Thursday, April 12, 2012

Amazon vs. Apple And The Agency 5: Let's Get The Facts Straight

Given that anyone who reads my blog is an author, publisher, or otherwise involved in the book business, I don't think I need to trouble myself with recounting every detail of how the U.S. Department of Justice came to charge Apple, Inc. and publishers Macmillan, Penguin, Hachette Group, Simon and Schuster and HarperCollins with collusion to fix ebook prices. But judging by the many hysterical, righteous articles and editorials I'm reading in the wake of antitrust charges being filed and three of the five named publishers promptly settling out of court, there's plenty of inaccuracy and flawed logic out there that needs to be addressed.

1. Before Apple and the Agency 5 publishers established their Agency Pricing plan, Amazon was hurting publishers' bottom lines by offering their Kindle-format bestsellers at a discount price. Publishers had to do something to stop Amazon from doing this, so they could earn enough money to cover their expenses and still earn a modest profit.

FALSE

Prior to Agency pricing, publishers sold their Kindle-format books to Amazon under the same basic wholesale terms they used to sell their hard-copy books to Amazon. Publishers set a suggested retail price for the public, but sold each copy to Amazon at a lower, wholesale price that generally constituted 60% of the suggested retail price. That percentage is standard across the industry for all booksellers, and is fixed regardless of the price at which a given book, digital or hardcopy, actually sells.

This means that if the publisher set a suggested retail price of $20 for a given Kindle book, Amazon had to pay the publisher $12 per copy sold. Even if Amazon elected to sell those books at a discounted retail price of say, $9.99, it still had to pay the publisher $12 per copy sold. Most of the mainstream Kindle bestsellers Amazon was selling at $9.99 were being sold at a loss to Amazon, but publishers still earned the same cut as they would if Amazon hadn't discounted.

2. If Amazon is allowed to offer mainstream bestsellers as a "loss leader" product, it will soon have a monopoly over ebook sales in general and will then demand that publishers accept a lower cut on each copy sold---and in fact, they are already starting to do this with their 2012 vendor contracts with publishers.

FALSE

While it's true that Amazon's 2012 vendor contracts do charge higher prices for on-site promotion than in prior years (though specific details of the new contracts have not been publicly disclosed), no one is claiming Amazon is demanding any decrease in the publishers' usual 60% cut. It's unclear whether publishers can opt out of the on-site promotion, but still offer their books for sale on the site.


3. Amazon has already driven most of its competition out of business through predatory pricing tactics.

FALSE

While it's true that Amazon operated at an annual, multimillion dollar loss for its first five years in business (as detailed in the documentary film series, Nerds 2.01: A Brief History of the Internet, 1998), during which time it was primarily a bookseller, the primary reason for its losses had to do with the usual business startup expenses, plus Jeff Bezos' very ambitious growth and expansion plans for the burgeoning e-tailer. Amazon spent immense quantities of cash on advertising and setting up a nationwide network of fulfillment centers in those early years.

Amazon also invested heavily in making its customers' buying experience the best it could be. Recall that Amazon launched at a time when online shopping was far from typical, and most consumers viewed online stores with suspicion, fearful that their credit card and other personal information couldn't possibly be kept secure online. A second obstacle to overcome was consumers' habit of instant gratification: why buy online, which is essentially no different from mail-ordering, a product one could buy in any local store? Amazon had an answer to both issues.

First, it could afford to offer products at a lower retail price because its overhead costs were much lower than those of a brick-and-mortar store. Warehouse space is cheaper to buy or rent than retail space, and fewer workers are needed to run a fulfillment center than to staff a retail store; much of its processes could be automated.

Of course, a lower retail price is meaningless if the difference is made up in shipping expense, and the customer has to wait for his purchase to arrive in the mail to boot. Amazon's answer to these two problems was to frequently offer free shipping, and (for its first couple of years in business) to ship every domestic order out via Federal Express, regardless of whether or not the customer opted to pay for expedited shipping, as a standard practice. Remember that?

These were strategic moves aimed at establishing the internet as a safe place to shop, and Amazon as a trusted retailer in the minds of consumers. Of course Amazon also wanted to become a preferred retailer in the minds of consumers, but that's true of any retailer. If its mail-order business model is simply more financially efficient and convenient for customers than brick-and-mortar shopping, that's more the natural outcome of a major technological and cultural shift than the result of any targeted, purposeful attempt to drive all competitors out of the marketplace. As plenty of others have observed, I'm sure the buggy whip manufacturers were pretty angry when automobiles became the standard mode of transportation, too.


4. Amazon is now in a position where it can strong-arm publishers into whatever pricing and sales terms it wants, slowly bleeding those publishers to the point where they can no longer survive.

FALSE
Publishers are no more dependent on Amazon for their survival than computer manufacturers are dependent on Best Buy for theirs. Publishers are free to enter into direct competition with Amazon by pulling all their titles from the site and selling them exclusively through their own online stores and selected brick and mortar outlets, such as Barnes and Noble, Target and airport stores. Computer and other manufacturers have long offered direct sales to consumers through their websites, and there's nothing stopping publishers from following suit, other than a reluctance to alter their failing, bricks-and-mortar-centric business model.

