An Unusual Battle Between Amazon and Publishers

Over at the New Yorker, Ken Auletta has a fascinating piece about the future of publishing as the book world goes digital. Highly recommended if you a Kindle lover, an iPad enthusiast, or a Google watcher (or, like me, all three).

The article also describes an unusual battle between book publishers and Amazon about the pricing of electronic books:

Amazon had been buying many e-books from publishers for about thirteen dollars and selling them for $9.99, taking a loss on each book in order to gain market share and encourage sales of its electronic reading device, the Kindle. By the end of last year, Amazon accounted for an estimated eighty per cent of all electronic-book sales, and $9.99 seemed to be established as the price of an e-book. Publishers were panicked. David Young, the chairman and C.E.O. of Hachette Book Group USA, said, “The big concern—and it’s a massive concern—is the $9.99 pricing point. If it’s allowed to take hold in the consumer’s mind that a book is worth ten bucks, to my mind it’s game over for this business.”

As an alternative, several publishers decided to push for

an “agency model” for e-books. Under such a model, the publisher would be considered the seller, and an online vender like Amazon would act as an “agent,” in exchange for a thirty-per-cent fee.

That way, the publishers would be able to set the retail price themselves, presumably at a higher level that the $9.99 favored by Amazon.

Ponder that for a moment. Under the original system, Amazon paid the publishers $13.00 for each e-book. Under the new system, publishers would receive 70% of the retail price of an e-book. To net $13.00 per book, the publishers would thus have to set a price of about $18.50 per e-book, well above the norm for electronic books. Indeed, so far above the norm that it generally doesn’t happen:

“I’m not sure the ‘agency model’ is best,” the head of one major publishing house told me. Publishers would collect less money this way, about nine dollars a book, rather than thirteen; the unattractive tradeoff was to cede some profit in order to set a minimum price.

The publisher could also have noted a second problem with this strategy: publishers will sell fewer e-books because of the increase in retail prices.

Through keen negotiating, the publishers have thus forced Amazon to (a) pay them less per book and (b) sell fewer of their books. Not something you see everyday.

All of which yields a great topic for a microeconomics or business strategy class: Can the long-term benefit (to publishers) of higher minimum prices justify the near-term costs of lower sales and lower margins?

14 thoughts on “An Unusual Battle Between Amazon and Publishers”

  1. I would suspect that a large percentage of ebook purchases are cannibilization of the print books market, so the question arises of what publishers’ margins are on print and e-books. If the substitution of ebooks lowers overall profits, publishers won’t be hurt be reducing sales of ebooks, particularly since Amazon controls the currently favored complementary good (the Kindle).

    Unless Amazon has learned some very creative economic techniques from Milo Minderbinder (Catch-22), they will not continue paying a higher price for e-books once the standard price is firmly established. This leaves publishers holding the bag in the near future, and raises the further question of whether there will be reductions in the incentives for authors and consequent negative pressures akin to music industry issues…though the lower production costs of ebooks might help keep the system balanced.

  2. Market cannibalization may be taking place, but I’d love to see some good data.

    Here’s a complication, for example:

    I am a Kindle owner & buy e-books frequently. Often, for e-books that I have especially enjoyed or thought worthwhile for the information, I have ALSO then bought two paper copies of the same book for sharing with each of my children. …which I probably would not have done if I had originally spent the greater cost for a paper book. I would simply have shared my initial purchase with the kids, with the additional instruction to “please pass it along,” as I used to do, pre-Kindle.

  3. I believe that free markets will sort this out. Publishers are trying to keep prices high to conform with their obsolete business model (print). Regarding pricing, I think that will find its own level.

    Regarding cannibalization: just look back a few generations to how the paperback entered the industry after WW2. It was hated and despised–in part because it took profits away from board-bound books, and in part because of snobbishness. Was this “thing” really a book? Sounds a lot like this artificial hype about digital books. Publishers kept paperbacks at arms’ length for decades, and there is still a pricing ploy in how hard/quality/mass market are released.

    Perhaps the key turning point was when mass market pb originals came out…which ended the “cannibalization” from hard cover to soft cover. The same thing will happen when digital books come out in original editions, not bothering with print. That will make the current pricing fantasies obsolete, and the markets will set realistic prices. $9.95 may not be too unrealistic when it all shakes out. Costs of paper, ink, assembly, inventory, shipping, and physical retail are a significant part of the cost of bringing a tradtional book to market, and will largely be absent with the digital industry.

    The idea of print determining anything from here on is a case of the tail wagging the dog.

  4. Anyone who thinks Amazon/Jeff Bezos will hew to a % of rakeoff that benefits the publisher (& by extension authors) needs an IQ transplant. The best way to ensure a vibrant literary culture in the years to come is to opt out of Amazon altogether. Buy from your local indie, order from Powell’s online or SPD, but avoid Amascrewyou.com, the WalMart of books. Does it need to be restated that independent publishers and bookstores are vital to a system that benefits authors over the long haul? Doesn’t matter whether the lit is digital or print, what needs to happen is for consumers to be better educated about where they shop or fewer authors of merit will be read in the years to come.

  5. Digital book publishing poses the largest threat to the big publishers because if the digital market becomes supreme electronic publishing can be available to anyone. There will be no minimum print runs and upfront publishing costs will drop dramatically. This will open a new model for authors to market their works, perhaps directly through Amazon or other electronic publishers or possibly hiring a marketing firm to generate buzz about the work and publish it electronically themselves.

  6. I don’t care what happens as long as they continue to print books on paper. I work on a computer all day; when I get home at night, I want a real book, not a computer screen!

    The idea that paper books will disappear, and I think that’s likely, horrifies me.

    If Amazon offerned me a free Kindle, I wouldn’t take it. But I know I’m a dinosaur and doomed to extinction.

  7. Anyone who thinks Amazon/Jeff Bezos will hew to a % of rakeoff that benefits the publisher (& by extension authors) needs an IQ transplant. The best way to ensure a vibrant literary culture in the years to come is to opt out of Amazon altogether. Buy from your local indie, order from Powell’s online or SPD, but avoid Amascrewyou.com, the WalMart of books. Does it need to be restated that independent publishers and bookstores are vital to a system that benefits authors over the long haul? Doesn’t matter whether the lit is digital or print, what needs to happen is for consumers to be better educated about where they shop or fewer authors of merit will be read in the years to come.

  8. Unless Amazon has learned some very creative economic techniques from Milo Minderbinder (Catch-22), they will not continue paying a higher price for e-books once the standard price is firmly established.…which I probably would not have done if I had originally spent the greater cost for a paper book. I would simply have shared my initial purchase with the kids, with the additional instruction to “please pass it along,” as I used to do, pre-Kindle idea.

  9. If it’s allowed to take hold in the consumer’s mind that a book is worth ten bucks, to my mind it’s game over for this business.”

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