Amazon gives numbers: it’s about prices, not share

Amazon gives numbers: it’s about prices, not share

Amazon has added a fascinating

Kindle forum post (at AmazonSmile: support a non-profit of your choice by shopping*)

which does something Amazon rarely does: it gives specific numbers.

I know when I do my analysis posts, some people just skip them.🙂 Not everybody likes seeing the mathematical interiors of something they enjoy:  for some, it’s like seeing an x-ray of the person they are dating.😉

However, these are statistics as a weapon…a weapon in what I call the Hachazon war. That’s the ongoing disagreement between Amazon and Hachette, one of the Big Five publishers (presumably, Amazon is also in or going to be in similar negotiations with the other four).

It’s a carefully crafted post, with again, Amazon taking the populist/consumer point of view…and tacking on support for authors.

I’m not saying that isn’t how they sincerely feel: it certainly could be. It’s just apparent to me that the statement has a very large position framing component…and it’s reasonable that it does, of course.

I recommend that you read it, and I do want to point out some key points.

The biggest argument made is that Amazon isn’t fighting with Hachette over revenue share, as has been reported. It’s not (according to the e-tailer) about trying to get, say, 50% of the sale rather than 30%.

It’s about keeping the prices low.

Amazon argues that e-book prices should be lower than p-book (paperbook) prices. Since the rise in popularity of e-books with the release of the Kindle in 2007, that’s been many consumers’ intuitive sense. We would see posts about that all the time in the forums: “There is no paper cost, it’s just a file.”

For many of those posts, it was clear that they didn’t understand the economics (which Amazon presumably does). They were only talking about manufacture, and that is a small part of the cost of producing a book. I remember an analysis, way back when, that an e-book was about 12.5% less expensive to produce than a p-book.

How can that be?

What costs the most money isn’t the paper, it’s the people. Even for an e-book, you still need to pay the author (although not necessarily the same amount), the editor, the cover designer, the proofreader, the layout artist, and so on.

You still have the same legal costs.

Marketing costs could be different, but are still significant.

Amazon adds in other costs including, interestingly, used sales. Since e-books can’t be sold used, they argue, the initial price can be lower.

If a p-book is sold for $20, and then sold used for $10 and used again for $5, the publisher only gets money out of that initial $20. If the people who paid $10 and $5 for it would have paid $20 otherwise, those second and third sales are a loss of revenue…which the publisher has to make up on the first sale.

Of course, many people who buy a used book at a reduced cost wouldn’t have bought the new book at the full price…but it’s a reasonable argument. Amazon has worked on creating a used e-book market, but that would presumably be a case were the publisher would get a cut of subsequent sales.

Here’s the big stat in this short excerpt from the post:

“We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.”

Amazon is saying, “Lower the price and make more money.”

They explain how that benefits everybody: publishers; readers; authors; and Amazon.

You know what it doesn’t benefit?

P-books.

That’s always been one of the publishers’ concerns with Amazon pricing many new and popular e-books at $9.99 (which sometimes meant Amazon was selling them to consumers for less than what the e-tailer paid the publisher). It’s “price perception devaluation.” If a Stephen King novel is worth $9.99 as an e-book, why is it worth $25 as a p-book?

If e-book prices set the market perception of what a book should cost, it hurts p-books.

You might think that would hurt Amazon as much as it does the tradpubs (traditional  publishers), but tradpubs have a massive percentage of p-book sales in brick-and-mortar stores (and those do still matter), and a likely significantly decreasing percentage of e-book sales.

I was a brick-and-mortar bookstore manager…and almost all of our stock came from the biggest publishers (the few that didn’t came from smaller traditional publishers, represented by a distributor such as Publishers Group West).

We simply needed the size and services of the big tradpubs. You need to be able to replenish stock quickly when a book is hot, and get credit for copies when a book is cold.

The smaller independent publishers didn’t have the resources to do that.

All of that goes away with digital reproduction and distribution.

The Big Five’s power is disproportionately in p-books…and POD (Print On Demand) hasn’t changed that (yet).

The other thing Amazon says in the post is that the publisher should get 35%, Amazon should get 30%…and the author should get 35%.

To me, that’s a little…manipulative, I guess. Amazon (as they say later in the post) can’t control how much the author gets from the publisher…that’s a matter of their contracts.

It would be like…looking over at another table at a restaurant, and saying to the six-year old, “You know, if your parents really loved you, they’d give you the whole pizza.”😉

Authors, of course, are not like six-year olds…I expect we’ll see some pointed comments from some of the Hachette-side authors about this part of the post.

Brand new or aspiring indie-authors may have the relative “life experience” of a six-year old, in terms of publishing, but they’ll have different abilities to judge.

Speaking of those indie (independent) authors, you may think that what Amazon is saying isn’t unreasonable: after all, Amazon pays KDP (Kindle Direct Publishing) authors either 35% or 70% (the latter if they meet certain guidelines).

Yes, but that’s a different case from Amazon’s traditional publishing efforts.

With KDP, the author/publisher (they are often one and the same in that situation) takes on the costs and risks of development of the book. Amazon takes on some of the marketing costs, although the publisher will many times continue to have those as well. Amazon will also have Customer Service costs, and accounting costs, but for the bulk of the costs, it falls on the indie.

KDP is a platform: the author delivers the book and updates it as needed, and Amazon sells it.

