Last week’s announcement by the Justice Department that they are suing Apple and several of the world’s biggest book publishers for conspiring to keep eBook prices high generated plenty of media coverage. One challenge in wading through this coverage is that most of it tends to be written by…journalists. And some journalists are also authors. And authors seem to have a soft spot for publishers who fight for higher prices. So, we get lots of coverage sympathetic to the plight of the poor book publishers. Amazon is evil, you see.
Absent from most of this coverage are two main questions: a) what is the right price for eBooks and who gets to set it, and b) why are eBooks not interoperable on different devices? These questions, in my mind, are far more interesting than the ongoing struggle of publishers to adapt to Amazon’s dominance in book retailing. In fact, the answers can significantly help legacy publishers stay competitive for the future and avoid extinction.
eBook Pricing
First, a conversation about eBook pricing. Readers of this blog are familiar with my many discussions on digital good pricing and price elasticity. There’s “Weighing In On the Amazon/Macmillan Pricing Debate” where I detail that the market can tell you your optimal (i.e., highest profit producing) price for digital goods. Each incremental digital good has no additional cost. The marginal cost of distributing it is zero. So you really want to maximize total profit by finding the price that produces the most number of copies sold. In these markets, you make a mistake when you set your price by looking at your legacy costs (which were designed for a physical goods market in pre-digital times). Digital markets produce much lower profit per item, since digital markets tend to have lower prices for goods. (See “As Big Media Goes Digital, Markets Shrink“.) In all the discussions about why book publishers demand that eBooks should be $15 and not $10, they say it is because they cannot afford to sell books at $10. That is, they cannot cover their legacy cost models on that number. Right. Which is why you must rebuild your cost structure for a digital goods industry with far lower prices. You start by paying your top execs much less than millions of dollars a year. Then you move your offices out of fancy midtown office buildings. Why should eBooks cost $15? Amazon is far more of an expert on optimal book pricing. They have far more data than publishers, since they experiment with pricing hundreds of thousands of times a day across millions of titles. Amazon can tell you the exact price for a title that will produce the most number of copies sold. Amazon is pretty sure that number is closer to $10 than to $15. Yes, they want to sell more Kindles. And they believe that lower eBook prices mean more eBooks sold which means more demand for Kindle. The negative coverage of Amazon is centered on them selling eBooks below cost in order to reach the $10 price point. But that is a function of publishers setting the cost higher than $10. If the profit-maximizing price for an eBook is $10, then publishers must adapt to set a wholesale price lower than that, even if it means your legacy cost structure doesn’t allow it. And that’s the rub. [By the way, as publishers continue to resist this market force, new "publisher" models are appearing and will replace the traditional functions of publishers with more digital-friendly models.]
Openness and Interoperability
Now, how do legacy book publishers fight back? Well, to begin, their biggest mistake prior to over-reaching on pricing was to insist retailers DRM their eBook titles. Just like in online music, this insistence on anti-copying protection (albeit with limited usefulness) not only creates inconveniences for consumers, it allows for dominant proprietary ecosystems to form (like Apple did with iPod/iTunes, where tracks bought from iTunes only played on iPods, Kindle books can only be read on Kindles.) Instead, publishers should have demanded the opposite. All eBooks should be sold in open, interoperable formats, so an eBook sold at Amazon could be read on a Nook, etc. This would have separated the reader market from the retail market and lessened Amazon’s eBook dominance. It may be too late for this change to work, but it is worth exploring. Incidentally, I predicted this in 2009 with this piece, “The Book Industry Is In Trouble, But Piracy Is Just A Symptom.”
Here’s the essence of what I see — we have authors and publishers screaming that Amazon wants to sell their books at prices lower than the arbitrary costs the authors and publishers have set. But why must eBook prices be $15? What is so magical about that price? Will it maximize profit? I am skeptical that this price does optimize profit. I see how it attempts to protect a legacy cost structure that is out-of-whack with a digital goods market. Yes, Amazon is a relentless competitor. But they always seem to be on the side of lower prices. And as consumers, we love this about Amazon. But none of the articles I have read seem to mention that the winner in a lower-price eBook market is the person authors are all writing books for in the first place. The reader.
(Incidentally, I am completely unmoved by the argument that if Amazon forces traditional publishers to sell books at lower costs, then the publishers will go away and we won’t have books anymore. Hogwash. The publishers built for a printed books world may go away, but their digital native versions will replace them.)
Shouldn’t prices be set by competitive markets where consumers have lots of choices of what to buy and where to buy it? If somehow that price happened to end up where all ebooks were $9.99, then fine. But seems highly unlikely.
