Tuesday, July 29, 2014

So the Real Authors Guild is… Amazon?!

In case you missed it, today Amazon issued an update on its stalled negotiations with Hachette.  It’s a great read:  short, clear, and devastating to the meme that Hachette is in any way the good guy in this fight.  But if you want just the executive summary, it’s this:

Amazon wants most ebooks to be priced at below ten dollars; Hachette wants ebooks to be priced higher.

So far, so simple.  But what’s critical to understand is that lower ebook prices create more revenue — a lower price for the customer, and more income for the retailer, publisher, and author.  In other words, a win for everyone:

We've quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.

The important thing to note here is that at the lower price, total revenue increases 16%.

This is what Hachette opposes.  This is what the “Authors Guild” and “Authors United” are fighting to prevent.  More money for authors.  And not just that:

This is good for all the parties involved:
* The customer is paying 33% less.

* The author is getting a royalty check 16% larger and being read by an audience that's 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who's trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)

* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties.

For anyone who follows Joe Konrath’s blog, none of this is news — Joe wrote a post over two years ago laying out why The Agency Model Sucks.  Legacy publishers know — they have long known — that the sweet-spot price for most ebooks (the point at which per-unit price multiplied by volume maximizes revenues) is lower than what they insist on charging.

So why do legacy publishers insist on high prices for ebooks?

As I starting pointing out about three years ago, “The current business imperative of legacy publishing is to preserve the position of paper and retard the growth of digital.”  Why?  Because although the legacy industry offers various value-added services (at least in theory), the only critical service they’ve ever offered — the only one an author couldn’t get any other way — has always been paper distribution.  Paper distribution is the foundation on which the legacy industry built its agglomerated business model.  That is:  “You want distribution?  Then you’ll have to take all the services you could have outsourced for a flat fee elsewhere (editing, jacket design, etc) along with it, and you’ll have to pay 85% of earnings for the agglomerated package.”

But in a digital world, authors don’t need distribution services from publishers.  In digital, individual authors have exactly the same distribution reach as any corporate publishing partner, and for the same flat rate of 30%.  Digital is changing the role of publishers from something authors needed to something authors might, for reasons separate from distribution, merely want.

Having the nature of your business go from “I’m a business necessity and the only game in town to “If I can prove my value, authors might still want me” represents a cataclysmic change for legacy players.  Remove the criticality of distribution from the equation, and the entire nature of the publishing business model dramatically changes, with services that once upon a time could only be had as part of a mandated and expensive prix fixe meal now available as low-price a la carte items authors can order from the menu however and from whomever they like.

If any of this sounds familiar, it’s because it is.  Forcing someone to buy an unessential item as the price of being able to buy the essential one is called tying and it is frequently illegal, especially in the context of intellectual property.  Or, for another example of tying, recall the pre-digital-distribution era way the music industry allowed you to buy the one song you wanted:  by forcing you to buy the entire CD along with it.  There are many other examples.  What they all have in common is that in whatever context it develops, tying can only exist in the presence of disproportionate market power.

There’s much more to be said on the origins and nature of the legacy publishing business model; if you’re interested, here are some thoughts I offered in a Pike’s Peak Writers Conference keynote a little over a year ago and in a follow-up piece I wrote for The Guardian.  And here’s some terrific analysis from Porter Anderson at Writing on the Ether.

But even if you don’t want to dive that deeply into this topic, the main thing to understand is this.  When legacy publishers choose the price of your digital book, they are not doing it primarily to maximize your revenue (in fact, they’re doing it with the full knowledge that their price will shrink your revenue).  Instead, they are choosing that price primarily in the service of their strategy to preserve the primacy of paper.

To put it another way:

The legacy imperative of using high ebook prices in an attempt to maintain the primacy of paper costs legacy-published authors money.

Otherwise known, in legacy-speak, as “nurturing authors.”

Now, the biggest bestsellers in the industry — say, James Patterson, or Doug Preston, or Richard Russo, or Scott Turow — sell the majority of their books in paper.  After all, they’ve won the distribution lottery and their books are available in every airport kiosk, Wal-Mart, drugstore, and supermarket across the land.  So their interest in retarding the growth of digital — where the same distribution is available to everyone — and in preserving the position of paper is identical to that of their publishers.  It stands to reason they would fight to maintain the system that has made them so rich.  But if you’re a legacy-published author whose sales are increasingly digital, you need to understand that the legacy strategy of pricing ebooks high is costing you money.  Is that really something you want to help perpetuate?  Yes, it works for James Patterson, but what is it costing you?

Also, for the “Books Are Special Snowflakes” crowd:
Keep in mind that books don't just compete against books. Books compete against mobile games, television, movies, Facebook, blogs, free news sites and more. If we want a healthy reading culture, we have to work hard to be sure books actually are competitive against these other media types, and a big part of that is working hard to make books less expensive.

