Amazon, Macmillan: an outsider's guide to the fight
antipope.org
antipope.org
Amazon is trying to drive the prices down to $10 or less because they believe that the eBook market will stagnate if titles are priced much higher than that. They're gambling that lower prices for eBooks will lead to higher sales, and that the increased volume will make up the difference for everybody.
Macmillan is trying to drive the prices up so they can still recoup their fixed costs given current sales numbers for eBooks. They're not gambling at all -- they're trying to structure prices so if the eBook market stagnates they still break even, which has the very pleasing side effect that if eBook sales increase even slightly (something the iPad is threatening to help happen), all the revenue from those additional sales will be pure profit.
I can see points on both sides here. I agree with Amazon that the eBook market is dead in the water unless eBooks cost significantly less than physical copies, but publishers like Macmillan would be insane to give Amazon any control over the actual "list" price that drives all the percentages.
(Pricing rant: In order to succeed, eBooks have to be priced competitively with the actual street prices of the print versions, not the list prices. Bestseller prices need to be competitive with Amazon and Costco, and backlist prices need to be at least nominally competitive with used. Particularly for titles have have been in print for decades -- I think you're recouped your costs on the Foundation trilogy by now, guys; it's not my fault you keep re-typesetting it so you can bump up the page count to make the ever-increasing cover price look "reasonable".)
Traditional chain: author -> publisher -> wholesaler -> bookstore -> consumer
Then he says that Amazon is acting as wholesaler to the publishers and bookstore to consumers. That would give us this:
Amazon's chain: author -> publisher -> Amazon -> consumer
What I don't really get is what's so different between that and what apple is proposing:
Apple's proposal: author -> publisher -> fixed-price distributor -> reader
The only difference I see is that apple hasn't started going after the publisher's profits (yet).
What am I missing here?
Amazon wants to sell me a book delivered on day 1 for $10. Macmillan wants me to choose a book delivered on day 8 for $30 or a book delivered on day 180 for $15. Remind me why I'm suppose to back Macmillan again?
Now, let's try a metaphor. It will be a little clunky, since the situation isn't the same. But go with it for a second.
I see that Bingo Card Creator sells for $29.95. That seems awfully high. [1]
But suppose I've got my hands on the channel through which 50% of Bingo Card Creator's sales are flowing. (Perhaps I'm Google, and I both (a) run AdSense and (b) own a lot of the pipes down which your content flows.) And I'm starting up an app store. My deal for you is: You will license Bingo Card Creator to me for republishing at my app store, where all apps cost $19.95 flat rate. If you refuse, I'll cut off all the ads and distribution that connect you to over half of your customer base, and we'll see how long you can afford to defy me while your cash flow has been cut in half.
Of course, if you say yes to $19.95, your customers will be very happy. They will flock to my app store where the prices are lowest. Soon 75% of your customers will arrive through my channel. At which point I might decide to lower the price on your app to $9.95, flat rate.
I'm assuming that there is a price point below which you will go out of business, and below which your replacements will go out of business (even if I hire the cheapest labor I can find, and cut QA to the bone). You may prefer not to explore exactly where that point is, if only because you like producing quality products, and because it's nice to not be one temporary sales slump away from bankruptcy. But, thanks to my grip on your distribution channel, we will now perform that experiment, on my schedule and my terms.
Why hasn't this happened more often in web software? Perhaps because no monopoly controls a sufficient portion of the network. Perhaps because those with the power are scared of anti-monopolist legislation (which, in this context, we tend to call "net neutrality laws") and don't want to provoke anyone. Perhaps because software-industry mavens are very well practiced at picking up their operations and moving to a different channel literally overnight. Perhaps because software has a huge profit margin compared to print books, which provides healthy margin for emergencies. Perhaps because we've been lucky so far. And perhaps because, if and when Google does destroy entire industries by tweaking a bit in AdSense, they tend to be industries we don't like very much, and/or it tends to stay under the radar. [2]
My sense is that this moment isn't so much about publishers and authors trying to stave off the arrival of the internet. It's about an attempt to stave off a monopolist's control of their pricing and distribution.
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[1] To a cheapskate. Cheapskates think all prices are high. People complain about high prices on the iPhone App Store, for god's sake.
[2] Note: I haven't seen any credible evidence that this actually happens, although people do complain about it now and then.
That is not a win for anyone except Amazon.
To enforce this, they told Amazon that if Amazon doesn't play ball with their dictated prices, MacMillan will use their strict legal monopoly on sale of MacMillan books to make it impossible for Amazon to sell them in the crucial post-release window. Amazon said "Two can play at that."
