Analyst: Amazon Is Losing Its Shirt

[anurag]

From http://www.tbiresearch.com/e-readers...ishers-2009-11

Wall Street can't help itself.

With all the buzz around e-readers, analysts expect big numbers out of hardware sales and e-book consumption. While hardware sales may experience huge growth in the coming years, we believe many underestimate the losses companies like Amazon will need to weather before selling e-books becomes a meaningfully profitable business.

Currently companies like Amazon lose about $2 for every e-book (we discuss this below). So, if it sells one million e-books the company loses about $2 million.

Analysts keep one-upping each other with forecasts of profits in 2012-2014. What they aren't telling you is that this will require publishers to radically reduce the prices at which they are selling e-book licenses.

Will this happen?

It should. Publishers should move to a high-volume model where they sell more units for less. But "should" is very different from "will."
In any event, in order for the e-reader market to thrive publishers must lower their wholesale prices so that distributors can turn a reasonable profit. We believe that if the price is lowered enough publishers may earn less per unit, but could ultimately earn more in overall revenue and profit through a greater number of sales. This, of course, benefits the e-book distributors as well.

...

[WT Sharpe]

The marketing strategy will make sense in the long run if what they're doing is to first get everyone acclimated to the convenience of e-readers, then raise the prices of e-books.

[Nate the great]

"Losing its shirt"? Horsepucky.

Am I the only one that remembers that "We'll make it up on volume" was Amazon's business strategy during the early years when it wasn't turning a profit? It worked then; why shouldn't it work now?

[Leep]

If a paperbook sells for $25 which includes paper, cover, printing, shipping, overstock and point of purchase personnel and an ebook sells for $9.99, how can they possibly be losing money on the ebook which is on demand and only uses an existing website?

Cannot understand the economics unless every paper book sold also loses money. Publishers (and Amazon) cannot be that dumb that they would agree on an unrealistic price that the market has indicated it will not pay. Maybe a couple of publishers and a couple of authors will try to hold out, but if you can deliver and sell a product for a profit, that's good business.

cheers

[jasonkchapman]

Originally Posted by Nate the great

"Losing it's shirt"? Horsepucky.

Am I the only one that remembers that "We'll make it up on volume" was Amazon's business strategy during the early years when it wasn't turning a profit? It worked then; why shouldn't it work now?

No, I remember it well. It's been their model since day one. The .com boom helped keep them afloat during the many years before their first profit. This time, though, they're in the position to fund the bottom end of the curve themselves.

[fugazied]

It's a common marketing strategy, they'll take losses while people snap up 10'000 Kindles per week after seeing the low book prices.

Eventually they will shift prices to a less extreme level, but for now Kindle users can just enjoy the price war.

[wallcraft]

It may be the case that Amazon is loosing $2 on bestsellers, but it isn't loosing money on backlist ebooks or on specialty categories and these are a substantial fraction of total ebook sales. In any case, as others have said, Amazon can afford to loose money on ebooks for years if necessary to gain market share. However, I'm not sure they would be willing to do this now that a large fraction of sales are presumably going to iPhone or Kindle for PC readers. Amazon's margins on the Kindle 2 and DX have to be much higher than 20% given that they are selling direct.

My best guess is that Amazon is making a huge profit on Kindle hardware and are close to breaking even on ebooks.

[anurag]

Originally Posted by wallcraft

It may be the case that Amazon is loosing $2 on bestsellers, but it isn't loosing money on backlist ebooks or on specialty categories and these are a substantial fraction of total ebook sales. In any case, as others have said, Amazon can afford to loose money on ebooks for years if necessary to gain market share. However, I'm not sure they would be willing to do this now that a large fraction of sales are presumably going to iPhone or Kindle for PC readers. Amazon's margins on the Kindle 2 and DX have to be much higher than 20% given that they are selling direct.

My best guess is that Amazon is making a huge profit on Kindle hardware and are close to breaking even on ebooks.

My thoughts exactly. 92k of the 350k Kindle titles available on Amazon.com are priced above 9.99, so Amazon might not be losing as much money as the original study suggests.

[Boston]

Originally Posted by wallcraft

It may be the case that Amazon is loosing $2 on bestsellers, but it isn't loosing money on backlist ebooks or on specialty categories and these are a substantial fraction of total ebook sales.

Same goes for books now in paperback. I notice the Kindle price often doesn't drop once the book is in paperback..and if it does it's only by a dollar or two. Once it hits mass-market paperback, it will drop more but only usually the savings is minimal (and at times none at all).

I've had a few incidents where I've wanted a book that was in paperback but refused to buy because the Kindle price was higher.

[rmclachlan]

Amazon hold a monopoly on Kindle books - they have no reason to price them much more cheaply than the paper equivalent, they will set the price to that which the market will sustain. Amazon and the publishers will want the e-book and the paper copy to produce much the same revenue. A business model which when you purchased a paper copy the e-book was included for a small extra fee would produce the most profitable revenue stream as they effectively sell you the same thing twice albeit at a discounted rate.