My favorite part of the update was this:

So, at $9.99, the total pie is bigger - how does Amazon propose to share that revenue pie? We believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30% -- we did have a big problem with the price increases… While we believe 35% should go to the author and 35% to Hachette, the way this would actually work is that we would send 70% of the total revenue to Hachette, and they would decide how much to share with the author. We believe Hachette is sharing too small a portion with the author today, but ultimately that is not our call.

It’s going to be fascinating to see how the “Authors Guild” and “Authors United” try to spin this.  Fascinating in no small part because Amazon is taking the very position on digital royalties you would expect — indeed, you would insist on — from any organization worthy of inclusion of the word “Authors” in its marquee.  Instead we have Amazon championing authors, and “Authors” championing publishers!

Imagine what the “Authors Guild” and “Authors United” could accomplish if they caught the pass Amazon just threw them and drove toward the end zone.   Instead, expect them to run in the opposite direction, as confused and frightened as creationists fleeing from carbon-dated dinosaur bones.

Look, I’m not saying anyone here lacks self-interest.  Of course businesses are self-interested and that’s not the point.  The point is, there’s enlightened self-interest… and selfish self-interest.  A guy who steals a car and a guy who buys one aren’t the same because, hey, each just wanted a car.  And in publishing, we have one camp that seeks to profit by keeping consumer prices high and author incomes low, and another camp that seeks to profit from lower prices and higher incomes.

Which side is deserving of your support?

Over to you, Authors Guilded and United...


Tyson Adams said...

I'm wondering if the authors guild (etc) are actually supporting the paper industry or if they believe that their book is a prestigious item in the market. Essentially, are they making the mistake you raise - their special snowflake - and thinking they should be pricing like Ferrari prices its cars.

If they are making that mistake, then that first set of sums from Amazon should prove enlightening. Assuming, of course, that they bother to read them.

Alan Tucker said...

I can guess at the response from Hachette and Preston et al:

But, the print! You're not taking the print sales into account, Amazon! People don't get onto the NYT list by selling ebooks! Pfft. And numbers and stuff? Advances! That's where authors make their money. Because publishers care about literature.

How did I do?

Meerkatdon said...

I believe that the big 5 decided a while ago that ebooks would fill the same niche that mass market paperbacks do now. Take the current $10 price of a Patterson mass market pb, add a couple bucks because inflation, and another couple bucks because new, exotic, futuristic format...and you've got a $15 ebook. I think they're just waiting for ebooks to reach a high enough penetration that they can phase out the mass market format entirely.

Unknown said...

Really the only argument that makes any sense at all is that print must retain primacy over digital at all costs and that will somehow end up better for authors down the line. It's trickle down theory, really. Only if the few at the top can reap massive windfalls do any of us down the ladder stand any chance of being rewarded for our efforts and then, only at their discretion. Patterson has to sell $100 million a year or there's no money for anyone else to be published. The publishers need to make outsized margins or books will dry up because no one will invest in them. It's nonsense. Patently false assumptions from a bygone era that were never completely true anyway. You can't price your digital products to serve a print-first ethic because there's already too many players who aren't print-first and won't be doing that. What Hachette wants is irrelevant. I want a pony. Not gonna happen, my apartment is too small. They won't stop the erosion of print. All they're going to do is hurt their own ability (and the ability of those under contract to them) to fully benefit from digital.

Unknown said...

Although I think Amazon's view is better for authors, I don't believe their enlightened self-interest begins and ends there. Recall, as legacy monopoly power over print distribution fades in favor of higher market saturation for ebooks, Amazon stands to gain most of that market share. I'm skeptical that Amazon would fight tooth and nail for the sole purpose of forcing Hachette to treat its authors better. Indeed, they say they don't care how their legacy payments are distributed between author and publisher. The short-term increase in profits would no doubt be welcome, but by itself, that wouldn't be worth the negative publicity either. For both sides then, this fight must really be about eventual market share. Cheaper ebook prices mean more people choosing ebooks over paper. In addition, at some point, authors will look at the diminishing influence of print distribution and decide the abusive legacy contract terms are simply not worth what they're getting in return. Those authors will likely choose Amazon instead. dougbornemann.com

Rob Gregory Browne said...

I'm skeptical that Amazon would fight tooth and nail for the sole purpose of forcing Hachette to treat its authors better.

I don't see Amazon or anyone else making that claim.

Unknown said...

What I'm implying is that treating authors better isn't really Amazon's goal in this fight, except insofar as that happens to help their bottom line. That's not necessarily evil, it's simply a reality of doing business. The battle makes the most sense if viewed purely from the naked self-interest of each party. With respect to corporate decision-making, altruism is rarely, if ever, a significant factor in anything other than the press releases. dougbornemann.com

Terri Lynn Coop said...

Neither did I see anything about Amazon not caring how the 70% of revenue that they collect and distribute to Hachette is distributed. All they said is that it wasn't their call (because they aren't a party to the publishing contract.)


