Amazon vs. Hachette Update - It's About Price

[fjtorres]

Originally Posted by ApK

Note KDP royalties are only 35% to the author/publisher if the price is below a certain point.

I know.
Also for certain undeveloped/expensive foreign markets. They discourage very low prices as much as they discourage very high prices. Their recent beta release of a pricing assistant tool for KDP (still needs work, I hear) recommends price hikes as often as drops.

Oh, and the 35% (of gross) author royalty they propose?
Those is their baseline for Amazon Publishing titles, the ones boycotted by B&M retailers yet still turning in tidy returns for the authors.

Whatever one may think of the fairness of their terms and practices, they are pretty consistent. They want to maximize their take and that requires maximizing income for the upstream players; publisher and author. Their KDP and small press suppliers for the most part tend to listen but the BPHs have other things in mind.

[fjtorres]

Originally Posted by Hrafn

You have buyers:

Some publishers (notably Baen) have already answered the second, segmentation, question for ebooks with:

• eARCs at 2-3 times the eventual mass-market price.
• Book bundles.

Subscription services (apparently) have a role in the new segmentation equation, along with perma-free ebook titles and POD limited editions. (I've seen indie publishers who refer to the print editions of their books as "gift editions" because most copies sell during the holiday season. Most happily signed up those books for Amazon's matchbook to give those buyers the ebook for free.)

(Nice and logical presention, btw.)

[John F]

Originally Posted by rhadin

Perhaps Amazon isn't as smart when it comes to retailing as it is being given credit for here on MR. We talk about how publishers need to fix their system if they want to remain relevant in the future and remain profitable. Perhaps, instead, we should be saying that Amazon needs to fix its business model if it intends to be here 10 years from now and become profitable.

Seems to me that Amazon's great claim to fame in the business world right now is market share, not profitability. No other company has been given the leeway by shareholders and the stock market that Amazon has to remain unprofitable for so many years.

Finally, it seems to me that as between the publishers' business model, which turns a profit for shareholders, and Amazon's, which doesn't, it is the publishers who have the better model. Too many MobileReaders praise Amazon's model because they think it leads to lower prices for them; that doesn't make it a good business model.

It would be interesting to see what would happen to Amazon should the publishers hold out and that inspires other suppliers to resist Amazon demands. Eventually something has to give at Amazon because shareholders are beginning to demand profitability instead of giving Amazon a free ride. At some point, shareholders will prevail and it is at that point that we will earn how customer-centric Amazon truly is.

Which company do you own shares in? Looking at Amzn, it looks like it has done well, I'm not sure where to look for the Publishers?

[fjtorres]

Originally Posted by darryl

I don't think Amazon is in a position to decree an end to what you refer to as Lexus type books.

And they aren't calling for that.
At all.
They explicitly allow for higher prices for titles that can reasonably justify higher prices.
Amazon isn't talking of $9.99 as a hard cap but as baseline: you start at $9.99 and move from their, but only when it makes sense for that specific title.

The biggest failing of the original agency scheme (aside from hurting everybody but Amazon) was its straitjacket pricing on midlisters and newcomers at $14.99 while the big-name authors got a boost at $12.99. With Patterson and King at $12.99, what chance did Joe Newcomer have at $14.99?

No wonder the two tier pricing collapsed quickly.

[fjtorres]

Originally Posted by John F

Which company do you own shares in? Looking at Amzn, it looks like it has done well, I'm not sure where to look for the Publishers?

Yeah... the old Amazon makes no profit jibe...
Yet again.

Amazon makes tons of profit for their stockholders. They just deliver it as higher stock prices where the income manifests as capital gains instead of a cash hoard.

Amazon doesn't accumulate cash because they don't want to. (In fact, a couple years back they got a multibillion dollar line of credit they didn't need simply because the effective interest for them was less than zero.) Companies amass vast cash hoards when they don't have productive ways to spend it. Amazon, on the other hand, still has better uses for their money; growing revenue 24% every year.

As long as there is available growth and cheap money they'll keep on spending.
And they'll keep on growing as long as they keep spending.

Eventually it'll end but not soon.

[Hrafn]

Originally Posted by rhadin

The fallacy in your argument is that you are assuming that Hachette would sell 74% more books. The numbers Amazon gave were over its entire catalog, not just the Hachette catalog, and the numbers only pertain to Amazon's customer base, which does not include all of the other outlets that sell Hachette books.

I suspect that if Amazon were willing to guarantee that increase over the full distribution chain, Hachette would agree. But I also suspect that Amazon is unwilling to even guarantee such a sales increase among its own customers.

As to whether it is a good business plan or not, I cannot say. There is too much missing data that is fundamental to making a sound business decision. I'm surprised that anyone here on MR believes they have enough data to determine who is objectively right or wrong in this dispute.