Certainly, a considerable amount of effort and capital investment would be required to set up an online sales outlet where none exists today for most publishers, but the realities of remaining competitive in a changing marketplace are what they are. The fact that publishers dragged their feet and dug in their heels rather than adapt to changing market forces can hardly be blamed on Amazon. The internet moved their cheese, not Amazon.

As to slowly killing off publishers, it behooves Amazon NOT to bleed its primary suppliers dry. Amazon has been launching its own publishing initiatives, but unless it succeeds in luring most major authors away from every major publisher, unless it starts buying up competing presses (a mistake the major publishers have made in spades and have probably now come to regret), it will always be one among numerous publishers.

Finally, consider the digital music example set by Apple with its iPod and iTunes. Apple undoubtedly dominates the digital music market, but it has not bled any labels dry or begun gouging the music-loving public. Tower Records, Licorice Pizza and The Wherehouse have disappeared from the music retail landscape, but I don't recall anyone accusing Apple of any kind of orchestrated campaign to cause their demise. Again, it's a simple case of consumers voting with their wallets.


5. Publishers have to play ball with Amazon if they want to offer their books in digital form, because the Kindle is the dominant e-reader platform.

FALSE

The Kindle is the dominant e-reader platform, but it can read formats other than Amazon's own proprietary .azw file type. It can read .mobi files natively, for example. Publishers are free to sell non-.azw format ebooks directly through their own websites, and Kindle owners would still be able to read those books on their Kindle devices. It wouldn't be as convenient for customers as downloading books directly to their Kindles from Amazon, but this is the same situation as loading digital music files that weren't purchased from iTunes onto an iPod: it can be done pretty easily, though it does require transferring files to the device.

Furthermore, if publishers really wanted to ensure the Kindle couldn't dominate the e-reader landscape they could do so, by offering customers the one thing the ebook reading public has most wanted from the beginning that they aren't already getting from Amazon: a cross-platform, DRM-free ebook format that can be read across multiple devices. They could invest in the development of cross-platform e-reader software users could run on devices they already own rather than having to buy a Kindle, Kobo Reader, Sony Reader or Nook, but here again, there's a reluctance on the part of publishers to take risks, expand their business model, innovate and compete.


BOTTOM LINE: Amazon has achieved a dominant position in bookselling and e-tailing through aggressive, risky and costly startup efforts. Unlike most CEOs who hold the title today, Jeff Bezos took and held the long view through some very lean and nerve-wracking years. If his ultimate goal for Amazon is to become and remain the #1 company in its sector, then all he's guilty of is the same thing that can be said of ALL CEOs.

Perhaps if publishers and competing retailers had been a little more forward-thinking, and willing to take the same risks, they would now be reaping similar rewards. Since they weren't, they are reaping a bitter harvest of resentment and fading market share instead. It's still not too late for publishers to turn the situation around, but their time, money and effort would be better spent on R&D than M&C*.



*(moaning and complaining)

42 comments:

R.E. McDermott said...

April - Terrific recap.

Donna White Glaser said...

And the choir sang AMEN!!

Carolyn said...

Yes. Exactly.

Marie/Underground Crafter said...

Sing it, sister!

Evan Gregory said...

I don't think anyone was disputing those facts. The problem is predatory pricing. Amazon can afford to take losses on e-books, because they can make up the money in traffic brought to the site by people coming to buy cheap books staying to buy slightly cheaper printers, microwave ovens, or sunglasses. Barnes and Noble, however, doesn't sell microwave ovens, they sell books exclusively. They can't afford to take a loss on every sale, they'd go out of business, as would any other book store.

That's the problem. If Amazon can offer books for the wholesale price or cheaper, then no other bookstore can hope to compete with them. That's where the monopoly comes in.

The problem is not that Amazon is a better competitor(though they are a good competitor), it's that they are making a conscious decision to sell books at a loss in order to obtain a dominant market share.

It's important to note, that unlike the music industry in the 90's (to which publishers are so often compared), the value of books is not inflated. The margins for books are comfortable enough for publishers, but they're not exorbitant. (for more info you can read this rather well researched article: http://news.cnet.com/8301-1023_3-57412587-93/why-e-books-cost-so-much/?tag=mncol;txt)

If the bricks and mortar stores go under, or tighten their belts dramatically, a third to a half of the publisher's business walks out the door. What's left, belongs almost exclusively, to Amazon.

For these past two years selling books at prices set by the publisher has not harmed Amazon's business in any meaningful way. They are still very competitive. Kindle sales are still robust.

What Amazon is doing threatens to destroy physical bookselling in the U.S., and it threatens to severely hobble publishers. If you like variety in the marketplace, you would do well be to be leery of Amazon's purposeful price manipulation.

April L. Hamilton said...

Evan -
If publishers have irrevocably tied their wagons to a brick-and-mortar distribution system that's unsustainable in the internet age, that's not Amazon's fault and consumers shouldn't be forced to overpay for books in order to subsidize a dying business model.

As I stated in the post, publishers are by no means Amazon's prisoners, and Amazon will only achieve a monopoly if no one else steps into the ring to compete against them. Amazon isn't engaging in "predatory" pricing, they're engaging in open competition in an open marketplace, and Apple and the publishers themselves are free to do likewise, Amazon has no special advantage in this.

