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Amazon reveals motives in Hachette war: forcing lower e-book prices

updated 08:34 pm EDT, Tue July 29, 2014

Retailer holds e-book authors hostage in standoff for lower profits for publishers

Painting itself in an altruistic, pro-consumer light, Amazon in a post posing as an "update" on the Hachette standoff -- that has prevented customers from buying print or e-book editions from the publisher because Amazon refuses to fill orders -- explains that it is putting pressure on Hachette (and other publishers soon to follow) to lower the wholesale price of e-books to where Amazon can make a profit on them selling them at $10 or less. Amazon argues that e-books "must stay competitive" against all other forms of media.

In its post, Amazon points out that "production and distribution" cost of an e-book is significantly lower than that of a printed hardcover. However, it neglects to mention that e-book prices already generally range from one-third to one-half the cost of a printed book in most cases, and can often be as little as one-fourth the list price of a new hardcover. It cites its own studies, which show that compared to an e-book costing $15 (a bit higher than average for an e-book across all digital marketplaces Electronista looked at), the same book priced at $10 would sell 1.74 copies for every one copy at the higher price.

Amazon makes its case on the idea of profit through volume. If publishers lowered prices, they would sell more books, which would create more readers, which in turn would sell more books, it argues. In the price split Amazon proposes, which gives 35 percent of the selling price to the author and 35 percent to the publisher (with Amazon taking the remaining 30 percent), more book sales would generate more revenue for all parties, by its calculations. It also has a further motivation to lower e-book costs, as this would promote its own eco-system of Kindle e-readers and their tie to the Amazon bookstores.

The argument of profit-through-volume rings hollow coming from Amazon, however, with its price-to-earnings ratio of 500. The company has yet to be able to achieve any sort of meaningful profit despite growing to nearly $20 billion in quarterly sales across a huge range of products. Over the past fiscal year, losses have widened by nearly the same percentage as sales have gone up, with more losses forecast by the company itself as it continues to diversify and, more importantly, tries to corner various markets through acquisitions or loss-leader pricing. The company sounds somewhat hypocritical when it tells currently-profitable companies that they will grow through volume alone.

Publishers, which have been in business for decades and are well aware of the argument of "lower prices versus volume," disagree with Amazon's math. Amazon's new push to lower wholesale prices simply means less profit for the publisher in a world that relies less and less on reading for pleasure (or even for education). Amazon also uses this argument to defend its previous bullying of publishers when they agreed to switch to an "agency model" of pricing, referring to the practice as "illegal collusion" (though in fact, no publisher was ever prosecuted for collusion).

The move echoes rather uncannily the words of the late Apple CEO Steve Jobs, who predicted this exact path of profit destruction for the publishers if they did not adopt the "agency model," where publishers set wholesale prices. Amazon, by its own admission, was previously losing $3 to $5 per e-book when it sold e-books at the $9.99 price point before the Department of Justice stepped in to force publishers to adhere to a wholesale model.

However, profits of the publishers did not go up significantly during the same period, suggesting that in fact publishers cannot sustain a $10 e-book price when it would only see $3.50 of each sale as Amazon proposes. In part, this is due to the fact that lower e-book pricing was previously demonstrated to have a deleterious effect on hardback and other printed book sales, as well as harming physical bookstores. These outlets continue to be the main profit centers for publishers, and the main way readers find and buy new books, despite the growth of e-books.



Jobs warned publishers that if they went along with Amazon's wholesale pricing (where the retailer sets the final price, and can opt to take a loss for a while to build marketshare), the retailer would eventually demand that publishers lower their wholesale pricing to allow it to make a profit. "You will make a bit more money in the short term [with Amazon], but in the medium term Amazon will tell you they will be paying you 70 percent of $9.99," Jobs wrote in an e-mail to a recalcitrant publisher. "They have stockholders, too." That moment, predicted in 2010, has arrived.

Amazon's post seems worded particularly to drive a wedge between publishers and authors, mentioning specifically that authors in its scenario would earn (on average) 16 percent more money and gain readers -- and intimating that Hachette "is sharing too small a portion" of its revenue with authors, but "ultimately that is not our call." Unmentioned by Amazon is that their scenario is based on average sales, and would not play out as predicted for most authors, but only for best-sellers.

