Clash of the titans

Sometime on Friday night, the New York Times reports, Amazon deactivated the Buy Now buttons on its website for all books published by the Macmillan group, including such imprints as Farrar Straus & Giroux, Henry Holt, and St. Martin’s Press. As of this writing, you cannot buy a new copy of the correspondence of Elizabeth Bishop and Robert Lowell from Amazon, though it’s still available from Barnes & Noble, Powells, and other indie booksellers. The same is true of thousands of other titles.

This is a bit of a stunner. Macmillan and Amazon have been arguing, it transpires, over the pricing of e-books, but Amazon yanked Macmillan’s ink-and-paper as well as its electronic books—bypassing conventional weapons in favor of first-use nuclear.

As a writer with friends who work at Macmillan imprints, my sympathies are with the publisher. To judge by the comments being left at the New York Times article on the conflict, however, quite a few people are siding with Amazon, in many cases because they believe it’s greedy of publishers to demand higher prices for e-books. Greed, no doubt, exists on both sides, living as we do under capitalism, but greed alone doesn’t explain the dispute. Yes, Amazon wants to sell e-books for $9.99 or less, and Macmillan wants Amazon to sell them for $15 or less. But as Macmillan’s CEO John Sargent explains, in a statement released today as an advertisement to the book-industry newsletter Publisher’s Lunch, Amazon and Macmillan aren’t at the moment fighting to see who can make more money on a book sale. They’re fighting to see who can lose more money. This is a very peculiar battle.

And it may only be the beginning. My sense, as a somewhat interested observer, is that the year 2010 is going to see radical change in the way books are sold. The catalyst, I suspect, is this month’s announcement of half a dozen new handheld electronic reading devices. Apple’s Ipad tablet is the most famous, but the Consumer Electronics Show at the beginning of January saw the announcement of the Skiff Reader, Plastic Logic’s Que Pro Reader, Entourage’s Edge, and Spring Design’s Alex. Not all of these are likely to make it to market, but those that do will be competing there with Sony’s Reader, Amazon’s Kindle, and Barnes & Noble’s Nook. Google seems to be planning to sell e-books soon. In other words, a large number of capitalists have been betting, lately, that increasing numbers of people want to read e-books.

Let’s leave to one side, for the duration of this blog post, the question of whether it is wise for our society to spend colossal sums of money replacing an existing technology that is durable, versatile, and aesthetically pleasing. (I will let slip this much: No, I do not care how many trees die. They should be so lucky as to be reincarnated as, say, the poems of Surrey. Ents, do you worst!) Assume, for the sake of argument, that a preponderance of these capitalists will prove lucky in their bets, and that a lot of people are going to buy these devices. That suggests, as I wrote in passing in a recent review of Adrian Johns’s new history of intellectual piracy, that a lot of people will soon be roving the internet in search of free or cheap electronically available texts.

Until recently, books have not suffered from internet-assisted piracy the way that music or film has. That’s mostly because it’s easy to make a digital copy of a CD; you slip it into a slot on the side of your computer and click Import. Making a digital copy of a physical book, on the other hand, is cumbersome, as a book pirate recently confessed to the blog The Millions. At the very least you have to turn all the pages. To do it elegantly, you even have to volunteer your services as a proofreader, which is not very many people’s idea of fun, and I say that as someone who has done his share.

But if publishers themselves are selling digital versions of their books, and all that’s needed to liberate them is a little hacking, the calculus changes. Hacking is fun in a way that proofreading is not. Let us pause here and observe a moment of silence for the death of the idea that book pirates, more literary and therefore more moral than their peers, will somehow prove honorable, stealing from the rich and giving to the poor. To the contrary, the pirate interviewed by the Millions said that he deliberately avoided stealing the works of the most successful authors, because they can afford lawyers. Instead he limits his purloining to the work of less commercial writers, such as John Barth, whom he calls “someone who no longer sells very well, I imagine.” Such nobility! “From those who have nothing, even what they have will be taken away.” If electronic reading devices catch on, the threat of piracy to book publishers—and to authors, at all income levels—is very real.

