Unqualified Offerings

You would think Macmillan and Amazon were Muhammad and Malvo the way I am obsessively blogging their doings, but I do have some follow-up items:

1. KT Bradford’s piece for Laptop mag has been much-tweeted since yesterday. Either Laptop magazine has proofreading issues or Bradford just writes down whatever someone says, because the article contains an unchallenged publisher claim that printing costs “usually account for about 1% of the cover price.” That’s a full order of magnitude less than every other source I can find. Bradford and Bradford’s sources spend the two paragraphs following the 1% claim confusing fixed and incremental costs. That, admittedly, I almost expect.

2. A PW item from last spring sheds more light on what Kindle-sale economics had been: Amazon treating them as loss leaders, so publishers and authors made exactly the same gross revenue as on a hardcover sale – except without returns.

3. In a piece from last spring on his personal blog, Evan Schnittman of Oxford University Press claims that ebooks are “perhaps as expensive or in some cases more expensive than print” because of . . . wait for it . . . metadata.

4. If you can deal with wiki formatting and you have any taste for the nuts and bolts of business analysis, a reprint of PW’s Cheerful Skeptic on variable and fixed costs in book publishing is invaluable. The scary part is that he was trying to explain contribution profit to publishing CFOs.

5. A 2002 piece from Salon on book costs again establishes printing as roughly 10% of the retail price (20% of the publisher’s take). Someone tell KT Bradford.

6. Finally, I unbury the lede: John Sargent of Macmillan’s open letter from Publisher’s Lunch yesterday. Sargent says Macmillan proposed to Amazon a dynamic pricing model with new ebook retail prices ranging from 12.99-14.99, books available on the day of print launch, prices dropping over time. Macmillan’s take would be 70% of the ebook retail and Amazon’s 30%. The letter makes it clear that Macmillan did indeed say it would sharply curtail Kindle offerings if Amazon rejected their terms. [Update: Barron's says Macmillan threatened to hold out new titles from Kindle release for 7 months, not reduce the number of Kindle offerings. See updates below for what Barron's implies about the economics from Amazon's side.]

Sargent’s letter talks about fostering a vibrant variety of devices and outlets for ebooks, which sounds pleasant in the abstract. But here’s what this dispute is really all about:

Publishers have been selling new hardcovers at prices ranging from $12.50-$15.00. Call it an average of $14. They’re spending not quite $3 to print them and losing a third of each book’s value on returns and no-sales, across all channels. (Some printed copies never ship. Only 60% of printed books become net sales. See my various links from this weekend’s posts.)

There are $7-8 in incremental costs coming off of every hardcover book as we move from print to bits, with some small new incremental costs for ebook production. So call it $7 a book.

One way or another, that $7 is going to be split among authors, publishers, retailers and customers. The question is, who gets how much?

Since Macmillan wants to sell new ebooks at $9.10-10.50, they’re staking a claim to 30-50% of the new surplus. Why not? they think. It’s our costs we’re saving. Why shouldn’t we turn a chunk of that to profit? We’ve been surviving on planar margins for decades. Macmillan offers the following to the various parties:

* To the publisher, $2.10-3.50.

* To the authors, ANSWER UNCLEAR TRY AGAIN LATER. (The commission piece is not in our $7 cost savings. It’s a separate issue.)

* To Amazon, $3.50-$3.90.

* To customers, $0-1.00. Suck it up, customers. Hope you didn’t pay too much for that fancy reader doohicky.

Bigtime authors have been grossing 30% of publisher price (15% of retail list) and netting 20% because of returns. Split with their agents of course. (Most authors have been making less, but we’ve been in the hot new bestseller world for all our models this weekend.) In theory, the end of returns means authors are automatically 50% richer per unit, an extra $1.40 in their pockets, less agent commission. In practice, they’re going to have to defend that 50% bennie from the other players.

Amazon wants to pay $7 an ebook and sell it for $10. Let’s see what that means for our parties:

* The author gets her extra buck-forty, unless the publisher raids it. (Remember that the extra author commission is not in our $7 cost-savings estimate.)

* Amazon grosses $3 on an ebook sale, but was grossing $1 on a hardcover, so their net benefit is $2.

