Wednesday, February 10, 2010

Clarifying Misconceptions on Amazon vs. Macmillan

Every Wednesday, I have an essay or feature article on any topic that catches my fancy!

Titles have power. And in a certain sense, I don't like the title of this essay. Amazon vs. Macmillan is catchy and memorable but it also creates several misconceptions. One of which is that you're either on Amazon's side or Macmillan's side but that's not really the case. For this article, I'm taking a page from Andrew Wheeler's excellent Myths of Amazon/Macmillan (you should all go read it) and counter some of the statements made with regards to the issue.

1) Over at Indie Author, April Hamilton is pretty much saying to authors: blame Macmillan and don't side with them. "It was Macmillan which set forces in motion that ultimately resulted in the removal of ‘buy’ links, not Amazon, and while Amazon's actions in this seem excessive, I still see plenty of reasons for authors to be irked with Macmillan." It continues at how Macmillan's proposed model is harmful to authors.

I have two countering statements here. First, many of the authors aren't really siding with Macmillan more than blaming Amazon. Author Scott Westerfeld has a breakdown here. Another thing I'd add to that is that while Amazon is well within their rights to pull-out any product from their catalog, it would have been great to have given advance notice to Macmillan. But that's not the case here and Amazon simply withdrew the books during negotiations, in addition to pulling out print books (which were not the subject of discussion as far as we can surmise) as leverage.

My second counter-statement here is that the authors who dislike Amazon aren't necessarily fans of the agency model. Some are optimistic about it while others are skeptical. They're complaining about Amazon's actions in this instance, not necessarily of the business model they're using (or the one that Macmillan is proposing).

2) At Teleread, the title says it all: Maybe we should be hurting the authors. It goes on about the plight of the consumer: "Where is the voice of the customer in all of this? What are they doing to try and make things better for themselves?"

The problem here is that authors don't determine book prices--unless they also happen to be the publisher (i.e. self-publishers). Nor do authors, for that matter, have much say when it comes to book covers, and blaming authors for book prices is about as effective as complaining to them about their book covers.

If you want to complain about eBook pricing, the ones whom you should be addressing are publishers, retailers, and distributors (when it's applicable) as they have the most say in determining price. Statements like "Maybe we should be hurting the authors" is simply looking for a scapegoat, rather than addressing the actual problem. At this point in time, the only option authors have in determining price is whether they'd actually sell their book to a publisher or not (and in the case of Macmillan books, those rights have already been sold, and it's not like the author can suddenly rescind the rights just because they're unhappy about the publisher's price point).

3) Michael Stackpole currently has a series entitled Authors Can Be Stupid which touches on the Amazon/Macmillan issue but one of his posts that I'd like to tackle is Please Feed the Authors! "I certainly have sympathy for the authors whose work is caught in this catfight, but this call for readers to go out and buy their books right now is nonsense. The appeals make it appear that if we don’t buy now, these authors will starve."

For the record, what Stackpole says is true: if you buy a book now, the author will most likely get paid eight months down the line (if not later)--pending special arrangements with the publisher (probable for an independent press, not likely for a major publisher). And if you read the rest of the series, Stackpole does mention some benefits for going the eBook route, or even as a self-publisher in tandem with this.

My complaint however is the dismissive attitude he has for authors "calling for support". Well, at least as far as the authors I'm monitoring, none of them have informed their readers that they're dying and broke and need the money now, now, now! Macmillan authors who have book releases in February have cause for concern, mainly because they're working with the traditional publishing model which entails book promotions that end usually on the month of the book's debut. This is problematic because, let's face it, while there are some titles that sell consistently over time, the biggest spike in sales tends to be during the window of initial release. (It can be argued that this is a chicken-or-the-egg dilemma where publishers should promote a book a long time after its release but it's a moot point to an author working with a major publisher.) If a casual reader hears about the book and doesn't find it on Amazon, well, that's conceivably a lost sale. While books aren't as time-sensitive as other commodities--such as comics--it is still an issue.

Granted, there are other factors that might cause a spike in sales, such as your book getting adapted into another medium (such as movies). At worst, this is an opportunity for Macmillan authors to maximize the publicity they're getting (or not getting) and turn around what is typically a bad situation into a positive one. I'm just surprised that Stackpole--who has been a great promoter of his own titles--is being critical of such an action. (Again, I'd understand it if the authors were actually claiming "I'm starving, buy my books now!" but that's not the case. And Amazon's withdrawal of their titles, albeit temporarily, could impact their sales; we'll find out 8 months down the line right?)

