Does Amazon EVER need to make money on e-books?

Does Amazon EVER need to make money on e-books?

You can’t keep losing money on something forever and stay in business, right?

Actually, yes…yes, you can.

You can even prosper that way.

The trick is that the thing on which you lose money has to “inspire sales” that make you money.

I’m speaking as a former brick-and-mortar bookstore manager, and that’s one of the main difference between the way consumers see things and suppliers (whether retailers or creators) see things.

Consumers see things in terms of the single transaction they are doing. Let’s say that a soft drink company changes the flavor of your favorite soda. You hate it. They lose you as a customer, and you figure they are going to go down in flames because of it.

However, if ten other people become customers because of the new flavor, it’s a net win for them, right?

Retailers (and creators) think in terms of populations of sales. It’s not each individual transaction which matters: it’s all of them.

It’s also not only all of the transactions of the same type. Let’s say they changed that flavor of soda, and almost everybody hated it. However, the flavor is part of a line of sodas…and they all got the same sort of change. The other flavors see increased sales because of the change. That’s also a net win.

In that case, it would be logical to discontinue the one (now) bad-selling flavor, right?

What if people who bought sodas also bought chips, and the company made more money on chips than on sodas? With the new flavor, only ten percent as many people buy it…but those people buy so many more chips (maybe the old flavor was saltier…and now they crave chips for the salt) that the company ends up making more money?

In that case, you’d keep making the less salty chips.

I was recently responding to one of my regular readers and commenters, Roger Knights.

Roger suggested that eventually, the investors and/or Amazon would want Amazon to make money on e-books.

That seems logical…but they wouldn’t want that to happen if losing money on e-books was making them more money on something else.

Let’s think about a restaurant.

When you sit down at a restaurant, they typically will give you a glass of ice water for free.

That ice water has significant costs associated with it:

  • The water bill
  • The electricity for the freezer for the ice
  • The capital investment in that freezer
  • The capital investment in water glasses
  • The expense to clean the glasses (water, detergent)
  • The salary expense for the server to bring it…and to keep refilling it, typically
  • The salary expense for the person who cleans the table
  • The expense to replace broken glasses
  • Expenses associated with when people spill the water, especially if it might wreck a menu

I could keep going.

The restaurant is losing money on every glass of water.

However, they may be making money on the meal…and if a restaurant refused to bring you free water, you might not stick around for the meal (or might not come back).

That would be true if the restaurant was in business for twenty years: they’d never have to make money on the glasses on water, because those glasses inspire other sales.

Could e-books be the “glasses of water” for Amazon?

Absolutely.

We don’t have to say the following is true for everyone, but let’s say it is true for a substantial number of Amazon’s customers:

  • They buy e-books from Amazon
  • They want something on which to read the e-books, so they buy a Kindle
  • When they want to get a tablet, they look at a Kindle Fire, because they like the Kindle…and they want the option to read those e-books on the Fire. In my case, part of that is wanting the Fire for text-to-speech in the car, even though I own a Paperwhite
  • When they have the Fire, they get a free month of Prime
  • Once they try Prime, they stay with it…and spend a lot more money on high profit items (like diapers, I would think)

Amazon is then making a profit on that customer, even though they could be losing money on every e-book sale to that person…forever.

Amazon never, ever needs to make money on e-book sales if the e-book sales inspire other sales which make them more money than they lose.

That’s why I don’t really worry about there being a day when Amazon suddenly raises e-book prices across the board. I hear people being worried about that, especially if they end up with less competition.

Even if they had no competitors, they could still lose money on e-books.

Let me give you an analog from when I managed that bookstore.

We sold TV Guide…and the cover price was sixty cents back then.

We gave a ten percent discount on magazines, so we sold it for fifty-four cents.

The profit margin on magazines was considerably below the profit margin on books…let’s say (although I don’t remember exactly) that we paid the distributor forty-eight cents for it…meaning that we made six cents on each sale.

Well, only directly.

We had those “costs of sale”.

We had to pay a sales clerk to sell it. This was some time ago: let’s say they made six dollars an hour, and that it takes a minute to sell the magazine on average. A six dollar an hour salesperson costs about 1.67 cents a minute.