Of course, large swaths of the publishing industry have not waited for pirates in order to be undone. Since the earliest days of the world wide web, newspapers and magazines have pillaged themselves, giving their articles away for free in pursuit of larger audience share. This is now widely understood to have been a mistake. Newspapers like the Times have many more readers online than they ever had in print, but even with these greater numbers, online ads bring in tiny sums compared to print ads. And online readers pay nothing. In the journalistic world that I happen to inhabit, much of the excitement about Apple’s new device has been driven by a hope that it will offer a chance to press the reset button. People stole MP3s, but they buy ring tones. They downloaded software for free, but they buy apps. Perhaps, publishers hope, people will prove willing to buy newspaper subscriptions on their Apple tablets, even though they’ve never been willing to pay to read them in their desktop browsers. (Long Island’s Newsday recently revealed that three months after putting its website behind a pay wall, only thirty-five people have purchased subscriptions.) Thus a week before Apple announced its tablet, the Times announced that by next year, it will be charging its online readers. Will the new business model work? Will newspapers be saved? Who knows, but there isn’t much to lose by trying. In the weeks before Apple’s announcement, I found myself muttering, in an echo of a recent, very bad movie trailer, “Unleash the Kraken.” We might as well find out what the Kraken will do. At the very least, if it finishes the print media off, we will be spared having to listen to further hectoring sermons from internet triumphalists.

Which reminds me that I’ve strayed from my topic: Amazon. Book publishers, unlike newspaper publishers, still have a lot to lose. About nine months ago, I received an email alert from a friend whose excellent book of nonfiction had just been published and who had discovered, to his dismay, that it was accruing one-star reviews on Amazon, not because readers disliked his book but because they objected that its Kindle price was only a few dollars less than its hardcover price. (The anti-Kindle-price reviews appeared on the webpage of both the Kindle and the hardcover version and figured into his book’s combined star rating.) He was caught in the crossfire of an early skirmish of the war that went nuclear this weekend. Eventually the Kindle price of his book was lowered, though I don’t know who blinked. I remember thinking at the time that the one-star ratings were a bad sign, because they suggested that Amazon had in a way already won the dispute over e-book pricing. Consumers already felt that e-books ought to be no more than ten dollars, and felt it with so much indignation and righteousness that they were willing to punish the very author they wanted to read, if they thought he was charging such sums. (My friend, of course, had no control over the pricing of any of the versions of his book.)

Consumers had come to feel that way largely because Amazon had trained them to, by keeping the prices of nearly all its e-books below ten dollars. Though few consumers understood it then, and probably few still understand it today, Amazon did so by sacrificing heaps and heaps of cash. Most publishers have until now sold their e-books to Amazon for the same wholesale price that they sell their hardcovers—roughly half the hardcover’s list price. It is up to a retailer like Amazon whether to sell the book to consumers at its list price, as printed on the inside front flap, or at a discount. With e-books, Amazon has usually offered a discount so low that it actually loses money. That is, Amazon buys for $12 an e-book whose hardcover list price is $24.95, and then Amazon sells the e-book to its customers for $9.95.

Why would Amazon want to do such a thing? When Amazon first introduced its Kindle reading device, the reception was tepid. But Amazon improved the device in later models, and thanks to its aggressive low pricing on e-books, it now reports that the Kindle and e-books are selling briskly. In other words, with the money that it has lost by discounting e-books, Amazon has bought market share for its e-book reader and for itself as an e-book retailer. To put it still another way, Amazon sped up the American public’s adoption of e-books by unilaterally lowering the American public’s idea of what the natural price of an e-book should be. The outrage of the Amazon customers who punished my friend with one-star reviews, and the outrage of commenters siding with Amazon on the New York Times blog post this weekend about the Macmillan-vs.-Amazon dispute, suggest that it may be too late for publishers like Macmillan to alter that idea.

Newspapers have no one to blame but themselves for having taught the public that they have a right to read newspapers online for free. Publishers, on the other hand, have woken up to the unpleasant discovery that the value of their work is being cheapened in the public mind by a third party: Amazon.

