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    Amazon caves to Macmillan

    Just read that Amazon has decided to give in to publisher Macmillan's demand that the online bookseller sell its books under an agency model for the price the publisher sets (which for the new books that make up most of the market will be 30-50 percent higher than the $10 Amazon currently charges).

    For a few days, Amazon tried to play tough by removing Macmillan's books - both physical and digital - from its inventory (tho the titles were still available from third parties). But that didn't last long and the company has put a statement on its Web site that it "will have to capitulate and accept Macmillan's terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books."

    To be honest, Amazon's decision to cave was a no-brainer. By showing some defiance, Amazon was able to get press to show that they were trying to be an advocate for the consumer, and now if the price changes stick and other publishers even adopt a similar strategy, Amazon could actually make money on its e-book sales as opposed to the losses it currently incurs when selling new titles at the $9.99 price point. The decision by Apple to agree to the higher price points for its imminent iPad tablet made it even tougher for Amazon to play tough.

    Of course, Macmillan's decision is a complete joke. The idea that digital books - which have a near-zero marginal cost of production (printing, transportation and distribution costs are all basically de minimus) - should cost the same as a printed copy is laughable. i don't think other publishers will play along here, but even if they do, the higher prices will only lead to people buying fewer books or pirating more content.

    When will old school, offline companies learn the lessons of recent history? Book publishers - which in the end are mere middlemen - should be trying to do whatever they can to embrace and encourage legal consumption of their content in the new medium and not go down the same path as the music industry.

    I have no doubt that the wholesale cost of e-books will eventually be cheaper than their physical counterparts. And over time, more and more authors will take advantage of the opportunity to go direct (Amazon offers authors a 70% split on titles sold without a publisher), bypassing the middlemen completely.

    For the truth of the matter is, neither Macmillan nor Amazon will in the long-run be able to set what they think the ultimate fair price of a book should be. Assuming competition is allowed to flourish and regulation remains minimal, the market will be the decider.

    And trust me, the market - and time - is on the consumer's side.


    D, it's a pleasure to read you again. Your writing is always lucid and interesting, and you add such breadth to this blog.

    As a new member of the publishing industry as well as a new Kindle owner, this is an issue of personal interest to me. I think that the pricing issue isn't as clear cut as you think. According to this blogger, the cost of distributing e-books is higher than one might suppose:

    The distribution and warehousing charges for e-books are absolutely as high as they are for print books. For example, the biggest book warehouser in the country, Gardners, who distribute our e-books, charge exactly the same as they do for print books – an average whopping 50% of retail price. Why? Because they argue that there are still large costs associated with the production and maintenance of e-books: they’re just different ones. They relate to building, managing and keeping secure e-warehouses, among other things.

    That said, this seems bizarre to me because e-books can't be much larger than the music mp3s that sell for $0.99. Moreover, the pricing structure is wacky because the cost of managing e-books should not depend on scale. That is to say, the cost of "warehousing" an e-book that sells a million copies should not be much higher than that of a book that sells a thousand copies. But the publishing industry is a bit backwards, so it wouldn't completely shock me if this were true.

    But let's say that you remove this market inefficiency in the long run. The publishers still have to spend a fair amount to bring a book to market even if you exclude the print, inventory, and distribution costs. Bestsellers, benefiting from efficiencies of scale, could be sold at very low cost and still turn a profit. But the majority of books, which aren't bestsellers, would lose money if they're priced too low, so publishers may have even less incentive to take risks on new authors.

    For what it's worth, publishers are already squeezing authors harder than consumers. I will make about the same percentage on an e-book that I make a hardback, which means that I will earn less than half on an e-book sale what I would make on a hardback sale, despite the lower production costs. And my agent locked in the rate on the expectation that industry standard ebook royalty rates will drop further in the future.

    Are the publishers just being greedy? I might be a little more cynical if the publishers were raking in the profits, but the industry is universally acknowledged to be struggling badly even without substantial digital piracy.

    Can we just eliminate publishers? I doubt it, not without dramatic loss of production value anyway. The books still need to be edited, produced, marketed, and distributed, and it's not as if publishing staff make huge padded salaries from which the fat can be trimmed.