(MacMillan doesn't "need" $12 to $15 to make money, but if they demanded it, Amazon would pay $2 a book during the new release window to make boku bucks on the hardware, midlist/backlist titles, and non-book services.)
Actually, you'd be surprised.
The author's cut is a royalty based on the suggested retail price, which for a hardback offering would be 10-15% of $24, or for a first ebook at $15 would be 25-30% of $15.
The production cost of an ebook is non-zero; there's a lot of editing, copy-editing, proofreading, typesetting that goes into it, not to mention commissioning cover art (arguably obsolescent) and other marketing activities. Rule of thumb is $7000-$20,000 for a book, which must be recouped somehow. Typical book sales are much lower than most folks imagine -- midlist hardcover SF novels sell 3000-8000 copies at $24 discounted to $16, paperbacks sell 15-30,000 copies at $8 discounted to $6 (but with a hideous level of wastage such that typically 20-50% of the print run will be pulped due to not selling within 90 days).
Suppose the $15 ebook somehow sells as many copies as the $16 (after discont) hardcover. The iBook cut is 30%, leaving $10. The author's cut is another 30% of $15, leaving $5 for the publisher. They then have to defray $7-20K of production costs before they're into profit; an expensively produced book that sells for $15 but only moves 4K copies is thus a loss.
You want to know the grisly truth? Right now, ebook sales are lucky to make it into three digits. Even Baen, who are Doing It Right, are happy to shift 4000 ebooks at $6 each.
And Amazon isn't taking only 30% of the cover price: they're wanting 30% with a cap of $10, and they get to set the retail price, or 70% of retail price (current books).
Let me say it again: in publishing, about 70% of the revenue stream is soaked up by rent-seeking intermediaries between author/publisher and reader.
Despite the fact that this is ridiculously convenient for argument I am about to make, I am actually telling the truth: http://news.ycombinator.com/item?id=1002315
When you say"rent-seeking intermediaries" I think of a different player than you do. See, Amazon makes my reading experience awesome. Your publisher? They have not made my experience awesome. I know they spend a lot of money on, e.g., typesetting and wood pulp. That must suck. I am having a hard time mustering up sufficient sympathy to back your publisher's attempt to charge me more so that I can subsidize the continued practices which result in 50% of print runs getting pulped.
Is Amazon's contribution to total awesomeness worth 70%? Eh, I don't know. I'm a software vendor. Google takes fifty cents out of the last dollar of sales for me (for advertising), despite the fact that I do all the "actual work". I use the scare quotes because if the last couple of years have taught me anything it has taught me that making the sale -- which is what Amazon does for you -- is a non-trivial bit of the business equation.
I don't see my profit split with Google as a moral issue -- I see it as a fairly simple business decision. To whit, I sure like getting that last fifty cents. I think I managed to get about $20 of your books on my trip to America. Now, I don't know whether you see $1 or $3 of that at the end of the day, but either is a darn sight better than $0, which is what your publisher is pushing hard for you to get from me.
Amazon's visible contribution is ... well, there's something rather nasty happening behind the stage curtain.
Agreed, the mass market channel for paperback distribution must die -- everyone in publishing agrees on this (the 50% wastage is grotesque) ... just not until there's a replacement way for injecting cheap books into readers' eyeballs.
And I know you must know this fact too- Ebook prices are going to come down, dramatically. It's going to happen, due to market forces. Publishers are going to have to adapt. There's not going to be a choice. They can lament. They can complain. That's understandable. I would too.
It's still going to happen.
Whether or not it's fair, or affordable, or even desirable.
So what's the plan to deal with that?
Unfortunately, I can't answer that.
See also: http://www.antipope.org/charlie/blog-static/2010/01/the-mone...
It depends whether you want a book, now, for $5 less, or better books for the years and decades to come. Publishing is already in the thrall of fashion; forcing them into prices that are only sustainable at huge scale means more Dan Brown and less literature.
Apple go the other way. You can get all sorts of content for iPads, including eBooks from other sources. They want to monopolize the player market and commoditize the content. The best way to commoditize content is to make it completely open: witness their original "Rip. Mix. Burn" campaign that got them hated by the music industry, and Steve's famous call for an end to DRM.
All things considered, I'd rather fight Apple over hardware than fight Amazon over DRM. JM2C.
The real solution is for the publishers to switch from wholesale (via channels like Amazon) to direct retail. The agency idea is a step along the way, but not the whole way. Some publishers already have done this: Baen's Webscription web storefront, shared by some other smaller publishers, is a thriving example of Doing It Right.
