In Amazon vs. Macmillan, Amazon Is The Loser

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Jack McKeownBy 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:

  1. The agency model pays them 70% of list price vs. standard retail discounts of 50%;
  2. 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;
  3. The ebook has no physical manufacturing cost, a pick-up of another $2.00;
  4. The ebook entails no physical distribution costs (packaging, order picking, shipping, etc.) for a gain of roughly $1.00-;
  5. 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.

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8 thoughts on “In Amazon vs. Macmillan, Amazon Is The Loser

  1. Hi Jack,

    I was going over your slides from your DBW presentation and I have a slight disagreement in the presentation from slide 25. As you stated above, about 28% (27.5% on the slide) are only interested in purchasing eBooks listed at a sub-$10 price, where a group of buyers of near-equal numbers are willing to accept the Macmillan proposed price point.

    Aren’t you using mutually exclusive logic there?

    Since you’re solving for a maximum amount, anything lower priced groups would include all higher groups. That is, while someone’s maximum willing price might be $14.99, that customer would still be included in the sub $10 group because $10 is less than $14.99. Pushing aside the 37% who are unsure, and merely working working with the numbers you present, wouldn’t the actual percents look something like this?

    Maximum $ Willing to Pay for E-Books:

    Under $10 – 62.9%
    $10.00 – $12.99 – 35.4%
    $13 – $14.99 – 21.8%
    $15 – $19.99 – 13.7%
    $20 – $24.99 – 7.5%
    $25+ – 3.8%

    The graph itself can be viewed here: http://www.flickr.com/photos/soporic/4325564480/sizes/o/

    I mean, those are some pretty dramatic drops. When a book crosses that $10 threshold, the number of theoretical customers drops from almost 2 in 3 to just over 1 in 3 for a change of -43.72%. The sub $10 to $14.99 is reduces the customer pool to almost 1 in every 5 customers, a -65.34% change.

    This, of course, raises several questions. Where will publishers earn the most revenue? Is the increase in price enough to justify the reduced number of sales? What about the loss in word-of-mouth marketing from fewer readers? The placement on digital best sellers lists?

    I’m in agreement that publishers will benefit from the agency model in the long run, and that Amazon will as well, but I’m in strong doubt that customers will support such an arbitrarily high price point. As you said yourself, publishers are attempting to earn the same revenue per eBook as they do with hardcovers, which is a perfect example of price fitting cost rather than cost fitting price. This is a pricing structure divorced from the beliefs of a large population of consumers.

    As seen time and time again in the digital environment, consumers are willing to shop around for the best price. If consumers can’t find a price point that they feel is fair, they’re willing to pursue other avenues of procurement. So, while at least one publisher has managed to win an arguable concession from Amazon, have they opened the door for competitors willing to offer their work at a price point far lower than $9.99?

  2. In response to Jack McKeown’s helpful analysis of ebook costs to the Publisher, it seems to me that he overlooks the AUTHOR as the longterm loser in this business model. While the Publisher receives the same unit gross, the AUTHOR’s royalty is reduced from $2.50-$3.75 to $1.68. Granted, there are start-up costs for the technology, but once they are recouped, (a cost of doing business one might argue), the PUBLISHER will see an increase in profit in relation to the Author whose income remains reduced by one third to nearly one half. Thus I would argue that a flat 25% net royalty doesn’t work for Authors as it does not achieve the appropriate profit share between Author and Publisher. As an aside, I have long argued that Authors and Agents made a mistake many, many years ago (before my time) in agreeing to what has become the trade paperback industry standard royalty because it did not preserve the equivalent hardcover profit split between the Publisher and the Author, favoring the Publisher. It seems to me that what Publishers think is appropriate pay for Authors IS the same arrangement we currently have for trade paperbacks. I’d hate to see us accept this scenario and make the same mistake with ebook royalties.

  3. One quibble with Jack’s analysis: the return scenario. Ebooks are returnable, and, I suspect, if the current quality standards are maintained while prices increase, returns will become increasingly commonplace. It is easier to shrug off the “atrocious” (Jack McKeown is being kind with this word) quality at a lower price. I suspect consumers will be less forgiving at higher prices, particularly as the iPad will really emphasize bad formatting (larger screen, crisper display).

    I wouldn’t (yet) characterize this as a win for anyone. I am pleased to see publishers taking a different approach to how they approach the digital marketplace, and that this new model somewhat levels the playing field. I’m not pleased that retailers are losing their ability to use price as a customer service tool. I am concerned that this approach puts independent booksellers (digital, IndieBound, etc) at a disadvantage since they don’t have the same ability to compete when it comes to device and delivery

    The author question remains wide open. They still haven’t heard what this means for them.