Some consumers have objected that e-books must be cheaper to make than ink-on-paper books. A simple cost breakdown by Money magazine last year, however, suggested that only about 10 percent of a book’s list price goes to printing. But ink-on-paper books have to be shipped, stored, and (when they go unsold) returned, and e-books would be spared these costs, too, as this analysis suggests. Also, according to TBI Research, because e-books are likely to end up with a lower list price after the dust clears, author royalties, calculated as a percentage of the list price, are likely to be lower, too—additional savings! Yay! When all these savings are added up, do you succeed in dropping a list price of $28 to one of $9.95? That’s a big drop. Profit margins at book publishers now are rumored to be no more than 10 percent, where they exist at all. It may not be possible for a single company to publish e-books at that price and also retain the infrastructure necessary to publish ink-on-paper books.

To return to the dispute of the moment: Macmillan has probably been selling its e-books to Amazon at the wholesale price of about $12, and Amazon has been selling them retail for about $10. Macmillan says that it would like to sell its e-books at the wholesale price of about $10.45, and have Amazon sell them for the retail price of $14.95. In other words, Macmillan was offering to earn $2 less per e-book. Amazon, however, insisted that it would prefer to take a $2 loss on each e-book, instead, and became so indignant over the matter that it has now ceased selling any Macmillan titles, print or electronic. Macmillan’s proposal is known as the “agency model” for e-book pricing, and the company probably only dared attempt it because Apple has promised that it will sell e-books for its new tablet on exactly those terms. (Amazon has said that they’re willing to accept the agency model, starting in June, but only if an e-book’s list price does not exceed $9.99.)

As I said at the beginning, my sympathies in this dispute are with Macmillan. Why shouldn’t a book publisher be able to exercise some control over their product’s price? Apple, to choose a wild example, rigidly controls the prices at which retailers may sell its products, and as Paul Collins noted in 2007, the legal barriers to publishers’ exercise of such control no longer exist. Here, alas, is where the pirates come in again. Pirates don’t bother when legal copies are available cheaply and easily. What’s perhaps most breathtaking about the Amazon-Macmillan dispute is how little, finally, is at stake: should the highest price of an e-book be $9.95 or $14.95? No one dreams any more that it’s going to be $28. What’s being fought over is control, and the reason control is being fought over so viciously is that the only way such massive cost savings are going to be achieved is by consolidation—by collapsing a few of the intermediary steps somewhere between the creation of a book and the reading of it. Will you some day download your e-books directly from Farrar, Strauss & Giroux’s website? Will Amazon some day be the publisher of Jonathan Franzen’s novels? Some future between these two outcomes is more likely to happen, but precisely where the division will fall remains to be seen. Authors, in the meantime, had better ask their agents to negotiate their e-book royalties very carefully, seeing as how, while the titans rage, the financial analysts have already factored into their bottom lines the expectation that someone else will be eating our slice of the pie.

20 thoughts on “Clash of the titans”

  1. Caleb: The Bishop/Lowell book was originally priced at the Barnes and Noble site for $45.00, but can be purchased, on their site, used, for $6.44 (from an individual indie seller). Donald Hall’s “White Apples” can be purchased used for $1.99. I guess my point is that I don’t see greed as much the problem as a lack of creativity and flexibility on the part of the big publishers and newspapers. What are their marketing departments doing that they don’t seem to understand that they are not selling books and newspapers but reading. They need to market reading, creating a market, and book and newspaper sales will follow. My own local newspaper, The Oregonian, is pathetic. I can think of no reason why a young person would buy a copy, except maybe to sleep under. The Oregonian has done nothing new to market reading. It still thinks it’s selling news. (BTW: it pains me to say so, their having published my little stroke piece last year!)

    One of the benefits of the demise of the recording industry as we knew it has been the proliferation of independent recording – i.e. small groups getting out from under the weight of the recording industry’s big tanks. How might that work for books? A recent article in the CSM about books in Kenya gives us an idea: From the article: “Still, in a country where the gross domestic product per capita is $1,600 – about 1/30th of the United States – many Kenyans don’t have the disposable income to spend on the $10 journals. So Kwani? has begun selling individual short stories in pocket-sized booklets, not only in bookstores but also in supermarkets, for about $2.50. The goal is to harness the lower-spending end of the market, as well as first-time readers. It’s a strategy that seems to be working.”

  2. "My friend, of course, had no control over the pricing of any of the versions of his book."

    Which is his/her fault for not having a better contract.

