Dealing with negotiation power plays

The Amazon-Hachette dispute suggests ways to overcome hardball tactics

By on / BATNA

In negotiation, visions of collaborating to create new sources of value can quickly evaporate when the other party engages in a power play—such as penalizing us financially, attacking our reputation, walking away, or threatening to do all of the above. Suddenly we find ourselves on the defensive, scrambling to do more than just break even.

That’s the position that Hachette Book Group, the smallest of the “Big 5” New York book publishers, appeared to face this year during its unsuccessful contract negotiations with Amazon. When Hachette refused to agree to Amazon’s revised deal terms, the online retailer retaliated: It upped the prices of Hachette’s books, delayed their delivery, let some Hachette books go out of stock, and even suggested books from other publishers to readers, saying they might like them more.

News of Amazon’s hardball tactics attracted a firestorm of criticism. In response, Amazon released a statement saying that such disputes were routine and encouraging consumers to buy Hachette books from Amazon’s competitors. The “everything store” was standing firm, apparently betting that Hachette would blink first.

In this battle between multimillion-dollar corporations, Hachette seemed to be in the one-down position due to a weak BATNA, or best alternative to a negotiated agreement. Amazon controls at least one-third of the U.S. book business and about 60% of Hachette’s e-book sales, while Hachette titles represent just a small fraction of Amazon’s overall sales. Moreover, given that Amazon’s Hachette negotiation is the first in a string of face-offs with the large New York publishers, the retailer has strong incentives to make an example of Hachette.

With Amazon seeming to hold all the power, what choice does Hachette have but to cave? Though the saga is unresolved at this writing, Hachette’s dilemma offers an opportunity to reflect on how negotiators can gain a foothold when doing business with a more powerful opponent.

A shifting status quo
Renegotiations between ongoing partners can be especially contentious because of the human tendency to resist changes away from the status quo—particularly when those changes will make one side worse off.

When Amazon was just another high-tech start-up in the 1990s, it attracted publishers by offering terms much more favorable than those offered by existing bookstores. As Amazon slayed its brick-and-mortar competitors one by one with rock-bottom prices and slim-to-negative profit margins, publishers became increasingly dependent on the company for sales. Meanwhile, Amazon undercut the publishers’ power by publishing and distributing books on its own.

After climbing to the top of the book business, Amazon became an aggressive dealmaker, such that one publisher told the New York Times that negotiations with Amazon “resembled a chef deboning a chicken—by the end, everything of value had been sliced off.” Amazon CEO Jeffrey Bezos allegedly compared small publishers to gazelles that were no match for his company, the cheetah, writes Brad Stone in his book The Everything Store: Jeff Bezos and the Age of Amazon (Little, Brown and Company, 2013).

Though neither Amazon nor Hachette have spoken publicly about the details of their recent negotiations, anonymous sources say the impasse came down to two main issues: control over the pricing of e-books and Amazon’s insistence that Hachette pay more for “co-ops,” or preferential services such as pre-order buttons, personalized recommendations, and a dedicated employee at Amazon for Hachette books.

Amazon has been “very inventive” in itemizing and pricing such services, one negotiator from the Hachette team anonymously told New York Times reporter James B. Stewart. After Hachette refused to pay extra for services it had been getting for free, Amazon allegedly began “taking away these services, like the pre-order button, to teach Hachette a lesson,” the Hachette source said.

Taming the “900-pound gorilla”
In his book Good for You, Great for Me: Finding the Trading Zone and Winning at Win-Win Negotiation (PublicAffairs, 2014), Massachusetts Institute of Technology professor Lawrence Susskind offers advice on negotiating with the proverbial “900-pound gorilla” dominating your market.

First, he advises weaker parties to “seek an elegant solution”—that is, a counterproposal that will create even more value for both sides than the more powerful party’s demands. In Hachette’s case, this would mean brainstorming creative ways to help Amazon increase its profit margins.

