Analyst: Amazon Is Losing Its Shirt

[Sydney's Mom]

I find I am looking at Amazon a lot more since I got my kindle. And since I joined Amazon Prime, with no shipping and no tax, I buy everything there. $6 oventemp gauge? I couldn't get in the car and drive to the store for that amount. And there is no guarantee they would have it that cheap.

[wallcraft]

See No, Amazon Does NOT Lose $2 Per Kindle Book Sold for a detailed summary of where Amazon makes money on ebooks. Only Amazon knows is what percentage of sales are in each category, but Amazon has said that backlists (for example) are a very significant fraction of sales.

[calvin-c]

Originally Posted by 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?

If they're losing money on each sale then they can't 'make it up on volume'. The more they sell, the more they lose. The 'make it up on volume' only works when the price of acquisition drops with increasing volume. That might be the case with ebooks, but not according to the article-it says they're losing money on every sale. And there's no way to make it up on volume if that's true.

[calvin-c]

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

Easy. If the cost to Amazon is $15 then they're making a $10 profit on the paperbook while losing $5 on the ebook. Remember that they have no more right to produce multiple copies of the ebook than you do. (That should probably include 'without payment' as I'm sure they actually do produce the copies themselves, but they're required to pay that hypothetical $15 for each copy they produce, no matter what they sell it for.)

[Elfwreck]

Originally Posted by DMcCunney

My point was simply that there is a lot of unrealistic thinking about ebook pricing. There are costs involved that don't go away simply because you are producing an ebook.

However, if the pbook is being simultaneously produced, those costs are part of an existing business model. Dan Brown's ebook costs are marginal (price of doc conversion & editing, if any, plus a bit of IT/uploading costs), because the advance, edit, proof & marketing costs were assumed to be included in the pbook publication.

Books that go to ebook *only* have substantial costs that many people overlook; books that are being printed by mainstream publishers are almost-free revenue sources added to an active marketing arrangement.

The hard part is convincing the publishers that each ebook sale doesn't represent a lost hardcover sale.

[DMcCunney]

Originally Posted by Elfwreck

However, if the pbook is being simultaneously produced, those costs are part of an existing business model. Dan Brown's ebook costs are marginal (price of doc conversion & editing, if any, plus a bit of IT/uploading costs), because the advance, edit, proof & marketing costs were assumed to be included in the pbook publication.

Save that you really can't allocate all of the costs to the paper version, and decide you get the ebook free. (Well, you can, but from an accounting stand-point, you shouldn't.)

Books that go to ebook *only* have substantial costs that many people overlook; books that are being printed by mainstream publishers are almost-free revenue sources added to an active marketing arrangement.

Using that logic, you can argue that paper books should be priced cheaper, because ebooks provide a broader base over which to allocate the costs. I don't see any publisher buying the argument, though you are welcome to make it to them.

The hard part is convincing the publishers that each ebook sale doesn't represent a lost hardcover sale.

Especially when it might very well be a lost hardcover sale?

I see publishers delaying release of ebook editions for the same reason they don't issue the mass market PB at the same time as the hardcover. Some folks specifically want the hardcover. Others want the book now, and will pay a premium for the hardcover edition to get it, but would not pay the premium if the PB edition was available at the same time.
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Dennis

[charleski]

Originally Posted by wallcraft

See No, Amazon Does NOT Lose $2 Per Kindle Book Sold for a detailed summary of where Amazon makes money on ebooks.

Hahaha, that blog post is ridiculous. Yeah, I'm sure Kindle books are making money for Amazon on some small-press, long-tail works, but the guy himself admits that when it comes to the majors, "The really big guys–Random, Hachette, S&S. Here, Amazon is supposedly losing money. And they probably are in some cases." Guess what? The majors are what count and represent the vast majority of Amazon's throughput. Doh!

If anyone thinks that Amazon's profits are founded on older works and small-press runs that are lucky to sell a few thousand of any particular title in a year, then I have a bridge to sell you.

