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February 1, 2010

Dispatches from the Ebook Wars: Macmillan vs. Amazon

For some time, publishers and others have been concerned about Amazon's policy of pricing ebooks at $9.99, regardless of the price tag publishers put on them. Many feel that Amazon's discounted ebook pricing is an attempt to control and monopolize the ebook market by forcing a pricing standard. Some in the publishing industry have even called the practice predatory. (Readers, of course, are more likely to applaud cheaper ebooks, but many publishers, which have fixed costs to earn back whether a book is ink on paper or pixels on a screen, regard the $9.99 price point as a major threat to revenue.)

Over the weekend, a publisher finally went head-to-head with Amazon on this issue.

Earlier last week, John Sargent, CEO of "big six" publisher Macmillan, presented new terms of sale to Amazon for Macmillan ebooks. Under the so-called "agency" distribution model (which means that Amazon could not discount the books--see below for an explanation), digital editions of Macmillan trade titles would be priced from $5.99 to $14.99, and digital editions of first-release hardcovers would be priced from 12.99 to $14.99. Amazon found this unacceptable, and on Friday, it yanked the buy buttons from all of Macmillan's titles, both digital and print--a move that forced Sargent to issue an emergency explanation to Macmillan authors/illustrators via industry newsletter Publishers Lunch.

You may remember that Amazon employed this very same power play back in 2008, when it decided that it would sell no print-on-demand titles that weren't produced by its own POD subsidiary, BookSurge (now CreateSpace), and disabled the buy buttons of some POD-based publishers that refused to deal. That decision spawned a lawsuit (recently settled), but ultimately, Amazon prevailed.

This time was different. On Sunday, in a message posted to its Kindle forum, Amazon gave in, if not entirely graciously. Despite "strong disagreement" with Macmillan, Amazon "will have to capitulate and accept Macmillan's terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books." (An interesting use of the word "monopoly," given that Amazon's own pricing policies have been subject to the same accusations.) Amazon goes on to say that "customers will decide for themselves," and that "we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative." (Take that, bad big publishers.)

So what's behind the dispute? Basically, competing distribution models for ebooks. Under the familiar wholesale model that is the norm for print books, and till now has been the norm for ebook sales from major publishers, publishers sell to intermediaries--such as bookstores or distributors--at a fixed discount, and the intermediaries then re-sell to the consumer at whatever price they choose. What Macmillan proposed is known as the agency model: Publishers sell directly to consumers via "agents"--such as Amazon or Apple's iBooks store--which get a commission on those sales. In the wholesale model, consumer prices are controlled by the intermediary, whereas in the agency model, they are controlled by the publisher. You can see why Amazon, with its aggressively competitive discounting policies, would not be enthusiastic about the agency model (even though, as agent Nathan Bransford points out, $9.99 ebooks are a loss leader for Amazon).

While this might seem to be a two-way tug of war--Amazon vs. publishers--there's actually a third player involved: Apple, whose brand-new iPad is perceived by many as a possible Kindle-killer, and which has adopted the agency model for ebooks sold through its iBooks store. There may have been an Apple in Amazon's eye when it blinked on Sunday. Other hints that Amazon is concerned about Apple competition emerged in the weeks leading up to the iPad's launch: Amazon increased royalties to 70% for authors and publishers using Kindle's self-publishing system (developers of apps for Apple products receive 70% of revenues), and opened up the Kindle to outside developers to stimulate the creation of Kindle apps.

As of this writing, the buy buttons for Macmillan books are still MIA at Amazon.

For a fuller analysis of the wholesale/agency issue, see this post from Mike Shatzkin's Idea Logical blog.

There's good analysis also from Macmillan author Charles Stross.

More analysis from agents Ashley Grayson and Rachelle Gardner.

A roundup of stories on the dispute.

Most people seem to think that Amazon is the loser here, but James McQuivey of Forrester Research offers an interesting opposing view.

18 comments :

Christopher said...

I threw in my two cents here (Book Publishing Goes Boom http://tinyurl.com/yhctsh9 & Amazon Slap Down http://tinyurl.com/yl3l5cz)

Anonymous said...

Victoria,

You wrote, "In the wholesale model, consumer prices are controlled by the intermediary, whereas in the agency model, they are controlled by the publisher."

The big wholesalers--Ingram and Baker & Taylor, do not tell publishers what prices to put on their books. They dictate only the discount they will take from the sale. The publisher can price a book at whatever price it needs to get to make the book profitable. The textbook publishers have shown just how high that price can go. Their books can be $100 or more each.

Amazon's POD move seems to have been directed only at the vanity publishers who sold POD books competing with Amazon's vanity arm, CreateSpace. They didn't block books published by presses, large and small who used LightningSource to print their books. It's possible LSI negotiated some deal with them, but if so it was never made public.

Victoria Strauss said...