  3. I don't see this as an insurmountable problem for book publishers' business. The publishing business has long used differently priced formats, published at different times, as a means of achieving price discrimination and capturing greater profits. The industry can live with $10 electronic books so long as they are released after the full-priced hardcovers.

  4. Very interesting column. As a Kindle owner I'm following this battle closely.

    There is a flaw in your comparison between book piracy and music piracy. The reason that music piracy became so popular is that the recording industry refused to adapt to technology and sell their works electronically. People wanted a way to get songs online and on-demand, and when the industry failed to accommodate they took it into their own hands. Unfortunately for the labels, by the time they realized that they could profit from e-distribution the idea of downloading songs for free became the cultural norm.

    Still, when the industry finally decided to adopt an online business model via iTunes consumers embraced it wholeheartedly and sales skyrocketed.

    Amazon has already built a great online model for selling e-books, which means people aren't forced to pirate books if they want to read them on their device of choice. As long as e-books continue to be inexpensive and available at the press of a button people will have no need to turn to piracy.

  5. Thanks for these thoughtful comments! I want to jump in to let people know that the University of Chicago Press has just emailed me to say that they're making Adrian Johns's history of intellectual piracy (mentioned in my post above) available today only as a free e-book download. If it's still February 1 when you're reading this, you can get a free electronic copy of Adrian Johns's Piracy: The Intellectual Property Wars from Gutenberg to Gates, by clicking here. Kind of brilliant timing on their part, I think.

  6. Thanks, Caleb. My first eBook. Not quite the Curious George I remember as my first real book, but I'm going to give it a try. Can you get Curious George in eCopy?

  7. I agree with Paul's post above. Publishers MUST adapt to a changing market, considering both the fact that people today are more mobile than in the past and their perception of value. Having a physical book can be viewed as a luxury. Sitting in a comfortable chair with a couple hours devoted to reading is simply not something most ppl can do. You snatch moments here and there, and you cannot carry the additional weight in the hopes you can open the book for ten or twenty minutes. Publishers need to realize this market segment is an ADDITIONAL marketing opportunity. Go get them.

    I would argue that there are many more casual readers in the US than serious readers. Most ppl I know (25-35 age bracket) buy very few new books in general, and even less in the first run hardback. Offering a book to them in electronic format is most likely the only way a publisher will reach them. The alternative is to buy used, which doesn't offer a revenue stream to the publisher or author. So they're SOL.

    The music industry almost killed itself by not realizing the fundamental shift in the market. If you need a clear example look at the sales of Lady Gaga v. Susan Doyle, and look at the number of times their songs have been downloaded. The RIAA falsely believed and still believes that every unpaid download is a lost sale when that is probably as far from the truth as you can get. Weezer, the Offspring, Gaga, Pearl Jam, Radiohead and others have proven that if you meet the needs of your target you will have continued success. They all gave away or encouraged taping their live shows to build their fan base. They 'gave away' free downloads only to be sued by their record labels, then had their bestselling albums ever. The publishing industry still has time to learn from the colossal mistakes of the RIAA. Hopefully the 60 and 70 year old execs buy a computer and listen to their grandkids before doing something really stupid.

  8. Caleb. Love your books by the way and this is a great post. A couple of comments:

    I think if you will check your contract you will see that your royalty is based on the NET to the publishers and is not linked in any way to the rather fictitious list price. Very, very few people buy at list anymore and publishers would lose huge amounts of income of the author's royalty were linked to the list price rather than net revenue.

    As someone who owns a nook, Kindle, iTouch, laptop and Droid and reads on all of them, spends about $4,000 per year on books, and would never, ever think of getting a pirated book; we have lots of choices of what to read and, frankly, price is a consideration in making the choice of what book to buy.

    As some have pointed out, unlike a physical book, you are buying a license to read: you can't resell it, loan it, or give it away. Therefore, you are actually getting much less than when you buy a DTB. I am not wedded to $9.99 but I am not oblivious to the HC cost in relation to the ebook. I will buy the ebook (rarely buy paper books anymore) only if the ebook price is 20-25% less than the discounted HC price. If it's not I buy a used copy (no author revenue) or get it from the library (no author revenue.)