    In short, while e-books should certainly cost less than print, I expect that the difference may not be that dramatic. But here's my hope--I find that the ease of buying books on the Kindle and the lower price point has already caused me to buy more books than I used to. And if, on top of that, e-book readers actually encourage people to read more, then sales may grow without any increase in production costs, and everyone wins. Time will tell.

    the idea that the cost of an e-book is similar to the cost of a physical book is inexplicable to me. perhaps one could argue that the publishers must engage in some upfront investments to manage, store and secure their digital content, but as you point out, we are talking about miniscule amounts of data. and certainly those costs should be quickly amortized away to basically nothing as more e-books are sold.  i dont have any inner workings of a publisher's business model, so I can't definitely say that the industry and the blogger you quote are full of it. let's just say im very skeptical.

    you are correct that book publishers aren't simple distributors and certainly add value in their roles as middlemen. they find talent, they edit talent, they market talent. some of those functions could be done better or cheaper by others - and as canuck points out in his comment, will increasingly be done that way - but certainly they play an important role and somehow need to find a way to recoup those costs.

    What's most interesting is that unlike with the music industry where piracy has been the primary challenge, the book industry's struggles have come at the hand of the digital revolution as well but in a different, far more dangerous way: Fewer people are reading books and book readers are reading fewer books. I suppose that's a trend that began even before the Internet, but Im quite sure its accelerated in recent years as people's choices for content consumption have expanded exponentially.

    So you would think the industry would be doing everything in its power to EMBRACE the one development in recent years that could reverse that trend: E-books. Instead, not surprisingly but still disappointingly, most of the players are living in the past and clinging to outdated business models.

    You can't just wish the Internet away, but you certainly could drive more retailers to become publishers, more authors to become self-publishers and more readers to become pirates.

    Instead, not surprisingly but still disappointingly, most of the players are living in the past and clinging to outdated business models.

    Surely that's not fair. Practical e-book readers only came out about a year ago, and you can already get most new books online. Could they embrace the technology more aggressively? Sure, but this nothing like the music industry, which spent a decade battling digital music after mp3s became popular. (Also keep in mind that publishing is a very old, slow-moving industry. On the subway, a woman who turned out to run a small publishing house asked me about my kindle. She was concerned that readers would miss the sensations associations with paper and ink.)

    I'm not even close to knowledgable in the field, so take this with a huge grain of salt, but I think the reason that e-warehousing costs about the same as warehousing isn't because of the expense in e-warehousing (cf. your mp3 example), but because of how cheap it is to warehouse paper books. That is, there's been significant added costs in physical warehousing for quite some time, and moving to digital books without including those added costs would eat into the warehouses profits significantly.

    Nice try, but the author writes that Gardners charges 50% of the retail price for eBooks and print. If they're charging $5 or more per eBook, they must be making a fortune. I should get into that business.

    My point is that they were already making a fortune with the print. It's not that expensive, either.

    By way of an analogy where I do have more experience (but this is purely hypothetical): Let's say that the cost to make a 32 oz soda is 15 cents (5 cents for syrup and carbonated water and 10 cents labor), and a movie theater sells it for $3.95. They make $3.80 in profit. Now, imagine that someone finds a way to drop that cost down to 2 cents (magic syrup and solar powered robotic labor). Is it really helping the movie theater that much to do so?

    Well, that's the pure, perfectly efficient cost, which doesn't happen in the real world. In actual movie theaters, there's spillage, waste (syrup that never gets sold), and inevitable labor inefficency (the kid who doesn't make any sodas for forty minutes because no one orders a soda). There's still a humongous profit on the sugar water.

    The unit cost of a book is quite favorable to publishers, if every book gets sold. But they don't. There are a whole bunch that get printed, shipped, left unsold and eventually shipped back to the publisher at the publisher's cost, which eats into the profits from the books that do get sold. And for paperbacks, there are books that get printed and then destroyed by the booksellers when they don't sell (so the publihsers don't have to pay for return shipping).

    You never print extra wasted copies of an e-book (although you do buy server space for books that sell extremely slowly).

