Amazon Spells Out Objectives in Hachette Negotiation

In a short note today on its website, the Amazon Books team spelled out for observers and readers just what its goals are in its negotiation with Hachette.

Amazon says that its overall goal is to make more money for itself, for publishers and for authors, and to help reading compete better with other media through lower ebook prices.

Related: Russ Grandinetti, Senior Vice President, Kindle, to Speak at Digital Book World Conference + Expo 2015

The company contends in its note (below) that $9.99 ebooks sell so many more copies than more expensive ebooks that it more than makes up the difference for a lower price. Authors, Amazon adds, should get a bigger piece of the ebook pie — specifically, the same amount the publisher gets. Amazon is proposing that it take 30% of ebook sales revenues, publishers take 35%, and authors get the remaining 35%.

See the entire note below:

With this update, we’re providing specific information about Amazon’s objectives.

A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there’s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market — e-books cannot be resold as used books. E-books can be and should be less expensive.

It’s also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. 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.

The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved:

* The customer is paying 33% less.

* The author is getting a royalty check 16% larger and being read by an audience that’s 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who’s trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)

* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties.

Keep in mind that books don’t just compete against books. Books compete against mobile games, television, movies, Facebook, blogs, free news sites and more. If we want a healthy reading culture, we have to work hard to be sure books actually are competitive against these other media types, and a big part of that is working hard to make books less expensive.

So, at $9.99, the total pie is bigger – how does Amazon propose to share that revenue pie? We believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30% — we did have a big problem with the price increases.

Is it Amazon’s position that all e-books should be $9.99 or less? No, we accept that there will be legitimate reasons for a small number of specialized titles to be above $9.99.

One more note on our proposal for how the total revenue should be shared. While we believe 35% should go to the author and 35% to Hachette, the way this would actually work is that we would send 70% of the total revenue to Hachette, and they would decide how much to share with the author. We believe Hachette is sharing too small a portion with the author today, but ultimately that is not our call.

We hope this information on our objectives is helpful.

Thank you,

The Amazon Books Team

 

Related: Q&A with Kindle Head Russ Grandinetti at DBW 2015

5 thoughts on “Amazon Spells Out Objectives in Hachette Negotiation

  1. William Ash

    Showing once again that Amazon is bad at math and does not understand the publishing industry.

    First, what are earnings per TITLE if the ebook is selling against a newly released hardback. Then when the hardback is on sale, the ebook also is on sale. And finally, when the prices can be adjusted for the paperback release. Can I profit more by controlling my price during the product cycle?

    Second, why does Amazon want such a large cut–equal to the publisher’s. Amazon does not have the production costs of the book. They do not need to fund the advance. And following their argument, they have no warehousing nor return costs. Amazon does not even have to upload the book, that can be done by the publisher. Having an ebook on their server and their automated sales site, basically they are just a file share server, I would imagine 10% would give them enough to cover costs and a healthy profit. Amazon could lower the price for their readers by taking a cut to their profits.

    Actually, I am not sure what Amazon is saying. They don’t mind their 30% cut. They don’t mind ebooks costing more that $9.99. As time goes on, I have less respect for this company.

    Reply
    1. Gabriella

      They seem to very much mind that ebooks are being priced higher than 9.99. That’s my takeaway from this whole thing… they’re furious that the publishers are pricing books higher because it cuts into Amazon’s profits when that happens.

      I think they’ve laid out their position pretty well.

      Reply
  2. editor

    Amazon does not admit that the publisher is paying the publicity and marketing costs in many other types of media, including direct promotions to mailing lists. Amazon is also charging the publisher hundreds of thousands of dollars a year so the publisher can actually speak with part of a person, who functions in a revolving door of account managers. So, with some exception for blockbuster authors, more than 90 percent of the publishers are doing the marketing for Amazon, which drives the buyer to Amazon. The publisher does this direct marketing for Amazon with desperate hope that a book title can be discovered among many millions of titles. As a result, Amazon creams the sales from the publisher’s efforts get their books discovered. Amazon also takes well over 50 percent (yes, even 60% in recent memory) of the revenue from the 99% of the publishers who are not among the Big 5 publishers. The monopoly eliminates competition from other distributors, and it is baffling as to why the justice department can’t see that monopolies always use predatory pricing to kill the competitive suppliers.

    Reply
  3. Steven

    Funny, Amazon wants Hachette to make more money (using a proven method), while at the same time suggesting (not requiring) that Hachette pay their authors (the ONLY reason Hachette exists) a bigger slice of the ebook profit pie. That sounds like the same incredible deal Amazon has given me as an independent author for the past 4 years. What are they waiting for?

    Reply
  4. Geoff

    From some of the comments I see that some people are ‘Amazon haters’. While no one is perfect, Amazon has done more to promote authors and books than many publishers have and has allowed an entire generation of writers to fulfill their dreams. They have used innovation to let the author go directly to the reader, letting them decide who sells or not or who is worthy to continue their efforts as a writer, not some stiff shirt or middleman agent. When I hear words like, ‘monopoly’ coming from those who support the publishing cartel, I roll my eyes. Amazon is a retailer, no one has a right to use or sell in their marketplace. If those who support the Big 5 so much want to compete, than create your own marketplace, out perform Amazon. Amazon got where it was because the consumer loves them, period. It’s basic business 101. Deliver a service or product that people love and they will continue to use it. Do I like everything about Amazon? No. But they have done an incredible job and continue to do so. Those who defend the Big 5 are the dinosaurs of publishing soon to be extinct, they rail against innovation in a vain attempt to keep the status quo.

    Reply

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