    Unless publishers harness the new technology, they will find themselves in the same position as the music industry. And smart authors will figure out that they can make tons more money by co-opting the supply chain.

    Physical bookstores, unless they learn that they can only survive by providing added value, will not survive. That will be a shame.

  9. I've been thinking a lot about this and pose the following questions:

    1. If the publishing houses are/were so concerned about the plight of independent bookstores, why didn't they take this fight to Borders and Barnes & Noble when those behemoths began discounting in such a way it was destroying the independents?

    2. If, under the RIAA model, making copies and giving them away is destroying sales, why aren't publisher concerned about the used book and library markets. One book gets read many many times, but the publisher gets paid only once? If a $30 book was available for $10 wouldn't they sell many more copies to people who said, screw the library wait queue or used book, I'll buy a new one. Sure the margin is smaller, but volume would make up the difference. That's the model Wal-Mart is based on and they seem to be doing just fine.

    3. Why are MacMillan ebooks priced higher than older paperbacks?

  10. When people spend all their money on the latest shiny media gadget but have nothing worth putting on it… I suppose then the technofetishists might have to reconsider?

  11. People in great numbers already search the internet for free e-books. Project Gutenberg had an impressive number by 1999, and the list just grows and grows. It's a great source for out-of-copyright material, much of which still deserves to be read.

    In e, it appears that *the same* people are buying more books; both in print, and in e. I am one of them. If we could really figure out what turns a non-reader into a reader, we'd have been doing it all along.

    Speaking for myself, I adore print. I want print for any books I need to 'have'. But if I'm going to read a book, I need it electronically, and readable on an E-Ink device, or it's not going to happen. It's not about trees. It's about space, and portability, and moving ideas from their containers into my brain.

    Book piracy is *completely insane*; and about as dumb as buying a diamond (or, is it a 'diamond') from an unknown source. Song piracy is bad; but it's at least easy enough to tell in a two-minute ditty whether it's the right song — and the whole song. But books? Forget it. Even if it weren't illegal, I'd never trust the quality. Remember those Chinese fake Harry Potter editions that had Harry & Hermione getting together in book 5 (or was it 6?). Whatever. No way.

    I have no problem with publishers adhering to an aging-based pricing model, with recent releases costing more and material that's been out for awhile costing less. But in e, since I'm only renting the book I'd like to pay a rental price. Even so, paying a little more for instant gratification seems fair. More than for older material. Not more than for print. (Of course, I speak as one who pays close attention to, but never buys, new releases; and who like Mr. Welch above buys used and goes to the library.)

    People are really making a pretty big deal out of not that much, here. On Amazon NY Times bestsellers are 9.99 — unless they're not. That's stated clearly on their site. And there are *a lot* of books that have been out in the world for a fairly long time that are still almost ten bucks, or even almost fifteen, in e at Amazon. Some of the Dummies books are in the $13 range. In fact, overall book pricing is pretty arbitrary. I'd guess that Amazon uses a version of the same price-tweaking algorithm that they use for everything else to dicker with the prices based on what's selling.

    I can't wait to see what happens when the 'Kindle Killer' giant iPod touch but with half the memory takes the market by storm. It promises to be an excellent gaming device.

    Long comment on a long post.

    I like your blog.

  12. >>> Amazon and Macmillan aren't at the moment fighting to see who can make more money on a book sale. They're fighting to see who can lose more money. This is a very peculiar battle.

    nice try, but in fairness they're fighting to see who can lose *less* money – perfectly normal capitalist behaviour in the current climate imo

  13. Hi, Richard! Great to hear from you!

    What I was trying to get at was the Alice in Wonderland quality of the dispute of the moment. Macmillan is saying that it would rather be paid less per e-book than Amazon has been paying, and Amazon is saying that it would rather continue to lose money on e-books than raise prices and make a modest profit. But you're no doubt correct that in the long term, as the book industry's revenues shrink, each side would prefer to be the less shrunken one.

  14. Sorry to have been so AWOL responding to comments. I just started a new assignment, and haven't had any time to spare. Also, I'm not sure I have definitive answers to many of the questions raised here. The situation is changing so quickly that I'm not sure anyone does.