Of course…and selling titles on Amazon is a whole lot closer to a competitive market than backroom dealmaking among publishers. I don’t mean to say *all* eBooks should be $10, but Amazon should be allowed to price them however they want and they seem to want to price them lower than $15 each, which is what the pubs required (until now).
The distribution of the revenue from books and music disks, and other items, needs to be detailed to understand how culturally ingrained price-fixing is, and how and why our culture tolerates it. Artists and writers are not getting any more from the excess profits, and have lost a lot on the back-end, like promotional advantages. Amazon is taking profits after a huge investment, but, if history repeats itself, they will not pass that along until they are forced to by the markets. Meanwhile, our markets are largely ignorant of consumer powers.
You’ve slightly missed the point. The outrage is over predatory pricing by Amazon, not the absolute price per se.
Amazon was selling below cost, subsidised by the ‘general merchandise’ that is now 2/3 of North American revenue, and therefore no-one else could compete in the ebooks market. Publishers universally expected Amazon to drive everyone else out of business and then come back and dictate terms. This is why they are so baffled by the DoJ investigation.
The settlement frees it to return to doing this (more precisely, publishers can insist that Amazon run the store at at least a 0% gross margin, but no higher). That’s the outrage.
Publishers are perfectly willing to at least contemplate a world in which books sell for $10. They are much less happy about a world in which Amazon is a monopsony and tells them that from tomorrow all of their books will sell for $1, to drive more traffic against which Amazon can sell diapers or shoes to TVs.
Indeed – this is the crucial point. You are of course quite right that Amazon is best at setting revenue-maximising prices – the problem is that it wasn’t maximising book revenue, but Amazon revenue, which is quite a different thing entirely.
I just don’t agree. Amazon’s pricing was not predatory just because it was lower than what publishers wanted. It wants to sell more books. It believes you do that with lower prices. It has so far been proven right about that. (Didn’t Costco and Walmart teach us this about 20 years ago when they started selling books?) The only reason it sold at a loss (subsidized by margins elsewhere) was because publishers set wholesale prices too high.
I get that people fear what Amazon may do to traditional publishers with its 90 million consumers who love them and shop with them every day. It may become a publisher itself (which it is doing) and further drive margin out of traditional book publishing. Publishers have to do much more than try to keep prices high in order to survive the transition to an all digital business.
If the publishers were REALLY concerned about Amazon being a monopsony, they would NOT insist that everything be DRM-ed. DRM locks buyers into a particular publication model, as witness that the Holy Kindle doesn’t support ePubs, at least, the DRM-infested ones for the Nook.
As for “predatory pricing,” please don’t make me laugh. If Amazon wants to subsidize eBooks, by all means. I haven’t forgotten the publisher still insisting on a $20 price for the ebook edition of a book that had been out in paperback for seven years.
We did a thought exercise of looking at the cost of publishing a printed book, and how that cost can then be reflected in e-books. We came out at a much lower retail e-book cost than $15, much lower than $10 too.
DP: http://digital-possibilities.com/blog/how-much-should-an-e-book-cost/
i don’t really care about journalists, authors, publishers, or amazon or apple for that matter…. as a consumer though, i can tell you i will not pay more than 8 to 10 $ for an ebook. and i think that is what the focus should be on…
[...] post was originally published at [...]
$15 is only the introductory price for popular books: bestsellers and books by A-list authors. As these books get older, they’re prices do tend to drop, often to $10 or so, even with the agency model. Kind of like how when a hot video game is initially released it’s priced at $60, but, if you wait 3 months, you can get it for $40. If you wait 6-12 months, you can get it for $25-30. I’ve seen the same thing happening with books even under the agency model, but the timeframe is much extended, like years instead of months for video games. Deep catalog titles are often less than $10. And new books by middle-tier and lower-tier authors often have introductory prices far less than $15.
This is as much about variable pricing as anything. Amazon probably looked at the success Apple had with its initially flat iTunes pricing at $0.99 per track and thought to reproduce that success by artificially pricing Kindle books at $9.99, even if that meant Amazon sold at a loss. I think you’re a little naïve when you say that Amazon was just trying to sell books at the optimum price. Retailers don’t sell stuff at a loss for no reason. It was a predatory move and a barrier to entry in the market. They were more concerned about positioning the Kindle in the market and locking in readers to the Kindle DRM than in selling the optimum number of books.
That doesn’t mean Amazon wasn’t right that the optimum price for books is closer to $10 than to $15. I think in the long term you’ll see the average book price drop under the agency model. More efficient, less established publishers will enter the market and price their books lower to compete on price. A-list authors with large followings (like J.K. Rowling) will cut out the middlemen and self publish. The more established publishers will gradually be forced to become more efficient so that they can compete better at lower prices.
