Amazon’s Prime Lending Library has them in a tizzy…but it makes sense
Jeff Bezos, CEO of Amazon, has said that one of the things about being an innovator is that you have to be prepared to be misunderstood for a long time.
I recently wrote about Amazon’s new Prime Lending Library.
It allows a Prime member to borrow up to a book a month from a select set of titles, with no additional cost.
It’s a new idea…and a new idea can be like taking a bag of grain and tossing it into the middle of a flock of pigeons. They scatter every which way, scared out of their clucking minds. Eventually, some of them realize it’s edible, and come back and enjoy the food.
I’m going to go through how the Prime Lending Library makes sense, but let me list some of the articles where people are saying it’s bad for investors, bad for publishers, bad for authors, bad for agents, bad for Amazon, and that it will die by the end of the year. This is just a sampling:
- WSJ: “Amazon’s Library Donation”
- The Digital Reader: “I Wouldn’t Get Too Attached to Those Amazon Prime Ebooks”
- AAR: “Author Contracts and Subscription Models”
- PublishersLunch “Kindle-Lent, Without Consent (subscription required)
- O’Reilly Radar: “Publishing News: Early response to the Kindle Lending Library”
- GovZine: “The problem with Amazon’s Kindle Owners’ Lending Library”
They think that it will cost Amazon too much and that Amazon may not have cleared the rights properly or be paying the right amount.
I can understand why this is new and scary. We have this from the Amazon press release:
“Titles in the Kindle Owners’ Lending Library come from a range of publishers under a variety of terms. For the vast majority of titles, Amazon has reached agreement with publishers to include titles for a fixed fee. In some cases, Amazon is purchasing a title each time it is borrowed by a reader under standard wholesale terms as a no-risk trial to demonstrate to publishers the incremental growth and revenue opportunity that this new service presents.”
Both of these ideas are innovations.
Let’s take the second one first…Amazon paying for a title that a Prime member borrows. I’ll go more into the economics in a minute, but this is bold and costs Amazon money…possibly significant money. When I had a brick-and-mortar bookstore, we might have books to give away…but we didn’t buy brand new books from the publisher, ones that were still selling, and then just give them away. It’s innovative, but it doesn’t change contracts for authors and publishers…it’s still a purchase.
The flat fee? That’s new…in books. It’s the way videos work for Netflix, though. The contracts with authors and actors are structured very differently, but here’s what it means.
The old way (pay per purchase)
Amazon pays a publisher for a book. We are leaving out the Agency Model for now, because they don’t seem to be involved in the new deal. The publisher pays the author a percentage of the money Amazon paid the publisher. That’s for each book or license sold. Let’s say the book has a list price of $20, and Amazon is paying the publisher $10 for each copy. The publisher (in the case of a paperbook) might be paying the author…let’s make this easy and say it’s $1. If Amazon buys 50,000 copies, the publisher gets $500,000 and the author gets $50,000. What does Amazon get? It depends on what they can sell the book for to the customers. That doesn’t affect what the publisher gets, though.
One of the things that considerably complicates is returns. Suppose Amazon has paid that $500,000 and there is a one percent return rate…out of those 50,000, five hundred are returned by customers for refunds. The publisher basically absorbs that risk (although in the case of e-books, Amazon absorbs the customer service costs). Instead of getting $500,000, they should net $495,000. That also affects the royalties for the author. That’s why it takes a while to get paid by Amazon when you use their Kindle Direct Publishing, presumably. Amazon doesn’t want to pay you and then take the money back…that’s complicated for everybody. Most people who are going to return a purchase are going to do it within two months…so there is a two month lag (roughly) in getting paid). There’s more to it than that, but that’s part of it.
The new way (flat fee)
This can actually be two different things.
One would be a flat fee for a single title. In this case, instead of Amazon counting up the number of people who buy each copy/license, they pay a certain amount (probably for a timeframe), and it doesn’t matter how many are sold. Instead of paying that $500,000 based on specific sales and figuring out the returns and tracking everything, Amazon might guess that they are going to sell 50,000 copies in six months…and just pay that $500,000 up front. If the book is less popular than Amazon guessed, Amazon overpays. If it’s more popular, Amazon underpays. One thing that does is encourage Amazon to really promote that book.
That one isn’t too complicated for the authors, although agents are big on having everything precisely spelled out. That’s a potential problem. Even though the author gets the same amount if it sells the same, they might lose money if it overperforms. However, they could also make money if it underperforms. That needs to be clear in the contracts.
The payment on that isn’t too complicated, though…much easier than the old way. The publisher gets $500,000, the author gets $50,000…without waiting for all kinds of calculations on returns and such.
The other sort of flat fee is much more complicated. That’s a flat fee for a group of titles. Amazon offers the publisher $500,000 for a group of one hundred backlist titles for six months. That’s how Netflix or Amazon’s Prime streaming presumably works. That works for the publisher…but it can be very complicated for the authors. Let’s say one of the titles sells 30,000 copies..and one of them sells three. Do both authors get the same chunk of money? If not, that means there has to be all that accounting again…including, possibly, returns. Even if the group of titles is all from the same author, that doesn’t mean they would have had the same contracted royalty for each of those titles. It’s understandably scary and complex when you change how people get paid.