If the Agency 5 had chosen to build robust, online stores instead of colluding and then going to court, they could be giving Amazon a run for its money instead of playing the victim.

If those publishers stand by and do nothing to try and win book buyers' business, if they aren't willing to adapt to a new paradigm AT ALL, yet try to force illegal and unethical pricing models on the public, then they deserve to lose to Amazon. In that event, if Amazon comes to stand alone, it's no one's fault but the publishers'.

April L. Hamilton said...

Evan -
Just want to add...you said, "If Amazon can offer books for the wholesale price or cheaper, then no other bookstore can hope to compete with them."

Actually, someone can. The publishers themselves. They're already selling their books to retailers at the wholesale price; cut out the retailer and they could just as easily offer their wares to the public directly at prices to match or beat Amazon. Plus they can offer all kinds of perks Amazon can't hold a candle to: exclusive content from favorite authors, live chats with favorite authors, sneak previews of galleys from upcoming titles, promo merchandise, etc. etc.

They could do all those things. They just don't want to. And if they're not interested in serving me as both a reader and their primary source of revenue, why should I be interested in subsidizing them?

TL Jeffcoat said...

Oh my, you just found a new fanboy. I've been saying this for over a year. The writing has been on the wall. Don't blame Amazon if everyone else is just ignoring it. Problems have to be solved. Ignoring them only makes them bigger problems. I say go Amazon! They know what they are. A business. It would do other publishers well to realize they are too.

Bookride said...

If it was simple and easy to pay any book or product provider on the internet Amazon would lose it dominance and Bezos would have to fall on his sword. The reason people use Amazon is that itis 1click easy, it is NOT cheaper. Most other sites make it difficult to pay them..even Paypal is cumbersome.

Evan Gregory said...

That's just the point. Physical book-selling is not a dying business model. It works quite well when its competitors are not intentionally sustaining losses on every sale.

Prior to the agency model, Amazon was buying a $24.00 book for $12.00 and selling it for $9.99 and losing $3.00 a sale. That's not competing in an open marketplace where all things are equal, that's intentionally subverting the market to drive prices below where your competitors can afford to go. It's losing money, so that your competitors are forced to lose money. It's also devaluing a products inherent value. Books cost what they cost. You're not overpaying for them, just because you're not paying less than the wholesale cost.

Lots of folks prefer physical books to e-books, and shopping in physical bookstores as opposed to online. Some customers do all the above, and are happy with the variety of options when it comes to buying reading material. Some customers are happy to embrace the Kindle and leave the world of dusty old paperbacks behind.

There's enough market for everyone, provided that all the players play fair, and there are an abundance of books at varying price points for Kindle owners to avail themselves of, without putting the pinch on bookstores and without putting the pinch on publishers.

Furthermore, the publishers haven't exactly been slow to adopt new business models. It should be important to note that they were selling e-books before Amazon was.

Their situation is not at all like the music industry, that fought as long as it could against selling MP3 files online, only to wind up in in the hands (almost exclusively) of Apple.

April L. Hamilton said...

Evan -
"Furthermore, the publishers haven't exactly been slow to adopt new business models. It should be important to note that they were selling e-books before Amazon was."

Publishers have been dragged kicking and screaming to the ebook table, as any mainstream-published author (including me) can tell you. And Amazon didn't have any obligation to offer ebook editions, they are merely a retailer. It was (and is) publishers' job to meet the needs and wants of the reading public.

Again, Amazon doesn't enjoy any special advantages that publishers themselves couldn't exploit equally, and in fact it's the publishers who have certain distinct advantages over Amazon.

Amazon sells plenty more than just books, but books are the only game in town for publishers. If Amazon chooses to use books as a loss leader to win more shoppers in general, and publishers are so certain this spells not only their own demise but the downfall of the book business in general, then publishers should take back the reigns of their product and cut Amazon out of their customer relationship entirely. There's nothing stopping them from doing so...it's just that it's EASIER and CHEAPER to keep forcing an existing model down customers' throats instead.

But as you can tell by reader comments here and elsewhere, publishers aren't winning any hearts or minds by responding to customer complaints (about ebook price gouging and limiting availability of less expensive paperback and ebook editions until well after a hardcover release) by essentially saying, "You owe us a living and if you don't support our outmoded and inefficient business model the book business will die, and it will be your fault for buying from Amazon."

Evan Gregory said...

Publishers have been dragged kicking and screaming to the ebook table, as any mainstream-published author (including me) can tell you.

A little over five years ago e-books were such a small part of the market that publishers really didn't pay them much mind. Sony Readers were their biggest customers (just for perspective). During those years they really could have invested in e-book selling infrastructure that could have allowed them to do much better in the marketplace than they are doing. Growth of e-book sales was getting exponentially bigger, the writing was on the wall. Amazon certainly did take the lead in forging a viable e-book marketplace. I wouldn't, however, say the publishers have been resistant. They were happy with Amazon's (and in many ways still are) growth in the market and glad to offer books on the Kindle. Don't forget, there would be no Kindle, if not for content. Amazon knows that as well as the publisher's do.


