Thursday, February 04, 2010

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 and 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, 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.)


Anonymous said...

Re Myth #1, Amazon doesn't even always have the lowest ebook price. Earlier on the Friday the switch was flipped, I'd been looking at Kage Baker's books, and I happened to notice that the Kindle version of Empress of Mars was $14 and some cents. Post event, I got curious and looked at Barnes & Noble, currently selling the same book for the Nook at $9.99. This is, of course, a Tor (hence Macmillan) title. So Amazon was offering it at a price that Macmillan would favor. B&N is not. I'm not sure exactly what that means, but it surely makes the situation seem more complex.

Anonymous said...

Finally a great post by an industry insider that is *not* clueless at best, disingenuous or outright lying

I would add 3 more little things as someone who has been into ebooks for a while now, way before Kindle - and no I do not own a Kindle though I buy from the Kindle store often but not exclusively by any means - I use an iPhone and a Sony Reader

1. Before Kindle I (and many others reading ebooks) was very skeptical that people will buy them in large numbers and at reasonable prices - I thought it very, very unlikely that for example 9.99$ will be a mass selling price point; well guess what Amazon proved us wrong

2. I think that most people agree that dynamic pricing works, happens and so on - Amazon does it for example even on those "9.99" titles which many times start at 14-15$ and then in a month or two drop there; the issue here is *Macmillan and Dynamic Pricing* which for quite a few reasons makes people laugh; were it be any other publisher it may have a higher credibility but all Macmillan's actions in the ebook arena from Tor/Webscriptions to their prices show that they have *ZERO* credibility

3. You and others opined somewhere that it was silly at best for Amazon to choose Macmillan to fight with considering Tor, blogs of popular sf authors...

Well, I have no idea why the fight started there but Amazon actually exposed many of those famous bloggers as quite unpleasant people at best - want to keep it polite - who lie or are clueless and repeat the party line, so sadly they lost credibility rather than Amazon; leaving aside 2 above, the main reason is that many of the ones who read those writers tend to know a bit about the history of ebooks, your points in the post here and such, so they are not fooled by the rhetoric

I have no idea how things will turn out here, with ebooks or with publishing in general, Amazon may lose this battle but got a lot of kudos back from their earlier gaffes and well, trusting Apple (remember Rip, Mix, Burn to fill iPods) to help the "content" people is like trusting the wolf ti guard the sheep...

Conrad - and no I have no Blogger ID/Open Id and all so I have no choice but to use the anon option

Unknown said...

Apropos of (probably) nothing, two things. I can't for the life of me remember where it was said, but Bezos commented that the price of Whispernet was built into the price people pay for books. I thought that was interesting.

Also, another bookseller indicated that the Kindle store was, overall, profitable, which ties into your comment about the $9.99 price myth.

Anonymous said...

Re: Myth 5: John Hawkinson posted on Making Light that the answer he got from Amazon's customer service pointed him to that Kindle post as the official answer.

Jon Lundy said...

While this does not directly affect me right now, I only purchase electronic books and not from Amazon (from Fictionwise or Baen) I find some of the posts about the 'writers' (see Conrad above) between 'readers' and 'writers' a bit disturbing.

I'm a science fiction reader, and I WANT the science fiction writers to be able to make a living writing books. To me it seems like Amazon and Macmillan were engaged in high level talks, which might affect overall prices when Amazon suddenly decided on a massive bullying tactic. While I would regret higher ebook prices, I would welcome Macmillan taking a rational strategy towards ebooks (their past history is rather scattershot), this looks like such an attempt. Especially if they can get off the Amazon train, I have no desire to tie into Kindle.

I will use the same strategy I used when I purchased hardcover books, depending on the author and the work I would pay more or less money. Let the market decide. If Macmillan indeed (and I'm not holding my breath) adopts a strategy where ebook prices drop as the book becomes older then I would greatly appreciate it.

As far as the writer's being unpleasant if the biggest internet retailer suddenly stopped carrying something I relied on to feed my family, then I would be far more unpleasant about it than they have been.

I only purchase ebooks, and higher prices will result in my purchasing fewer ebooks, it seems clear to me who is in the wrong here, and it's not Macmillan.

Anonymous said...

Andrew, as someone who knows marketing and sales much better than I, I was hoping you could comment on a thought I've been having recently:

Despite all the clamor for cheaper ebook prices, is it credible to say that the people making that noise--current ebook readers--are not, in fact, the real market? Yes, ebook sales have increased, but after two or three years, they represent only 2-3% of the market. That's early adopter status and I'm beginning to think these are not early adopter ebook buyers but early adopter ereader buyers.

It makes no sense to me that someone who says "paying $30 for a hardcopy is ridiculously expensive" is willing to wrap a $250 computer cover around a book instead as a cheap alternative. Sure, the ereader is a one-time purchase (which we all know it really won't be), but it's cost-effective only assuming someone used to buy a minimum of 12 hardcover books at $30 retail. I'm trying to reconcile that attitude and math with 1) the general market never really pays full retail for hardcovers, never mind buys that many hardcovers and 2) studies showing most Americans only read 8 books a year regardless of format, which would mean a significant share of that market is paying much less than the $30 per book (i.e., fewer than necessary at much cheaper price to justify the ereader purchase for the broader market).

Julie said...