Such efforts could focus on showing the value traditional publishers bring to the industry. Amazon’s actions suggest it
views New York publishers as little more than costly middlemen between readers and books. Moreover, some observers have argued that publishers such as Hachette are artificially driving up the cost of e-books and shorting their authors on profits. Hachette could work to allay such perceptions by finding new sources of value not only for publishers but also for authors, perhaps by collaborating on new editorial and marketing initiatives with Amazon.

Appeal to principle
Second, Susskind advises weaker parties to appeal to principle in their persuasion efforts. That is, identify nonfinancial interests the other party may have, such as the desire to avoid antagonizing customers or to preserve a mutually profitable relationship.

For Hachette, this might mean reminding Amazon of the risks of continued negative publicity. Comic and Hachette author Stephen Colbert has launched an anti-Amazon campaign, and it may be working: Walmart reports that its overall book sales skyrocketed 70% in the week after the Amazon-Hachette dispute went public. Both Walmart and Barnes & Noble have been promoting deep discounts on certain Hachette books in the midst of the standoff. Presumably, Amazon calculated the risks of losing ground to competitors, but Hachette could continue to make them salient.

3 more strategies to boost your power

Consider applying three other power-balancing moves from the pages of Negotiation Briefings:

1. Present multiple offers to the more powerful party to gain a better sense of what she values.

2. Build the relationship and address conflict quickly by keeping lines of communication open between formal negotiation sessions.

3. Encourage the other party to take your perspective, and thus become more cooperative, by asking him to explain his decisions.

Amazon may also be exposing itself to legal risks, particularly if the U.S. Federal Trade Commission views its tactic of directing buyers away from Hachette titles to other products as a type of “bait and switch,” writes David Streitfeld in the New York Times. In Germany, where Amazon sells up to 70% of books sold, the publishers and booksellers’ association recently filed a complaint against Amazon for violating competition laws in the wake of the retailer’s similar hardball bargaining with the German publisher Bonnier.

In addition to pointing out risks, you might also play a role in the other party’s efforts to mitigate them. In its statement about the dispute, Amazon offered to chip in funds for “an author pool to mitigate the impact of the dispute on [Hachette] author royalties,” but only if Hachette agreed to fund 50% of the pool. Hachette rejected the proposal, saying it would be “happy” to discuss any ideas Amazon had about unilaterally “compensating authors for the damage its demand for improved terms may have done them” only after an agreement is reached. By refusing to collaborate on the issue, Hachette attempted to put the blame for the dispute squarely on Amazon.

Finding strength in numbers
If these first two strategies are ineffective, the less powerful party in a negotiation might also try to level the playing field by forming strategic alliances with its competitors, writes Susskind. Such partnerships can undercut an opponent’s power by weakening his BATNA— his ability to reach a better offer that excludes you.

Notably, there are wrong ways to go about this approach. In 2010, for example, the Big 5 publishers tried to gain leverage with Amazon by teaming up to promote a new sales model for e-books. This strategy amounted to collusion, according to the Department of Justice (DOJ); Hachette was one of three publishers that settled a price-fixing suit with the DOJ in 2012 and had to pay consumers rebates on their e-book purchases.

This time, Hachette may have hit on a more successful (and legal) strategic alliance. On June 24, weeks into its dispute with Amazon, Hachette announced that it was acquiring Perseus Books Group, the sixth-largest U.S. book publisher. Hachette CEO Michael Pietsch insisted that the purchase had nothing to do with the Amazon dispute and was simply part of the company’s long-term expansion plan. But the merger will allow Hachette to bring more books to its negotiations with Amazon—and therefore more profits for Amazon to win or lose. Indeed, Random House’s recent merger with Penguin was believed to have been motivated in good part by a desire to gain leverage with Amazon. Coalitions and strategic alliances need to be undertaken with care, but could be an effective way to gain leverage.

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