Tears of the major publishers

Amazon is cracking down on the ability of major publishers to rip off authors:

The battle is being waged largely over physical books. In the United States, Amazon has been discouraging customers from buying titles from Hachette, the fourth-largest publisher by market share. Late Thursday, it escalated the dispute by making it impossible to order Hachette titles being issued this summer and fall. It is using some of the same tactics against the Bonnier Media Group in Germany.

But the real prize is control of e-books, the future of publishing.

Publishers tried to rein in Amazon once, and got slapped with a federal antitrust suit for their efforts. Amazon was not directly a party to the case but has reaped the rewards in increased market power. Now it wants to increase its share of the digital proceeds. The publishers, weighing a slide into irrelevance if not nonexistence, are trying to hold the line.

Late Friday afternoon, Hachette made by far its strongest comment on the conflict: “We are determined to protect the value of
our authors’ books and our own work in editing, distributing and
marketing them,” said Sophie Cottrell, a Hachette senior vice president.
“We hope this difficult situation will not last a long time, but we are
sparing no effort and exploring all options.”

What is hilarious is the authors and publishers crying about how Amazon is “raising the prices” of their books. It’s an absolutely ridiculous charge. What Amazon is actually doing is refusing to continue its extreme discounting on the artificially high retail price of books.

Castalia House has no issue with Amazon, and Amazon doesn’t discount its prices on our ebooks much because they are already in the price range that Amazon expects: 2.99 to 4.99. But publishers that price their ebooks at $15.99 are in trouble, because no one wants to pay actual retail price for them on Amazon. Compare the price of two John C. Wright books. We sell AWAKE IN THE NIGHT LAND for a digital list price of $4.99. Tor sells JUDGE OF AGES for a digital list price of $26.99. Tor is counting on Amazon being willing to offer the customer a 45 percent discount, thus allowing Tor to collect $12.15 (assuming the standard 55 percent distribution discount) on an ebook compared to the $3.50 that Castalia receives. But Amazon only makes one dollar more from the 5x more expensive Tor book than it does from the Castalia book, which means a 17 percent operating margin instead of a 30 percent margin.

And Amazon sells more copies of the lower-priced books. At $4.99 AWAKE IN THE NIGHT LAND is #18,816 on Kindle. At $27.99 reduced to $12.99, JUDGE OF AGES is #41,075. Ebook prices are elastic, so if Amazon can sell 2 low-price ebooks for every 1 high price ebook, it not only makes a) about twice the margin, but also b) about fifty cents more.

No wonder Amazon is unwilling to continue the conventional arrangement. Amazon can only successfully sell its books up to a certain price, depending upon the format and length. Due to the distribution discount system, a higher retail price means a higher distribution price, so Amazon makes half the margin on the more expensive, more steeply discounted books from the major publishers. Amazon is not only perfectly within its rights, but logically needs to stop discounting the book from what is, after all, the publisher’s suggested retail price; Hatchette’s complaint is rooted in the fact that Amazon is now selling its books for the price that Hatchette itself suggests!

By the way, this showdown between Amazon and the major publishers is a development that I predicted would be taking place soon during my campaign for SFWA President. The possibility was pooh-poohed by the business geniuses there, including the eventual winner. Nevertheless, the outcome will likely have a huge effect on authors with major publishers because the reason the publishers are fighting this uphill battle is their inability to support their current overhead structure without the additional revenue they receive from their inflated retail prices on ebooks. If either Amazon or the author were to receive a more equitable share, no major publisher could survive in its current form.

What the publishers should do – what they should have done a long time ago – is to set up a joint online store and then stop distributing books through Amazon. But they didn’t have either the nerve or the foresight, so now they’re faced with trying to develop some sort of alternative as Amazon begins to dip its toes into its own publishing line. Their best bet, in my opinion, would be to buy the Nook Store from Barnes&Noble, embrace a truly open standard, and go into competition.

However, they won’t embrace the open standard, and in doing so, they are giving up one of their two advantages over Amazon.