An issue related to the Amazon/Macmillan issue that I'd like to tackle is eBook pricing.

eBook Pricing

I've tackled the issue of eBook pricing before (1, 2). Not to rehash much of it, let's look at it from a different perspective. There are two factors that determine the price of a product (any product, not just eBooks):

  1. The cost to produce the product and
  2. Perceived value.

Let's talk about #2 first. Here, the $9.99 price point wins out. We live in a world where people value tangible products more than intellectual property. That's why cases that involve theft of the latter is harder to adjucate than the former. (And to their credit, it's sometimes harder to prove.) And just look at the typical reaction when it comes to eBook prices: people rationalize eBook pricing by saying "I don't want to pay hardcover price for an eBook". Or even authors say "eBooks should be priced less than the print book" but how much exactly, they can't really say. This is an instinctive and gut reaction. And more often than not, it's not rational.

One of the arguments for cheaper eBooks is that the publisher isn't paying for additional costs, such as printing. Yes, that's true. But printing costs around 10% - 20% of the retail price. For a $25.00 hardcover, that drives down the book to $20.00. But most eBook buyers aren't content with $20.00. They want it down to $9.99 (and $9.99 is, in itself, a psychological trick--why not a whole number such as $10.00?).

And then there are other reasons batted around such as publishers not paying for storage space, shipping costs, returns, etc. Again, that's only a percentage of the retail price of a book. But they also neglect to mention factors that sway print books in favor of the publisher. Books for example can be pulped and provide a significant tax deduction. The same can't be said of eBooks.

So when we talk about the price point $9.99, recognize that it's an arbitrary number that consumers respond to, irrationally or otherwise. That's not to dismiss $9.99, but recognize that it's what people are willing to pay for, no matter how much you justify everything else. And to most consumers, this is their paradigm when they talk about eBook pricing.

Tragically, going back to the topic of valuing tangible products over intellectual property, we see the former in play when it comes to the consumer's view of eBook pricing. Readers don't say "I think this eBook is worth $0.99 while that eBook is worth $9.99". Instead, they say "I'm not willing to pay $14.99 for this author's work". They conveniently ignore the benefits eBooks have over books (for example, you get the book immediately when you order it online, as opposed to waiting for it to arrive at your doorstep; or the fact that you can print and make multiple copies of an eBook--and if it can't, well, blame either the retailer or the publisher or whoever's dictating the format) or the fact that what we prize about books isn't that it's a glorified paper weight, but rather the message it carries--the story in the case of Fiction--which should translate whether it's a book or an eBook. (Sure, there are other factors, such as readability, but if eBooks are difficult to read for you, why are you buying eBooks in the first place?)

And then there's point #1. Hardcovers are relatively expensive because while I wouldn't say that the cost to produce the product is cheap, it's modest enough. People's perceived value of it, however, is high, hence warranting the $25.00~$30.00 price tag. (Arguably, the publisher could sell it for $20.00 but that means someone down the line, whether it's the publisher, distributor, retailer or author, is getting less profits.) Mass-market paperbacks, on the other hand, are cheap, not because it's significantly cheaper to produce, but because publishers can sell it in large quantities for its price point. It's the supply vs. demand argument: mass-market paperbacks are cheap because it sells a lot.

Now some consumers want eBooks to be priced the same as mass-market paperbacks. Unfortunately, looking at it from the production cost point of view (which is the paradigm of most publishers), they can't, at least doing so without taking a significant loss. Again, mass-market paperbacks are cheap because it sells a lot. In order for eBooks to be competitively priced as mass-market paperbacks (I include competitively because feel free to shave off the 10% retail price it costs to print the book), eBook sales must equal mass-market paperback sales. But that's simply not the current reality. Compare the number of people with eBook readers vs. the number of people actually buy mass-market paperbacks, and there's already a disproportion in the numbers (heck, I'm even hard-pressed to make the argument that eBook sales equal that of hardcover sales--although I have no hard numbers). One might boast that Amazon's Kindle has sold millions of books but bear in mind that's all the books that have been bought, not any single particular title. That could represent 10 copies sold of each Macmillan title and that's honestly not profitable enough for each book to stand on its own feet.

