Business Musings: Price Wars and Victims
I had an interesting experience this week: I just bought a brand-new hardcover novel for less than I would have paid for the ebook. I wouldn’t have noticed except that I’ve been doing a lot of stuff online this week, and Amazon, good marketers that they are, sent me an e-mail to let me know that I had received a preorder discount of 90 cents.
I prefer to read paper books, although I do read ebooks, especially when I’m binging on a series.
The thing is, I’d ordered the book six months ago from Amazon. The book, Sara Paretsky’s Brush Back (which I’m enjoying, thank you very much), has a publisher’s list price of $27.95 for the hardcover. Amazon never listed the book at full price. I believe I initially ordered a $17.95 hardcover. I kept getting notices of discounting from Amazon, until this last, which arrived after the book was shipped.
Caveat here: I preorder because it makes some random day feel like Christmas. Suddenly, a book I really, really want shows up in the mail, almost like a surprise gift from a special friend.
I had forgotten that the Paretsky was coming out in August. If you’d asked me, I would have said September, because that used to be her release date. So when I received the most recent notice of the preorder discount—one that sounded final, final—I went to Amazon and looked up the publication date for the book.
And just about fell off my chair when I saw that the Kindle edition was $13.99 and the hardcover was listed at $13.
Remember that Amazon changes its pricing and its listings all the dang time. When I logged on today, the book had an $11.64 Kindle edition and a $13.37 hardcover.
As I searched for the publisher’s list price, too lazy to get up and pick up my copy from the other room, I found that Barnes & Noble lists the book at $16.83 for the hardcover and $11.84 for the Nookbook. Powell’s lists the book at full retail, $27.95, but not an ebook, and sadly, the description of the book wasn’t for Brush Back, but for the previous novel in the series.
Agency pricing has returned to ebooks, which means that publishers are setting their own ebook prices and the retailers, like Amazon, are not discounting. The ebook price on Amazon is clearly a price-match with Barnes & Noble, not something that Amazon has done.
I poked around Amazon, looking at e-book prices, and almost fell off my chair for a second time. Lisa Scottoline’s next book, which releases in October, has a $14.99 ebook. So does Michael Connelly’s November release. And Stephen King’s November release. Robert Crais’s next book shows a $12.70 Kindle edition paired with a $13.37 hardcover. Does that sound familiar?
And what’s fascinating to me is that these books, and the dozens of other traditionally published upcoming releases that I looked at are coming out of different publishing companies. Not different imprints of the Big 5, but each of the Big 5.
Once again, pricing seems…agreed upon.
Five years ago, just after ebooks took off, the largest traditional publishers set their ebook prices high so that readers would buy the paper editions. Despite the high prices, ebook sales increased. Then the whole Justice Department debacle happened, pricing became an issue for traditional publishers, and, last summer, Amazon and the big publishers started renegotiating their contracts.
After a lot of Sturm und Drang, the contracts were finalized: Big publishers could set their own ebook prices, and Amazon wouldn’t automatically discount them. I’m seeing different reports as to whether Amazon is even allowed to discount ebooks, except through price matching.
Nonetheless, Amazon is leaving the ebook prices—set by the publisher—alone…and messing with the paper prices.
I mean seriously messing with the paper prices. I should not have been able to get a brand-new hardcover for more than half off the list price on the day the book released. Maybe at Christmas. Maybe nine months from now, as the publisher gets ready to release the mass market paperback.
But now? Release day? Seriously?
I looked at all of my other preorders and found the same issue. The hardcovers are the same price—or nearly the same price—as the Kindle edition.
And I got to thinking…
The traditional publishers are screaming about Amazon. I’ve learned over the years that when someone screams about something, they’re doing so because they feel some kind of pressure, some kind of pinch.
How could traditional publishers be feeling a pinch from Amazon? After all, in the United States, Amazon is selling more books than any other retailer. Why would that hurt traditional publishers? Is it hurting traditional publishers?
Oh, my friends. One should never ask these sorts of questions. Because the answers are often surprising.
From the evidence that I’m seeing, here’s what I believe is going on.
Amazon is clearly fighting the price war on a variety of fronts, and I’m sure Amazon’s policy is pretty simple: They want affordable ebook prices. So if traditional publishers want to charge $14.99 for a Kindle edition, then Amazon will make sure no one buys the expensive Kindle edition by lowering the price of the hardcover.
My unscientific examination shows that when the Kindle prices are high, the discount on the paper edition is deeper.
Hear me out before you get enraged that I’m taking Big Pub’s side. I’m not. I’m trying to look at something here, something that’s been bothering me.
So of course, we must go directly to the calculator for a bit of math.
When publishers returned to Agency Pricing, they had to agree to the same ebook royalty schedule that indies have. Which means that for any ebook priced over $9.99, the publisher will receive 35% of the sales price. (If the publisher prices the books between $2.99 and 9.99, then the publisher receives 70%)
The publisher, with a $14.99 ebook, will receive a royalty payment per sale of $5.25. If the publisher had priced the ebook at $9.99, the publisher would have received $6.99.
So traditional publishers are deliberately receiving a lower percentage royalty to keep the ebooks prices artificially high.
