Amazon vs. Hachette Update - It's About Price

[Hrafn]

You have buyers:

1. Who definitely want to buy and read the book, want to do so as soon as possible, and don't care too much how much they pay for the privilege.
2. Who definitely want to buy and read the book, but are willing to wait a bit to read the book in order to do so more cheaply (particularly if they can spend the money saved reading/watching/playing something else in the mean time).
3. Who are not sure whether they want to read the book, but may be tempted into trying if the book is cheap enough.

The fact that this price elasticity exists can be seen from the long-standing behaviour of the publishing industry, trying to maximise their profits with Market Segmentation:

1. High-priced hardcovers/trade-paperbacks for those unwilling to wait.
2. Lower-priced mass-market paperbacks for those willing to wait.
3. Remainder racks for those willing to try something new, cheaply.

(There are also libraries and second-hand bookstores, but they exist outside the publishing industry's segmentation and profit structure.)

Thus Amazon's figures are not in fact presenting some radical new claim, they are merely quantifying, and giving empirical support to, an insight that was always there, if you looked carefully enough.

Where prices are highly elastic, two things need to be considered:

1. What mass-market price maximises profits?
2. What market segmentation is possible around this to further enhance this profitability?

The massive decrease of incremental/per-unit cost of production/distribution/retailing of going from pbooks to ebooks is likely to change the answer to the first question considerably (in a downward direction -- as the incremental cost reduction enhances per-unit profitability, and thus makes selling larger number of units for a lower price more attractive).


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.

[DuckieTigger]

Interesting thread. Very entertaining.

Except a lot of going on.

My take on it? If you want to tread pbook and ebook the same, then implement the same wholesale model for both. You cannot have it both ways: agency for ebook and wholesale for pbook. Does not make sense.

[rkomar]

Originally Posted by Hrafn

The fact that this price elasticity exists can be seen from the long-standing behaviour of the publishing industry, trying to maximise their profits with Market Segmentation:

1. High-priced hardcovers/trade-paperbacks for those unwilling to wait.
2. Lower-priced mass-market paperbacks for those willing to wait.
3. Remainder racks for those willing to try something new, cheaply.

I shop at a scifi bookstore, and have noticed that a lot of books come out in hardcover, then trade paperback, then nothing else. Trade paperback seems to be the new MMPB (at nearly twice the price). I'm not sure why, but they seem to be abandoning that second market. Maybe that market has abandoned them?

[Hrafn]

Originally Posted by rkomar

I shop at a scifi bookstore, and have noticed that a lot of books come out in hardcover, then trade paperback, then nothing else. Trade paperback seems to be the new MMPB (at nearly twice the price). I'm not sure why, but they seem to be abandoning that second market. Maybe that market has abandoned them?

Could this be from publishers/authors that are too small to be able to afford the additional (typesetting, printer setup, etc) fixed costs of publishing two different formats, as they don't have enough total sales to make market segmentation profitable?

Of course the extreme form of that phenomenon would be a publisher who released a book, as a pbook, only as print-on-demand (low fixed costs, but considerably higher incremental/per-unit costs).

[rkomar]

Originally Posted by Hrafn

Could this be from publishers/authors that are too small to be able to afford the additional (typesetting, printer setup, etc) fixed costs of publishing two different formats, as they don't have enough total sales to make market segmentation profitable?

Of course the extreme form of that phenomenon would be a publisher who released a book, as a pbook, only as print-on-demand (low fixed costs, but considerably higher incremental/per-unit costs).

It's possible; I haven't been keeping track of who publishes what. My fear is that the publishers crank the price up on the trade paperbacks to maximize return, then when sales are low, decide that there isn't enough interest to warrant a MMPB release. But I could be wrong. Maybe the publishers know what they're doing, and the people who used to buy paperbacks don't anymore.

[darryl]

Originally Posted by pwalker8

And now your assuming that I'm assuming.

The fundamental problem is that there is a host of factors that people evaluate when they choose a book. Price is just one. Without a model that takes those factors into account, it's very unlikely that you can reliably predict what will happen, just using that model.

Yes. And a good model, which includes Amazon, would take these factors into account so far as relevant.

[darryl]

Originally Posted by SteveEisenberg

Seems fair to me. And it's a lot better than Amazon decreeing an end to Lexus-type books.

I don't think Amazon is in a position to decree an end to what you refer to as Lexus type books. The question will be whether Hachette is still prepared to produce these books. The answer, of course, is that if there is a sufficient market for them, they will survive. They will also survive if Hachette sees sufficient business advantage in publishing them irrespective of market. I don't pretend to know what will happen, but I do know I would not mourn the passing of these books if they can't survive.

[rhadin]

Originally Posted by pwalker8

Amazon, on the other hand, just celebrated their 20th anniversary in July and isn't a particularly profitable company.

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.