Amazon’s traditional publishing, and the Big Five’s, involves a lot more investment.

The other thing about pricing is that consumers (and Amazon is positioning itself as seeing things from that viewpoint) look at an individual sale, while publishers (and stores) look at populations of sales.

Popular books support unpopular books.

As readers, we do want publishers interested in something besides profits on each title.

We want them to take risks on new authors, and we want them to publish “meaningful” books which won’t be popular.

If a researcher spends ten years documenting working conditions in 19th Century America (I’m just making that up as a topic), it’s not going to top the bestseller lists…but it’s important that the information be out there and preserved.

That book will probably never make back its developments costs…so popular books have to be priced somewhat higher to enable the publisher to take a loss on the “public good” book.

That’s not inherently different on e-books and p-books…except that the risks are quite a bit lower on e-books.

Right now, it’s likely that e-books are, to some extent, supporting the publishing of p-books. They are providing, if not a higher margin, a better cushion for taking risks on the development of p-books.

All of that said, this is an extraordinarily revealing post, as far as Amazon goes.

What do you think? Will it persuade the public to be more on Amazon’s side? How will authors react? Would consistently lower e-book prices hurt p-book sales? Would that cause publishers to take fewer risks with p-books, resulting in less innovation? Would indies pick up that slack? Feel free to tell me and my readers what you think by commenting on this post.

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* I am linking to the same thing at the regular Amazon site, and at AmazonSmile. When you shop at AmazonSmile, half a percent of your purchase price on eligible items goes to a non-profit you choose. It will feel just like shopping at Amazon: you’ll be using your same account. The one thing for you that is different is that you pick a non-profit the first time you go (which you can change whenever you want)…and the good feeling you’ll get. :) Shop ’til you help! :) 

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.

4 Responses to “Amazon gives numbers: it’s about prices, not share”

  1. Curryanne Hostetler Says:

    I guess I agree with Amazon. Why should I pay more to support the pbooks. I also believe that ebooks have more people reading books. I got my husband a kindle fire and he will occasionally read a Book. In fact in the last two years he has read 12 books in the previous 30 years he read 0.

    • Bufo Calvin Says:

      Thanks for writing, Curryanne!

      Certainly, that’s a reasonable position.🙂 It doesn’t really come down to a choice between e-books existing and p-books existing (they can both be in the market), but if it did, I would pick e-books. One of the reasons is the better accessibility for people with print disabilities and other challenges. Another one is, as you mention, that I do believe more books are being read because of them. I’ve heard that anecdotally, and it makes sense to me…it removes a barrier of inconvenience to have (many) books available where you are when you are there.

  2. Edward Boyhan Says:

    This was a good analysis of Amazon’s proposal.

    Two points: you mention that there isn’t much of a MFR cost differential between an eBook and a pBook because of all the ancillary services that “people” provide in the Tradpub ecosystem. Some of those are valuable — especially to big name authors, but for the bulk of mid-rank authors, a Tradpub does little or no meaningful marketing. Copy editing, and covers and all the rest can be provided at much lower costs (as has been shown in the indie space) — there are in fact automated programs that can do a reasonable job of copy editing.

    A large fraction of those tradpub people just aren’t that useful if your target distribution is mostly eBooks.

    If you happen to be one of the privileged few that have a tradpub contract, and you can expect to be distributed in hardback, mass market, and eBook, then all those tradpub “people” do have some value, but in a mostly eBooked world — at some point they’re just dead wood (to go along with all those “Dead Tree Books” no one will want anymore :grin).

    Second point: that 70% KDP royalty is a bit misleading. I’ve been talking to a couple of KDP authors — that 70% is 70% of net. The KDP authors get hit with some “expenses” (one author told me they have to pay for whispersync — I didn’t get a chance to dig deeper — so I’m not sure exactly what that entails). One author told me he sells his book direct off his own web site for $2 and off the Amazon kindle store at $5, and that his rough unit net is about equal for both channels.

    Last point (which became apparent in reading one of the blog follow-up articles): royalty percentages are different depending upon the distribution modality. One royalty percentage for hardback, one for mass market, and finally one for eBooks. Amazon was mostly addressing what the author royalty ought to be for eBook distribution.

  3. Man in the Middle Says:

    I just ran a Quicken report on all my Ebook purchases since October, 2004. In almost 10 years of avid reading (579 books in all (not including 117 Vine review Pbooks), only 87 Ebooks read cost even a penny. Four were under $4. Five under $5. Three under $6. Five under $7. Five under $8. Two under $9. Two under $12 (2 copies of same book.) Two under $14 (One a compendium of 7 books.) One specialized PDF title for $37. Everything else cost under $3.

    I find it utterly astounding that anyone is even TRYING to raise Ebook asking prices above $10, as anything over $3 is a non-impulse purchase, and usually gets added to a watch list on EreaderIQ or borrowed from the local library as a Pbook instead.

    The largest royalty I ever got as an author myself was $1 per copy of a $26 book, back when printing cost $1 a book. So to me, Amazon’s 70% royalties on $3 Ebooks seem more than fair to authors, and I usually feel at least a bit ripped off when forced to pay more for an Ebook.

    Also, I have long noticed Pbooks offered used for $4 including shipping from third party Amazon suppliers, so can’t imagine why anyone paya more that that for such a title as an Ebook, except for faster deivery or to add it to a permanent digital library.

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