Weighing in on Amazon/Macmillan Pricing Debate
If you are following the eBook pricing dispute between Amazon and pretty much all the major book publishers, you know that this is indicative of the struggles most traditional media companies are having in adapting to lower-cost digital distribution outlets. As a quick summary, Amazon has been buying eBooks for its Kindle from the book publishers on a wholesale basis (reportedly around $12 – $15 per book). The publishers are hopeful Amazon would them mark the eBooks up and sell them for the same price as hardcovers, around $18 – $25 each. Amazon, with an eye towards building a large eBook market, and with all of its pricing data culled from its more than 90MM users, believes the right price for most eBooks is $10 or less. And as such, they have been willing to sell many eBooks at a loss, hoping to eventually force publishers to sell eBooks at a lower, perhaps optimal price. They would know. They sell gabillions of items to about 100MM consumers every day. Between them and eBay, they probably know more about the price elasticity of most goods than every good manufacturer out there.
Remembering your Econ class, you also know that most goods are elastic; as price lowers, demand increases. An optimum point exist that maximizes profit. I am pretty sure that the book industry, like the music industry before it, has not maximized profit by finding the optimum price. This is generally because the book publishers are not retailers — they have never forged a relationship directly with a customer. To optimize pricing (particularly on a per title basis), you need to conduct lots of tests and analyze lots of data. Amazon does this in near-real time and, I am told, is constantly optimizing pricing, page layout, merchandising, bundling, shopping cart path, and many other ecommerce variables.
While Amazon may have other motives for pursuing lower-priced eBooks (to sell more Kindles?), they are smart enough to know that once a market is established, it is hard to raise prices when competition exists. And with Apple entering the iBook/eBook market, they know they will have competition.
So, why would publishers NOT want Amazon to find the optimal profit-maximizing price? Because, like many entrenched media companies, they have massive legacy cost structures that don’t support selling books at, say $6 wholesale. They offer many unreasonable arguments against this: books are “worth” more, authors won’t make enough money, it’s bad for the industry, etc. These are not economic arguments, but are meant to maintain the status quo economics as long as possible. And it’s ultimately bad for them. The music industry has held firm that music is “worth” $1 – $1.30 per song, regardless of the track. For 7 years, they would not experiment with pricing under $1. (eMusic just convinced Sony and Warner last year to try…and I understand the results are positive.) But is all music really worth $1 a song? No, it is not. We know hundreds of thousands of tracks have sold 10 or fewer units digitally. That is the market telling you something.
As a way forward, Macmillan adopted Sony Music’s agency model which allows Macmillan to actually set the selling price for its eBooks and pay a sales commission to Amazon. You would expect that Macmillan would then be interested, since it controls pricing, in finding the optimal price. But I suspect its Amazon partnership does not allow it to get real-time feedback from price experimentation. And if they really were experimenting, you would expect that some people would see a title for $10 and others for $18.
The bottom line is that “value” or “worth” is not decided in a board room, it is decided by the market. And low-cost digital distribution, where the marginal cost of each incremental item sold is zero, brings consumer expectation that price must fall. They don’t care if the rent on your offices at 50th and Broadway are $8M a year. Traditional media companies whose products are going digital must accept lower unit selling prices and massively cut their operating costs in order to survive. Trying to play hardball with the market ultimately won’t work. See the music industry whose sales are now $20B worldwide, down from $40B, and I think are going much closer to $10B – $12B before finding bottom.
For more reading on this, see my post on piracy in the book industry, the movie industry ignoring market signals from Redbox, and a reminder of what we went through at eMusic with the music industry.
Don’t forget that many people see paying for an eBook that has DRM as a rental rather than a purchase. If I can’t use all the books I bought from Amazon on my iPad then I don’t really own them, now do I.
perhaps if they dropped the DRM people would feel there was more value in the digital product. I know I would.
Thanks for your comment, Bob. This is a lesson the music industry learned the hard way. DRM not only inconveniences customers and lowers sales, but it also increases piracy.
You will be able to read your Kindle books on an iPad. There’s a free Kindle app.
You should forward your words to all the publishers, they really need to read this.
I wouldn’t consider DRM-free to be worth the extra price MacMillan and other publishers want for the ebook versions. It is NOT MY PROBLEM that MacM and others have legacy cost issues. Furthermore, with Amazon’s DTP, authors can – and are – take their older, “my publisher won’t re-issue as ebook” works direct to the customers and get a full 70% of the price. Which skips the publishers’ legacy cost issue completely.
So sorry, MacM, but just because you own an aging, unmarketable buggy-whip factory does NOT mean I must be forced to pay extra for orange smoothies from another of your divisions. Nope. It means if you, MacM, cannot cut the legacy costs, I’ll just buy my orange smoothies elsewhere. There’s no such thing as a publisher ‘too big to let fail’.