Anonymous, of course you're right--in both models, list prices are set by the publisher. The point I was trying to make is that in the wholesale model, the intermediary--whether it be Ingram, Amazon, or an independent bookstore--is free to re-sell the book to the consumer at whatever price it chooses. That might be list price, or it might be a discounted price. So while the publisher "suggests" list, the actual price the consumer pays is controlled by the intermediary--which may mean, as in the case of Amazon and $9.99 ebooks, the intermediary takes a loss in order to get an advantage over its rivals.

In the agency model, by contrast, the "agent" is not free to discount publishers' list prices--it must sell to the consumer at that list price. In other words, control of what the consumer pays remains with the publisher.

I think that money was behind Amazon's 2008 POD move, but also convenience--it simply didn't want to bother with the tiny orders that are typical of POD-produced books, and it was easier just to require that all POD books be produced in-house. Any loss of income incurred thereby would be negligible, since, as we now know, the Long Tail generates very little profit. Also, as I remember, Amazon turned off the buy buttons for quite a number of POD-based indie presses, so it wasn't targeting just the big self-pub services.

Lynnda - Passionate for the Glory of God said...

Thank you, Victoria, for summarizing everything in this soap opera.

I think Mr. McQuivey is correct in his analysis that Amazon wins either way. More to the point, what happens to writers and readers? Do either of these groups come out ahead in this model?

Since I am in both groups, I am looking for opportunities to earn more money and to keep more of the money I have.

Be blessed,

Lynnda

TirzahLaughs said...

Amazon would be hurting their business to agree to the agency model. They take a hit on e-books to promote the sale of Kindles. The more people who own kindles, the more sales they are guarenteed.

And I'm sorry but fifteen dollars for an e-book that will be available in an 8 dollar paperback in six months is ridiculous.

I'd like to see a breakdown of what it costs Macmillan to put out an e-book? How many sales until they make a profit?

This whole mess made me rethink even buying a kindle.

And the iPADs are not readers but rather a half a laptop with a reader function.

T

Andra M. said...

I agree that the publishers should determine the price of the e-book, even as Amazon has the right to say how much they want (be it a fixed price or percentage) in order to list the book on their site.

By the same token, I'm with Tirzah. $15 for an ebook is more than I'm willing to spend.

In the end, it will be the consumer who decides what an ebook is worth.

Victoria Strauss said...

Tirzah and Andra, I don't disagree with you on ebook pricing. High prices have been a major stumbling block to ebook adoption from the very beginning.

However, even though an ebook costs less to produce, distribute, and maintain than a p-book, publishers have other fixed costs that are associated with acquiring and producing a book (editing, design, cover art, marketing) and must be spread across all editions of a book if they are to be recouped. So the pricing of a book reflects not just the costs involved in physically producing and distributing it, but the costs involved in getting it into book form.

I think that publishers' drive to keep ebook prices higher reflects their fear that ebook sales will cannibalize hardcover sales. Hardcovers realize the most profit for publishers, and if hardcover sales decrease because of growing ebook adoption, publishers will find it harder than ever to make a profit if ebook prices are too low. There's much grumbling these days about money-grubbing publishers--but publishing is a business, and businesses have to make money in order to survive.

No one knows yet how all of this will shake out. Will ebook sales cut into hardcover sales? Will they replace mass market instead? Will they find their own audience and leave sales of other formats relatively unaffected? (There were very similar fears about mass market paperbacks when they first started to become popular.) What will the pricing standard for ebooks actually wind up being? Again--no one knows. Plenty of people think they do, and aren't shy about saying so--but I can all but guarantee that they will be wrong, in part or in full. It's simply too early in this enormous paradigm shift to tell.

Sustenance Scout said...

Terrific overview! A small publisher offers her take at The Know Something Project http://www.knowsomethingproject.com

Chad said...

Though, I really enjoy a physical book, and have not purchased any type of e-reader, yet, I can't wait until the e-reader crushes both Amazon and the publishers.

As someone who has been in different industries within coporate America I am convinced beyond a shadow of a doubt a large portion of the fixed costs publishers site are really just excess fat and rather useless services.

The closer an industry is to a massive change or death, always creates massive inefficiencies, as most humans/businesses have a hard time changing. Publishers are still operating like it's 1950, and like record companies haven't realized there usefulness has passed.

Andra M. said...

I think you're right, Victoria (it is, after all your blog ;) ) that to price eBooks too low, it will discourage people from purchasing the hardcovers, or even the paperbacks for that matter.

Good point about the costs involved. It's easy to not see it when all we buy is a bunch of paper with words on it.

It'll be interesting to see how it all pans out.

Chad: I don't want to see publishers fall, because I still want one to publish my books!

And yet, I firmly believe in the free market system; if a company can't manage itself well, then it either must change or fold. Again, the consumer will ultimately let companies know what's working and what isn't.

Interesting discussion!

Chad said...

@Andra M

The free market system only works when there is a lot of competition. Given that the publishing industry is down to the big "six" it's getting perilously close to not being a free market. Plus, free markets are not quite as efficient as their faithful preach.

No large publishers does not mean there won't be books published. It just means it will be done by the individual or small publishers who have the correct model. Though, I think anyone would be hard pressed to find a good reason to have a publisher in 5-10 years.