[Kali Yuga]

Actually, Amazon's Q3 earnings were in the plus range. Apparently the departments that sell the Kindle devices (electronics) and the ebooks (included in with regular books) both increased sales and profits. It's not a substitute for hard numbers, but it is reasonable to assume that they aren't losing money hand over fist on the Kindle.

You also have to keep in mind that some paper bestsellers are also loss-leaders, and that Amazon does make a big chunk of sales on "The Long Tail" (all the less popular books that you usually can't get at your local book shop). Plus Amazon eats the cost on a lot of shipping, either via Prime or to encourage you to buy More Stuff with each order. So although it's extremely difficult to know for certain, the situation probably isn't nearly as different from their paper business we might think.

[DMcCunney]

Originally Posted by charleski

Hahaha, that blog post is ridiculous. Yeah, I'm sure Kindle books are making money for Amazon on some small-press, long-tail works, but the guy himself admits that when it comes to the majors, "The really big guys–Random, Hachette, S&S. Here, Amazon is supposedly losing money. And they probably are in some cases." Guess what? The majors are what count and represent the vast majority of Amazon's throughput. Doh!

Nope. Amazon may well lose money on some major publisher titles. "Loss leaders" are standard practice in retailing. You set an artificially low price on a popular item, where you do in fact lose money, because the object is to get the customer into the store. Once there, you are betting you can sell them other things at a margin that more than covers your losses. You may rest assured Amazon is not losing money on all major publisher titles.

Major publishers are peeved at Amazon's pricing, and several have announced plans to delay ebook releases because of it. They'd like ebooks to be priced higher and give them a bigger margin, because their costs to produce ebooks are lower. Amazon has countered by offering even lower prices on some ebook titles.

At some point, I hope the major publishers will figure out that most buyers will balk at a price on an ebook higher than the cost of a mass market paperback, because the customers certainly understand the publisher's costs are lower with ebook editions. Meanwhile, this reminds me of the tempest in a teapot a while back where various major music labels were threatening to stop selling through Apple's iTunes store - they wanted Apple to charge a higher price and give them a bigger cut. The old fable about the goose and the golden eggs comes to mind...
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Dennis

[brecklundin]

Originally Posted by rhadin

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.

I know you are just spit balling here but having once been in the book business...no seller pays 50% of cover price...a seller like Amazon pays 30% MAX probably more like 20-25%. I used to pay 30-40% in the late 80s. And i was a lower volume seller at around $200k/yr in wholesale purchases spread aorund 4-6 publishers.

So I see no chance they are losing, even on best sellers. Maybe breaking even on best sellers considering overhead.

[DMcCunney]

Originally Posted by brecklundin

I know you are just spit balling here but having once been in the book business...no seller pays 50% of cover price...a seller like Amazon pays 30% MAX probably more like 20-25%. I used to pay 30-40% in the late 80s. And i was a lower volume seller at around $200k/yr in wholesale purchases spread aorund 4-6 publishers.

So I see no chance they are losing, even on best sellers. Maybe breaking even on best sellers considering overhead.

We have also seen experiments in recent years with lower prices to retailers for a different reason. Publishing has historically been a 100% returns business, where any unsold books could be returned for full credit. In most other retail lines, the retailer is expected to know what will sell to their market and returns will be limited. If the retailer guesses wrong, they eat the cost of unsold goods. Publishers are experimenting with deals that give retailers lower wholesale prices in exchange for lower returns. If they take the lower price option, they can't just return anything unsold for credit.
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Dennis

[Lemurion]

I don't have any problems with the idea of publishers wanting to protect hardcover sales by not offering ebooks at mass market paperback prices as soon as the hardcover comes out.

What I have a problem with is publishers selling ebooks for significantly more than mass market paperback prices when the mass market paperback is available.

