Monday, February 1, 2010

Round One: Macmillan

If you haven't already heard, a small war broke out in the publishing biz over the weekend. It went something like this: Macmillan had a round of talks with Amazon about increasing the price of their e-books from $9.99 each to somewhere between $12.99 and $14.99 each. When Amazon said they wouldn't do it and it was clear Macmillan wasn't backing down, Amazon responded by pulling all Macmillan titles from its e-shelves on Friday. Macmillan cried foul and, late yesterday, Amazon caved. Macmillan titles sold through Amazon will, starting next month, be priced between $12.99 and $14.99.

[EDIT: Apparently only hardcovers and new releases will be in the $12.99 to $14.99 range; Macmillan titles may appear on Amazon for as little as $5.99, as reported by Macmillan CEO John Sargent.]

What do we make of all this?

It's important to understand that Macmillan's move is based on the long-term goal of keeping e-book prices in the same ballpark as print book prices (as well as their recent deal with Apple), whereas Amazon's goal is to deflate the price of e-books to 1.) sell more Kindles and 2.) gain enough electronic market share to be able to dictate to the publishing industry what books will cost. As we've just seen, Amazon doesn't (yet) have that kind of clout, but that doesn't mean that day will never come.

To quote the Times article: "Book publishers, meanwhile, are volunteering to limit their digital profits. In the model that Amazon prefers, publishers typically collect $12.50 to $17.50 for new e-books. Under the new agency model, publishers will typically make $9 to $10.50 on new digital editions." Publishers are willing to take a short-term loss in order to maintain the status quo; their fear is that if consumers become accustomed to a $9.99 price point for new books, they'll eventually believe that's simply what a book costs, which just isn't true for their print counterparts (hardcovers). Whether this will be the case remains to be seen.

Some are concerned that Macmillan will start seeing a drop in sales if their e-books are priced in the $12.99 - $14.99 range while the rest of Amazon's e-books are sold for $9.99. Although Macmillan may see some shortfall due to lower rate-of-movement and lower profits per book (see above), I don't really think they're going to be hurt by their pricing model in the marketplace. This is chiefly because, unlike vegetable oil or aluminum foil or ball bearings, books are not fungible—that is, one book is not more or less identical to any other and therefore readily exchanged for another. Sure, individual copies of the same title are fungible—you would trade one brand-new hardcover copy of The Help for another brand-new hardcover copy of the The Help—but books in general are not (you wouldn't buy The Help for $9.99 on Amazon simply because it's cheaper than The Gathering Storm at $12.99).

Buying books is not like buying tupperware; consumers do not automatically go for the cheapest product that will get the job done. For this reason, I disagree with anyone that believes Macmillan's breaking Amazon's $9.99 standard will hurt them or the sales of their books; after all, they've competed just fine in brick-and-mortar stores where prices vary significantly from title to title already.

Finally, it's important to realize that neither publishing companies nor Amazon are charities. While both are looking to provide consumers with goods they will purchase (thereby earning profits for the companies involved), none of them believes that they "owe" customers low prices or that they should lose money to keep everyone satisfied. Most importantly, Amazon's imposition of a uniform price should not be misconstrued as the result of market pressure. Regardless of whether the market could tolerate, or even favor, a higher price point—and we'll soon see whether it will—Amazon has made its position clear. We'll see whether their predictions bear out.


  1. Well said as always, sir. I've thus far seen many people crying foul on Macmillan for demanding higher prices, but Amazon didn't exactly act like a bastion of good "consumer-friendly" business either.

    I mean -- pulling all Macmillan books from its e-shelves? Really? Isn't that a little bush league for a company that's supposed to be "helping consumers buy books for less."

  2. Ah! Econ major... brain exploding...

    And I love the "doom" and "more doom" tags. Gonna go watch 300 now.

  3. I'm shocked both companies acted so hastily in this popcorn eating drama. Bad PR smearing both sides it's like we're dealing with politics and not publishing.

  4. This is where you and I disagree, Eric. I think Amazon won this round. How, you say? It was necessary for Amazon to oppose Macmillan to show they have taken a position and will pursue that position with strength. Everyone's seen it. Everyone's talking about it. Now Macmillan has raised their prices above Amazon's benchmark and the public has already started to jump on the "9.99 boycott."

    Books aren't like tupperware, but you're making the wrong perception. It's a matter of perceived value, and electronic files do not hold the same perceived value as a physical printed text.

    So Macmillan will charge $15.99 for a new ebook release that exists on Amazon's servers, includes DRM, and you can't give to anyone or use in any device other than a Kindle. Or, you can buy the same release as a printed hardback discounted 30% (assuming a $30 price tag) for $21. That's a five dollar difference. Which are people going to pick? They're going to pick the printed book much more often than they do the ebook.

    What happens now is that Macmillan's higher priced ebooks will undersell and Amazon can reassert its position using Macmillan as its own justification. It's a well played strategy and Amazon will come out on top.

    As for your numbered list for Amazon, I think it is a little unnecessarily menacing. Perhaps they do not intend to tear down the Jericho that is publishing and instead are trying to create a price point that will be associated with books just like $0.99 is associated with a music file.

  5. Even music file prices are going up. I'm starting to see songs on iTunes listed for $1.29 now. So far it looks as though it's only on new listings; I haven't noticed anything previously listed for $.99 as having gone up.

    I like having prices low enough to pick up several books, but that's why I primarily buy paperbacks. The cover price is generally already under $10, and I don't feel like I'm cheating anyone. Personally, Amazon is my last resort; I only go there when I can't find something anywhere else.