Selling books at $9.99 isn’t predatory, and it should NOT be “below cost,” according to the numbers that IPG put out as far as book production goes. Wholesale, if a publisher sold the right to Amazon to sell, say, 10000 copies (just setting a limit as an example, even though ebooks don’t have such limits), according to the numbers put out at IPG, the wholesale cost would probably be about $4.48 per ebook once you took out the physical book costs of printing and warehousing and such; using the agency model, Amazon might pay $6.30 per unit. Selling at $9.99 would not only still be profitable for Amazon, it would definitely still be profitable for the publisher. That’s not a “barrier to entry” or anything of the sort, it’s just plain ol’ wholesaling.
By the by, the numbers for IPG were for *independent* publishers, whose costs are always higher and margins slimmer. I imagine for the big six? their margins look a lot healthier and their costs are even lower.
2 points:
1. Don’t you maximize profits by selling the most books at the highest price? You don’t win by selling the most books, or by selling at the highest price, but in the combination of the two.
Selling a million copies at dollar, vs 500,000 at 3 dollars isn’t a win. But compare to selling 1000 copies at 50 dollars.
2. I’m all for no DRM. I’d love to be able to get a book and move it easily to other systems – i have both a Kindle & ipad. I’m actually a big fan of Baen books which sells everything w/o DRM.
The thing I’m really waiting for is being able to buy a hardcover for $15, and for a $1 dollar charge, or even free, add a ebook copy. I really want the physical book, but I also tend to use the ebook version during the week. If they can figure that out, I’d be even happier.
Perfect article on this. You hit the nail on the head. I think the main reason why some people and writers were quick to attack Amazon is because they were indirectly trying to defend Apple.
Here’s what I think. Amazon is turning into a pretty big monopoly with great lock-in on readers, but that’s nothing the publishers can’t fix by eliminating DRM and encouraging DRM-free books in the market.
Also, the publishers are a much bigger threat to the consumers and innovation in the market right now than Amazon is. That alone should make them the #1 target. In fact Amazon “the monopoly” has been surprisingly a lot more innovative not only compared to the publishers but also to their direct competitors like B&N and Google Books.
Besides the fact that Amazon is what made e-books a “thing” (remember when people thought ebooks suck?), besides the fact that they brought e-books under $10, they’ve also built a self-publishing platform for authors, they created the Singles platform for shorter books and with lower prices, and they even created a lending platform, which is something the publishers fought. What innovations have the publishers brought us in the past few years? Higher e-book prices by 50%. Great, thanks publishers!
So far, it’s been rather consistent: when distributors get too powerful, it isn’t the end user (readers) who “win”, nor the people who produce the product – but the distributors.
It’s rather like how every major market fair in the middle ages always had powerful entities setting up toll booths – to gain all their profit not from anything productive, but rather from allowing buyers and sellers the privilege of meeting each other.
I don’t want books to go the way videos have gone – where media companies get rich and writers don’t see a penny. I hear the writers for I Love Lucy were at that last writer’s strike – to give moral support – don’t you think it’s odd that the people who wrote for I Love Lucy don’t earn any royalties at all for syndication and video?
As a consumer the sweet spot would be $3 for a novel. Low enough that I would not think twice about buying it even with DRM. Anything else and I’m going deep into paradox of choice and bittorrent.
let’s take it a step further…
what is the right price for selling a file?
that’s all you get with an e-book — a file!
keep in mind that you must cover the costs of
storing the files, and squirting them to many
machines, over the lifetime of the customer.
you also have the costs of customer service,
updates, cross-platform viewer-app development,
engines for both recommendations and reviews,
site maintenance for tens of millions of files,
management of user annotations/notes/highlights,
and perhaps even digital rights management…
you’ve got to handle complaints from the public.
you must be able to take payments, from customers
all over the world, and manage the money to pay
authors on a regular basis, with transparency…
and you’ve gotta keep the government happy too.
so don’t underestimate the cost of selling a file.
but don’t overestimate it either.
because at base, that’s what we’re talking about:
selling a file.
and let us be clear: amazon is willing to sell
a file for $1, a sale on which it takes $.70.
and apple, in its app store, is willing to sell
a file for $1, a sale on which it takes $.30.
let us also be clear that — in the past, even
up to recent days — there have been many authors
eager and willing to sell their books on the basis
of receiving a royalty of $1 or $2 or $3 per sale.
and indeed, there are many self-published e-books
in the amazon store that are being sold for $1.99.
if it really costs big6 publishers a lot more
for them to make their books, then maybe it is
because their workflows are not cost-effective.
-bowerbird
It eludes me how people defend the quasi Monopoly of Amazon, a purely business organisation.
You guys should be on the side of the authors! They’re the ones that make you laugh and cry, educate you and bring a little phantasy to the everyday life.