Those clamoring for $9.99 might claim that it's not significantly costing the publisher to convert their books to eBooks. Well, that's what we call subsidizing:

eBook Subsidizing

Right now, when we talk about eBooks, a lot of them are priced at a point where it's being subsidized. Now I'm not a fan of subsidization because it means that in the long-term, a particular model is not self sustaining. But we'll get back to that later.
  1. Free - Some eBooks are simply free. Cory Doctorow uses this tactic to boost the sales of his print books by having his fiction fall under the Creative Commons License. This is typically part of a publisher's marketing strategy. Note that this is only sustainable as far as the print books are selling.
  2. Reduced Costs via Print Books - Some eBooks are not priced to be self-sustaining. Instead, they're priced in tandem with the publisher's books. The books do much of the selling and the eBooks are there for the few who want them, building good will with the publisher's customer base. Or it might yield some profit for the publisher, but it stops becoming sustainable the moment the publisher dumps its print books. Here, the books pay for the other factors that go into producing a book: the editor, the layout artist, the proofer, marketing, etc. while the eBooks pay the publisher, the author, and the retailer.
  3. Reduced Costs via Some Other Method - This is how Amazon is selling their eBooks. It could be theorized that Amazon is losing out on every eBook it sells if it's priced under $10.00, but that they're making up for it in Kindle sales. Here, eBooks are a loss-leader. (However, read Myths of Amazon/Macmillan as to why this might not be the case.) The other theory is that Amazon is gambling that they'll get significant market share in the future using their current strategy (remember the time when Amazon was giving significant discounts even on mass-market paperbacks? Why aren't they giving the same discounts now?) Either way, this really isn't a model that's universally applicable. Or if you're not in the business of selling eBook readers.

Now there are claims that Amazon is interested in developing the eBook market. That's not exactly accurate: Amazon is interested in developing its own eBook market, and that's the business model it's based on. It's a model that's full of control on Amazon's part (which is why Amazon refuses to disclose the Kindle's exact capabilities, and how they can "pull" books from you such as in the case of 1984, or the sample chapters from Macmillan). Even the format Amazon uses--its own proprietary format that's closed and DRM-protected--is telling. Not that I blame them, mind you, but it's not Amazon's best interest to innovate the eBook market in general, unless it's under their own terms.

Now to produce a book, eBook or otherwise, there are several people that need to be paid: the author, the editor, the layout artist, marketing, etc. If you don't do it all yourself and not having books to subsidize payment for those services, you need to be selling a lot of eBooks to price them cheaply (i.e. $9.99)--which at this point in time is, I think untenable*. Amazon's model works for Amazon because of the reasons that I cited above.

As for the pricing of the other subsidized eBooks, they work fine for now, but if you genuinely believe that eBooks are the wave of the future and that one day, print books will disappear, then publishers need to look to a model that's self-sustaining and doesn't involve subsidies. This means pricing books at a higher rate than what it is now (or growing demand for them), or looking at other business models. Macmillan's Agency model, in my opinion, looks clunky. It does favor print books over eBooks, but it also makes the latter more self-sustaining: there's no loss-leaders involved (and in this sense, Amazon still wins as they're profiting for every eBook sold) and the pricing scheme is more flexible. Is there a more efficient system? Possibly, but a willingness to experiment is, I think, the key to finding one.

*That's not to say it's impossible. If you're selling a short story--as opposed to novels--for example as an eBook, I think that's certainly doable, although some entrepreneurial skills will be needed. Or you could simply be a self-publisher, handling everything from editing to layout to marketing.


Bradley Robb said...

The biggest flaw I've seen in the eBook pricing debates is the one almost wholly owned by those pushing for higher prices – cost. It's been stated time and time again by the higher price crowd that books are expensive. And the low cost crowd often rebuts with “Yeah, but, you don't have to pay for the following: printing, shipping, warehousing, and manpower. You're saving a fortune.” The disconnect is that these two groups are arguing about different aspects of the publishing cycle.

The real crux is that publishers need to look at producing a book in much the same way that an author does regarding their advance – with an eye on the fixed final cost. That is, there is a grand number associated with the production of each title – a number that encompasses the advance, the editing, the layout, design, and the physical production. This grand number is the book's true cost and the goal for the publisher is to then bring in more money than the cost, making the book profitable. It's the same relationship as an author has towards their advance – until an author earns out their advance, the book isn't going to generate a profit.

So, it would behoove publishers to focus on each title's cost, so that they can focus on each book earning out.

With print books, that cost is fuzzy. Each subsequent print run pushes the cost somewhat higher, but as we've seen the line doesn't move that much. Ideally, that first print run will earn out (at least for the publisher), and following prints require far fewer sales to be profitable.