Barry Eisler said...

Thanks for all the thoughts, everyone.

Douglas, you responded to Rob's observation that no one is making the argument you purport to refute (would Amazon fight tooth and nail?) with another refutation of an argument no one has made (altruism isn't a factor).

Please have another look at the third-to-last para of my post:

"Look, I’m not saying anyone here lacks self-interest. Of course businesses are self-interested and that’s not the point. The point is, there’s enlightened self-interest… and selfish self-interest. A guy who steals a car and a guy who buys one aren’t the same because, hey, each just wanted a car. And in publishing, we have one camp that seeks to profit by keeping consumer prices high and author incomes low, and another camp that seeks to profit from lower prices and higher incomes."

Love of or loyalty to a corporation is neurotic. Recognition that one corporation's interests and aims currently align with your own is sensible. The presence or absence of altruism is, at least in the context of the discussion here, not terribly relevant because I don't think anyone is arguing in these terms.

Lyle Lachmuth said...

Kodak went bankrupt when folks went to digital ... but they re-imagined their business..

Maybe Hachette will re-Image theirs ... oh wait .. IT is Hachette we speak of

antares said...

"Love of or loyalty to a corporation is neurotic."

I do not love corporations 'cause corporations cannot love me back.

That said, right now Amazon is my first choice for distribution.

Unknown said...

Actually, I had just come from reading other blogs dealing with Amazon's statement. It was not my intention to refute any of the points made in this blog, but rather to voice my agreement and expand upon them. I felt one might easily read in a bit of altruism on Amazon's part based on some of their statements (Such as, "the author is getting a royalty check 16% larger and being read by an audience that's 74% larger" or "We believe Hachette is sharing too small a portion with the author." The tooth and nail comment was a hypothetical--if you stripped away Amazon's self-interest, the fight would end abruptly, because the real fight here is over market share. That said, I still applaud Amazon for the opportunities they've provided authors. Indeed, I was sitting next to RGB (hi Rob!) at Brett Battles' talk at the SCWC. Brett's and Rob's experiences and insights at their workshop were instrumental in convincing me (along with Barry, Hugh Howey, Passive Guy, and Joe Konrath) to self-publish my debut novel last week, instead of hold out for a traditional deal. Thanks guys!
Doug. dougbornemann.com

Barry Eisler said...

Thanks Doug for the kind words and for the clarification. I deal with a lot of strawman arguments on the Internet and the experience might leave me over-sensitive to their potential presence!

Dusty White said...
This comment has been removed by the author.
Dusty White said...

" . . . Then you’ll have to take all the services you could have outsourced for a flat fee elsewhere (editing, jacket design, etc) along with it, and you’ll have to pay 85% of earnings for the agglomerated package.”

Let's just call legacy publishing what it really is "vanity press."

. . . Okay, I really should leave it at that, but I fear that people might not truly get the beauty of referring to it as such. Author's vanity of being "a real author," and all of the money (and hoops) you have to spend up front: printing and mailing manuscripts, lost time waiting--what, your time is worth nothing? Lost sales, phone bills, and then if you do get lucky and get a $5,000 advance you are supposed to spend that on MARKETING, not putting a down payment on a Cadillac. For those who have never been "Vanity published" (in this case meaning legacy), you probably have no idea how much you end up spending of that advance to market your books. In the end, you are an author so that you can say that you are an author, because McDonald's pays better.

I have seen both sides of this, and been successful enough to quit my day job long ago. Know your corporate masters, not by what they say in defense of their ways, but how they treat "you."

Crowhill said...

This is a very good article, and thanks for posting it, but I don't agree with one small point, which is your premise that in the digital age authors don't need publishers. There are tons of self-published authors out there (including yours truly) who have a hard time getting their works in front of people. Publishers can still offer that service.

Barry Eisler said...

Hi Crowhill, agreed legacy publishers can be useful on the marketing front. But marketing is not an *essential* publisher service. Paper distribution is. Plenty of authors have proven that they can reach thousands of readers with no publisher assistance in digital. But I don't know anyone who's managed paper distribution on her own. That's the distinction I'm trying to make -- "have to have" vs "nice to have."

Tom Craver said...

Is there a possibility that the right price today is $9.99 - but once that is established, it falls to $8.99, and $7.99....$0.99, etc?

After all, only a few "big name" authors need to make a good living from writing, to continuously draw in a crowd of hopeful authors who write well for a while but eventually find they can't make a living at it.

That leaves only publication costs (marketing, electronic distribution, etc) to support book prices above $0. Just how low might book prices eventually fall?

Broken Yogi said...

I've been getting the impression lately that Hachette and other major publishers have actually been getting more than 70% of the ebook revenues through the previous private negotiations. Not sure what they were getting, possibly 75-80%. And that Amazon's offer of 70% represents a bigger slice for Amazon. Which may be why Hachette is bitching so much.