    All the old models of selling or controlling intellectual content were based on the complexity and cost of distribution technology. That's now fallen virtually to zero, so all those models are broken. As you point out, from music to books to newspapers and beyond. Technology has been democratized; people increasingly make their own movies, record their own music, publish their own books, pontificate on their own blogs. They make do without the profits the big studios, record companies and media moguls raked in, but they can pull it off because their costs are so much lower.

    And it's not just an economic revolution. It's a societal one -- a universal knowledge and access revolution. It's no accident that for many of us there are no more priests and, except in the limited role of TV news fodder, no more experts. No more "arguing from authority."

    An example: My brother-in-law, who drove a bus and wasn't a university grad, suffered for years from a debilitating illness that doctors could not find a definitive diagnosis for. Fed up with the uncertainty, he went online and read everything he could find related to his symptoms, narrowing down the possibilities. Finally, he went back to his doctor and -- armed with the knowledge he had gained -- demanded to be tested for what he was now certain he had. His diagnosis proved correct, and one of several treatments (which he had also researched) eventually proved effective. He still takes that medication, but has been symptom-free for years. So, even in the exalted field of medicine, more and more people are learning the utility of cutting out the middleman.

    Couldn't resist going off on this tangent to your basic point -- that the middlemen (all of them, in every field) are fighting a losing rear-guard action against the e-economy. And don't seem to have caught on that they are.

    It's a great comment, with an analogy that seems out of left field but is actually brilliant

    I hazard to guess that your brother-in-law is part of a small percentage of effective self-diagnosers. The majority likely blame vaccines, artificial preservatives, fluoridated water, and UFOs. My grandmother succumbed to cancer some years ago after her homeopathic doctor warned her that the anti-cancer drugs that had kept her in remission were actually causing the cancer.

    Not that doctors are omnipotent saints. Just sayin--democracy has its warts.

    Man, that's a terrible story. I'm sorry to hear it.

    Thanks. She was a very old woman of 95 when she died. It's still a sad story but perhaps not quite as tragic given her advanced age.

    Good point, Genghis. My brother-in-law did the legwork of trudging through the online medical literature and, because he was off work on sick leave, he had plenty of time and motivation to do a thorough job. Not even the most dedicated specialist knows -- much less has time to research from scratch -- all the ways a disease can manifest itself in different individuals.

    The key to his successful self-diagnosis was that he then turned to the medical community for confirmation and treatment. When he did, he'd already researched online the various treatment centers throughout North America with expertise in his form of the disease. So his cure resulted from collaboration with established medical practitioners, not circumvention. This wasn't so much a case of cutting out the middleman as redefining his role for him.

    Sorry about your grandmother. Alternative medicine has more than its share of quacks. My daughter is a certified acupuncturist, but she has a good working relationship with several medical specialists, who often direct patients to her. And vice-versa. She has had people come in for acupuncture whom she has immediately sent to the nearest ER for life-saving treatment. 

    The explosion of e-knowledge is a good thing -- a great thing, actually, with vast implications for improving the lot of mankind. The problem, with access to so much information, is that most people don't understand the limits of their own knowledge. They lack the critical faculty to distinguish what they know from what they think they know. That's always been the case; it's just way more important a skill today. I believe people can learn it.

    Great post, Deadman. But while I think you're dead right about the price hike being a mistake, I'm totally okay with publishers setting the price for their own e-books, instead of Amazon setting the price unilaterally. I might prefer Amazon's price to MacMillan's in this case, but the principle that publishers set their own prices is a very reasonable one. Look, if you're right (and I think you are) that MacMillan set its price point wrong, then market forces will correct that, and possibly lead them (or their competitors) to sell books for $8.99 or $6.99 or whatever. But the idea that Amazon, through a monopoly on distribution, can dictate the prices, is scary. At the moment, Amazon decrees that the price for every single e-book is relatively low, but that's part of their struggle to get monopolistic reach for the Kindle. Once that monopoly seems safe from any threat of competition, they'll be free to set the prices as high as they like. So I'm not eager for any company to have a chokehold on e-book technology. And the idea that a single retailer will dictate the price point to publishers (and by extension to authors) is a terrible idea.

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