To evoke Faust as allegory for the ongoing dispute between Amazon and book publishers is appropriate on two levels, the first being the nature of the original story.

Faust was the protagonist of a German legend, who, dissatisfied with his life as a scholar, sold his soul to the devil in exchange for infinite knowledge and the full array of worldly pleasures. Said legend has been appropriated by multiple authors for variations on the same theme, including Christopher Marlowe’s The Tragical History of Doctor Faustus, Johann Wolfgang von Goethe’s Faust, and a host of other plays, operas, books, and symphonies. Indeed, most of you reading this have likely uttered the phrase “Make a deal with the devil,” and so have adopted the original idea and made it your own, without paying a cent to anyone.

Ideas have always been free, but their closest cousin, words, have long been a bit more problematic. The publishers would have you believe that their words, written by authors of course, but blessed by them, are worth a premium, and certainly ought not be shared freely. And, for centuries, that was mostly true. Books – and newspapers and magazines, for that matter – were sold for a price.

The problem, though, as newspapers and magazines have long since discovered to their peril, is that no one was ever paying for the words. Rather, it was the difficulty in distributing words that demanded a premium, whether that be the paper, the printing, the shipping, or the distributing. With the Internet, each of these proved unnecessary, leaving only the writing, editing, and publishing, and the market has dictated exactly what those are worth, all things being equal: $0.

The issue is that writing, editing, and publishing are all fixed costs; they are accrued before an article or book is published, and increasing the distribution of said article or book is, relative to these costs, completely free. The costs the Internet obviated, on the other hand, such as paper, ink, shipping, and retail space, were all variable costs; to create one additional book (or newspaper or magazine) required money. To put it another way, before the Internet free was not an option, and once customers were already paying something, it was a whole lot easier to get them to pay just a little bit more. And, with that little bit more, publishers could cover their fixed costs, and perhaps even turn a tidy profit.

On the Internet, though, words are much more like the mythical story of Faust, available to anyone and everyone for zero marginal cost. Each of you reading this article is creating a new version of this site on your computer, and it’s not costing anyone a cent.¹ Unfortunately for those accruing those fixed costs, it’s much more difficult to convince customers to move from $0 to even $0.01 than it is to go move from $1 to $2 (or $10 to $20).

This reality, unsurprisingly, terrifies the publishers, which is where we return to Faust: just as the doctor made a deal with the devil, so have publishers, but in this case the devil is Amazon, and Mephistophilis, the devil’s agent, is DRM.

Unlike newspapers, which quickly placed all their content on the Internet in the 90s, massively increasing readership but ultimately hollowing out their revenue base, publishers approached the digital era much more gingerly. It’s not that the idea of ebooks was unknown – the first ebook reader launched in 1998 – but rather that publishers, having seen what happened to music with the release of Napster, were rightly terrified of a world in which books were accessible to anyone, at any time, for free. Over the next several years different publishers dabbled with different ebook readers, but it wasn’t until Amazon, with its longstanding relationship with publishers, launched the Kindle in 2007 that the publishers fully got on board, and key to the publishers embrace of the Kindle was its proprietary DRM. Over time the publishers would also launch their titles on other companies ebook readers, such as the Nook and iBooks, but always with DRM.

The problem with DRM, as Nook owners now know all too well, is that it ties your books to a single company. If you start buying Kindle books, you will always buy Kindle books, because your books will only ever work on a Kindle. The result is that anyone who has bought Kindle books is now more loyal to Amazon than they are to any of the publishers. Not that they were ever loyal to publishers, of course; said loyalty is reserved for specific authors. And that right there is the root of the publishers’ Faustian bargain: unloved by consumers, yet unwilling to give up their position as middleperson, publishers traded away infinite distribution and the truly free exchange of ideas for the yoke of another, infinitely more powerful middleperson – Amazon.

And now, Amazon is demanding its payment. While the specifics are unclear, publishers Hachette and Bonnier are to give up more control and money when it comes to ebooks, and to help them remember their end of the deal, Amazon is “forgetting” to keep many of their physical books in stock.

Let me be perfectly clear here: I think what Amazon is doing is ugly and I don’t like it. And, were this 1985, I would absolutely be raising antitrust alarms around Amazon’s monopsonistic position in printed books (i.e. their position as by far the largest buyer of books gives them undue power). However, it’s not 1985; it’s 2014, and a huge percentage of the population has at least one device capable of reading ebooks. In fact, publishers could break the back of the Amazon monopsony today were they to start selling all of their books without DRM. Can’t find the book you want on Amazon? How about you simply visit the publisher’s site and buy it there. Or, as is more likely, visit the site of your favorite author.

Ah, but that’s the rub. The publishers need Amazon because they need the Kindle’s DRM, because they know without that artificial friction their contribution to a book’s fixed costs would become untenable. As George Packer recounted in his anti-Amazon article Cheap Words:

Amazon executives considered publishing people “antediluvian losers with rotary phones and inventory systems designed in 1968 and warehouses full of crap.” Publishers kept no data on customers, making their bets on books a matter of instinct rather than metrics. They were full of inefficiences, starting with overpriced Manhattan offices.

I’ve worked with publishers, and here’s the thing: Amazon is right. It’s not that publishers don’t add value,² but rather that their economics are wholly incompatible with the reality of the Internet. If publishers are to have a future free of Amazon, that future will be as a service with upside directly tied to a book’s success. Specifically:

• Authors will hire publishers from a competitive marketplace based on reputation, quality of service, and price
• Fees will likely be some sort of fixed price up-front, with a percentage of revenues
• Books will be published without DRM and marketed primarily by the authors themselves, likely at lower price points but with significant upside for breakthrough works

Some sort of DRM remains an option in this new world, but it must be controlled by the author (or, if he chooses, his publisher) directly. DRM is artificial scarcity, and whoever controls it controls the entire market (I myself have chosen to not make all my content here on Stratechery available to everyone, but I control the means by which it is distributed). The problem with publishers is that, due to their own incompetence and (understandable) unwillingness to change, they gave the keys to the castle to Amazon, and it’s no surprise they are now paying the price; the devil always has its due.

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1. OK, fine, the bandwidth and electricity cost something, but you know what I mean ↩

2. As the author Charlie Stross notes:

   Forbes seem to think that Hachette is a producer and Amazon is a distributor. This isn’t quite true. I am a producer. From my perspective, Hachette is a value-added wholesale distributor: they supply editorial, production, packaging, marketing, accounting, and sales services and pay me a percentage of the revenue. (I could do this myself, and self-publish, but I don’t want to be a publisher, I want to be a writer: we have this thing called “the division of labour”, and it suits me quite well to out-source that side of the job to specialists at Hachette, or Penguin, or Macmillan.)

   Unfortunately for Stross, a division of labor neatly isolated from the market success of his work is one of those inefficiencies ruthlessly culled by the Internet; of course he thinks this is a loss to consumers, but that ignores the fact that most would-be authors never actually even had a chance. ↩