In that one minute to sell it, we are now down to about 4.33 cents of profit.

However, we also had to “receive” the magazine when it came in. That’s more salary.

We had to pay rent on the space in which it sat until it sold.

We had to take into account “shrinkage”, due to shoplifting (yes, they got stolen), and damage (people would pick up a TV Guide just to check something…and maybe bend the pages to where somebody wouldn’t buy it).

We had expenses for doing the payment to the distributor.

We lost money on every TV Guide sale.

However, people who bought the TV Guide often came in every week to get it…and some of them left with several books.

It was because of those “inspired sales” of the other books that we sold TV Guides.

Amazon doesn’t depend on e-book sales, or even p-book (paperbook) sales. They make a lot of their money with web services, and with acting as fulfillment centers for other sellers.

This, by the way, is why the publishers (and many other bookstores) hated Amazon’s $9.99 price point for some well-known books. Amazon was losing money on many of those, but Amazon could afford to lose the money.

Not because Amazon was such a big bookseller, but because they can make their money on other things besides books.

That doesn’t excuse illegal collusion to raise prices. Do people who sell bottles of water have a case against restaurants giving it away? Could they get the Department of Justice to step in and force the restaurants to charge for water? Well, maybe in France😉, where they are passing laws to make customers pay more to get an Amazon book delivered than they used to pay.

Not in the USA, though…not as far as I know.

I also think Amazon isn’t always losing money on e-books, even calculating in costs of sale. That might make a difference legally.

As readers, we reap the benefits of Amazon charging so little for e-books.

I believe authors are likely making more than they used to make. Certainly, that’s true for many non-brand-name authors, who may be making more independently publishing.

Is there a risk that the downward price pressure pushes tradpubs (traditional publishers) out of business? If price-matching eventually drives the price of a new Stephen King novel to $4.99, how can the publisher afford to pay enough to Stephen King to keep the mega-author from going independent? Would the low price point kill the business?

Hypothetically…but publishers can find other ways to monetize books. That includes adaptation rights (for movies and TV shows), and I think it will include subscription services.

I can even see the possibility of paying somebody like Stephen King a salary, rather than royalties. Sure, it would be a big salary, but it might be worth it.

I’m sure a lot of authors would take a $50,000 salary, with a requirement to turn out x number of books a year as a deal.

That may, actually, be a good way to go.

Stop paying authors based on individual sales, which is a very complicated process.

Pay them a salary (and benefits).

These sorts of things have been done before, and in other industries. Comic book writers are employees, right? TV screenwriters?

I assume that’s how those work.🙂

There might be no doubt about exclusivity in a case like that. Amazon could employ authors, and have exclusive rights to their work and adaptations. Writers would be subject to performance reviews, of course: if there isn’t enough interest in what you produce, you could be put on a performance improvement plan…and eventually, if things didn’t pick up, terminated.

Hm…I’ve gone a bit far afield here!🙂

The bottom line is that book sales can be below the bottom line for Amazon…as long as they inspire other sales.

What do you think? Does Amazon’s long term strategy include making money on every e-book sale? Is what they are doing “predatory pricing”, or a legitimate business practice? Feel free to tell me and my readers what you think by commenting on this post.

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This post by Bufo Calvin originally appeared in the I Love My Kindle blog. To support this or other blogs/organizations, buy  Amazon Gift Cards from a link on the site, then use those to buy your items. There will be no cost to you, and a benefit to them.

10 Responses to “Does Amazon EVER need to make money on e-books?”

  1. Edward Boyhan Says:

    I agree with what you’re saying here — absolutely.

    As to where Amazon goes from here, I look forward to following whatever they do — with pleasure.😀

    I think that two items will contribute mightily to their future fortunes: the rearchitecting of their distribution centers to accommodate Kiva Systems (the warehouse robotics company Amazon bought a while back), and AWS. Amazon has actually said in past earnings calls that they eventually expect AWS to become their largest business segment. Kiva could dramatically improve the margins of their existing etailing businesses.