You only have to look over at Macmillan’s titles on fictionwise.com to see that they could care less about maximizing profit on ebooks. Otherwise they would not have so many titles that are available as $7.99 paperbacks priced at $14 or more. They just aren’t interested in really supporting e-books, and seem to hope that if their prices are stupid enough, their customers will go back to buying paper. Instead, they’re only going to encourage piracy.
Is there a way to quantify the lost MacMillan eBook sales while they are off the Amazon and BN websites? I know I’m looking for a .pdf of Elie Wiesel’s ‘Night’ on the other browser tab as I type this.
You are 100% correct in your analysis above. I’ll think much harder about buying a $15 eBook vs a $10 eBook. There are plenty of options out there and the lost goodwill from MacMillan will result in fewer eBook sales even at $10 a pop.
If only a logical person who understands Economics could run a publishing house.
sorry….DRM does not increase piracy…this is simply a long time fallacy promoted by media and blogger….pirates will pirate because it’s a simple economic decision albeit unethical….free or more than free…. if anything DRM helps prevent the average joe which can’t or won’t spend the time on youtube and websites finding how to guides on hacking DRM.
In music, there is not data to support your assertion. Various studies and indeed the music industry itself concluded the opposite and removed DRM on all digital music downloads sold. To the extent DRM renders the pirated good more convenient, portable and flexible, there is then even more motivation to pirate.
Another industry the publishing industry needs to watch is film distribution – the bundling of digital copies of movies with DVD purchases enhances the value of the DVD purchase at very little incremental cost. Publishers will need to consider the real possibility that customers purchasing a $25 hardcover (or an $8 paperback for that matter) should also receive an e-book with their purchase. With music it is easy to copy a CD to portable formats. Books don’t come with this convenience, so bundling the purchase seems to be a logical way to ensure sales don’t drop precipitously of paper books with the adoption of e-readers.
Bookpal is correct. Eventually ebooks will be free with the hard copy just as cds are now.
Yes publishers are old and cranky but they have long memories. 20 years ago many publishers went out of business
because they thought cdrom was the way to go.
Publisher greed is going to serve books about as well as Music Industry greed served music! I and a lot of people I know are interested in ereading but havent invested in the platform for all the usual reasons and this move by publishers is going hasten a similar open format non DRM MP3 counterpart to ebooks that takes all the Google scans and adds a cracked copy of current bestsellers! Man you got to love the will of the consumer, when its matched to the wrath of outraged geeks! Long Live the Internet!
This is the more intelligent assessment of the publishers vs. Amazon drama I have read. Amazon is acting in favor of the market and the publishers are acting in favor of their industry. They are so focused on not repeating the music-industry history with book publishing, that they are treating it like its the same problem, with the same solution. Instead of looking for a way to grow and appease the markets!
Thank you for this commentary. Will be visiting your blog more regularly.
Thank you for your thoughts and your compliments.
One intersting aspect of price, is that once you set a lower one, it rarely works to increase it again. The only exception is when there is a shortage situation where demand exceeds supply (see for example the sellers of out of print products with low volumes on Amazon or eBay.)
So just like Apple set the 0.99 price per ‘song’ expectation with consumers and driving lower cost offers outside its ecology, Amazon set one for eBooks.
I expect the eBook market to crash with people rather buying lower-cost print than to ‘rent’ at an inflated price. The disablement of eBooks by Amazon under pressure by ‘copyright owners’ sets a precedent for that. I also expect a thriving market in illegal copies until the pricing comes down.
I for one, have just delayed purchasing a Kindle and eReader App indefinetely.
I tried (but never loved) ereaders long before I fell in love with Kindle. The problem was rarely cost or form factor (although that was an issue) but always content.
I buy Kindle books from Amazon twice a week and only pause when the price is over $9.99. Price does count (I’m an economist) and the book publishers are once again cutting off their noses to spite their faces.
When I want a book in hardback (some books don’t suite an ereader) I look for the best price and terms (usually Amazon). Sometimes I buy one of each, so I like the idea of being able to get hardbacks and ebooks together — sometimes.
THe Kindle not only lets me have lots of books anywhere, it also lets me have fewer books in my home library (which number 10K+, so this is a big issue).
But I know something the book publishers apparently don’t know — the market will sort it out.
Yes, it will, Amy! Nice to have an economist verify the concept of supply and demand!
Isn’t this scheme called price fixing? I was under the impression that resellers were free to sell products for whatever price they wanted. Why should be publishers be allowed to “set” the price of ebooks? If this really happens, I smell government intervention. The publishers can set a “suggested retail” price, but can’t dictate the price the reseller charges. I believe that’s illegal.
