Amazon on Hachette Controvery and Pricing

A lot of people are going to have a lot to say about this, but for anyone interested in the inner workings of publishing, ebooks, and pricing, it’s worth checking out this open letter from Amazon about their ongoing dispute with Hachette.

Just to recap: Hachette and Amazon are currently negotiating over terms, a situation that entered the public consciousness when Amazon stopped accepting preorders for Hachette titles. This led to Stephen Colbert encouraging people to order Edan Lepucki’s novel California from Powells.com, and generally revitalizing the spirit of independent booksellers.

There have been numerous rumors about what Amazon wants from Hachette, mostly focusing on Amazon charging Hachette to have “buy buttons” on their books, demanding larger co-op payments (basically a kickback on books sold that’s then used to market other books from that publisher, a common practice with booksellers of all sizes for decades now), and a larger cut of ebook sales.

Who knows what’s true and what’s misinformation, but Amazon’s letter is an attempt to address the ebook part of this:

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. [. . .]

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.

I highly doubt this is the only thing holding up the Hachette-Amazon negotiations. And, because I’m a dick, I think the suggestion to Hachette to split their ebook royalties 50-50 with the author (spoiler: they don’t do that now and probably never will) is a funny jab. But the thing that’s most interesting to me is the price elasticity bit of this.

Again, all of this should be taken with a grain of salt—Amazon is releasing these numbers to help sway public opinion while negotiating with a major publishing house. But, at the same time, if anyone has the data to plot out the impact of price on sales for ebooks, it’s Amazon. And something about this feels right to me.

There are a few things at play with the $9.99 thing that are kind of interesting to me, starting with the supply-demand math to figure out the ideal price point. With enough data, you can plot sales for books at various price points, graph this against the variable costs for producing the ebooks, and find the number at which you’ll make the greatest profit.

None of that is how pricing works in the book industry. At best, one might do a simple calculation involving fixed costs, advances, printing bills, distribution fees, marketing costs, projected sales, to come up with a price that will give you an acceptable profit margin. (E.g., if a book costs $45,000 to make and market, and you’re expecting to sell 10,000 copies, you could price it at $15, which will give you ~$56,000 after discounts and other fees.) Even typing that out feels really low-rent. Sure, every book is different, and audiences will pay different amounts for different things, but you’d like to think that by this point in publishing history, more of that is quantified and understood. (I don’t work at a Big Five publisher, obviously, so they might tell me that it is and that I’m full of shit, but I doubt it’s all that sophisticated when compared to most other industries.)

What makes this all difficult to figure out mathematically is the interplay between printed books and ebooks. If you price your ebook optimally, at say $7.99, how many print book sales is that going to cannibalize? There are ways to figure out how to optimally price the two goods—the print book and ebook—to maximize revenue, but again, I kind of doubt many publishers are trying to figure this out.

One reason there’s some resistance to this sort of thinking and calculating is because it would upend the current business model for a lot of big presses. The system of expensive hardcover, cheaper paperback, sub-rights sales, has worked so well for so long . . . What Amazon, through the wide adoption of ebooks, has done is create a pressure that shifts some of the profits from that model to the customer. Readers are now accustomed to discounts, to ebooks costing $9.99 or less, and never paying suggested retail value for these books.

Which is what I find really interesting . . . There’s a bit of a socio-cultural element to the $9.99 price, the feeling that this is what is “right,” that books shouldn’t cost more than that. Which is weird, and partially stems from the relationship to music prices—remember when CDs were $18 a piece? No one would pay that today with $10 iTunes albums and free streaming services—and partially to the idea that a lot of the money you pay for a book goes, not to the author, but to a handful of corporations along the way.

If I buy California for $26, Edan Lepucki probably earns about $2.00 back on her advance. The rest of that goes to the bookstore, the publisher, the agent, the distributor, etc. And although there are always exceptions that make bank as writers, this article from The Guardian paints a bleak picture with the median income for writers in the £11,000 range. (Highly respected author Will Self is quoted in this, so we’re not talking about your neighbor’s kid who wrote a “book” and is now a “writer.”)

For bookstores to remain in business, prices have to stay rather high, ebooks can’t cannibalize sales too much, and people have to shop at real life stores. This is another motivating factor for publishers to resist the $9.99 ebook pricing scenario—to give bookstores a fighting chance.

I wonder about the customer perspective though. We’ve grown accustomed to $7.99 monthly fees from Netflix, to paying $1.99 for an app, to streaming music for free or buying a song for $.99. It’s hard to convince someone that an ebook is equivalent to two months of Netflix or 100 extra lives on Candy Crush.

I know this is meandering, pointless, and a reiteration of things I’ve written before, but I feel like the future of books depends in part on how society treats the activity of reading. Things aren’t the way they were—people seem to treat me with zoo-like curiosity when I read a book in a bar over a pint or glass of wine (bear in mind that this is Rochester, not NY or Seattle or Minneapolis)—and won’t ever return to those times. But there’s also a sort of hyper-active drive among techno-enthusiasts who want to create all sorts of new upstart e-reading services to cash in on the changes in our reading habits. Recommendation websites, platforms to allow people to self-publish stories in a serial format, etc. These sorts of companies are helping to disassociate ebooks from printed books, move them into a different category of goods, where you make a decision whether to buy a $3.99 ebook or a $3.99 app, rather than one $15 book instead of a different $15 book.

I have more thoughts and questions about this—like how individuals think about their spending money, and whether more books can be sold by getting them into this “app category” where people are more willing to spend money, rather than in the “books category,” where a semi-expensive purchase comes with a 10-hour commitment in order to enjoy what you bought—but I’ll save it for other posts.