    In any event I look forward to their 4Q earnings report at the end of the month.🙂

  2. babelclaire Says:

    Re: the France thing. They have an incredibly vibrant publishing and book selling industry because of the rules about prices on books. I think they have that right.

    • Bufo Calvin Says:

      Thanks for writing, babelclaire!

      It’s an interesting hypothesis, and they certainly may have it right…you might notice that I didn’t condemn the laws in that statement. My intuition is that arranging things so customers pay more is probably not especially healthy for an industry, but I’ll admit, that’s largely intuition.

      You may be more specifically familiar with the French situation than I am.

      The newest law, which has online retailers choosing between offering up to a 5% discount and free shipping, as I understand it, is too new to be able to judge its impact:

      International Business Times article by Meagan Clark

      The Lang Law was passed in 1981, right? France’s literary tradition is very strong, and of course, goes back much more than a century. I’m curious as to the cause and effect you see: do you think French publishing in particular has been more vibrant since 1981? Has it improved its marketshare, for example, compared to similar markets which do not have a law limiting discounting?

      The French bookstore chain Chapitre recently filed for bankruptcy, I believe, and the stores are being sold.

      On the other hand, a quick look suggests that the independent bookstore outlook in France has been good in recent years:

      New York Times article by Elaine Sciolino

      So, I’m curious…in what ways do you think the French publishing and book selling industries (they aren’t quite the same) would be doing worse without the Lang Law, and the recent free shipping law?

  3. rogerknights Says:

    Bufo wrote: “I was recently responding to one of my regular readers and commenters, Roger Knights. Roger suggested that eventually, the investors and/or Amazon would want Amazon to make money on e-books.

    No exactly. Here’s what I wrote, at https://ilmk.wordpress.com/2014/01/14/borrow-to-buy-e-book-equivalent-of-rent-to-own/#comment-55234 :

    “Eventually, Amazon is going to want to tilt the incentives in favor of books it can make money on, as opposed to low-cost Indies. (Incentivizing low-cost Indies was, IMO, a temporary tactic it used to undermine the appeal of competitors like the Nook—a tactic that is no longer necessary.) Allowing low-cost nibbles of full-priced books would be a great way to partially implement this turnaround, because it wouldn’t directly step on anyone’s toes.”

    And, at https://ilmk.wordpress.com/2014/01/14/borrow-to-buy-e-book-equivalent-of-rent-to-own/#comment-55255 I wrote :

    “Well, surely in five years’ time, max, Amazon or its stockholders will get tired of losing as much money as they are doing on e-Books.”

    IOW, I suggested that Amazon will eventually want to be less aggressive with its loss-leader strategy, by changing the mix of the e-Books it sells to include fewer at low prices, because in time it will no longer be in a war with other eBook and eReader sellers. That’s a somewhat different thing from saying that Amazon will want to make money on e-Books.

    Bufo wrote: “If the restaurant was in business for twenty years: they’d never have to make money on the glasses on water, because those glasses inspire other sales. Could e-books be the “glasses of water” for Amazon? Absolutely.”

    Could be. I agree that e-Books should probably continue to be a loss-leader for years to come. (Especially if Amazon wants to take over the whole book publishing industry and not have to “buy” its e-Books at a fixed price from outside suppliers. To do that, it should continue to make it easy for established authors and Indies to self-publish on Amazon.) But:

    1) The analogy is a bit “loaded” (not fully analogous), because table water is a freebie that is based on true need (some customers are thirsty when they come in), competitive pressure (other restaurants will be more attractive to those customers because they provided free water), and embedded custom.

    2) Under-$3 e-Books are not the only “glasses of water” Amazon could offer. It could (and should) offer a book-reading Subscription Service, for example. There are many other inducements that would be less costly to the company, and/or that would better serve its long-term strategy.

    3) In five years, max, Amazon will have less need to tempt customers into its corral with aggressive loss-leader eBook pricing to inspire other sales, because: There will be fewer competitors, both online and B&M; It will have shortened delivery times with its network of warehouses and USPS Sunday delivery deals (and Santa-Claus-like drones?); More customers will have become accustomed to buying from Amazon as their initial default (i.e., they’ll be “corralled”); and the eReader market will be nearly saturated, so fewer new Kindle sales will be gained thereby.

