I really should be writing, but the misinformation and outright lies being tossed around the Interwebz drives me to distraction.
Hachette CEO Michael Pietsch responded in Digital Book World to all those who answered Amazon’s email plea and sent him a message this weekend. He said several questionable things, but I want to focus on the last bullet point in his letter:
• The invention of mass-market paperbacks was great for all because it was not intended to replace hardbacks but to create a new format available later, at a lower price.
As a publisher, we work to bring a variety of great books to readers, in a variety of formats and prices. We know by experience that there is not one appropriate price for all ebooks, and that all ebooks do not belong in the same $9.99 box. Unlike retailers, publishers invest heavily in individual books, often for years, before we see any revenue. We invest in advances against royalties, editing, design, production, marketing, warehousing, shipping, piracy protection, and more. We recoup these costs from sales of all the versions of the book that we publish—hardcover, paperback, large print, audio, and ebook. While ebooks do not have the $2-$3 costs of manufacturing, warehousing, and shipping that print books have, their selling price carries a share of all our investments in the book.
This bit: “create a new format available later, at a lower price” is referred to as windowing and it’s something readers have railed against since mass-market paperbacks were first introduced. We all know the drill. Our favorite author writes a new book. First, it gets released in hard back. Then, sometimes more than a year later, it finally is released in paperback. Why do the publishers do this? Profit.
Let’s look at a typical bestseller hardback new release. I am going to use generic, made-up numbers for this example. There are always exceptions to every rule. Most new hardbacks these days are priced at about $28. Publishers sell them to distributers/retailers (like Amazon, Barnes & Noble, and Ingram) at a 50% discount, meaning the publisher gets $14 for the book. Mr. Pietsch states above that print books have production costs of $2-$3 per book attached to them, in addition to the fixed costs he states, such as editing, design, etc. (We’ll ignore the fact that he uses warehousing and shipping twice in his argument) Those fixed costs, in normal accounting procedures, would get amortized over the projected sales of the book. For argument’s sake, I’m going to use a figure of $6 per book to cover those “investment” costs — and I think I’m being generous here. Remember that the author’s royalty is baked within that figure because the publisher has paid the author an advance already, so about $4.20 of that $6 is being used to pay down that advance. That leaves $1.80 for the other costs. If the book is expected to sell 100,000 copies, that’s $180,000 for editing, design, marketing, blah, blah, blah.
So, we have a final “cost” of the hardback book at roughly $9 and the publisher gets $14. Pretty good deal. Here’s the problem though. The paperback version of the book retails for around $10 these days. Meaning that the publisher gets about $5. That figure doesn’t look so good against the $9 cost we established earlier, yet Mr. Pietsch claims they recoup those fixed costs he mentions from “sales of all the versions of the book that we publish—hardcover, paperback, large print, audio, and ebook.” Even if we assume the production cost of a paperback is a little less than the hardback, it still doesn’t make financial sense. What are we missing?
Windowing. Because the book is only released in hardback initially, the publisher guarantees it sees that nice number for the first several months to a year of the book’s existence. Contrary to what Mr. Pietsch is claiming, the publishers don’t amortize those fixed costs over all formats — at least not equally. They make their money with that initial hardback release.
Now, ebooks enter the picture. People expect to have access to the ebook version of a new release at the same time as the hardback. To make that happen and still get the profits they want from a new release, publishers have to jack up the price of the ebook beyond reason. Let’s look at the numbers. We had a figure of $9 for production/fixed costs of our hypothetical new book, but we can take out that $3 needed for printing and distributing the paper version, so we’re down to the $6 fixed cost figure. Amazon would like to sell ebooks for no more than $10 ($9.99), of which, they take 30% instead of the 50% for paper copies. That leaves $7 for the publisher. Profitable, but nowhere near the $9 vs $14 we saw with the hardback. Ah! But if the publisher says, “Let’s charge $15 ($14.99) for the ebook,” then we have something. Now, they are getting about $10.50 from Amazon for that book vs. the $6 cost, which is nearly the same as the hardback profit margin. (This doesn’t take into account the lower author royalty dollar-wise for the ebook, which amounts to about $2.65 instead of the $4.20 we showed earlier, meaning the publisher actually does better on the $14.99 ebook than the hardback.)
With me so far? Everything sounds like it works out just fine for the publisher, right? Except for one thing: people get really pissed off at paying $14.99 for an ebook.
Amazon knows this. People leave nasty one-star reviews by the droves whenever a book gets priced over $10. People also get pissed off when publishers have tried to window ebooks — in other words, not release them at the same time as the hardback. The publishers can’t stomach the $9.99 price point because their business model falls to pieces.
Guess what? It’s time for a new business model. Ebooks aren’t going away and neither is the average reader’s desire to not pay more than $9.99 for it. Until the big publishers grasp this concept, they are going to continue to butt heads with Amazon.
Just a quick note to let everyone know I’ll be at Hastings Books & Music in the West Park Promenade in Billings, Montana this coming Saturday, July 26th from 3-5 PM. I’ll be signing books, passing out bookmarks and other goodies, and ready to chat about all things books and writing. Stop on by if you missed your chance to go to San Diego for ComiCon!