In the age of e-books, many have wondered why there even needs to be a "publisher" in the traditional sense. While it is possible for authors to self-publish -- a pathway Amazon has made no secret of wanting to encourage, as it increases the profitability of the e-book considerably -- it's easy to forget that in order to do well, even ebook-only works still need to be judged worthy to make an investment in, edited and proofread for publication, deal with potential legal and rights issues and, most importantly, get marketed to gain attention -- all among the duties of traditional publishers, who take risks on unknown authors or edgy-but-brilliant works in the hopes of recouping enough profit to re-invest in other new talents.

While some authors are adept at the many different hats worn as aspects of professional publication, most aren't -- and prefer to focus on the creative aspects rather than the business, legal, accounting and marketing areas that are required to make publications successful. Although it can be argued that 21st-century bookselling can't follow the traditional rules or models anymore, publishers believe that Amazon is bullying them into accepting a deal that is not ultimately sustainable, in the same sense that Walmart has driven innumerable US manufacturers and retailers from the market through unsustainable and predatory price-cutting.

Proponents of digital publishing argue that getting rid of traditional book publishing roles such as paying advances, editing, art direction and marketing will give authors a chance to make more money post-publication by connecting more directly with readers. Amazon believes that the increased audience for e-books is worth the loss of between $3 and $5 per copy in gross revenue compared to average best-seller prices today (the average price of e-books overall is actually well below the $10 mark already). It has even attempted to bypass publishers in some cases, offering to do the reprinting of traditional books itself in some cases.

"The concept that because a book is an e-book it should automatically be priced significantly lower than a paper book is one we don't agree with," Carolyn Reidy, chief executive of Simon & Schuster told The New York Times. "What a consumer is buying is the content, not necessarily the format," she added, pointing that the expenses involved in making manuscripts suitable for mainstream publication haven't decreased anywhere near as much as the public believes.

This sentiment has been echoed by a surprising number of authors, many of whom point out that due to the length of time it takes to come up with a truly polished and noteworthy book, most writers cannot afford to make a living off their work. A recent survey of authors by UK newspaper The Guardian found that only 11.5 percent were able to make writing their sole source of income, and that author incomes overall had plummeted nearly 30 percent over the past 10 years -- in large part due to the rise of e-books and the aggressive devaluation by entities like Amazon.

A number of best-selling authors have said that if e-book prices continue to fall as their popularity rises, authors will be unable to afford the investment of years and effort into creating a high-quality work due to the difficulty in achieving a true "profit" in the relatively short window most books enjoy their top sales figures. Over 900 authors recently signed a letter urging Amazon to stop using "thuggish" tactics against publishers by withholding sales, which hurts the authors and readers more than the publishers. For their trouble, Amazon called the lead author of the effort "entitled" and "an opportunist."

Unsurprisingly, Amazon has blocked any comments or discussion of its argument and proposal.



By Electronista Staff
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Comments

  1. smacker

    Fresh-Faced Recruit

    Joined: 04-24-03

    The company's name is Hachette, without the "t" after the "a" http://www.hachettebookgroup.com/

  1. nowwhatareyoulookingat

    Fresh-Faced Recruit

    Joined: 07-13-09

    Now that we've spent 5 years paying you about $15 per ebook we sell for $10, just to get customers used to expecting to pay only $10 for an ebook, regardless of how expensive the physical book costs, would you mind accepting only $3.50? We have been taking a loss for quite some time, and we'd like to make more money now. Please.

  1. dronkert

    Fresh-Faced Recruit

    Joined: 06-07-07

    Yes, Hachette, what smacker aid. Wrong in the previous article on this subject as well.

  1. Inkling

    Mac Enthusiast

    Joined: 07-25-06

    The title is naive. Amazon isn't revealing its motives. Amazon is simply trying to make it appear better than it is by claiming motives that aren't backed up by its behavior. All you need to do is look at Amazon's strange and convoluted royalty scheme for authors and publishers to see that Amazon isn't interested in lower ebook prices. By only paying 35% royalties for ebooks priced outside the $2.99-9.99 range, Amazon forces up the price of inexpensive ebooks (those that would cost less that $2.99) and roughly doubles the price of schools textbooks whose limited sales mean they must be priced over $9.99. No, in this dispute Amazon isn't for cheaper ebooks. It's for more Amazon profits, typically at the expense of authors.

  1. Charles Martin

    MacNN Editor

    Joined: 08-04-01

    Thanks for the correction on Hachette. We've changed the spelling and will post a note to prevent the problem in future stories.

    Inkling, agreed with your conclusion, but I think it is at the expense of authors *and* publishers.

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