* The customer is $5 better off. Instead of paying $15 for a hardcover, he pays $10 for an ebook.

* The publisher gets bupkis. Amazon’s $2 plus the customer’s $5 equals $7. Nothing left over. Sorry! Go tell the author how expensive “metadata” is. Unless they write science fiction. You’ll have to just tell them to eat it.

Amazon tells itself that it’s responsible for the $7 in savings, not the publishers. It made the fancy device that lets everyone say goodbye to printing and returns. It took a loss on every sale for two years to build the ebook market. It knows what customers will and won’t pay for an ebook because it knows customers. The publishers are no worse off.

You can see why the publisher gets offended at Amazon here. The publisher is offering to split the windfall with Amazon; Amazon is offering to split the windfall with the customers. You can even sort of see why authors instinctively align with the publishers. If Amazon and the customer get the full windfall from manufacturing and returns, the publisher starts casting a covetous eye on the author’s returns windfall. The author’s experience is that she never comes out ahead from major changes in publishing, and she doesn’t expect to this time.

I’m not scandalized by Macmillan’s threats or Amazon’s retaliation. Both sides played chicken and now they’ve smashed up.

But it’s very hard for me to see why readers should side with the publisher in this feud. The publisher wants the reader to buy a device costing hundreds of dollars and then pay the same price for virtual books as physical ones. The best price the publisher eventually plans to offer is equivalent what readers pay for a discounted mass-market paperback now (about $6, per Sargent). We’ll trade physical clutter for the electronic clutter of DRM and licensing. For some people this will be a net benefit, for others a net cost. On the bright side, those of us with worsening vision can make the print as large as we need. The thing is, with Amazon’s model, I get that anyway, plus five dollars.

UPDATE: The Barron’s article does not substantiate an Amazon counteroffer of 70/30 on $9.99. That IS what Amazon is offering independent and self-publishers now, but there’s no indication that it has offered major publishers the same deal. Instead, the status quo seems to obtain: Amazon pays publishers the same price it pays for hardcovers and prices each unit at will: usually $9.99; occasionally more. In that case, here’s where the $7 windfall goes:

The author gets her $1.4o. Not included in $7-windfall calc.

The publisher gets: $7. All of the windfall!

The reader gets: $5 – rough discount over Amazon hardcover price.

Amazon anti-gets: $5 – rough discount over Amazon hardcover price. Amazon loses income on each hot new frontlist book.

The “Amazon deal” in the main post is not currently on the table, so far as we know.

This is a dispute about control. In the hardcover world, publishers declare list prices, but the retailer has ultimate say over the street price of the book. Macmillan wants to wrest control of street-pricing from the retailer. Amazon wants to keep it. It’s a power-grab on Macmillan’s part. If they can control street-pricing, they can strengthen their hand vis-a-vis retailers. Down the line, they can almost eliminate retailers.

What do you need Amazon for if you can sell the book directly from your own website for more than you used to sell hardcovers? Answer: nothing. Except - somebody’s got to make e-readers, either software or hardware. There may be only six major publishers, but they can’t sell six different proprietary devices. Yesterday Charlie Stross asserted that

This asinine jockeying over electronic book prices has very little to do with what’s actually good or useful for anyone other than the manufacturer of a piece of hardware… who also happens to be a book retailer. I understand Amazon’s desire to corner the electronic book market with the Kindle, which requires publishers to bend to its will on pricing, but I’m not notably sympathetic to it.

But from what I can tell, in an ebook world it’s going to be only “the manufacturer of a piece of hardware” who even has the option of being a book retailer. Nobody else offers anything the publishers need. You know what the future of ebook retail is for non-manufacturers? The Amazon affiliate program. Only not with Amazon. You’ll be a “Macmillan affiliate” or a “HarperCollins affiliate” or etc. driving traffic from your website to the publisher and making 10-15% a sale, paid quarterly. Alternatively you’ll be an iBooks or Amazon or BN or Sony affiliate, depending on whose hardware survives.

In the long term, the publishers bet on device convergence and hardware commoditization so that device-makers lose their power. Then the telcos and cable companies come sniffing around for their cut. But one day at a time!