    4) In five years, max, Amazon will have achieved its “get big fast” goal, and its revenue growth rate will decline. Its revenue growth is what has been sustaining its stock price at a very high (and rising) level. Its rising stock price is mainly what has retained its key asset—many of its highly talented employees—despite a very “demanding” work environment. In order to sustain its high stock price (and key employees) then, Amazon will need to start reaping profits. So its loss-leader pricing will probably have to be reined in. (Perhaps it will drop or modify its price-matching policy. An experiment would reveal how badly this would impact sales. It could easily revert back to its current policy if necessary.)

    So I disagree that:

    Bufo wrote: “Actually, I don’t think Amazon ever has to change to an e-book model that directly makes them money . . .”

    And I think the following needs to be qualified:

    Bufo wrote: “…if having e-books creates “inspired sales”, in particular, through Prime.”

    But, as I wrote, not many price-sensitive “buyers” of $1 or $0 books are good candidates for signing up for Prime, IMO. Abhi / Switch11 repeatedly differentiates between customers of “good intent” and others—those with whom a seller is unlikely to have a profitable long-term relationship. (Only Amazon would have the statistics on whether many of these poor-intent customers are Prime candidates, so only it would really know if it makes sense, long-term, to cater to them. So I’ll argue no further.)

    Bufo wrote: “As readers, we reap the benefits of Amazon charging so little for e-books.”

    Not necessarily in the long run for very low-priced books. Abhi / Switch11 has pointed out (in his ireader.com blog) that, because there are many amateur authors who aren’t in it for the money and who desperately want to be read above all, they will price their books at $3 and under (including $0, via price-matching). He’s argued that many readers will come to “expect” such giveaway prices to be the norm and thus these ultra low prices will tempt many readers away from higher-priced books that are usually better researched, written, copy-edited, etc. He claims that this “race to the bottom” will make it harder for higher-quality authors to make a living, resulting in them dropping out and a diminution of average book-quality.

    Bufo wrote: “Is there a risk that the downward price pressure pushes tradpubs (traditional publishers) out of business? If price-matching eventually drives the price of a new Stephen King novel to $4.99, how can the publisher afford to pay enough to Stephen King to keep the mega-author from going independent? Would the low price point kill the business?”

    Concern about publishers is a tangent (as Bufo acknowledged (“far afield here”) later on). FWIW, I’m not concerned about the tradpubs going out of business if it would benefit authors and readers.

    Bufo wrote: “I can even see the possibility of paying somebody like Stephen King a salary, rather than royalties. Sure, it would be a big salary, but it might be worth it. I’m sure a lot of authors would take a $50,000 salary, with a requirement to turn out x number of books a year as a deal.

    That would help keep established high-output higher-quality authors’ noses above the waterline. But what about the rest? How about those who are just getting started, or who write slowly? It’s a chicken and egg dilemma for them. (I’m not saying this mightn’t work as a supplement to the current system. But I’m dubious about it becoming a replacement, because it hasn’t caught on so far—which means there’s likely a good reason why not.)

    Bufo wrote: “That may, actually, be a good way to go. Stop paying authors based on individual sales, which is a very complicated process.

    It’s not very complicated for e-Books, because the “returns” computation is much simpler. And I can see complications arising from disputes over whether authors had really met their manuscript quota in good faith. Such disputes already occur, and they’re hard to resolve.

    • Bufo Calvin Says:

      Thanks for writing, Roger!

      I was actually referring to the second one you’ve quoted above, and you are correct, I overstated your position. Not wanting to be “losing as much” is not the same as wanting to make money . I considered quoting you there, and in hindsight, I probably should have. I just hadn’t checked with you first, or alerted you to the likelihood that you had inspired me to write a post. In the future, should I just assume that you are fine with me quoting a comment of yours, made publicly to the blog, in an article?

      That said, I don’t think the difference between wanting to lose less money, and wanting to make money, substantively changes my post. In both situations, the suggestion is that Amazon will either need to raise prices or lower costs eventually on e-books, and, for the reasons I laid out in the article, I don’t think that’s the case.