  4. As a consumer…..what he said! (Well said Janet)

    This technology has a long way to go. For us to put our money up front so that Publishers can improve on it is just not where the consumer is going. You improve first then we follow like sheep.

    I don’t pay 9.99 for an e-book because it is out in hardback at $25. I wait until I can buy it for $7.99 in paperback and then use a 40% coupon! The digital market needs to analyze the overall market of “books” before setting such a high price point on something you can not sell, trade, share or return.

    I buy e-books all the time and the highest I have paid is $6.99 for books that retail at least double the cost. there is no way that I am paying $7.99 for an e-book that is out in Mass Market paperback for the same $7.99. E-books and readers are in the teenage stage right now, I’m not sharing my stuff with you! mentality. When we get to the mid-adult stage, Here’s what I have what do you have? stage, the price point may be worth raising because the e-reader and the e-book technology may be finally worth it. Publishers, you ain’t there yet!

  5. I’m a Tor author…and a Baen author and a Daw author and a Harlequin/Luna author. And right now I am thanking my own foresight for not having my eggs in one basket, and the Scheduling Gods for not having a new Tor release out.

    But people who do are getting hosed. WORSE, the folks with paperbacks, whether new releases or not, because to get that free shipping, people often add a PB to the HOT! NEW! HC they are buying.

    I hear a lot of calls for authors to do something else and somehow magically produce and publish, or at least sell, their own books. I do not, however, see a lot of calls for that from writers.

    Anyone wonder why that is? I can tell you, because I may be one of the few people commenting that actually HAS some small business experience. Having had, and failed, in a small business, there are a thousand things you must do that are invisible to the customer to keep a small business going.

    Here is why authors don’t go into the self (e- or real-book) publishing business.

    In order to HAVE a small business you MUST have the following:

    Clearance from where you live to run a small business on your premises. If you do not have this, buy or rent space from which to operate same. ($ to $$$) If the authorities find out you are operating a small business from your home (and they will) without this clearance, Very Bad Things can happen. Like fines ($$$$$)

    Small business insurance. ($$ to $$$$) If you do not have this and someone injuries himself or you have a flood or a fire, your homeowners will NOT cover you ($$$$$$$$$$$$$$$).

    Business licenses. Sometimes three, from city, county and state. ($)

    Business tax number.

    The ability to process credit card payments ($$. Yes, Virginia, they charge you). You can use PayPal, but that comes with its own set of fees and problems.

    Someone to separate your business accounting from your personal accounting. And someone to handle the business tax reporting. If this is you, this is time you won’t be using to write.

    A website ($ to $$$$). If you are setting up and maintaining, this is time you won’t be using to write.

    Someone to handle orders ($ to $$) After all you don’t want to ship product until you find out if the credit card/PayPal account is good. If this is you….yada.

    Someone to think of good ways to promote your books. If this is you….

    The sure and certain knowledge that 4 out of 5 small businesses fail in the first 4 years.

    A day job, because at the end of 4 years, chances are you will need it.

    To sum up, here, to run a small business selling my own books, whether in e- or paper format, I would have to take the odds of 80% failure and the loss of at least 50% of my writing time.

    For the record, when our small (scrapbooking, brick and mortar) business failed, our end result was a loss of over $200k.

    Start a book business myself? That’s the sound of hysterical laughter you hear. Thanks, I think I’ll stab myself in the eye with a fork a few times instead.

  6. I have to take issue with Ms. Lackey’s response. While a wildly successful author like yourself can have issues with respect to managing your business, those issues will arise whether you have a publisher/agent or if you’re managing yourself.

    Publishers will realize that the digital flattening of the marketplace enables more writers to publish their content and that this will actually serve as a valid competitive force. The deflation of book prices–both electronic and print–will further this democratization.

    SOOOOooo, with the rules of business such that volume speaks louder than margin in this case, perhaps more publishing houses will open their doors to more authors, increasing their sales volume while lowering the margin. It’s not rocket science.

    ~jenn

  7. Not everyone is so frikkin ignorant of what the hell it takes to run a business. I’ve had several ventures in my life. I’ve been through the failure. All that has left me with the knowledge that a newbie lacks and puts me ahead of the pack. You can go ahead and discourage the ignorant, that’s fine. But all this makes me do is say, “Hey, too bad for YOU. This doesn’t apply to ME.”

    And all it will take is ONE person to break through on their own and — as we’ve just seen with print publishing lining up lemming-like behind Macmillan (which is using Apple’s iPad as its shield) — the pile-on will begin.

    My advice to all writers is, starting reading stuff like Business for Dummies.

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