@ last Anonymous: "It makes no sense to me that someone who says "paying $30 for a hardcopy is ridiculously expensive" is willing to wrap a $250 computer cover around a book instead as a cheap alternative. [...] most Americans only read 8 books a year regardless of format"

I think this is an average; many, many people read that many per month. Among the ereader owners I know, most are heavy readers who polish off a couple of books per week (frequently while commuting). The impetus for buying the ereader is usually convenience, not cost, but the price point does seem to have an effect on the decision whether or not to purchase a given book, especially if it's an impulse buy.

Anonymous said...

Macmillan books appear to be returning to Amazon, although in a very gradual, manual process. I've not seen any Macmillan Kindle editions return as yet, however.

Susan Loyal

Anonymous said...

Darn it, my CTRL-V kept the last URL! For the official answer, look here.

Andrew Wheeler said...

Anon @Fri Feb 05, 06:10:00 PM 2010: Well, nobody likes to see prices rising, so it's understandable that Amazon customers, and particularly heavy Kindle-edition buyers, would be angry and upset at Macmillan. And, honestly, customers generally don't care if a price is unsustainably low.

For example: I know I bought a whole lot of toys from Amazon during the Christmas season of '02 (I think it was) when they had an offer that gave toy buyers a $10 coupon for their next purchase (and I think had free shipping as well). I bought a whole lot of toys priced at about $10.50 for my older son that year, and I know Amazon was losing money on every single one of them.

Oddly enough, I don't think I've bought a single toy from Amazon since, but tactics like that did buy them the loyalty of other consumers, and they've been able to leverage that into profitability.

But, back to your point: ebooks are still a tiny part of the market, though a hugely growing one. (It's very easy to have huge growth when you start from zero.) So by definition, ebook consumers are currently a small part of the larger world of book consumers. And Kindle customers are a subset of that group. And people who spend their time on Kindle message boards presumably self-identify as Kindle users much more than the general Kindle owner, which would tend to make them more strident in their opinions. So none of this is surprising.

And a lot of people seem to be more willing to pay for hardware than software. Again, I have a personal example: I got an iPod Touch a few weeks ago, and have a bunch of Apps on it. But I haven't paid for an App yet, and it might be a while before I do. Kindle owners have a similar mindset; the "I've already paid a lot of this thing" idea can be strong.

There's also the common Internet effect: people are nastier and meaner on the 'net than they are in person, because they're not looking at a person when they say nasty things.

So a lot of it will turn out to be posturing, even among the people who are morally sure that they'll never pay more than $9.99 for an ebook or buy anything published by Macmillan again.

Chris Meadows said...

Especially in regard to Myth 8, I'd like to point you at this post I made on TeleRead in which I recapitulate the most sensible reasons that a lot of long-time e-book fans are skeptical of Macmillan's bona fides in the Amazon/Macmillan fight. In particular, Macmillan's past (and present!) record on "variable pricing" does not make it easy to believe they are trustworthy now.

I would be very interested to hear what you have to say, either in comments there or over here.

Andrew Wheeler said...

Chris: That's a long post with a lot of careful thought behind it; to reply in full I'd need a post at least as long as the one above (and more time than I have).

So let me just make a few quick points:

The first is that the e-book market is tiny, and that's why ebooks don't get any respect. (The other reason ebooks don't get any respect is that they're the publishing industry's version of Brazil -- they've been the format of the future for nearly twenty years now.) Ebooks are around one to five percent of the market, and that's why they don't get any respect. Audiobooks are about 10% of the market, and they don't get any respect, either. And books in large print get even less respect. Publishing, as an industry, pays real attention to the things that will make it real money. If ebooks hit that level -- and I can see them topping out at 5-10% of the total market, double or triple what they are now -- then they'll get about as much respect as audiobooks.

That's the first reason this market has been ignored or badly treated by publishers: it's been small. No business spends a lot of money to chase a little money.

The second reason is that ebooks, at the moment, are more expensive and complicated to produce than print books. (At least to do it right, with proper QC to clean up the output files.) And given the small quantities sold -- there are plenty of ebooks that haven't sold a single copy, and all of them had to have their conversion costs paid for -- ebooks have been, up to about mid-2009, been more of a money sink than anything else.

So, yes, you can say that publishers have treated the ebook audience badly -- but that's because there have only been a few thousand of you, and many of those people have been, to put it frankly, overly demanding and obnoxious about it.

From the POV of a publisher, a customer who demands that you publish all of your books just for him at a ruinously low price and then complains is not a customer you want to spend much time placating.

The comparison with paperbacks is enlightening: paperbacks, in the late '30s, were about as much cheaper than hardcovers as ebooks are today. But paperbacks instantly sold in massive quantities, and lifted the new paperback publishers to positions of power in the industry. Consumers, en masse decided that they loved this new format and supported it hugely. That has not happened with ebooks, and I don't think it will; ebooks are a format for the relatively rich consumer who also reads many more books than the average. (A quarter of Americans don't read books at all, and, even taking them out, the average American only reads seven books a year -- those people aren't going to buy a $260 gadget, not matter how much hype consultants and the media shove at them.)

So publishers are actually being smart: they're hedging against the e-Apocalypse, which nobody really believes in, while trying to shift their position to take advantage of a market that finally, after a long, long time, shows a glimmer of profitability.

(And that answer may annoy you further; if so, I apologize.)

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