Lately it looks as if Amazon has been getting surprise after surprise. Its showdown with Macmillan ended with Amazon backing down. The online retailer had taken all of Macmillan’s books from its site, including from pending sales on the Kindle, over a pricing tiff, and when it relented, it sent out a sniffy letter about Macmillan and its heavy-handed tactics.
Then Apple introduced the iPad and also announced a book sales division, through which the major publishers will sell their books. And all of a sudden it maybe didn’t look like such a good idea to kick a major publisher to the curb, when that publisher could just go to a huge rival with a proven track record in selling technology and media.
What happened? Amazon wanted to set the prices for ebooks at a flat $9.99. Macmillan and other publishers wanted the flexibility of variable pricing. This is the way books are priced now – new releases, hardcovers, etc., are priced at the top, and then are gradually discounted (until they are remaindered, but we won’t talk about that now. Too painful).
A furor erupted over what exactly went into the price of a book – hint, it’s not just printing and distribution costs or even writer advances on royalties. There’s editing, design, proofreading, development, marketing – in short, everything that goes into creating a product. Price a book too low, and it’s not a matter of just selling more. A publisher may never break even. (Price it too high, of course, and it may not sell at all. However, a publisher might know more about its gross margins than a retailer would, although I concede that the industry has been struggling lately.)
At the heart of the matter is Amazon’s identity crisis. It started as a simple online bookseller, and much like its namesake river, it grew into an enormous torrent of goods. But even then, Amazon is not content to be a retailer, and it developed the Kindle to more efficiently deliver content. Even though the Sony Reader and other models had already been available, the Kindle, backed by Amazon’s marketing might, quickly gobbled up market share.
So now we have the Kindle, the Sony Reader, the Barnes & Noble nook, and finally, and most ominously, the Apple iPad. Amazon is no longer the only big dog. There’s a lot of competition out there, and Apple has a proven track record in this arena.
Amazon enjoyed the market lead for years and executed brilliantly for most of that time. It has a great deal of leverage, but to its own surprise, not as much as it thought it had. Now the lesson is being hammered home – being first is great, but you have to take a look behind and see what’s gaining.
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photo courtesy of Lollyknit, used under a Creative Commons license.
What I don’t understand is this assumption in everyone’s argument regarding fixed vs variable prices (the cost that goes into producing the first book vs the price that it costs to produce every copy after that). If you assume that you don’t have to pay for “editing, design, proofreading, development, marketing” for every copy printed (since it’s an inherent copy of the original) then the argument is completely valid to say price a book too low, and it IS a matter of just selling more. Because those are fixed costs! If you sell more, you pay those fixed costs off. The time it takes to amortize those fixed costs depends on price margin and velocity of sales.
The move by publishers to ensure they can set retail prices, is all about protecting another other market segment which makes them a good share of profit: hard cover new releases. (As a side note, imagine if other manufacturers denoted the retail prices of goods, what a horrible consumer world that would be?). So rather than being progressive and trying to expand the market with e-books (which equal limitless and timeless supply and very little consumer friction, think one-click instant buy), publishers have chosen a protectionist stance that they would rather reduce short term risk and maintain short term gain with an smaller existing market that provides higher margins (that’s the exact opposite of visionary). This is a great example of an industry that is old beyond it’s years and really needs to have its foundation shaken in a way that Apple attempted to shake the record industry. Ironically, now it’s apple that is using it’s challenged position to provide more amiable agreements with publishers. I’m hoping Apple and the publishing industry manage to shoot themselves in the foot with this.