Oh, good grief. Another post about the spat between Amazon and Hachette. When is it going to end?
That’s a question I’ve seen more and more people asking and it’s a good one. The answer, though, is more complicated than you might think. To most people, the fight is between two companies: Amazon and Hachette. For Amazon, however, this is the first in a line-up of five which will be coming one after the other in the next year or two. Each of the Big 5 publishers (MacMillan, Simon & Schuster, Harper Collins, and Penguin-Random House — along with Hachette) is going to be taking their swings at the online retail giant as their contracts expire in the relatively near future. Because of the Department of Justice ruling against Apple and the settlements those publishers agreed to, they must negotiate their deals separately with Amazon, or any other ebook retailer, to avoid the appearance of any collusion which was what got them in the legal hot water in the first place. The judge set the publishers apart by six months each and first up happens to be Hachette. Harper Collins is on deck.
The other clock that’s ticking is the two-year ban on entering into contracts which restrict the retailer’s ability to discount ebooks. Hachette settled with the government in April of 2012, but it’s unclear exactly when that particular ban will end. Most of the speculations I’ve seen are later this year. Hachette has explicitly stated in its own materials to shareholders and investors that it wishes to “control ebook pricing”.
Now, if the negotiations were only about coop advertising costs and the price for the privilege of pre-order capabilities, do you really think it would have taken seven months and more to come to an agreement that was acceptable to both parties? I am doubtful to say the least. The evidence on hand points to a larger issue about pricing, discounting, and the slices of the pie that Amazon and Hachette receive from books.
With all of that as background, enter the authors who are published by Hachette and its subsidiaries. They are understandably upset when they see their books being treated differently than others in Amazon’s store. Preorder buttons disappear. Titles show delayed shipping dates. And prices are set to the publisher’s suggested retail with no discounting. All these things, I’m sure, impact the sales for those authors on Amazon. Ire against Amazon ensues with angry blog posts, calls for boycotts, and negative publicity accusing Amazon of hurting authors in its dispute with their publisher. Hachette and other organizations pile on with accusations of Amazon “putting authors in the middle” of the fight because of their actions.
Let’s set aside, for a moment, our feelings about books, literature, monopolies, large corporations, and the way publishers treat the majority of their authors. I know, that’s a lot of stuff to set aside, but please try. Amazon and Hachette are in a dispute regarding the sale of books that Hachette and its authors supply. Amazon wants to get an agreement in place it feels it can live with — not only for Hachette, but for the other publishers waiting in line — but Hachette, by all accounts and their own lack of denial, has dragged its feet in trying to get an agreement done. Amazon has taken steps to put economic pressure on Hachette to speed up the process, yet those steps coincidentally hurt authors and drag them into the dispute. To alleviate some of that injury, Amazon has twice offered to directly help the authors involved while the companies conduct their talks.
My question is this: What can Amazon do to pressure Hachette that won’t harm Hachette’s authors?
Seriously. Think about it for just a minute. Hachette supplies products to Amazon for sale. The two companies can’t agree on terms for the sale of those products. Should Amazon continue to sell those products without a contract in the hope that Hachette will eventually offer terms Amazon considers reasonable? Is that a smart way to conduct business?
Consider this: Say I have a super nifty widget I’m designing and you have a store that sells widgets. I contact you to sell my super nifty widget once I have it produced and ask you to promote it to your customers and get them to place orders for them ahead of time so I have a better idea how many to manufacture. You think my super nifty widget is, well, super nifty, so you agree and really hype it up to your customers, collecting a bunch of preorders. Now, delivery day has arrived, but since we never signed a contract, I decide to charge more for the super nifty widgets than we’d originally talked about. You have tons of customers anxious for my super nifty widget and they surely won’t be happy with a higher price, regardless of whether you tell them it’s my fault or not. What do you do? Buy the widgets at the higher price and take the loss, or tell me to forget it and refund all those preorders? Neither scenario is especially fun for you. You operated in good faith, but I felt no compunction to do the same.
Would Hachette do that to Amazon if it kept preorder buttons for Hachette’s upcoming titles? I have no idea, but neither does Amazon and it would be bad business for them to take that risk.
I’ll ask again, from a purely business perspective, what can Amazon do that won’t harm Hachette’s authors?
How would those authors feel if Amazon simply removed all those books from their store? They are certainly within their rights to do so. There is no law in place anywhere that says you must sell my super nifty widget in your store. If you don’t like the price I want you to pay or sell my super nifty widget at, you can tell me to go fly a kite. Amazon did this once before with MacMillan when the publishers decided to enforce Apple’s pricing structure on Amazon. It was a PR nightmare for Amazon and the other publishers stood up and flexed their collective muscle to force Amazon to accept their terms. Thus began the DOJ investigation of the whole affair.
So, to any Hachette authors out there who happen to read this (ha! fat chance! if only I were so popular or influential!) or those of you just confused regarding what this mess is all about, take a second to ask yourself the question I posed and honestly examine what answers you come up with.
Maybe it’s also time to start asking Hachette: Why is it taking so long to work out a deal here? Do you really have your authors’ best interests in mind?