And for authors to do what they do, they need people marketing their stuff. Amazon doesn’t do that. It just adds the book to the catalogue. But the partners of the authors are the ones doing the legwork.
Private stinginess and envy paired with totally skewed propaganda about “freedom of speech vs. censorship” paid for by Google and the likes have unfortunately managed to sink into readers, listeners, viewers thinking and justification system.
A sad state of affairs.
Yeah right.
Authors should be on the side of readers! They’re the ones the authors want to impress with and persuade to their ideas.
So the more affordable the book, the better for the author, if the latter is not in this just for “sentimental” reasons.
[...] There appear to be many people who don’t actually understand what the US Department of Justice is alleging and what their job is. The claim is that several major publishers and Apple colluded to fix eBook prices. The Department of Justice is not empowered to pass judgement on Amazon’s business model, unless it breaches US law, and nobody appears to have any evidence that it does. The Wall St Journal reports that Macmillan CEO John Sargent complained the decision will “have a very negative and long-term impact on those who sell books for a living” but this misses the point. Jordan Weissman in the Atlantic also wanders into the irrelevant when he complains that “Amazon isn’t simply a garden variety retailer, or a helpless, well-meaning innovator.” The Department of Justice is required to investigate when businesses appear to be colluding on price. Whether their competitors are large and successful or not doesn’t matter. Whether the people running the businesses believe colluding on price is the only way to maintain a profit is also of no import. It is not the DoJ’s job to keep publishers’ and writers’ incomes high, but rather to keep the price consumers pay low. The law states that you can’t collude to artificially hold up the price consumers pay. Everything else is noise. If publishers can’t work out how to make money from $9.99 eBooks, then so be it. [...]
not all books are worth the same amount
some bad fiction you should pay me to waste my time reading
some textbooks could be fairly priced at $99 or more.
there should be a wide range of actual prices, in a free market ,depending on the content, length, authors cred, and other factors including the effort to research and write it.
fiction should likely be on the low end from $0.99 to $4.99 with higher prices , say 9.99 to 14.99 , for authors like janet rowling and stephen king.
“You start by paying your top execs much less than millions of dollars a year. Then you move your offices out of fancy midtown office buildings.” Amen. Why should readers (and authors) support paying for real estate – and business lunches – in the most expensive city in the country? None of that is necessary to the production of quality books. (I’d also suggest quitting that thing where they all take Friday afternoons off in the summer, and the other thing where nothing gets done for the whole month of December.)
Why is it that no one ever mentions that e-books are essentially a one time read,at least for fiction? A digital book is akin to streaming a movie ($3.99) in lieu of purchasing the DVD. When I purchase a print book I pass it on and the book will be read several times. Eventually, readers will figure out that they can buy an extra e-reader and pass that around (cumbersome but cost effective).
Despite the popularity of “Hunger Games” and “Twilight” most readers a mature adults who can afford to purchase books if they are reasonably priced and resent being overcharged. I particularly balk when an e-book costs more than a printed version. So for now, I save my purchaes of e-books for when I travel and buy printed books to pass on to friends or give to the library when I am done.
[...] also linked to a post on David Pakman’s blog, “Why should ebooks cost $15?” In this piece, Pakman writes, “Absent from most of this [ebook] coverage are two main [...]
[...] And as David Pakman of NYC-based VC firm Venrock has pointed out, when it comes to digital goods, the marginal cost of producing another copy is effectively [...]
[...] And as David Pakman of NYC-based VC firm Venrock has pointed out, when it comes to digital goods, the marginal cost of producing another copy is effectively [...]
[...] And as David Pakman of NYC-based VC firm Venrock has pointed out, when it comes to digital goods, the marginal cost of producing another copy is effectively [...]
[...] Economic perspective: the e-book pricing game, Cheap battery pack(e)Book PricingAmazon vs. Publishers – Round TwoDigging Further Into the Intrigue RE the DOJ Investigation of the Big Six PublishersDownload Harry Potter DRM-free eBooks on Pottermore StoreHarry Potter eBooks finally available — A Dribble of InkRandom FridayWhy Should eBooks Cost $15 [...]
[...] David Pakman, who watched all of this happen in the music industry for years, is pointing out that publishers are fooling themselves if they keep trying to rationalize higher ebook pricing: In all the discussions about why book [...]
[...] Why Should eBooks Cost $15? | Disruption: David Pakman’s Blog [...]
The real reason that the publishers are going after Amazon is that Amazon is not only getting into being a publisher itself but if you look into it, Amazon is offering the authors a much better deal than the traditional publisher. Self publishing through Amazon, you can get either a 30% or 70% royalty on gross sales with no costs taken out of the royalty, which is better than any beginning will get from a traditional publisher.