    Joe L.: I, too, find appealing the idea of a flowering of indie publishers, analogous to that of indie record labels. But writers would get paid much less, in that ecosystem. And my hunch is that literature is different from music, and wouldn't thrive in the same way.

    Dave Barnes: I'm on record as having ranted against camel case, so in the utopia of my blog, it's always spelled "Ipad." As for writers and their contracts, I don't think very many writers have contracts that grant them control over their book's final price. I suppose, though, that if Macmillan were to prevail in the current dispute, and win effective control over pricing, then such contracts might become legally possible.

    Robert, "guest," Eric Welch, & "another guest": I don't think publishers imagine that they'll be able to charge the same price for an e-book as for a hardcover, though no doubt once upon a time they did. I'm 99 percent sure they plan to have the price fluctuate. Macmillan's CEO said in his statement Saturday: "Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99." He also said, "Pricing will be dynamic over time." That suggests to me that publishers want to experiment to figure out how much to charge when, as the writers Tobias Buckell and Charles Stross explain on their respective blogs. I don't think this dispute is really between high prices and low prices, though that's probably how Amazon would like its customers to think of it. It's between whether Macmillan gets to do the experimenting or whether Amazon does, and what proportion of the total profit in the system each of these two gets to take home at the end of the day.

    Several of you referenced the music precedent, and I think that if there's any hope that publishers will get this right, it's in the fact that they've been able to watch another industry stumble over similar challenges quite badly. Also, perhaps because Apple wants to neutralize Amazon's first-mover advantage (or perhaps just because Apple is saintly and altruistic?), Apple is offering book publishers the sort of price control that they long denied to record labels.

    Eric Welch, more: I don't think that publishers were ever that concerned about the fate of independent bookstores, were they? Alas. In any case the publishers are fighting on their own behalf at this point, and for their way of publishing books. As for used-book sales and libraries, they are supported by very sturdy legal precedents, though no doubt if they weren't, some publishers would try to fuss. Indeed, I've heard rumors of publishers deliberately printing paperbacks on quick-to-rot paper so that the books won't resurface on used-book sites and interfere with sales a few years later. To look at it another way: if an e-book were designed in such a way that it could be transferred to another person without leaving behind a copy of itself with its original purchaser, I suspect you'd have a good chance of convincing the courts that you had a right to re-sell it no matter what the fine print said when you first downloaded it.

    Thanks again to all of you for these thoughtful comments!

  15. Looking at a cost breakdown only highlights how much LOWER the cost for electronic books should be.

    Between the retailer, the wholesaler, and the publisher, only one entity is needed in an electronic transaction. The trio of Author/Editor/Amazon is enough.

    Advertising is important, but that is incredibly cheap once computerized… and not just cheaper, but better. Look at the netflix referral system, and amazon's own referrals. The marketing advice from their suggestions are far more effective than any flashy book tours or ny times reviews a traditional publisher buys — and they're all automated or user generated.

    Do you need an agent to convince someone to publish your book, if the cost of publishing/distributing it is zero? You could split 10$ 3 ways between the author/editor/amazon and everyone would come out on top.

    Everybody except the 0$ going to publishers, but just as you lack sympathy for the trees or enthusiasm for a new medium, I (and other consumers) lack some wistful attachment to paper and ink books, and your dear friends in the publishing industry.

    The bitter truth about news is not that they fumbled their online monetization strategy — factual reporting was simply made vastly easier and cheaper by technology. News companies made it easier by deciding to plunge into sensationally selling shallow facts. It decided that in-depth analysis is too costly, and unappreciated by the public.

    Once that was agreed, it had nothing to offer a technology that enables every person to instantaneously report facts… that allows group interest to ferret out the most sensational tidbits. Sure, any given random internet report can be wrong and is less trustworthy than most news sources — hopefully the editor-reporter-source all increase reliability — but technology allows you to cross check and fact check to your heart's content… all without the taint of editorial media company bias.

    It's all for the good in my opinion. Tired of "rumors of bombing of settlements", "X reports 200 civilians killed", "Y reports 3 terrorists only were killed", or "Nameless senior official claims". Give me a million people tweeting their reactions, and hundreds of pictures and videos of what their eyes saw… mourn your foreign consultants, your publicists and your old media elitism all you like — good riddance.

Comments are closed.