[rhadin]

Originally Posted by howyoudoin

If the reverse is true, and sales at 14.99 yield greater profits than sales at 9.99, why isn't Amazon pushing for the greater pricing instead?

I do not know whether $14.99 or $9.99 yields greater profits. Quite frankly, I do not know whether selling Harry Potter books at $9.99 sells more Harry Potter books than if the price were $14.99.

Point of fact is that none of us know that information.

Amazon knows (or claims) that among Amazon customers it sells overall (in gross) more books at $9.99 than at $14.99. What Amazon has said is that of the whole catalog of books it sells, it sells 1.74 books at $9.99 compared to 1 book at $14.99. Amazon hasn't identified whether that disparity is the result of increased sales of indie erotica at the lower price point or increased sales of New York Times bestsellers only or of Hachette published fiction. Amazon has left a lot to interpretation and assumption.

But more critically is that Amazon is, at best, telling us about Amazon sales to Amazon customers. Granted that Amazon dominates the ebook market in terms of sales, but what we do not know is what the effect would be on the total market -- Amazon customers and non-Amazon customers combined -- should the price be $9.99 rather than $14.99. It might be that Amazon customers are the "cheap" customers in the sense that they are highly price conscious and will only buy at certain price points. Kind of like the difference between the customer who shops at the Dollar Tree store and the customer who never shops there but does shop at Nordstrom.

Amazon only provides a limited view of the market that Hachette and the other publishers inhabit. What may be good for Amazon because of the type of person who shops at Amazon, may not be good for Hachette because of all the other outlets it sells to. We simply do not have enough information.

And as to the question as to "why isn't Amazon pushing for the greater pricing instead?", Amazon has clearly been more interested in market share that profitability. Consequently, it is possible that Amazon sees $9.99 as a way to further increase market share even at the expense of profitability. The $14.99 price point may well be more profitable for Amazon but might not work to increase market share. Market share has been Amazon's mantra since day 1; perhaps it is changing its mantra to profitability, but that hasn't been what Bezos has been saying as he resists shareholder demands.

[rhadin]

Originally Posted by eschwartz

I was discussing Hachette's products, which cost nothing for them to make and therefore everything is profit for them.

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

[rhadin]

Originally Posted by ApK

You consider Amazon paying Hachette, and then choosing to take a loss themselves, if they actually chose to do so, to be a losing proposition for Hachette?
Despite the fact that Hachette would get paid no matter what, and also that Amazon's previous loss-leader efforts had resulted in the biggest growth the industry has every seen?

You've lost me.

And you have lost me.

Amazon's position is that the PUBLISHER's retail price for an ebook should not be greater than $9.99 and Amazon would pay the publisher based on that $9.99 price. Amazon is saying that if the retail price is $9.99, Amazon will sell over all its catalog 1.74 ebooks as compared to the $14.99 price.

Hachette is saying it prefers the $14.99 PUBLISHER retail price even if it is forsaking some sales that it might otherwise gain at the $9.99 price point because over Hachette's catalog -- not Amazon's catalog -- it is not proven that Hachette's earnings will be the same.

As of this moment, there is nothing to prevent Amazon from taking the unilateral move of discounting all ebooks to $9.99 or lower, yet Amazon hasn't done so. Why is that?

My guess -- note, I said guess -- is that at $9.99 Amazon would lose a significant amount of money if it acted unilaterally. That what Amazon wants is for the publishers to absorb any loss by dropping to the $9.99 price point, a position that the publishers are refusing to accept.

• That Amazon pays Hachette does not make what it pays Hachette sufficient for Hachette to be profitable.
• Just as Amazon has no obligation to be unprofitable and take a loss, neither does Hachette.
• To say that Hachette then needs to tighten its belt and become more efficient can just as easily be said of Amazon.
• Or to say that Hachette needs to come back to reality can just as easily be said of Amazon.
• Just as you think Hachette can lower its pricing, others think Amazon could raise its pricing (just ask the unhappy shareholders).

[Hrafn]

Originally Posted by rhadin

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

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).

[Hrafn]

Originally Posted by rhadin

As of this moment, there is nothing to prevent Amazon from taking the unilateral move of discounting all ebooks to $9.99 or lower, yet Amazon hasn't done so. Why is that?

Why? Because they'd still have to pay 70% of $14.99, which is $10.49 to Hatchette, so they'd lose money on each book. Hatchette would still make this same $10.49 per book, but on 74% more books, so they'd nearly double their revenue without having to actually do anything.

Does that sound like sound business practice to you?

[rhadin]

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).

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

[rhadin]

Originally Posted by Hrafn

Why? Because they'd still have to pay 70% of $14.99, which is $10.49 to Hatchette, so they'd lose money on each book. Hatchette would still make this same $10.49 per book, but on 74% more books, so they'd nearly double their revenue without having to actually do anything.

Does that sound like sound business practice to you?

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.