And Amazon didn't have any obligation to offer ebook editions, they are merely a retailer. It was (and is) publishers' job to meet the needs and wants of the reading public.

As John Scalzi helpfully points out on his blog (http://whatever.scalzi.com/2012/04/12/dear-consumers-who-apparently-think-the-current-drama-surrounding-ebooks-is-like-a-football-game/) publishers obligation is to make money. In hindsight their decision not to invest in a joint venture to sell e-books seems rather foolish, but in 2005, with retail sales slumping in books (and across the board) shareholders weren't terribly interested in listening the publishers arguments to invest capital in an e-book market that, at that time, didn't exist.

Again, Amazon doesn't enjoy any special advantages that publishers themselves couldn't exploit equally, and in fact it's the publishers who have certain distinct advantages over Amazon.

Amazon's annual revenue is a couple billion more than the Big 6 combined. I'd say that's a bit of an advantage.

Certainly publishers could tell Amazon to go stick it, but they would be missing out on a lot of money, and Amazon would too. The fact is both the publishers and Amazon rely on each other, which is why they should really start treating each other better.

Without Amazon the publishers are giving up 60% or so of the digital marketplace, and without the publishers, Amazon won't have the content that's drawn so many to the Kindles in the first place.

Evan Gregory said...

But as you can tell by reader comments here and elsewhere, publishers aren't winning any hearts or minds by responding to customer complaints (about ebook price gouging and limiting availability of less expensive paperback and ebook editions until well after a hardcover release) by essentially saying, "You owe us a living and if you don't support our outmoded and inefficient business model the book business will die, and it will be your fault for buying from Amazon.

I think that's a straw man argument. I don't think any publishers have said what you quote above, or any variants.

Publishers aren't price-gouging. That's what books cost. Paying authors, editors, designers, publicists, sales and marketing staffs cost money. Publishers run rather efficiently compared to other businesses, and they've been doing it for a very long time, so there's a lot of precedent when it comes to learning how to maximize sales, and how to price effectively. They're not getting fat off the consumer by charging you more than what the book is worth. There's just too much competition between publishers for them to inflate the price.

As for the the differential between e-books and physical books on Amazon's store, that can be explained. Physical books are not sold on the agency model, and thus can be discounted by Amazon below the fixed price the publisher sets for the e-book. They don't control Amazon's discounting of the physical book, and they often don't have a reason to discount the e-book to below what Amazon has chosen to sell the physical book for. And that's not the case for all books, or even most books, just some books.

April L. Hamilton said...

Evan -

"publishers obligation is to make money..."

Surely, you're being purposely obtuse. HOW do they make money? By selling books. WHO buys books? Consumers. So WHOM do they need to please? Consumers.

Yes, publishers are running a business, but they can't have it both ways - claiming on the one hand they have no obligation to please the purchasers of their products, and on the other that they deserve to remain powerful and stable players in the marketplace.

As for Amazon's cash advantage, it was HARD EARNED and Amazon started out as a nobody. The vast majority of internet startups fail, and Bezos managed to steer Amazon safely through those waters by putting the customer first, he is to be commended for it, not publicly flogged as a greedy, evil man bent on bringing down the book business as we know it.

Moreover, it doesn't matter that Amazon has more money when publishers control the PRODUCT and can deprive Amazon of it anytime they choose. What might happen if, the next time Ammy threatened to take away 'buy' buttons, the owners of the product said, "Fine. We'll sell it ourselves and cut you out of the transaction entirely." Imagine the possibilities if you will...because publishers WON'T.

Readers will follow their favorite authors wherever those authors go. If publishers aren't willing to step up and defend their own territory, then they're going to lose not only consumers but authors as well. (*cough* Pottermore *cough*)

And when Amazon is more than happy to partner directly with those authors in the future to bring readers what they want, when they want it, at reasonable prices, publishers will whine and moan about how unfair THAT is, too.

An opportunity squandered is a defeat well-earned.

BooksAndPals said...

Evan,

A a reader and consumer who also pays attention to what is going on in publishing that is the message I'm hearing, whether stated explicitly in those words or not. They couch it in terms that sound pretty instead. They say that they're providing value by curating or helping to maintain a "literary culture" and that is why we need them. They claim that an ebook costs almost as much to produce as a paper book, and I get that, to a point. But I have to question it when I see that profit from ebooks are the only bright spot whenever any publisher's financials come out.

April L. Hamilton said...

Evan -
"Publishers aren't price-gouging. That's what books cost."

SO not true!! An ebook edition of a novel or other primarily text-based book costs a few hundred dollars to create, tops. TOPS. And that's for getting a professional ebook conversion service to do it.

After those few hundred dollars have been recouped, net revenue on each subsequent copy sold is PURE PROFIT. And publishers have been pretty open in maintaining that they HAVE to price ebooks in line with hard copies, whether the production cost justifies it or not, for two reasons. First, to help defray costs associated with the many print title losses they must absorb each year. Second, to prevent ebook sales from cannibalizing print book sales.

The Big 6's ebook pricing models have NOTHING to do with actual production costs, and even the publishers themselves have stopped trying to claim so.

Evan Gregory said...

BooksAndPals,

The reason why e-book sales look so good, is because the e-book market is growing the number of readers. People rarely bought books, are being converted into readers by the convenience and coolness of the Kindle, and that's excellent news that everyone should rejoice in.