      I think Amazon could continue at the same level of revenue generation it currently has on e-books beyond the five year period you suggest.

      I don’t quite follow the “true need” argument for water. Isn’t someone who goes into a restaurant intending to buy a meal as likely to be hungry as they are to be thirsty? I know in the overall population that thirst is likely to occur more often than hunger, but if the restaurant is giving free water because the potential customer “needs” it, why aren’t they giving free food? Does the customer need the water in a glass with ice? Why don’t restaurants all just have a drinking fountain for free use if the customers’ need is their concern here?

      I agree with your argument that if every other restaurant was charging for water, there would be less motivation to offer it for free.

      The “embedded custom” point is an interesting one…and, given the short life cycles of tech, I’m wondering how embedded the idea of relatively (compared to p-books) inexpensive e-books has already become…

      I think here, you may have overstated my position.😉 You refer to “Under-$3 e-Books…” I mentioned, in the past, the $9.99 price point, and a hypothetical $4.99 price point for a Stephen King, but the post (and as I interpreted your originally inspiring comment) wasn’t about price point, but about profitability. If Amazon paid a publisher $15 for a book and sold it for $14, that would still be losing direct money. Let’s say that book was about how to get the most use out of a $300 TV, on which Amazon makes a $50 profit. If selling that book for $14 (when a competitor sells it for, say, $25) in turn sells the TV, Amazon wins on that one.

      We don’t know how profitable a subser would be for Amazon…at least, I don’t know what the costs would be and what sales it might inspire. I’d be curious to see you expand on this statement: “There are many other inducements that would be less costly to the company, and/or that would better serve its long-term strategy.” What are a few examples there?

      On your third point above, I think there may be many more competitors…thousands of them. Right now, many authors sell e-books from their own websites, which is a form of competition. Will that become less likely as time goes by? My own feeling is that the ability of individuals to reach customers is likely to increase in the next few years, partially through social networking. I also find your saturation conjecture intriguing. I will just say that I don’t think it is about selling Kindles, except as selling those Kindles leads to other more profitable sales and services.

      I’m also not sure why the “get big fast” goal is more likely to be defined as having been met now than it was in 2009 or 2004 or 1999. There is still a tremendous amount of growth possible for Amazon, even in physical goods retail (although I think that there real potential may be in infrastructure).

      This thought of yours from above

      “In order to sustain its high stock price (and key employees) then, Amazon will need to start reaping profits. So its loss-leader pricing will probably have to be reined in. ”

      is where we have our prime (no pun intended) disagreement on this. If Amazon’s profit comes from infrastructure which overwhelms losses from its retail pricing, and if that retail pricing is seen as driving the need for the infrastructure (web services, fulfillment for third parties), why would it have to change?

      If its discount pricing on e-books leads to people buying more profitable physical items, why would they want to experiment substantially with it?

      Abhi is very intelligent and a great writer: I have recommended iReaderReview in this blog before.

      The “race to the bottom” argument, though, doesn’t match my experience as a retailer. It suggests a homogeneity of buying motivations…that most purchasers buy for the same reasons, and that those reasons are the same for most purchases.

      When I managed a game store (I did that in addition to the book store), we could sell both $500 chess sets and $8.99 chess sets. If there was a simple race to the bottom based on functionality (you could play chess with both of them equally well), you would think the $500 chess sets wouldn’t sell. If someone wanted to give an anniversary gift, though, they didn’t want a $8.99 set (even though ours were wood, not plastic). They wanted something that was more expensive and perceived to be of higher value. To me, that’s the market for tradpubs (traditional publishers). I’ve suggested before that we could see $50 pricing for a new Stephen King novel in hardback, and I still think that’s the case.

      You are limiting your argument there to low-price books. Are you suggesting that there isn’t a benefit to consumers with lower prices? I believe that is a benefit, generally, even though there might be offsetting costs to it. In this case, having many low-priced, poorly produced books might actually result in higher quality and more expensive versions of higher-priced books. If you are going to charge $50 for a novel, it better be immaculately proof-read, since that’s part of the dividing line of perceived value.