If you are a huge author or a small author why would you even use a publisher or sell it through a site like Amazon? You wouldn't, as it doesn't make economic sense.

More and more I think authors will have to have more of a business understanding, as the model appears to be moving towards self-publishing like Wil Wheaton is doing at wwnd in exile.

Victoria Strauss said...

Chad, Wil Wheaton can self-publish and do well because he has an existing fan base that's ready to buy his book. Very famous or successful authors could do the same (or hire others to do it for them and pay out of their own pockets) for the same reason (if they wanted to, which most, at this point, don't). For smaller authors, the problem isn't simply getting the book into physical or digital form--which is the easiest thing in the world these days--but getting it noticed.

What can publishers do for authors? Select (people do not want to sort through a vast sea of choices; they want to select from a smaller choice pool that has been pre-screened in some way); market (yes, publishers do market--not just to consumers but to the entities that actually put books into consumers' hands); and distribute (the online book world is only half the book sales picture; you need physical presence for volume sales).

The "author as entrepreneur" model tends to be proposed by people who find that model congenial. Plenty of people don't. I don't believe we'll ever have a situation in which every author is his or her own business concern; but if we did, I can guarantee that many more good books would be lost than with the current system.

Chad said...

I completely agree with your analysis for the current market. Though, I must admit I am very skeptical that publishers do me any favors by picking great books for me to read, as I struggle to find them.

My disagreement with you has to do with the near future 5-10 years, as at some point during that time the iPod of e-readers (probably more than just an e-reader and not necessarily from Apple) will come out. Once it does then most publishers are finished.

You mentioned three things:

Selection – I mentioned my view above, but that is just preference so I will say I can see your point here to a certain extent.

Market – This is valuable now, but what about when most books are digital and there are only 2-3 major online retailers like Amazon? Amazon already is fairly easy to list with, so the publisher isn’t doing much for me when online sales reach 70-80% of the marketplace.

Distribute – No distribution necessary when a few 1’s and 0’s can send a 400 page novel across 500 miles in a few seconds.

The size of the author’s audience also matters.

As a small author with loyal fans why would you allow 80%-90% of the book price to go somewhere other than you when the majority of your buyers will buy the book even if the only place it is sold is on your website. This model might even allow you to write full time, as you wouldn’t be limited to such a small slice of the revenue. This would also require you to hire an editor, though I think you could skimp on the copy editor (a few more grammatical errors…sure I might complain but I would still buy my favorite authors) and the cover.

As a huge author (Dan Brown, J.K. Rowling, etc.) the same argument could be made, but they could afford to actually hire the staff they need. In the end they would have a much much higher profit margin.

I could see the mid-tier authors wanting publishers, as they would want the top tier services and might be afraid they would lose too many buyers doing it themselves.

The real question would be new authors. Carve your own niche? Or, go the publisher route?

Bethany Wiggins said...

Can't wait to see how it all ends!

S.D. said...

This debacle is something I'm glad I missed in favor of doing my Geometry.

Ronica Stromberg said...

I'm an author with buy buttons turned off on Amazon. I blogged about this from the perspective of an author with a small publisher: www.ronicastromberg.wordpress.com

samuel plahetka said...

I didn't even know about this. wow, but I can see a lot of advantages to this sort of fighting.

R.V. Windfield said...

One of the reasons this is a topic is that eBooks make money. It is not Amazon who is price setting is is the dead tree publishers who are covering their assets.

The $9.99 was not a greedy arbitrary number it was a field tested number that showed the ark of value. Testing showed people were more likely to “click” buy at that price then not. Amazon lets you price your book at any price but since they know higher prices don’t sell as frequent they have to sell a book that is not moving so they just give the publisher a smaller royalty cut.

According to a New York times article dated January 2010 by Motoko Rich: -- Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin and Simon & Schuster are trying to pressure Amazon as it did Apple to raise its suggested price of $9.99 an eBook. Amazon says publishers are colluding to set prices, which has been deemed illegal by the Supreme Court in 2007.

Consumers are not stupid or charity minded when it comes to consumption. If a paper book printed, bound, covered, shipped and stored cost $16 why does an eBook with none of the baggage cost the same or more?

As an author or publisher - if I print a paper book and sell it for $16 I might get $2 out of the sale after all that is said and done on a great day. If I sell an eBook for $10, I’m going to make $7. Now why would I think the agency model sucks?

The final point is that if it were not for Amazon and the initiative of pricing for the Kindle it is doubtful that the eBook would be as important and viable to the “entire” industry and a revolution of sorts for those who could never get published by the cry baby publishing leviathans.

While there are some big shop publishers involved the fact remains this is an Indy business.

Ingram Digital’s General Manager Andrew Weinstein has sent a letter to its client retailers informing them of the possibility that they will be forced to stop the availability of ebooks titles in their catalogue listing from publishers who intend implementing the agency model. Ingram Digital may only list Random House ebook titles because they remain the one large publishing house likely to opt out of implementing the agency model.

 
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