Simultaneous to that welcome and awesome news, there has been some rather unfortunate news, namely: the recession. Retail sales are down across the board, and bookstores are not immune.

So in comparison to the decline in book sales, e-book sales look especially good.

I don't think its too much to ask that consumers pay what a product is worth. Publishers are already doing more with less, and it shows. Cut their margins and you'll see more consolidation amongst the publishers as the mid-sized publishers get bought or fold. You'll see less variety, and less quality in the books that are published. Because publishers will only be able to afford "safe" books and safe books are often boring books. Furthermore they'll cut editorial staff, so you'll have one editor doing the work of three.


Books need editors. It's the biggest complaint I have when reading books, and its the biggest complaint I see in comments for self-pubbed books on Amazon. If you want a quality product, you should be prepared to pay a quality price. If you want to buy a book as soon as it is released you should be prepared to pay a premium for early adoption.

Americans in general have this sickness when it comes to the drive for lower prices. Not everything can be made cheaper and better simultaneously. Sometimes you should pay for quality.

And really paying $25.00 for a book upon release isn't too much to ask. You pay that much for two folks to go to the movies these days, and movies only have an hour or two of entertainment value.

Dave Freer said...

This is probably the best article I've seen on the subject. Your reply to Evan was even more masterful.

One point I'd like to add to 'that's what books cost'- this is, I'm sorry, drivel. 'That's what books cost, doing the accounting the way we now do, spending money the way we choose to' is accurate, and effectively summarizes the problem. The only 'costs' which really can be billed to producing a specific book are those which unavoidable to get the book itself on the shelf. All of those costs add direct value to both the author and/or the reader. So the cost of cover art is a real cost. The cost of editing and proof reading are real costs (which are worth having and not particularly well paid jobs). The cost of the author's advance... may be a real cost. The cost of the interest bill from vast advances (shared by generous accounting in the 'cost' per book) is not. It, like the cost of a New York office, or cost legal department to write hamstring contracts for authors, adds no value at all to either the author or the consumer. The 'real costs' are actually fairly small (I did a breakdown some months back. Publishing houses have claim the cost at over a 100K per book, real figures are probably less than 1/5 that. When you go to e-books this drops further) The legacy overheads and way of operating are not real costs, and there is no need for the author or consumer to subsidize their desire to continue business as usual. And I have to agree, publishers have vast opportunities, which they have squandered and show no sign of longer view of and using.

Evan Gregory said...

SO not true!! An ebook edition of a novel or other primarily text-based book costs a few hundred dollars to create, tops. TOPS. And that's for getting a professional ebook conversion service to do it.

The cost of manufacturing a book, and the cost of shipping it, is actually not that much, and those costs are deducted when it comes to e-book pricing. Read that Cnet article I posted before. It lays it all out. The publishers wholesale price is lower for e-books on average.

After those few hundred dollars have been recouped, net revenue on each subsequent copy sold is PURE PROFIT.

Yes, well there's the rub. WHEN those costs are recouped it becomes all profit. Often times e-book sales (as robust as they are) don't end up recouping that cost. Some authors sell a lot of e-books, some authors have readers who just aren't that in to e-books. Also, the further along they go the cheaper ebooks become. So it's not like they're perpetually screwing you by holding prices unnaturally high.

And publishers have been pretty open in maintaining that they HAVE to price ebooks in line with hard copies, whether the production cost justifies it or not, for two reasons.

The preparation of the text (and marketing/publicity) is the main cost. It's the same base cost for e-books as physical books. The per unit cost of physical books is slightly higher, but that's reflected in the price.

While its true that the per-unit cost of a physical book remains static, whereas the per unit cost of an e-book approaches zero the more e-books you sell, the publishers don't ever sell enough units of e-books as compared to physical books for there to be much of a difference in terms of profitability. In fact, the reverse is often true, with publishers earning more money per unit on physical sales because the markup is better.

First, to help defray costs associated with the many print title losses they must absorb each year. Second, to prevent ebook sales from cannibalizing print book sales.

E-books do not subsidize print losses. Sorry. Just doesn't happen. It won't happen until the majority of authors begin to sell more e-books than physical books. That just isn't the case.

They drop the price to reflect the market, and the market at this point still includes print books.




The Big 6's ebook pricing models have NOTHING to do with actual production costs, and even the publishers themselves have stopped trying to claim so

Evan Gregory said...

Disregard those last few lines, I was doing some editing on the fly. : )

BooksAndPals said...

Evan,
Most of what I would respond to has already been done better by April (in the post above) and Dave below, however I do have a response to this ...

"If you want to buy a book as soon as it is released you should be prepared to pay a premium for early adoption"

There is nothing that says this has to be, but I understand the reason it is. Over the years publishers did a great job of getting the reader accustomed to this, but most consumers didn't understand what they were paying for was almost entirely early access. They also thought it was mostly for a "superior format" (the hardback versus paperback). In any case, I don't object to this. It is something we see in many industries in some fashion.

"... even the publishers themselves have stopped trying to claim so."

In other words, "they've stopped lying to us"? Or they're now telling different lies?

BooksAndPals said...