      There was a period when production quality of mainstream paperbacks went down considerably…ceding the low-price end to the indies (independent publishers) could conversely drive up value for the higher-priced books.

      As to this one: “…because it hasn’t caught on so far—which means there’s likely a good reason why not.)”…and it’s possible that reason has been impacted by changing circumstances.🙂 New folks could establish themselves through indie publishing, which is what has been happening in recent years for some. That, in turn, means that tradpubs need to take fewer risks (they don’t have to guess at what new author will sell well, since they already have a track record), which could allow them to compensate brand-name authors more highly.

      Paying authors on per-sale is still complex, because it requires reporting from the sellers. If an author is compensated based on what is paid by the consumer (or at least, by revenue received by the publisher), rather than on the list price (and those arrangements exist), there are many individual data points to be examined. I would still suggest that paying a flat rate for a year (perhaps with bonuses) would be less intensive in terms of accounting. Having met their “manuscript quota” in good faith seems simpler to me…much the same way that you evaluate most non-commission employee.

      Once again, you have made good and interesting arguments! Thank you for taking the time to write such a lengthy comment.

  4. rogerknights Says:

    PS: My early remark, “No exactly” should have been “Not exactly”.

  5. rogerknights Says:

    In the future, should I just assume that you are fine with me quoting a comment of yours, made publicly to the blog, in an article?

    Sure, no worries. More on the rest of your comment later.

  6. rogerknights Says:

    “I think Amazon could continue at the same level of revenue generation it currently has on e-books beyond the five year period you suggest.”
    . . . . . . . . . . . . .
    “I’m also not sure why the “get big fast” goal is more likely to be defined as having been met now than it was in 2009 or 2004 or 1999. There is still a tremendous amount of growth possible for Amazon, even in physical goods retail (although I think that there real potential may be in infrastructure).”
    . . . . . . . . . . . .
    “If Amazon’s profit comes from infrastructure which overwhelms losses from its retail pricing, and if that retail pricing is seen as driving the need for the infrastructure (web services, fulfillment for third parties), why would it have to change?”

    Amazon revenue grew 35% in the last fiscal year, IIRC. In previous years it grew at a rapid rate (over 20%). It’s a growth stock, and its premium stock price reflects that. Such growth rates are not sustainable indefinitely—especially not when the company is so big that the “law of large numbers” (a financial market phrase) catches up with it. Apple is an example of how the growth rate slows as the market becomes saturated. Once Amazon’s growth rate comes down to earth, its stock will decline (costing it many of its top employees) unless its profitability rises. That will put pressure on aggressive loss-leader pricing.

    Amazon’s web services division’s growth isn’t dependent on low retail pricing. That division could be part of any other big, credibile company and do just as well. Buyers of its services have little in common with buyers on Amazon’s store.

    I think that although Amazon’s overall low retail pricing is necessary to attract buyers of 3rd-party fulfillment services, which is very important (and Bezos’s foresight in anticipating this was genius), that doesn’t necessarily mean that eBook pricing must be as low as it is now.

    “I don’t quite follow the “true need” argument for water. Isn’t someone who goes into a restaurant intending to buy a meal as likely to be hungry as they are to be thirsty?”

    People must drink and eat. And a person can go for much longer without food than without water. e-Books are optional.

    “I know in the overall population that thirst is likely to occur more often than hunger, but if the restaurant is giving free water because the potential customer “needs” it, why aren’t they giving free food?”

    Water’s cheaper than food and takes no time to prepare. Incidentally, food would be free if the retailer were making his money on drinks. That’s how the old “free lunch” worked. Hard-boiled eggs and other salted 19th century finger food was free, tempting you to beer to wash it down with. (There may even be laws against free food offerings by bars now—or at least a requirement to get a restaurant license before doing so.)

    “Does the customer need the water in a glass with ice? Why don’t restaurants all just have a drinking fountain for free use if the customers’ need is their concern here?”

    Possibly restaurants are trying to make the customer feel obligated to repay for what he’s been given. Or they’re trying to “break the ice” gently and establish a relationship with him/her before asking for an order.