I don't mind the idea of paying hardcover prices (by which I mean the prices to which new hardcovers are discounted online) for ebook versions of hardcover bestsellers that are released simultaneously, so long as I have the same option I do with dead tree of waiting for the paperback release so I can buy it cheaper and knowing the price will come down if I do.

[rhadin]

Originally Posted by Elfwreck

However, if the pbook is being simultaneously produced, those costs are part of an existing business model. Dan Brown's ebook costs are marginal (price of doc conversion & editing, if any, plus a bit of IT/uploading costs), because the advance, edit, proof & marketing costs were assumed to be included in the pbook publication.

My experience is that it is preplanned to do a p and an e version and that the costs are spread over expected sales of both, not just over the pbook.

Originally Posted by Elfwreck

The hard part is convincing the publishers that each ebook sale doesn't represent a lost hardcover sale.

Very true. The difficulty is that publishers do not divide the market into its component parts -- hardcover buyers, paperback buyers, and ebook buyers. Although there is some overlap in the sense that a hardcover buyer may also buy a paperback and/or an ebook, for the most part people tend not buy outside their preferred format. Thus a hardcover buyer will continue to buy hardcover even if the paperback or the ebook are also available. Price is not the consideration, esthetics and preferences are.

In my own case, I buy nonfiction in hardcover only, very rarely in ebook, and never in paperback. Fiction I buy only certain authors in hardcover and never buy them in either paperback or ebook, but the bulk of my fiction purchases are ebook. If it isn't in ebook, with the exception of a handful of preferred authors who I buy in hardcover, I simply do not buy the fiction book.

My wife, OTOH, buys paperback and only occasionally in hardcover and never in ebook. She dislikes the weight of the hardcovers and is only marginally interested in ebooks and thus doesn't have an ebook device.

In speaking with neighbors and relatives about their bookbuying habits, the scenario repeats itself; that is, they have their preferences and rarely deviate from them.

[DMcCunney]

Originally Posted by rhadin

My experience is that it is preplanned to do a p and an e version and that the costs are spread over expected sales of both, not just over the pbook.

Which is the correct way to look at it, from an accounting standpoint.

Very true. The difficulty is that publishers do not divide the market into its component parts -- hardcover buyers, paperback buyers, and ebook buyers. Although there is some overlap in the sense that a hardcover buyer may also buy a paperback and/or an ebook, for the most part people tend not buy outside their preferred format. Thus a hardcover buyer will continue to buy hardcover even if the paperback or the ebook are also available. Price is not the consideration, esthetics and preferences are.

Yep. People sensitive to price get the trade paperback or mass market paperback edition, and are willing to wait to get it.

Interestingly, hardcovers seem to be an increasingly large portion of books sold, with mass market editions often struggling. I've heard reports of MMPB editions with press runs of 15,000 copies, which would have been unthinkable not that long ago, and leaves me wondering is the publisher is doing more than covering direct costs.

In my own case, I buy nonfiction in hardcover only, very rarely in ebook, and never in paperback. Fiction I buy only certain authors in hardcover and never buy them in either paperback or ebook, but the bulk of my fiction purchases are ebook. If it isn't in ebook, with the exception of a handful of preferred authors who I buy in hardcover, I simply do not buy the fiction book.

My wife, OTOH, buys paperback and only occasionally in hardcover and never in ebook. She dislikes the weight of the hardcovers and is only marginally interested in ebooks and thus doesn't have an ebook device.

In speaking with neighbors and relatives about their bookbuying habits, the scenario repeats itself; that is, they have their preferences and rarely deviate from them.

I'm a bit more diverse. There are both fiction and non-fiction I buy in hardcover, and I'll take most things as ebooks. The big exception will be things like coffee table art books - those don't translate well to electronic editions, due to small screen sizes and thinks like lack of color support in current generation readers.

I'm not normally concerned with the weight of hardcovers because I don't usually carry them around. In fact, I've been gradually replacing some paperbacks with hardcover editions for durable reading copies. If I'm traveling, hey, that's what ebooks are for...
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Dennis