In Amazon vs. Macmillan, Amazon Is The Loser
By Jack McKeown, Director of Business Development, Verso Digital
I think it more than a bit of a stretch to call this a flat-out victory for either party.
Despite its feigned martyr’s pose (in Saturday night’s so-called “capitulation” letter), Amazon has suffered a public relations debacle among some very important constituencies: authors, agents, and disaffected Kindle readers. I don’t include publishers in that line-up because they have become well accustomed to Amazon’s hardball tactics for years.
Amazon effectively has had to abandon its loss-leader pricing strategy at a point well before Kindle sales have reached a mainstream tipping point. Publishers effectively will now have to abandon their declared windowing strategy, and suffer some top-line revenue erosion as an increasingly significant porton of hardcover sales slip over to lower-priced ebooks.
The truth is, however, that $12.99 -$14.99 represents exactly the right price point for ebook versions of new hardcover releases, from both a publisher and consumer perspective. At that price range, roughly a 52-54% discount from standard hardcover prices of $25.00-$35.00, the publishers will make the equivalent unit gross margin that they make on their current hardcovers, about $6.75 per copy.
They can accomplish this because of several factors:
- The agency model pays them 70% of list price vs. standard retail discounts of 50%;
- Ebook royalties are established, for the most part, on 25% of net receipts vs. 15% of list for hardcovers which yields a lower per unit royalty;
- The ebook has no physical manufacturing cost, a pick-up of another $2.00;
- The ebook entails no physical distribution costs (packaging, order picking, shipping, etc.) for a gain of roughly $1.00-;
- The ebook sale is a guaranteed one, affording no risk of return.
Why is this gross margin equivalency, new e-book vs. hardcover, so critical? Because at that point of indifference, the hardcover publisher ceases to worry about the potential cannibalization effects of simulatneous ebook release.
The consumer wins because the publishers’ need to engage in windowing is effectively over, except in very rare instances, e.g. very time-sensitive nonfiction releases. Our research shows that as many current ebook buyers are prepared to pay in the range of $12.99 -$14.99 as are represented by the $9.99 fanatics–about 28%. Of the remaining cutsomers, 37% have no fixed opinion about ebook prices and as are likely to be converted to the $14.99 prices as not.
Publishers now have the incentive to invest in quality formatting of all their ebook product (the current quality of scanned ebook product is atrocious), experiment with new enhanced ebook content, and spend the necessary dollars to perfect their internet marketing channels. I would call this a win/win for consumers and publishers, hands-down. Those $12.99 – $14.99 prices are likely to be around for some time as a result.
The only real loser is Amazon in its monopolistic ambitions. But it too will benefit in the long term from the heightened publisher interest in expanding the ebook market, and in the short term by actually making money on its ebook sales, as Mr. Mc Quivey rightfully points out.
As has always been true, publishing is best served by a strongly competitve and diversified distribution ecosystem.
[Ed: This op-ed in response to Jim McQuivey's PaidContent.org article, In Amazon vs. Macmillan, Amazon Is The Winner, was originally posted in the comments to that article and has been reprinted with McKeown's permission.]
Jack McKeown is the former co-founder and CEO of the Perseus Books Group, and past president of the Adult Trade Group at HarperCollins. Currently he serves as Director of Business Development for Verso Digital, the first vertical ad network for book publishers, and as president of Conemarra Partners, a media consultancy.