Myths of Amazon/Macmillan

There has been a lot of commentary about the Amazon-Macmillan battle over the past week, including a number of statements that I know to be false. So I thought I might as well collect some of them and try to explain, as best I know, what the truth is.

(Once again: I work in publishing, but I'm speaking only for myself here. This is not anyone's official statement.)

Myth 1: All Kindle editions are priced at $9.99.

Truth: Hell no. Amazon's actual promise is "New York Times Bestsellers and New Releases are $9.99, unless marked otherwise." They don't even promise that all bestsellers will be at that price, just that they'll be $9.99...unless they're some other price. Some of those prices are lower, but many are higher.

Particularly when you wander away from the bestseller lists and dig into more specialized titles, Kindle editions have varying prices just like any other kind of book. Looking at the Kindle Business & Investing page -- partially because that's the category I work in these days -- I see some books at $9.99, but a cluster in the $14-$16 range as well.

Amazon has sold the myth of $9.99 ebooks even better than they've sold actual ebooks. But it's not even their own current, consistent strategy.

Myth 2: Macmillan is just doing this to make more money.

Truth: This has been debunked elsewhere, but here are the numbers (roughly accurate, though of course the actual discount percentages that Macmillan gives Amazon are a trade secret which I don't know).

We will assume Albert A. Author's book, Dark Mace of Ake'fujji, is published in hardcover at a list price of $24.95.

Current Scenario: Publisher sells the book to Amazon based on their discount structure. Amazon may get a discount as low as 50%, but I suspect it's more likely to be about 55% (given Amazon's size and strength in the market), so I'll use that figure. Thus Amazon pays $11.25 for each copy of Dark Mace, print or electronic. Assuming Amazon then turns around and sells that Kindle edition for $9.99, the revenue looks like this:
Publisher: $11.25
Amazon: -$1.26

Agency Scenario: Publisher sets the retail price for the e-edition, and we'll assume that is set at $14.99, under the publicly-released terms from Macmillan. Amazon makes the sale and retains 30% of the revenue, passing the other 70% on to the publisher. Thus the revenue looks like this:
Publisher: $10.49
Amazon: $4.50

Thus -- if these numbers are roughly accurate -- the publisher gets about $0.75 less revenue per unit, and Amazon goes from losing a buck and a quarter per book to making $4.50.

(If Amazon is getting a 60% discount, which is possible -- at least on some titles -- they may actually not be losing money in the current regime, but not making money either. In that case, the publisher's revenue would also rise in the new scenario. Still, unless Amazon is already getting discounts within hailing distance of 70% -- and I very much doubt that, except for some particular special circumstances on individual books -- this new model will bring them more money per unit.)

The effect on the publisher's revenue, over a large list, will be negative. The effect on Amazon's revenues will be to turn a large number of small losses into somewhat larger gains.

Myth 3: Amazon makes lots of money selling Kindle hardware, and so keeps e-book prices low to simulate demand for the unit.

Truth: This is half-true; Amazon is deliberately managing the perception that Kindle editions are a great bargain to stimulate increased sales of the hardware. But electronics hardware famously has low margins, and even if Amazon might have had a fairly strong margin before (though that analysis only covers manufacturing costs of the device itself, not overhead or any of the software and connectivity costs), competitive pressures have forced them to drop the price of the unit to $259. If the outside estimates of physical costs are correct -- and I have no way of judging them -- that implies that Amazon has about $75 per unit to pay for Whispernet connectivity, software R&D, and contribution to overhead.

Considering that similarly complicated hardware, video-game consoles, are famously subsidized to sell at below-cost prices, I'd be very surprised if Amazon were making more than a small nominal contribution to overhead on each unit. It's quite possible that they're actually losing money on each unit sold. (There's one analysis of their costs that implies that they are, to the tune of $50 per unit.)

Amazon is actually playing its usual long game: their strategy is to lose a lot of money for extended periods of time to buy overwhelming market share, and then purge inefficiencies and start making profits once the competition is marginalized. (Remember: Amazon started in 1995, and didn't post a quarterly net profit until the holiday season of 2001, racking up more than $3 billion in debt along the way.)

Myth 4: Dynamic pricing is impossible.

Truth: Not at all. Actually, let me just quote what Scott Westerfeld recently wrote on the subject:

Publishers have always delayed lower-priced editions, like paperbacks, until the people who will pay $27 for a shiny new book have coughed up their money. This is not an evil strategy. It’s common with many products—clothing, music, gadgets, prescription medicine—early adopters pay more. Why? Because they’re the ones paying to defray the creation costs. (Which is ME!) Once that’s been done, later adopters can pay less by buying last year’s stuff (and cheap knock-offs). We’ve been lucky in publishing, because we have a physical distinction between what we sell early and late adopters (hardcovers and paperbacks). But this is not a given. In fact, in many industries, the reverse is true. (A later generation iPhone is both cheaper and better. A later, cheaper DVD release often has more extras on it.)

What he said. Or look at the price of the Kindle itself, which dropped from $359 to $259 last year. Consumer prices quite often start high and then drop -- and even, as Westerfeld points out, are cheaper for a better, later product. Even prices for purely digital products can, and have, easily go up and down.

This argument is really just a very thin veil covering "But I want it cheaper than that!"

Myth 5: Amazon has already capitulated.