With electronically published works, the cost per title is fixed. That is, once an eBook earns out (again, for the publisher) every copy sold afterwards is pure profit. And the book will continue to be profitable until the end of the publisher's rights. In both systems, the goal is to earn out as quickly as possible, but in an fixed cost environment the benefits towards the publishing entity are greater.

And while publishers are very keen on the notion of cost, the arguments made in favor of keeping eBook prices higher tend to push the entire weight of the cost onto the digital format. This is a foolish attempt at absolution. Hard covers and eBooks are multiple revenue streams working towards earning out the same cost. That is, if a book “costs” $200,000 – that cost is split between all revenue streams, not attributed uniquely to each of them.

Current arguments seem to support the idea that hard cover readers and eBook buyers are largely exclusive, with little overlap in terms of sales but correlative influence in less tangible areas like word-of-mouth-marketing and mindshare. That is, when a book is popular in one group, there tends to be a net positive sales effect in the other. This relationship extends beyond dual-medium sales, as several studies (both anecdotal and scientific) have drawn correlative relations between piracy and print sales.

Thus, it would benefit publishers to make each product as appealing to the unique demographic as possible – investing in richer production on hardcover books while making eBooks less expensive and more convenient. This allows for a larger per-unit profit in print and a greater volume profit in eBooks and seeks to earn out a title's cost as quickly as possible.


Bradley Robb said...

As to whether a market currently exists for eBooks, I think you're leaving out the fact that the current dominate screen for electronic reading isn't based on e-ink. True, Amazon has only sold roughly 3 million Kindles – and the total dedicated reader market is around 10 million screens (Kindle, nook, Sony, and a dozen or so other parties) – almost every eBook retailer has ventured into the smart phone market. The iPhone/iPod Touch market blew past 50 million units last year. And the number of Blackberries in circulation is larger than the population of the nation they were created in (Canada).
Personally, my iPhone is where I do all of my electronic reading. It's not an ideal solution, as I tend to tire after about 45 minutes, but the current e-ink solutions have their own recognizable drawbacks (refresh rate and the cost associated with a dedicated device being primary). As it stands, the iPhone is a more than adequate eReader, and is the only place where I have ever paid for an eBook.

The size of this market, the pure potential, highlights the real hurdle that publishers are facing. It's not pricing that will be the major issue, but a shift in just who the customer is. Current publishers are accustomed to dealing with a pool of customers measured in the hundreds – the distributors and retailers. For the pre-2010 publishers, there was a firewall between publishers and ultimate customer, and that meant the publishers had more leverage in negotiations. However, when working in a digital environment – especially in the “agency model” - the publishers is now dealing (in)directly with the ultimate consumer – the reader. And the reader wields a considerable amount of leverage. Just ask the recording industry.

The agency model alone won't facilitate that relationship. Pricing alone won't help publishers, not when they're giving up all the data that current retailers posses. Not when retailers are still locking customers into devices through DRM and proprietary formats – a situation that means the agent has more control over the customer than the publisher. For the publisher, any publisher, to truly arrange an agency model, they need to make it dead simple for a customer to switch between agents without putting prior purchases at risk.

And they need the data. I don't think publishers realize just how much Amazon knows about it's customers. Amazon knows not only every item a customer has purchased, but also every item the customer has looked at. Amazon knows how long a customer looked at an item before buying, how many times they visited the page, and they can compare that data to suggest other items. Amazon is able to build a rather comprehensive profile of its millions of users with measurable knowledge that mothers wish they had. If publishers were able to tap into that data, they'd have the true upper hand. Imagine what a publisher could have done with early data on the Twilight series – “Vampires are going to be hot, what are the agents bringing us?” “Reader X likes noir detective books, what do we have on the back catalog that we can suggest he read?” “Joe Finder's eBook is selling well – we should look at a second printing to meet spill over demand.”

So, while the agency model is in it's infancy, it has a long way to go. Currently, publishers are wielding the device like a club, a “gotcha” leveled at Amazon for providing eBooks at the most efficient price (the point where price and volume equalize to the greatest profit). The $12.99 best seller and $14.99 eBook won't sell at $9.99 volume, but they will facilitate an increase in piracy. As has been proven, that piracy will lead to higher print book sales, but not in the way that publishers secretly want. In the long run, this will only lead to a future price war – when one of the Big Six will slash prices to gain a competitive advantage and the others will be forced to play catch up.

After all, the only way to beat piracy is to marry cost with convenience.