not just Macmillan’s ebooks but EVERYTHING THEY PUBLISH, no matter the format. Whether this works or not, I’m glad Macmillan is testing it; I’d rather see the publishing industry try to adapt, than hunker down in its burrow until starvation kills it.

There’s more stuff to talk about here, too, but at this point I think I’m better off linking to other people. Such as Toby Buckell on why fixing a maximum price ceiling is a bad idea, and also what the cost of producing an e-book is; apparently there are a lot of people doing back-of-the-envelope calculations on the latter who don’t actually understand what they’re talking about. (Short form: physical production is a much smaller percentage of the cost than you think, and the other expenses don’t change for electronic format. This is why e-books can’t all be four dollars.) Also Lisa Gold on e-book pricing, and why this has flared up in the immediate wake of the iPad. Or Charlie Stross, on the tangles that arise when Amazon is trying to be both a retailer and a wholesaler, and sometimes also a sublicensed publisher. Jay Lake talks here and here about why Amazon’s public-facing behavior is bad. And if you didn’t read Cory Doctorow before, do so now, because he has some cogent things to say about the restrictiveness of the Kindle setup, and the ways in which it’s bad for the book-buying consumer.

Back outside the cut to say that I am, in fact, going to remove the Amazon links from my site, replacing them with links to companies (such as Powell’s or IndieBound) who haven’t been skirting or possibly dancing over the antitrust line. Even if I agreed with Amazon’s general position in the dispute with Macmillan — which I clearly don’t — their reaction to it has not been the reaction of a company run by mature adults, as John Scalzi has abundantly detailed (see the link above). Yanking a sixth of your inventory, without warning, without explanation to your customers, is bad business. I don’t want to do business with a company that behaves like that.