Truth: The only even semi-public announcement from the Amazon side since this fight began is this self-justifying post by an unnamed member of "The Amazon Kindle team" on a Kindle message board at Amazon on Sunday afternoon. (In contrast to Macmillan's open letter from their CEO, John Sargent, which was released on Saturday morning through Publishers Marketplace.) Many of us took that post to mean that Amazon was admitting that their actions were disproportionate to the offense, and that Macmillan books would soon be back on Amazon.

Well, it's four days later, and that still hasn't happened.

My initial suspicion, on reading that "Amazon Kindle team" message, was that some junior staffer, drunk on Amazon Kool-Aid, was trying to be proactive and helpful but had gotten himself far out ahead of Amazon's actual current corporate position. (I also half-assumed that said junior staffer was quietly canned on Monday; I hope not, but it's possible.) As the week has gone on, I've become more and more convinced.

So I would not suggest that anyone consider that message as indicative of Amazon's current thinking or strategy; it did not look like a carefully considered message and quite likely came from someone not authorized to announce (or make) policy for Amazon.

Myth 6: This involves a company named "McMillan" or "MacMillan" or "Mac Millian."

Truth: Macmillan. The US trade-publishing arm of the von Holztbrinck publishing empire. Not Pan Macmillan (the UK arm of the same octopus), not the Macmillan that was eaten and digested by Simon & Schuster in 1994, not the Macmillan that's part of the educational publisher McGraw-Hill, not Princeton University's MacMillan Group, not the firearm company McMillan Bros., not McMillan and Wife, not Mak Million.

More myths may be added as I think of them.

My previous posts on this subject: Amazon and Macmillan, More on Amazon-Macmillan. Related: A Modest Proposal for E-Book Pricing.

Update, two hours later: Today also brought a second open letter from John Sargent. The box score is now Sargent 2, Bezos 0. Somebody hire Amazon a public relations expert, and fast.

Update 2 (still Feb 4, 2010): Inspired by Conrad's comment, below (which I don't entirely disagree with, though I don't agree with large parts of it as well).

Myth 7: Someone has already won this battle.

Truth: The SFF author community believes that Macmillan has already won. The Kindle boards on Amazon are full of messages crowing about the power of Amazon and the e-book. But this is far from over.

More than that, any resolution is likely to be secret, so there won't be any way to tell who "won" at that point.

And these are two large corporations that are at serious odds over this issue, but also strong long-term partners who will be working extensively with each other for the indefinite future. As John Sargent wrote in his second open letter, "I want to assure you that Amazon has been working very, very hard and always in good faith to find a way forward with us. Though we do not always agree, I remain full of admiration and respect for them. Both of us look forward to being back in business as usual." I don't believe that's just words; that's what publishing and bookselling is about. Like so many others, this is a relationship business, and this issue came out of a serious breakdown in the Amazon-Macmillan relationship. That break can be mended -- it has to be mended, for both parties to continue with their business.

So I'm really saying two things: first, that it's not going to be at all clear to the outside world which one of the parties got more of the things they wanted in this current negotiation, and, second, that this isn't really a case for one party to "win" and the other one "lose."

I was going to write that Macmillan is clearly winning the corporate public relations battle, but that would imply that they're fighting the same battle. Amazon, against all popular wisdom, has kept almost completely silent -- and, as I wrote above, I think the one break in that silence wasn't an official statement to begin with -- and has let their fans do the fighting for them. It's an uncommon strategy these days, when everyone insists that one must get out in front of a story and "frame the narrative," but it's working about as well for them as Macmillan's open letters are working for them.

That's with the general public, though; I suspect that the opinion of Amazon among professional authors has gone way down, and that may open up some serious opportunities for BN.com and Borders.com. Many authors have suddenly seen how much of the online business Amazon controls, and they're uneasy with the use Amazon is willing to make of that control. So a bit of spin-doctoring on Amazon's part might have been very useful to avoid that collateral damage.

But, still: this isn't over yet. And we won't know who won even when it is over. Feel free to keep rooting for whichever side you prefer, though.

Update 3, Lunchtime on Feb 5: The Authors Guild has come through with a new service for all authors, Who Moved My Buy Button.com, which will be tracking the availability (or lack of same) of thousands of books on Amazon. They're also asking for help from authors who see their books' "buy buttons" appear or disappear mysteriously.

Update 4, slightly later in the afternoon on Feb 5:

Myth 8: Any capitulation by Amazon will mean that all ebooks will be priced above $9.99 from now on, alas!

Truth: Actually, Macmillan's proposal is for a sliding scale of e-book prices (similar but not identical to my own, slightly later and only mildly plagiarized Modest Proposal), with a top end of $14.99 and a bottom about $5.99. The details haven't all been released, and, obviously, those are the very details that Macmillan and Amazon are heatedly negotiating at this very moment, so the initial proposal won't be the final result.

But the general outline is clear: higher prices on brand-new books with hardcover editions, with prices dropping from that point as books get older and move into paperback editions. Presumably, books mainly available in mass-market at this point would be at or around that $5.99 mark in electronic form.

This may actually mean that some books would have lower Kindle edition prices than they did before this recent unpleasantness. And, even on the high end, this plan explicitly expects that books will stay at those price points for a limited time. Given the spread, $9.99 might well be the average e-book retail price -- if that average isn't actually lower than that.

But Amazon would no longer be able to sell the newest, most popular hardcover books as $9.99 Kindle editions under the Macmillan plan -- those are the books that would rise in price.

(I had thought this myth was safely dead, but I just read a tweet that implied people still believe it. So I added it to my list.)