Ok, now they’re gonna market e-books in a manner analogous to hardbacks: where’s the e-book analogue to paperbacks?
I maybe wrong, if the publishers are making more money from Amazon i don’t find them making the right decision by switching to the agency model. By doing so means the Amazon model has faults that we know nothing about. And which publishers prefer to make less money.
Book lovers I believe are different from music lovers (they had been spoiled by the Napster, kazaa era where it is the norm to download free music) and most book lovers wouldn’t stoop to the level of downloading and pirating books. I believe your assertion of them doing so is erroneous.
Btw those publishers falling behind Apple know a lot more than we do and they do know a few thing about price elasticity because they are in the trade whereas we only assume.
Something I wonder about, is public libraries. If the current laws allow public libraries to loan paper books, will it allow them to loan e-books too? I hope so, but I suspect the new copyright laws coming into place in most western countries will destroy the notion of public libraries once e-books take over as the dominant distribution method.
Very interesting and well articulated post. Eventually, markets must come to equilibrium, otherwise arbitrage opportunites are created. At this point if the brick and mortar retailers are paying a higher effectivie wholesale price or Amazon is consistently selling below costs one of two things will happen. Traditional book retailers will force wholesale prices down or will bring an anti-competitive suit against Amazon. I believe it will be the former which will then take the heat off Amazon’s pricing practices.
I always wonder this when I see “sales” numbers for the music industry… Is that CD and download sales? Does it include streaming services like Rhapsody and ancillary revenue streams?
This is from a couple of years ago, but I imagine it still reflects reality…
“We don’t focus anymore on total album sales or the sale of any one particular product as the metric of revenue or success,” Mr. Caraeff [now CEO of VEVO] said. “We look at the total consolidated revenue from dozens of revenue lines behind a given artist or project, which include digital sales, the physical business, mobile sales and licensing income.”
Can the book publishers find similar ancillary revenue streams?
The number I quoted is inclusive of all recorded music sales, physical and digital.
Hey David, I was happy to stumble onto your blog. It’s been a minute; I hope all is well!
One thought with regard to this:
“is all music really worth $1 a song? No, it is not. We know hundreds of thousands of tracks have sold 10 or fewer units digitally. That is the market telling you something.”
Is it really? If each of those sells for $20,000,000 THEN what is the market telling you? It might sound like an empty argument but, if you think about it, maximizing revenue might not be consistent with a standard low price.
For instance, let’s say a cult author sells consistently to the same circle of fans. She rarely reaches outside of it and they rarely read anything by anyone else. Why drop the price? If anything, a smart publisher and/or retailer will raise it. So fewer units does not necessarily indicate a low potential gross (or, certainly, net) and a lower price is not necessarily the way to maximize profits. This is an example of a less elastic market within the overall elastic market of online sales.
Now, who is most likely to understand this kind of market: the publisher (Macmillan, let’s say) who works with this author, signed her to a big advance and has an aggressive marketing team on the case or the retailer (Amazon in this case)? I acknowledge your analysis of eBay’s and Amazon’s responsive pricing, etc. but I wouldn’t be surprised if, by the time they figured this market out, the hardcore would have snatched the book up for $1.00 when most of them would have been happy to pay $20. Both Amazon and Macmillan (not to mention the author) could have made a lot more money if the retailer were receptive to input on price. In the long run, customers will be happier too because they are willing to sustain this author even though the market of Amazon’s one-size-fits-all policy won’t allow that.
Looked at in this light, it seems that Amazon is much more interested in establishing the Kindle brand than in maximizing profits for authors and publishers, no?
Big up,
Mitch Goldman
Hi Mitch,
Thanks for your comments. The pricing strategy you are describing is “price skimming”, whereby a price changes (usually lower) over time. This is what Hollywood does with movie “windows”. If you really want it when it first comes out, you pay more than those who wait. There is nothing wrong with this — in fact, it is usually an optimal way to maximize profit. The problem in the digital world is that creators cannot monopolize distribution anymore — there is no scarcity in digital. So, you can charge more up front, but those who really want it and don’t like your price will just pirate it and get it from BitTorrent for free. This is why I try to make the case here that, with digital content, it is more important than ever for a content owner to set the optimal price up front. If it is truly profit-maximizing, then those who REALLY want it will pay less than if you charged more, but those would not have bought it because of the price will do so given a lower price.
El mercado terminara decidiendo a la larga que rumbo se va a tomar con respecto a los libros ,lo importante para Amazon es el desafio para una empresa que tiene una trayectoria ya bastante conocida en en este rubro en el que son lideres.
The market ended the long deciding which direction they will take with regard to books, Amazon is important to challenge for a company that has a path already well known in this area where they are leaders.
If I had a nickel for each time I came here! Incredible writing!
What a nice compliment. Thank you!