However, nothing says that the publishers can’t make those arrangements with the authors and with Amazon.
Amazon wouldn’t just change it on their own…they would negotiate it with the publishers (which is what it’s been said that they’ve been doing) and the publishers would negotiate it with the authors (generally through the authors’ agents).
Why it’s good for Amazon and investors
Amazon suggested it was going to be an expensive quarter. Part of that is the first wave of reportedly millions of sales of the Kindle Fire. Amazon may be losing money on each of those units…initially. Over time, they will likely make that up with the items that people who became Prime members because of the Fire buy.
Similarly, there might be initial flat fee payments this quarter to publishers which could be a significant outlay. Amazon would again presumably make that up with Prime sales.
The math on this doesn’t seem complicated to me (and I dealt with those sorts of things as a retail manager).
Let’s take the worst case scenario for Amazon with the Prime lending library. A person buys Prime for$79 for a year. They borrow the maximum number of books: twelve in a year. We’ll say these aren’t flat fee books…Amazon is paying the publisher 50% for each borrow.
$79/12=$6.58. That’s how much Amazon got from that customer each month for Prime.
Since Amazon would pay wholesale for that book to the publisher, the average list price of the book could be twice that…$13.17, roughly. Take a look at the books on the list…they are cheaper than that.
Even if the customer buys nothing else from Amazon during that year, Amazon makes money.
The hope, though, is that the customer takes advantage of Prime and buys physical things that they wouldn’t have bought from Amazon. Those are the profitable items. I’ve gotten that concept down to a slogan. “It’s about diapers and windshield wipers.”
How could Amazon lose on this?
Well, if they pay a flat fee and people don’t become Prime members…that’s a potential risk. Amazon is gambling a lot on Prime…but Prime has been exploding and doing very well and people like it. If shipping costs shoot way up, that makes Prime less profitable for Amazon, but that might be pretty calculable.
Investors have to hang in there while Amazon buys customers with Prime expenditures (for the streaming movies, for the books that can be borrowed)…and then they’ll reap the benefits in future years. That’s the way investing is supposed to work, right? Not quarter to quarter.
Why it’s good for publishers
Publishers are still getting paid for the books. Here’s one of the amazing things…they may sell the same book to the customer twice! Amazon would pay them for it originally, the customer borrows it for free…and then the customer decides to buy it and pays for it again! Nobody paid twice (Amazon paid the first time, the customer paid the second time), but the publisher gets twice the money.
That’s on a “pay per purchase” basis. With the flat fee, the publisher has the risk that they may not make as much on a book that turns out to be surprisingly popular…but they could make more on sort of dead weight. “Sure, Amazon, we’ll include the next Stephen King…but we want an additional $25,000 for these fifty old romance titles.” It’s a way to monetize the “long tail” in a fresh way.
Also, it’s quite possible Amazon will pay them full wholesale price…for a short term rental. That sounds like a good deal to me. Readers won’t tend to hold on to a book for months, I think, since they will want to borrow another one (you can only have one at a time). It’s an advantage for Amazon if the customer doesn’t borrow the twelve books in the year. In a pay per purchase deal, that’s obvious. Even in a flat fee, that helps…there are processing costs involved in the loan. It’s sort of like a gym membership…you sell potential. In this case, you want the customer to use Prime…whether or not they actually borrow books.
Publishers also get the publicity. Somebody who borrows a book may tell people about it, and may write a review. They may be predisposed to like the book better, because they got it for free. Presumably, a loan still drives a book up the bestseller list, since a purchase still happens. That’s certainly true in pay per purchase…not quite sure how it would work in a flat fee, but it certainly may still count for the bestseller list.
Why is this good for customers?
Does this mean everybody will be happy?
No, that pretty much never happens. I made the mistake of thinking that publishers would welcome the free expansion of their markets that Amazon gave them with text-to-speech on the Kindle 2…but they didn’t (I was wrong on that). Agents may need to rework deals…that’s not good for them. Accounting departments may have less to do. If the Authors Guild actually sued (and as an advocacy group, they do that), Amazon would probably back off…they always back off with the publishers, pretty much (see text-to-speech and the Agency Model). That’s one reason why Amazon becoming a publisher, as they’ve been doing recently, is so significant. If they need the publishers less, it gives them more power.
Overall, this seems like a great thing. Oh, there is definitely an element of “the big get bigger”. Who else could afford to take on this kind of money to set up a lending library like Amazon can? Barnes & Noble can’t do these licencing deals and make the money back on the sale of boardgames…”diapers and windshield wipers”, baby.
What do you think? Are authors going to get cheated in this deal? Will the lending library get shut down through publisher threats? Will any of the Big Six join in? Feel free to let me know…
This post by Bufo Calvin originally appeared in the I Love My Kindle blog.