Oops. Too late to ignore that last bit. :)

Evan Gregory said...

Dave,

As far as overhead is concerned, contracts departments don't really cost so much. They're not all copyright attorneys getting paid through the nose, most of them are kids fresh out of college with an English degree who are just pushing papers and coordinating efforts with the acquisitions team comprised of sales, editorial and marketing. Contracts are relatively small staff wise. Most of the staff is in rights, sales, editorial, marketing and publicity. Rights pays for itself, and the rest are necessary components. Books that receive big advances aren't priced any less competitively than books with small advances. The only thing a big advance means is that the book will have a larger initial print run. If the book flops then publisher takes its lumps, not the consumer.

As I said before, publishers run pretty efficiently as it is. They've had to. Sales have been on a decline since 2001, and increasing consolidation has occurred over the past 10 years. Editorial staffs are pulling double duty, contracts departments are deluged, things are lean as it is. You ask them to do even more with even less, and you'll get worse products. You'll get your $9.99 books, but most of them will suck. I don't know about you, but I'd rather read good books than cheap books.

April L. Hamilton said...

Evan -
What's killing publishers and HAS been killing them for decades is returns. There's no other industry in which retailers can routinely buy products at wholesale prices, then return them to the manufacturer when they don't sell.

The more typical scenario is that once the retailer has bought the goods, it's up to the retailer to unload them, at whatever price they can. Publishers have allowed this unsustainable business model to persist for far too long, and it's the primary reason why they've been forced to maintain such narrow margins and become more and more risk-averse with each passing year. It's also the primary reason why the vast majority of published books fail to turn a profit, and publishers must rely on a handful of bestsellers to subsidize their entire business.

It was always going to be painful and costly for publishers to disengage from this distribution model, but it needed to be done if publishers ever hoped to survive. They have known this for a very long time, and it's got nothing to do with Amazon.

Evan Gregory said...

What's been killing publishers has been killing them for centuries, arguably. Yet they're still not dead. I suspect they will live through the digital revolution as well. Probably because, as loathe as we are to admit it, we need them around to ferret out the junk, and improve on the good stuff. Malcolm Gladwell more or less agrees with that notion (http://www.ustream.tv/recorded/21283411). I think that puts me in good company. : )

Evan Gregory said...

I think the transition from all print to all digital will be slower than you think. It certainly can't be sped up through Amazon's pricing schemes. If you really want to lower e-book prices, the best thing to do as a consumer is buy more e-books. The market will take care of the rest.

Lucas said...

Evan,
"That's the problem. If Amazon can offer books for the wholesale price or cheaper, then no other bookstore can hope to compete with them. That's where the monopoly comes in."

"The problem is not that Amazon is a better competitor(though they are a good competitor), it's that they are making a conscious decision to sell books at a loss in order to obtain a dominant market share."

Having a monopoly is not illegal, immoral or illegitimate. If Amazon were to (say) raise prices significantly after driving its competition out of business, then lower them again whenever a new entrant entered bookselling, that would be illegal.

Businesses do not have a right to stay in business. They don't have a right to competitors using the same strategies. And they don't have a right to competitors not using the product they specialize in as a loss leader.

For example, grocery stores frequently use delis, coffee shops, and bakeries as loss leaders. That might make it harder for someone to open a bakery, competing directly with a business that has a different cost structure, but there's nothing wrong with that. Indeed it /clearly/ benefits consumers who get cheaper bread, which is the whole point of competition. The only way a bakery is able to compete against a grocery store is with convenience or quality, since they can't compete on price.

April L. Hamilton said...

Evan -
"If you really want to lower e-book prices, the best thing to do as a consumer is buy more e-books. The market will take care of the rest."

That's a completely fallacious argument. If consumers accept an inflated price for a product and buy the product in quantity anyway, what motivation does the manufacturer have to EVER lower the price? It's like you're saying the way to force manufacturers to lower artificially inflated prices is to keep paying the inflated price as often as possible. Yeah, that'll bring 'em in line. [sarcasm]

And besides --- I WOULD buy more mainstream ebooks, if they were reasonably priced.

BooksAndPals said...

Evan-

I listened to the Malcom Gladwell speech. I think I came away from it with a different impression than you did.

I'd summarize it as having three main parts.

1) Given the situation, I might not be able to tell you what I really think, because my message has to be positive for the audience and not upset certain powerful people. Is he joking, or only saying he's joking?

2) The sagging middle which seems to be saying, too many choice are bad.

3) The grand conclusion, which is that the publishing business has always been in the business of taking "too much choice" and narrowing it down. If they're to continue being successful, they need to continue doing just what they've been doing.

It's a compelling narrative and, if I worked in the publishing business (or was one of those people in power I refer to in #1) I'd be thrilled by it.

But I'm none of the above. I was struck by two things.

The first, is how much his description of Steve Jobs' success with Apple also pertained to Jeff Bezos and the history of the Kindle.

The second, is that *if* the publishing industry was able to do what he says they need to do, that the majority of thrillers he read wouldn't consist of "flat characters" and "derivative plots" (which if he's read in excess of 5,000 must not really be all that bad, despite his complaints). Who (or what) produced all those "bad" books over the last 30 years? Maybe there is a better way to separate the wheat from the chaff that doesn't cost so much. I'll give you a hint, I think Amazon is doing it.