    “The “embedded custom” point is an interesting one…and, given the short life cycles of tech, I’m wondering how embedded the idea of relatively (compared to p-books) inexpensive e-books has already become…”

    I think there’s been a shift downward in the average price paid for e-Books over the years. Abhi has documented this (as have you, IIRC). I think it’s going to continue to fall. A decline to the $5 to $10 range for most books with fiction popular appeal seems inevitable—and desirable. But if huge numbers of books are priced below $3, and many customers come to expect this, it will have long-term negative effects on the revenue from Amazon’s eBook sales, the income of high-quality authors, and book quality.

    “I think here, you may have overstated my position. You refer to “Under-$3 e-Books…” I mentioned, in the past, the $9.99 price point, and a hypothetical $4.99 price point for a Stephen King, but the post (and as I interpreted your originally inspiring comment) wasn’t about price point, but about profitability. If Amazon paid a publisher $15 for a book and sold it for $14, that would still be losing direct money.”

    Err . . . you got me, based on what I said. But what I had in the back of my mind was that Amazon intends to eliminate the middleman, partly by encouraging self-publishing and partly by getting into the publishing business itself, so that eventually it won’t have to pay publishers anything. Its revenue will all be a percentage of sales—i.e., pure profit (after allowing for overhead!). THEN it’ll prefer to sell higher-priced books.

    “We don’t know how profitable a subser would be for Amazon…at least, I don’t know what the costs would be and what sales it might inspire. I’d be curious to see you expand on this statement: “There are many other inducements that would be less costly to the company, and/or that would better serve its long-term strategy.” What are a few examples there?”

    Err . . . you got me—I was, in part, “woofin’,” because I couldn’t think of many examples offhand. Now that you’ve put me on the spot, I’ll mention one: AmazonSmile. Come to think of it, there were two others I did mention, in another context: shorter delivery times and Sunday delivery. And now I’ll add that its innovative book lending services could be expanded, and that its free video for Prime members could be expanded.

    And, lest I forget, its so-so basic eReader software could be considerably improved within six months for only a five-figure amount. See http://ireaderreview.com/2013/05/05/reviewing-49-kindle-keyboard-improvement-suggestions-from-roger-knights/ . (These suggestions aren’t just for the K3, despite what the title says. I wonder if some poo-bah at Amazon dismissed it unread because he assumed it only applied to an obsolete model.)

    There must be more things it could do—I bet Jeff & Co. could brainstorm up a dozen in an afternoon (and already has).

    “On your third point above, I think there may be many more competitors … thousands of them. Right now, many authors sell e-books from their own websites, which is a form of competition. Will that become less likely as time goes by? My own feeling is that the ability of individuals to reach customers is likely to increase in the next few years, partially through social networking.”

    I remember reading a blogger’s thorough rebuttal of that argument within the past year. (And I thought that blogger was you!) I can only remember a few of his points. They were that buyers want a convenient centralized marketplace to buy from; they want a seller who has all their credit card and contact info already (so they don’t have to re-enter it); they want a seller they can trust with their credit card data; they want a seller who has a good reputation for handling customer complaints; etc. (Example: I bought a $6 science-fiction eBook direct from a specialist science-fiction publisher. It never arrived. I sent them a message. It wasn’t answered. I gave up. I decided I wouldn’t trust outside sellers again. I feel pretty sure my experience is far from unique.)

    This is why I think Amazon could get away with modifying its price-matching program to be less aggressive in the future. (For instance, it could only price-match if the buyer provided a link to a cheaper site. Or it could cut its price to a more competitive level without fully matching the competitor’s.)

    “I also find your saturation conjecture intriguing. I will just say that I don’t think it is about selling Kindles, except as selling those Kindles leads to other more profitable sales and services.”

