The Amazon-Macmillan Flap

Over the weekend we all got to watch the first of several fights over the pricing of ebooks. It occurred between Amazon, who is dedicated to keeping ebook prices as low as possible (having previously noted that delivering an ebook costs about 15 cents) and wants ebook bestsellers at $9.99 or less; and Macmillan. Macmillan, and other publishers, see this price as artificially low and undercutting the price of hardbacks, thereby eating into their sales. They maintain this happens with no solid demographic data—and the data for the same phenomena in the gaming industry indicates cannibalization does not occur. Macmillan, using perceived leverage resulting from Apple’s willingness to let publishers set whatever price they want in the forthcoming iBookstore, dug in its heels with Amazon over this issue.

Amazon pulled all Macmillan content from both the Kindle store and its regular store. You’ll recall this was the same thing which Costco did in refusing to sell Coke products until they reached a pricing agreement with Coke. This is the same thing Walmart and other retailers do all the time when a supplier wants too much for a product. Retailers have a right to decide if a transaction will be profitable, and Amazon decided it wasn’t going to be.

In a letter to authors and agents, Macmillan’s John Sargent said:

Amazon has been a valuable customer for a long time, and it is my great hope that they will continue to be in the very near future. They have been a great innovator in our industry, and I suspect they will continue to be for decades to come.

It is those decades that concern me now, as I am sure they concern you. In the ink-on-paper world we sell books to retailers far and wide on a business model that provides a level playing field, and allows all retailers the possibility of selling books profitably. Looking to the future and to a growing digital business, we need to establish the same sort of business model, one that encourages new devices and new stores. One that encourages healthy competition. One that is stable and rational. It also needs to insure that intellectual property can be widely available digitally at a price that is both fair to the consumer and allows those who create it and publish it to be fairly compensated.

(Emphasis mine.)

What Sargent is saying here is that the digital world, and digital sales, are not suited to paper publishing’s current business model. Mind you, this is a model where the cost of actually printing a book is 10% of the cover price. Another 10% is the royalty paid to the author (that’s actually 6-15% in most cases, averaging out around 10%). This leaves an average of 80% of the cover price to cover discounts, warehousing, transportation, editorial, publicity and overhead. 50% is the margin many books are sold at, so 30% of the cover price is nut that has to cover overhead, operating costs and profits for the publishers.

Mr. Sargent, and most of the other large publishers, are missing a simple point: their current business model does not work (hasn’t for years, as industry data proves). They’re fighting to maintain profits on a product—hardback books—which are not truly under assault by digital publishing. If anything, it’s the economy, stupid! Who wants to spend $25 on a single book, when they can spend that same money at a used bookstore and get ten books, or go to a library and get all they want to read for free?

In any other business (writing, for example), when profit margins get squeezed, business people have to undertake drastic measures to make economic corrections. This means lowering costs. How could big publishers do that? Use the digital age to their advantage. Move out of New York. Sell off their high-priced warehouse space and offices. Use the cash to buy a town in Kentucky near rail and Fedex hubs. They could pay their staff to move and keep their salaries as low as they do, and they would be kings and queens in such a place. Buy their own server farm, set up their own POD (print on demand) kiosks in all the malls and coffee-shops in America. Allow folks to order a copy of a book online, swing by and pick it up as they get their latest latte.

And remember the bottom-line: If you’re making more off a digital download than you do off the physical sale of a book, you are ahead of the game. Manipulating the publication time of digital books (delaying them, a practice known as windowing) only encourages piracy, and delays your profiting from a non-returnable, non-loanable, non-piratable copy of a book that has minimal production and delivery costs.

Amazon as already indicated that they will accommodate Macmillan because Macmillan has a monopoly on its content. And prices will be set by the big publishers. I urge them, however, to take a good look at how prices fell sharply for apps in Apple’s Appstore as people fought for market-share. There is and will continue to be constant pressure to push prices down.

Since I already sell digitally-delivered stories and novels for between $2 and$5, or the rough cost of a cup of coffee, I don’t think I will face quite the same pressures. And since I can get editorial help cheaply, can do my own publicity, and can produce and deliver the books myself, I do fall into that camp of folks wondering what the heck the publishers are doing out there and why, exactly, we need them.

And wondering how long they will last in the decades to come.