1. The argument works whether the Hatchette-specific number is 74% or 4% -- Amazon still loses money, Hatchette still makes more money -- so NO it is NOT a "fallacy"!
2. There are no guarantees in business -- commerce is an inherently risky endevour. But when (i) you need a business partner more than they need you & (ii) they have hard numbers which you lack, which they say back up their strategy, then you would generally be very foolish to reject their strategy out of hand.
3. Lacking large incremental costs for ebooks, or evidence that demand is very price-inelastic (both absurd claims), it is bleeding obvious that Hatchette's current strategy is sub-optimal.

[ApK]

Originally Posted by rhadin

And you have lost me.

I think we are indeed both lost on this particular tanget.
And I don't think I disagree with anything you said just now (I might, but I'm not fully awake and nothing jumped out at me).

All I meant by my post to pwalker was that Hachette can't sell ebooks to amazon at a loss, which seems to be what was claimed.

They can only impact the number of sales it takes before they recoup their investment and how much profit they make after.
Hachette can certainly wind up in non-optimal deal with Amazon.

We might disagree on which side we'd bet on being right, I think that's all.
We're all here making predictions of mostly-secret negotiations, based on past events, right?

[DuckieTigger]

All color mine, not in originals.

Originally Posted by rhadin

[ red original quote, green omited from original post ]

Please provide the independent source that supports your statement quoted above.

Originally Posted by Hrafn

Hachette's (or any publisher's) incremental cost for ebooks is zero (there is no printing, distribution or similar incremental costs) -- all their ebook production costs are fixed. Each additional ebook sold is therefore pure incremental profit for them (they do of course have to cover their fixed costs from this in order to break even).

Originally Posted by rhadin

So then, you are saying, the statement is not true, that there are costs and all is not profit.

Seriously? First you quote out of context a reply to a reply (in red), then to make your point you conveniently omit the sentence right after (in green). Then you get explained again the meaning of your out of context quote (by somebody else), and all of a sudden that makes you think you are right in the first place?

What is lacking is your reading comprehension, or what is worse, you knew exactly what you were doing by misrepresenting words for your own advantage. Go back to the original, the reply to your own post:

Originally Posted by eschwartz

Your excellent piece of nonsense applies only to pbooks, and is thus completely irrelevant.

A pbook that costs x to make and store and ship must be sold for x+profit, and it is possible to lose money on it.

An ebook costs 0 to make and store and ship, and any price = profit.

Both have the overhead to pay off, but that is the same no matter how many sell, so the only thing that matters is maximizing revenue.

And if Amazon makes more revenue by selling more books for less per-unit cost (which they claim), the publisher gets an equivalent amount more under Agency, and under wholesale the unit price doesn't matter so they make even more.

It simply means that for an ebook to be profitable overall all it needs is pay for creation, which is fixed. Once that happens that ebook never has a chance to reduce or eliminate the profit overall at any cost it is sold at (even for free). A pbook will never ever be profitable if each unit is sold below manufacturing cost, no matter how low the overhead is.

Which is contrary to your belief that a set number (e.g. 100,000) of sales is needed to break even (Post # 65). For ebooks it is a set number of $ to break even, not # of sales. Each ebook sale is profit in the amount of the price the publisher is selling it. All of that profit first goes toward paying for the overhead (creation + advance), and then a certain % amount of that profit from additional sales goes to publisher as overall profit for them. The rest is going to the author. It is not rocket science.

[HarryT]

Originally Posted by DuckieTigger

It simply means that for an ebook to be profitable overall all it needs is pay for creation, which is fixed. Once that happens that ebook never has a chance to reduce or eliminate the profit overall at any cost it is sold at (even for free).

The mechanisms used to sell an ebook are not free. It's the profit that pays for the server farms, the e-commerce systems, the staff to support them, etc. To imagine that it costs nothing to sell an ebook is erroneous.

[DuckieTigger]

Originally Posted by HarryT

The mechanisms used to sell an ebook are not free. It's the profit that pays for the server farms, the e-commerce systems, the staff to support them, etc. To imagine that it costs nothing to sell an ebook is erroneous.

Do you have any numbers on how much you are talking there? The servers need to be maintained no matter how full they are. It does not matter if there is one or 10,000 different ebooks on the server. Storage wise you can fit 3 million books at an average of 100MB each on a measly 282 TB. Now please tell me that you actually need a server farm for that? Amazon has to pay a lot more for their server farm just to keep track of the many users each second that shop. You certainly don't believe that each individual customer that buys a ebook warrants a download from the publisher?