  6. $1.29/song costs are DRM-free files.

  7. What I don't understand is why they can get away with charging the same price for e-books as paper & ink books. I have always thought that most of the money associated with bringing a book to market was the production costs. With e-books there is no production cost. So why do they cost so much?

    I have a nook and I love having many of my favorite titles in one spot, and for the time being I am willing to pay the high price, but this can't go on forever.

    As the popularity of e-readers continues to grow, I hope the publishing houses and distributors (Amazon, B& al) get together and decide on a decent price point where everyone can get a modest slice of the pie, without gouging customers.

    But that's just my $0.02

  8. Wow. Am I the only one who sees that MC> wins in this? If Amazon is right and people don't buy the ebook, they will go buy the hard copy with the 30-40% off the new release price. So, the publisher gets their printed books sold and a few people buy the ebook anyway. It's amazon that loses the most, I think. It's why they made such a big fuss. If people buy the printed copy instead, they don't get the cut they wanted.

    As a new release, I think it's smart to keep the ebooks from being priced too low. It undermines the publisher and the author.

    Personally, I haven't seen the point of having any reader that only allows me to read the book on their program. I have a few books downloaded to my computer, but that will allow me to read it any time, even if Amazon gets in a fight with another publisher. They can't pull my files off.

    I'm offended, deeply, that Amazon even pulled the free chapters others had downloaded. Seems like their should be some law against it, or something.

  9. As a Macmillan (St.Martin's) author with a novel released less than 2 weeks ago, I feel like I have quite the fragile little puppy in this fight. From my (admittedly totally self-interested self-terrified POV) having one's book (and it was hard copies as well as ebooks) POOF away was horrifying.

    (Wrote about my nightmare on Amazon Street )

    Kinda felt like having a trip wire stuck in front of you in the middle of a race. WHOA! Where did I go? Still waiting for it to come back (come back, Shane . . . )

  10. I'm with Mr. Selby here. I think Amazon won, and I think they won handedly.

    I mean, not only was Amazon suddenly able to turn a profit on a product that they were selling at a loss last week, but they actually got more of a return than the deal they initially offered to publishers. Under the proposed Amazon Agency model, Amazon would earn a maximum of $3 per unit sold. Under the Macmillan arrangement, Amazon can see between $4 and $5.

    Amazon also seems to have won the PR battle. Not with publishers, agents, or authors, but with the true deciding force in this whole fight – the public. By removing the books, Amazon drew a great deal of media attention to the scuffle while painting Macmillan as greedy (even though Macmillan was giving Amazon more than they asked for). That's what will resonate with customers. “Hey, remember when Amazon used to only charge ten bucks for a best seller but then the publishers got greedy?”

    Not that Macmillan came away with any sense of victory, they do now have the impressive ability to set their own prices. Granted, those prices are immediately being raised to a point contradicts at least one outside study (by Verso Digital, which showcased that study at DBW) and the market research by Amazon. So, if book sales slow, then Macmillan can always experiment with the prices until they find that elusive pricing “sweet spot.”

    As for the customers? You're right, they won't buy a substitute book if they don't want to pay the couple extra bucks. But there is another option – piracy.

  11. I don't see Amazon as having won anything by this. They came off looking like they had a juvenile stomping fit. Finding the price people will be willing to pay for ebooks should involve experimentation, not having it imposed by a vendor with an ebook platform to sell.

    John Scalzi had a very interesting post about this whole thing.

  12. Maybe someday there will be a "priceline" of ebooks, that will drive down the prices among distributers... Or worse, (or better) a "napster" of distributers.

  13. Of course books are fungible. In the sense that a large proportion of buyers are browsers. They go to the bookshop (or Amazon) and start browsing till they hit a book they really want and then they look for some more and then they choose a book they want to buy. Price will be one of the factors they consider along with format apart from the actual title. Why do you think bookshops still exist?

  14. I have to agree with those that say books are fungible: When I shop for a book, there may be others that are similar, or for a particular book I can choose from several formats at different prices. I buy a book accordingly.

  15. to -30-
    "What I don't understand is why they can get away with charging the same price for e-books as paper & ink books. I have always thought that most of the money associated with bringing a book to market was the production costs. With e-books there is no production cost. So why do they cost so much?"

    I think you're mixing "production costs" with "printing costs." For a standard, mass-market paperback, it probably costs about $3 to print, maybe less. The true costs come in the form of paying the author's royalties (10% off the top), the bookstores' discount (seller discount is usually 40%), and the editor, proofreader, designer, and everyone else involved in getting the book to the "ready to print" point. And then getting something to ebook format isn't free, so while it's a lesser cost than physically printing, it's still a cost.

    So, you can price an ebook about $2 lower than a physical copy, and everyone would make about the same money off an ebook as the physical copy.

    The next argument is then "you can sell more ebooks than physical copies, since you're limited on physical copies. Just make up the loss in volume." The response to that is: Just because you *can* sell more copies doesn't mean you *will* sell more copies. The ebook market is smaller than the physical book market, currently, since you usually need a specific device. But even if the markets were the same size, you're not going to magically sell 2x as many books just because you're selling the book at half-price. There's a hard, but unknown, limit to how many copies you'll sell. If you set the price point of e-books too low, you're going to undercut your physical copy sales AND end up destroying your profits, since you'll hit the saturation point without making up for reduced physical copies and the lower revenues you get per ebook.

  16. I just sent out this newsletter to alert fans who pre-ordered on Amazon, because my [Macmillan] book comes out two weeks from today:
    I have to write the books and then deal with this crap, too? Color me PO'd.