Interesting piece of public information that not many people know: Baen is a private company, about 30% owned by one Tom Doherty, CEO of Tor, itself a subsidiary of Macmillan.
Publishing is made out of pipes. Traditionally the supply chain ran: author -> publisher -> wholesaler -> bookstore -> consumer.
Then the internet came along, a communications medium the main effect of which is to disintermediate indirect relationships, for example by collapsing supply chains with lots of middle-men.
From the point of view of the public, to whom they sell, Amazon is a bookstore.
From the point of view of the publishers, from whom they buy, Amazon is a wholesaler.
From the point of view of Jeff Bezos' bank account, Amazon is the entire supply chain and should take that share of the cake that formerly went to both wholesalers and booksellers.
Is he kidding? Macmillan occupies the famous Flatiron Building on Fifth Ave. in Manhattan. (It's the narrow triangular building shown in a lot of movies and TV shows.) If they can run their operations out prime real estate like that, then they are either profitable or mismanaged.
Tor (who are my publisher -- I've visited them there) occupy one of the 22 floors of the Flatiron, along with their fifty staff (total) who publish 300 books a year. They rent, the building's been bought, and they've been served an eviction notice of sorts -- the lease almost certainly won't be renewed; they can't compete with the hotel chain who want to turn the Flatiron into a des. res.
The Flatiron may be famous as the first steel-framed skyscraper (and the view from Tom Doherty's office at sunset is awesome -- the Empire State Building, backlit!), but it's an elderly and rather badly maintained building.
Wait. This guy is claiming that publishers are trying to push book prices down, and Amazon is trying to keep them up. This doesn't jive - Amazon has cut the prices of books so incredibly heavily since they came along, and had a very good shopping experience with reviews, excellent customer service, shipping, and so on.
I think people are afraid of any company getting too powerful because of the abstract concept - but myself, I'm starting to get comfortable with companies like Google and Amazon taking large share by being the best. If they get corrosive later, they'll have a few year window where they're still on top, but then someone will come and take them out. But I think the current leadership of companies like Amazon and Google is good enough that they won't make shortsighted bonehead decisions against their customers.
What Amazon have done is to sneak up on the distributor/bookseller pipes and merge them into one lucrative hose, and now they're playing both ends for their own benefit.
Amazon squeeze their suppliers, just like Wal-Mart. Amazon is already corrosive -- if you're a small supplier.
Are any publishers really offering those kinds of terms, even to Amazon?
Yes, Tesco (in the UK) and WalMart can and do demand discounts up to 70%. I have heard hearsay reports (I can't cite sources, due to confidentiality) of Amazon demanding 80% discounts off ebooks from British publishers -- which is why they only launched Kindle in the UK about three months ago: nobody would take them up on it.
Personally I think your figures ($24 list price, 70% wholesale discount) are edge cases, and don't represent a typical sale. But even if we take them at face value, in your example the publisher/author get $7.20 of my $16 and the distributor/reseller get $8.80. That's a 55/45 revenue split, not a 70/30 split.
This also assumes I'm buying at 1/3 off list, which is on the low side. Amazon is discounting bestsellers by at least 45%, with a select few going for 60% off or more. Example: Going Rogue, list price $28.99, sale price $13.50 (53% off). If Amazon's getting a 70% wholesale discount, HarperCollins gets $8.70 and Amazon keeps $4.80. That's a revenue split of 65/45 in the publisher's favor.
So: when I buy a hardcover that's been discounted down to $16, the actual reality is that the distributor/reseller is not making twice as much on the sale as the publisher/author -- it's more like a 50/50 split.
None of which is to say I support Amazon OR Macmillan's position in this particular battle (they're both wildly overreaching, IMO). I just think your example inappropriately conflates two different things.
So: you (the publisher) guarantee not to sell ebooks for less than $9.99 elsewhere, and not to publish a dead tree edition for less than $12 ... and Amazon are free to cut their competition off at the knees, sell books for $6, drive their competitors into extinction, and then can raise their price to whatever the market will pay.
Meanwhile, as the author's royalties are a percentage of the SRP, that 10% of SRP cut they're due -- $1.20 of a $12 title -- comes out of whatever Amazon pays you -- $4 in the case of a book they choose to sell for $6 on Kindle. The SRP is set to reflect the price at which the publisher expects to sell enough books to gain sufficient sales to break even -- assuming a 40-50% discount. If the discount goes to 70%, they're in the stinky stuff up to their eyeballs. That $12 ceiling is forced on what was formerly a $24 SRP, and a $14-16 expected sale price. The money has to come from somewhere, and it ain't going to come out of Jeff Bezos' wallet ...