Mari Stroud said...

Co-freaking-signed. Needless to say, I agree with virtually with everything you've said, April (and, Evan, I found your debate very worthwhile to read, though I don't agree with you).

Indiana Jim said...

Evan needs his own blog. One wonders why he feels the need to carry the banner for Traditional Publishing so vehemently, and be so wrong about the business.

Dave Freer said...

Evan
"The preparation of the text (and marketing/publicity) is the main cost. It's the same base cost for e-books as physical books."
- well,unfortunately the publishing industry spent the last at least 30 years blaming recurrent price increases on the costs they now say are irrelevant. Hmm. So... They've lied to us for 30 years, over and over and over... but _now_ they telling the truth. Yes of course everyone believes them.

Legal departments? 'don't really cost all that much' - having dealt with one-sided doorstops and read the latest attempts to screw authors, and unworkable, outright illegal attempts at restricting the right to work, 1)they're not doing what people just coping are - sticking to the minimum and not trying new 'astute' tricks. 2)most of what they are doing, outside of their own minds (in which they important and overworked) is relatively worthless. So whether they're a small expense or a large one - what value do they add to the author or the reader? Zero.

Marketing/publicity? Ha. come off it. The publishers are still geared to selling to book chain buyers. Their effort adds less to e-book sales than most inept author's efforts do. If they added any real value (which at present 15% from publishers as opposed to 70% from Amazon, would mean 300-400% the sales a writer can attain without them) authors would never consider indie (except where it is really needed... advertising JK Rowlings or Stephen King - where to recover their advance gamble they spend big).

The point with big advances is they're almost inevitably paid with borrowed money. Which in turn means large interest bills - which as these are accounted as cost of capital, are costs carried by all. So the accounting practice has Joe Newbie, advance 4K... carrying a share of the interest bill for Fred Bigname. The interest bill probably eclipses his advance. The other point with vast advances is acquiring editors and the publishing have a very big vested interest in recouping that. So the effort (and expenditure) on making them succeed is proportional. So you start seeing marketing and distribution affecting sales figures, meaning these, which determine your next advance are of questionable value. Needless to say the cost of that marketing department, that publicist is bourne by the entire output of books. So Joe Newbie, who got nothing, carries the same cost as Fred Bigname who got everything. This all comes down letting the advance determine effort, which has led to casino mentality in publishing. - This is a tangent, but explains the bizarre disconnect in publisher accounting and independent accounting - where you bill a book for its costs not costs which have no bearing on the value of that book. That's part of why publishers say it costs 100K... and indies say WHUT?

I notice you avoided the issue of NY premises. Let me point out that I know - and know what they got paid - several freelance editors and proof-readers, and lots of cover artists, all of whom have worked on top-flight books. If they got paid a pittance (and they do, closing on newbie author rates...) then WHERE is the money going in these 'efficient' organizations?

Finally, just how do you measure 'good' in books? Popular? Or we paid 500 000 for this, it's good. Or I like her face, it's good... or I think it's great literature, therefore it's good. The latter versions do have a problem when publishers no longer control access to the market. On the other hand popular seems to be thriving, figures showing e-book owners are buying more ebooks AND more print books. I guess they're buying the wrong 'good' books?

Saul said...
This comment has been removed by a blog administrator.
Evan Gregory said...

I actually do have blog, just click my name link. I haven't written on it recently, but you can check it out to see where I'm coming from. Just FYI, I'm an agent (I know big surprise, I'm part of the evil empire). I don't have any enmity with Amazon, I love them actually. My client (himself a successful self-publisher) is being published by Amazon Publishing this Summer and I'm thrilled. I like the Big 6 too, and indi publishers. I want them all to succeed. I also care deeply about authors, and I want to see that they are fairly compensated for the work they do. I also care about readers, and I think that its important that we don't get ahead of ourselves and destroy bookstores economically in our headlong rush into the future. I think there's a way forward that will benefit authors, readers, publishers, and retailers equally, rather than at each other's expense. I also think that America's obsession with lower prices creates a downward economic spiral that will eventually destroy us all.


That's a completely fallacious argument. If consumers accept an inflated price for a product and buy the product in quantity anyway, what motivation does the manufacturer have to EVER lower the price? It's like you're saying the way to force manufacturers to lower artificially inflated prices is to keep paying the inflated price as often as possible. Yeah, that'll bring 'em in line.

Well that's the thing the price isn't inflated. Ebooks cost what they cost based on the reasonable expectations of # of sales as compared to amounts to be recouped. If the per-unit cost of print books is fixed (a dollar a copy) and the per-unit cost of ebooks approaches zero the more books you sell, if you sell more ebooks than print books you can afford to lower prices to maximize sales. Currently the picture is 80% of the cost of the book are being recouped by print sales and 20% (maximum) is being recouped by e-book sales. You flip that ratio, and you'll see cheaper e-books as publishers seek to maximize sales.

What's going to make ebooks cheaper is when the ebook market eclipses the print market. That's going to happen all on its own. You're not going to be able to accelerate that process prematurely by throttling prices lower than they should be and bankrupting bookstores, because if you do that you'll bankrupt some of the publishers too. Then you'll be left with even fewer choices, and most of them will be bad choices.