    My point was different. I was saying (or implying) that currently it’s of strategic importance for Amazon to “corral” as many customers as possible into its ecosystem by buying a Kindle as opposed to a Nook—and that low-ball eBook pricing is one way to do that. I wasn’t saying that it was important to make customers buy a Kindle outside of that context, e.g., in five year’s time. Presumably, by then there’ll be no Nook threat, in part because potential customers will have already committed themselves to a particular eReader. (Here’s what I wrote: “In five years, max, Amazon will have less need to tempt customers into its corral with aggressive loss-leader eBook pricing to inspire other sales, because: . . . the eReader market will be nearly saturated, so fewer new Kindle sales will be gained thereby.”)

    “If its discount pricing on e-books leads to people buying more profitable physical items, why would they want to experiment substantially with it?”

    I think that in five years Amazon will have become so dominent in the marketplace and in buyers’ minds, and by corralling customers into its Prime program, that buyers will turn to Amazon first for physical items without a need for it to offer extra-cheap e-Books any more.

    “Abhi is very intelligent and a great writer: I have recommended iReaderReview in this blog before. The “race to the bottom” argument, though, doesn’t match my experience as a retailer. It suggests a homogeneity of buying motivations…that most purchasers buy for the same reasons, and that those reasons are the same for most purchases.”

    Well, I think that he did overstate his case. It’s not a race, and it’s not to the absolute bottom, and there will be countervailing forces at work. It’s only a tendency he’s describing. But that doesn’t dispose of most of his argument.

    When I managed a game store (I did that in addition to the book store), we could sell both $500 chess sets and $8.99 chess sets. If there was a simple race to the bottom based on functionality (you could play chess with both of them equally well), you would think the $500 chess sets wouldn’t sell. If someone wanted to give an anniversary gift, though, they didn’t want a $8.99 set (even though ours were wood, not plastic). They wanted something that was more expensive and perceived to be of higher value. To me, that’s the market for tradpubs (traditional publishers). I’ve suggested before that we could see $50 pricing for a new Stephen King novel in hardback, and I still think that’s the case.

    “You are limiting your argument there to low-price books. Are you suggesting that there isn’t a benefit to consumers with lower prices? I believe that is a benefit, generally, even though there might be offsetting costs to it. In this case, having many low-priced, poorly produced books might actually result in higher quality and more expensive versions of higher-priced books. If you are going to charge $50 for a novel, it better be immaculately proof-read, since that’s part of the dividing line of perceived value.

    “There was a period when production quality of mainstream paperbacks went down considerably…ceding the low-price end to the indies (independent publishers) could conversely drive up value for the higher-priced books.”

    I think there’s less differentiation in perceived quality between low- and high-priced e-Books than between low- and high-priced physical goods, so I don’t see this as a strong countervailing force.

    “As to this one: “…because it hasn’t caught on so far—which means there’s likely a good reason why not.)”…and it’s possible that reason has been impacted by changing circumstances. New folks could establish themselves through indie publishing, which is what has been happening in recent years for some. That, in turn, means that tradpubs need to take fewer risks (they don’t have to guess at what new author will sell well, since they already have a track record), which could allow them to compensate brand-name authors more highly.”

    My lead-in to the words you quoted were, “I’m not saying this [salaried authors] mightn’t work as a supplement to the current system. But I’m dubious about it becoming a replacement, . . ..” So I can concede what you’ve said above without retreating much from my claim. We’ll have to wait and see.

    “Paying authors on per-sale is still complex, because it requires reporting from the sellers. If an author is compensated based on what is paid by the consumer (or at least, by revenue received by the publisher), rather than on the list price (and those arrangements exist), there are many individual data points to be examined. I would still suggest that paying a flat rate for a year (perhaps with bonuses) would be less intensive in terms of accounting. Having met their “manuscript quota” in good faith seems simpler to me…much the same way that you evaluate most non-commission employee.”

    In five years, I think Amazon will sell 90% of US e-Books, inducing most authors to sell only through Amazon (and many to publish through Amazon). And if Amazon is the only seller, then there’s no complexity.

  7. rogerknights Says:

    Oops–I forgot to turn off the italics after the word “genius”. (If possible, could you do it, Bufo?)

    • Bufo Calvin Says:

      Thanks for writing, Roger!

      I think I fixed it.🙂 You just left off the “/”…the italics tag was there, just not closed.

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