[fjtorres]

Originally Posted by HarryT

The mechanisms used to sell an ebook are not free. It's the profit that pays for the server farms, the e-commerce systems, the staff to support them, etc. To imagine that it costs nothing to sell an ebook is erroneous.

Those are retailer costs, not publisher costs.

Once the publisher uploads their "master" copy to the retailer they don't incur any further costs whether the ebook sells one copy or a million. Those retailer costs, which are mostly fixed, are precisely why Amazon wants to see ebook sales maximized.

[pwalker8]

Originally Posted by ApK

I think we are indeed both lost on this particular tanget.
And I don't think I disagree with anything you said just now (I might, but I'm not fully awake and nothing jumped out at me).

All I meant by my post to pwalker was that Hachette can't sell ebooks to amazon at a loss, which seems to be what was claimed.

They can only impact the number of sales it takes before they recoup their investment and how much profit they make after.
Hachette can certainly wind up in non-optimal deal with Amazon.

We might disagree on which side we'd bet on being right, I think that's all.
We're all here making predictions of mostly-secret negotiations, based on past events, right?

What I said was that Amazon was selling ebooks at a loss. Amazon had to pay Hachette a percentage of the list price for each Hachette ebook that Amazon sold. If Amazon sold that ebook for less than that, then Amazon sold it at a loss. Very straight forward and simple. As for ebooks not costing Hachette anything, then I would suggest that you do not understand how one formats an ebook. I would also suggest that you don't understand modern accounting practices. One simply can't assign all the expenses to hardbacks and pretend that everything else doesn't cost anything to produce.

[crossi]

Originally Posted by pwalker8

What I said was that Amazon was selling ebooks at a loss. Amazon had to pay Hachette a percentage of the list price for each Hachette ebook that Amazon sold. If Amazon sold that ebook for less than that, then Amazon sold it at a loss. Very straight forward and simple. As for ebooks not costing Hachette anything, then I would suggest that you do not understand how one formats an ebook. I would also suggest that you don't understand modern accounting practices. One simply can't assign all the expenses to hardbacks and pretend that everything else doesn't cost anything to produce.

No one believes it costs nothing to produce an ebook. Even an ebook of a backlist book with no editing (just copyediting and formating), advances, legal, ect costs. But it is an upfront fixed cost. There is no additional cost/ebook after the first one is uploaded to the retailer. Unlike paper books where you need additional printing runs, shipping, warehousing and occasionally even completely new editions to be produced. The more copies that are sold the bigger the difference in costs between the two formats. One keeps growing the other stays the same.

[Fbone]

Originally Posted by ottdmk

A question: is $14.99 really that common a price point? I freely admit that I only usually look buying ebooks when the mass-market paperbound comes out. At that point the publishers I buy from are usually pricing the ebooks at a little less then the paperback.

Currently, of the 300 books published this week, only two fiction titles are priced at $14.99. There are a couple of non-fiction titles priced higher.

[SteveEisenberg]

Originally Posted by fjtorres

They explicitly allow for higher prices for titles that can reasonably justify higher prices.

Amazon isn't talking of $9.99 as a hard cap but as baseline . . .

I wish you were right. But that's not what Amazon says in the statement starting this thread:

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.

I can't see how you got from Amazon's "small number of specialized titles" to the baseline concept.

Amazon is, taking in all their imprints, the lowest pricing of the big publishers, and the biggest publisher who, most of time, doesn't pay advances. That's their right. But we shouldn't celebrate when they use their retail dominance to force other publishers closer to their own mold.

Physicists writing books to be read by other physicists will fit into that "small number of specialized titles" exception, at least if only a small number of physicists write such books. But what about readers who didn't take college physics and want lots of popularized books on physics to choose from? As I read Amazon's statement, we are likely to be out of luck. Ditto when I want to read a middlebrow, 600 page, narrative history title that required worldwide research and four years to write. Do you really think that can plausibly cost little more than the six-months-to-write, no-research-required work of pure imagination? If not -- if you just want $9.99 as a baseline -- you should stop defending Amazon.

Originally Posted by ApK

And if your Chinese history author requires an advance from a BPH to do work, maybe it's time to look for a new model: grants, patrons, crowd-funding....it's a brave new world.

I quoted this one before, but I want to quote it again because, fjtorres, what ApK writes is much more consistent with Amazon's statement than your baseline concept. Don't have a PhD? Not interested in teaching undergraduates? Don't have the skills or inclinations to be a fundraiser? Don't want to be beholden to a right-wing, or left-wing, think tank? In that case, Amazon decrees that you can no longer be a research-oriented non-fiction author, no matter how many books you could sell, because Amazon wants you to fit into the $9.99 or less model used by authors who write multiple genre page-turners a year.