You'll also leave a significant portion of consumers who prefer to buy print books with no recourse. What about the reader who doesn't own a computer, and likes to buy romance novels from the B&N down at the mall? Suddenly that reader is going to become a Kindle customer? They're going to have to buy a PC and pay for internet to buy books from Amazon?


Finally, just how do you measure 'good' in books?

Well there's no accounting for taste. What makes books good is work. Even "bad" books are made better through work. The more work you put into them the better they are. What makes good books good is when an editor and author work together to make them the best possible books they can be. When plot holes are sewn up, when characters are developed, when awkward sentences are fixed, when typos and grammatical errors are excised, when the book is designed to be easy to read, that's what makes good books. You can't do all that yourself. You can hire people to do that on your behalf, but who is going to do that for you on a shoestring budget?

The biggest complaint I see in comments for self-published books is copyediting mistakes, and bad writing, most of which could be avoided if people had the scratch to pay professionals to do the work necessary to make good books better.

Mike McGuire said...

Consider me cruel, but I don't have the slightest concern over the demise of bookstores or of publishing in general. Online is changing everything, and some are going to survive, some are going to become buggy whip manufacturers. I haven't entered a bookstore in years -- they're not on my radar, for all of the reasons that have been cited elsewhere and repeatedly. I don't know whether it's a Darwinian capitalistic streak in me or merely apathy, but I expect change to accelerate and matters to worsen considerably for both entities. Extermination? I dunno.

If there are people who still want printed books, someone, somewhere will make it available for them if there's a business model that supports it. If not, life is hard. I know, cruelty yet again. This is where my apathy kicks in and I start ignoring all those shrill voices of despair.

If Amazon attains monopoly, squelches noble stalwarts like Apple (yeah, right) and B&E, then suddenly begins to demand 25 bucks a pop for the latest Alan Smithee novel, then something else will evolve to fill the gap -- or not! Regardless of the outcome, you can't stop the change what's coming, and all of the handwaving and the appeals to playing fair lends this entire discussion an air of the surreal.

Finally, the idea of publishing being the gatekeepers of good taste is ludicrous. When it worked, it enforced a certain groups mindset through control of price point and publication channels. With the evolution (mutation?) of both, that rusty gate has all the efficacy of the Maginot line, regardless of how anyone views the merit of having self-appointed gatekeepers in the first place.

April L. Hamilton said...

Evan -
"What about the reader who doesn't own a computer..."

People who refuse to adapt to new paradigms get left behind. Period. Anyone who chooses not to use a computer in this day and age is about as backward as someone who willfully refused to use a telephone in the 1960's.

And while of course I realize not everyone can yet afford a computer of his or her own, public libraries, schools and community centers have them available.

As for people who prefer print books, Amazon sells plenty, and so do Target, CostCo, WalMart, BooksAMillion, B&N, et cetera, et cetera.

I believe paper pulp books are the vinyl records of the future: with few exceptions, I think they'll soon be of interest to purists and collectors only.

Hey, I used to pore over the liner notes of my LPs and admire the album art, but I got over it when the convenience and cost savings of the MP3 won me over. The same thing is happening with books. You can accept it or not, but it's happening. And I know you think it's going to be a much more gradual process than I do, but how long did it take to happen to music?

BooksAndPals said...

Evan,

First I want to second Mari's comments. Even though I don't agree with some of what you're saying, I'm enjoying the discussion.

However, I do have one nit to pick. You said:

"Suddenly that reader is going to become a Kindle customer? They're going to have to buy a PC and pay for internet to buy books from Amazon?"

This isn't true and never has been. The first two generations of Kindle used 3G cell phone signals to deliver books to the device. The 3rd generation is a combination of 3G and WiFi, depending on the specific model. Assuming a reader doesn't live somewhere outside of the service area of the cell phone network being used, no internet is required. While shopping at Amazon via the web is the ideal situation, it is also possible to shop from the Kindle device, so no computer is required with the possible exception of the initial setup of an Amazon account.

Tony Hursh said...

"Probably because, as loathe as we are to admit it, we need them around to ferret out the junk."

Sorry, that's simply not true. Counterexample: the web.

No one could deny that the web is full of utter crap -- everything from YouTube comments to (insert rabid partisan site whose political views you find repugnant).

Yet somehow I still run across more good stuff than I have time to read, with no need for a publisher to ferret out the junk. How does that work?

Gatekeepers were necessary when publishing was difficult and expensive. Neither of those is true any more.

Barry said...

April, thanks for the terrific, insightful post!

Christy Pinheiro said...

April, this post was great. As an author who has published both fiction and non-fiction under Amazon's Kindle platform, I can tell you that it's a wonderful time to be an author.

I collected quite a few rejections from traditional publishers--- and I'm SO glad that I never got picked up by a traditional press.

The last fie years have been very good for me, thanks to Amazon and POD.

B. Justin Shier said...

Fantastic post. Spot on and well delivered.

B.

Jesse V Coffey said...

Wow! I came over from Joe Konrath's blog to read this article and it's everything I've been saying in my online column. You have a new fan; I am here to stay.