[rhadin]

Originally Posted by Leep

If a paperbook sells for $25 which includes paper, cover, printing, shipping, overstock and point of purchase personnel and an ebook sells for $9.99, how can they possibly be losing money on the ebook which is on demand and only uses an existing website?

Cannot understand the economics unless every paper book sold also loses money. Publishers (and Amazon) cannot be that dumb that they would agree on an unrealistic price that the market has indicated it will not pay. Maybe a couple of publishers and a couple of authors will try to hold out, but if you can deliver and sell a product for a profit, that's good business.

cheers

You are missing the basic economics of book publishing. If the paperbook has a suggested publisher's price of $25, Amazon has to pay the publisher $12.50 (maybe a little less or a little more depending on the negotiated discount) for each copy of the book that it sells -- REGARDLESS of the price at which Amazon sells the book. Thus if Amazon sells the book for $15, it grosses $2.50 in profit; it sells the book for $10 is has a loss or $2.50.

The same holds true for an ebook. It doesn't matter that the ebook has no paper costs or warehousing costs or some other cost that is associated with a physical item. If the publisher sets a retail price of $25 for the ebook, then Amazon is in the same boat as if it were a physical book and if Amazon sets the price at $10, it loses $2.50.

Remember, Amazon pays a wholesale price that is a percentage of the publisher's retail price; Amazon does not set the publisher's price.

[DMcCunney]

Originally Posted by Leep

If a paperbook sells for $25 which includes paper, cover, printing, shipping, overstock and point of purchase personnel and an ebook sells for $9.99, how can they possibly be losing money on the ebook which is on demand and only uses an existing website?

Easy: what did the ebook cost to produce?

Having a book in electronic format cuts manufacturing, warehousing, and distribution costs. It does not reduce the cost to acquire and produce the book in the first place, and those can be substantial.

When a book is published, it must first be acquired. An editor will read a manuscript, decide the book has potential, and choose to buy it. The publisher will negotiate with the author or author's agent and if successful, will agree on a price to license the right to publish the book. The price will be paid as an advance against royalties, and how large the advance is will be determined by the publisher's best guess of how well the book will sell. If the book sells enough copies to cover the advance, it is said to have "earned out", and further sales will generate royalties for the author as specified in the contract.

Once a manuscript has been acquired, it must be prepared for production, including line edits by an editor intended to improve the overall quality of the manuscript, and copy editing and proofreading. Once a final form of the manuscript has been agreed upon, it must be marked up and typeset to produce the files which will go to the printer and/or become an ebook. And a cover must be designed and commissioned.

The book will also be charged with an allocated share of general corporate overhead: rent on office space, telephone bills, utilities, salaries of other publishing house employees not directly involved in acquiring and publishing the book...all of which are incurred whether or not the book ever gets issued, in paper or electronic form.

The mere fact that it's an ebook doesn't make those costs go away, and the amount it costs to acquire and prepare the book will tend to set a lower limit on the price that will be charged. Pricing cheap and making it up on volume only works if there is significant volume for a particular title, and price is only one factor in demand.

Some books will sell better than others. A new Dan Browne book may be confidently expected to sell hundreds of thousands of copies. A first novel by a new author may be confidently expect to sell a few thousand copies, if all concerned are lucky, and if all concerned are really lucky, sell enough to make the publisher receptive to acquiring future books from the author.

Being in electronic form won't magically that first novel a big seller, nor will a cheaper price. The book is competing not only for your dollars, but for your time, and if it's not a book you want to read, it doesn't matter what the price is.
______
Dennis

[pwalker8]

I would imagine that as the e-book market strengthens, Amazon and other e-book stores will be in a position to start pushing back on the publishers putting prices more in line with what the consumers are willing to pay, kind of like what happened with music industry and Apple. It may take a couple of years, but Amazon has the money to stay with it.

I also think that Amazon is a lot more interested in the sale of e-books than they are in the sale of kindles. I would not be terribly surprised to see the kindle get spun off as a separate company at some point.

[pwalker8]

I have read that many authors expect the old publishing model (authors getting advances, etc..) to go by the wayside as e-books become more popular. Part of the reason for the advances is the long lead time from the time is complete to when it hits the stores. That is mostly because there are only a few printing companies (i.e. publishers don't actually own the printing presses as it were), so there is always a backlog. While there will still be a need for editors, and I can see value in publishers who select and market certain types of books, especially for new authors, I think a lot of the current expenses will go away.

The bottom line is that the price has to match what people are willing to pay, not what the publishes want to charge.

[Boston]

Originally Posted by rmclachlan

Amazon hold a monopoly on Kindle books - they have no reason to price them much more cheaply than the paper equivalent, they will set the price to that which the market will sustain.

My point was that while they may be losing money on hardcover bestsellers, I believe they are easily making it up in other areas.