But traditional publishers aren’t the only ones taking less money to prove a point. If business is being conducted as it usually is, then traditional publishers sell their books to Amazon at the discount they use for all of the other big accounts (Wal-Mart, Costco, and so on). (See comments below. Deep discount might not apply. kkr 8/7/15)
That would be 60-64% of list price. This is known as a deep discount.
So, if Amazon pays 64% of $27.95 for the hardcover of, say, the Paretsky book, then Amazon is paying a little over $10 per book. Amazon is currently selling that book for $13, making a $3 profit.
If Amazon sells the Kindle edition of that book, Amazon makes $7.57 per sale. (65% of $11.64) If Amazon sells any of the $14.99 ebooks, it makes $9.75—over three times what it’s making on these discounted hardcover new releases.
Why is Amazon doing it?
I’m guessing here that the price wars continue. And Amazon is trying to force publishers to return to $9.99 ebook prices.
The problem is that in this price war, the publishers and Amazon are still making an okay profit on each book sold. The people who are getting squeezed are the ones who get no vote in this: the traditionally published writer.
Here’s what’s happening.
Publishing contracts have changed in the past 15 years. Now, each contract has a discount schedule, reducing the royalty if a book is sold at deep (or what the average person would call high) discount. In the past, many contracts didn’t have a discount schedule; the publisher would eat the loss.
Now writers get a much lower royalty if the actual discount to the retailer is low.
At 60-64%, some writers are receiving only a 1-2% royalty. Let’s be charitable and give that writer a 2% royalty. That’s 2% of $27.95, which comes out to 56 cents per hardcover sold.
If the book sells at full price, the writer would get 10 to 15 to 20%, depending on the royalty schedule. (Often royalties are based on sales numbers—10% to 150,000 copies, 15% to 500,000 copies, 20% over 500,000 copies.)
Let’s be realistic instead of charitable this time. Most writers traditionally published in hardcover never sell 150,000 copies of that hardcover. The writer will get the 10% royalty, which is $2.75 per book. Not 56 cents. That’s a significant loss for books sold at deep discount.
But it’s a fact of life. That writer would get the 56 cents if Amazon sells the book at $27.95 or if Amazon sells the book at $13.37. It won’t matter to the writer at all.
The squeeze occurs on the ebook prices. Currently traditionally published writers across the board are getting 25% of net income received on ebook sales.
So…if the publisher sells the ebook through Amazon at $14.99, and Amazon pays the publisher a royalty of 35%, then the publisher will receive $5.25. That’s “net income received” of which the writer will get 25% or $1.31.
However, if the publisher sets the ebook price at $9.99 on Amazon, the publisher will receive $6.99. The writer will get 25% of that $6.99 or $1.74. A little better.
But the other bonus at the lower ebook price is this: It has been proven over the years that the lower price point brings in more sales. So the writer would receive more money per sale and also make more sales.
The traditionally published writer is losing out here.
It’s really important to note that the problem in this equation is not Amazon. Yeah, they’re acting like a 300-lb gorilla, trying to force behavior within their own marketplace. Just like any other retail business does.
(Dean and I have a tiny retail business, and we have certain policies that our suppliers must follow as well. If the suppliers don’t like it, they can go elsewhere. That’s just business.)
The problem here is the traditional publisher. They’re still acting as if it’s 2010, without recognizing that the ebook market has changed dramatically while they were defending themselves in court and trying to negotiate with Amazon.
As I’ve mentioned time and time again when discussing pricing, retail businesses study pricing to death. Study after study have been released since ebooks started showing that there really is a sweet spot in pricing. The sweet spot depends on what you’re trying to do, what genre the book is in, and whether or not you’re running a promotion or setting a standard price.
Even if you’re trying to avoid Amazon’s pricing suggestions, you’ll find a million retail sites that have actual sales numbers that support the price-sales correlations. Places from Bookbub to Smashwords have accumulated enough data on sales to outline how price impacts purchases. The links I posted are to the sites’ blogs, which often have articles on pricing. You can find a lot of unsubstantiated opinion on the internet about prices too, but look at the places that are actually in the business of selling ebooks. They’ll tell you more about price than you want to know.
Traditional publishers still believe that setting a high ebook price on a new release will drive the readers to the hardcover. That may have worked in 2010 (although even that’s up for debate), but what’s clear this month is this: that strategy does not work in 2015.
Lagardere reported its first half-year financial results late last month. Lagardere, for those of you who don’t know, is the parent of Hachette Book Group (among many other companies). Lagardere’s financial statement doesn’t break down HBG in particular, but does discuss its US operations in general. And what Lagardere admitted this in its financial statements:
Their ebook sales in the US have declined. The ebook sales in the first six months of 2014 were 29% of their trade revenues. In the first six months of 2015, ebook sales were 24%. Lagardere blames “a less successful slate of new releases and the implementation of the agreement with Amazon.”
Lagardere expects that the company will absorb the new reality—lower ebook sales—by 2016, although that might simply be hype for the investors.
Industry analyst, Mike Shatzkin, who often acts as an unofficial mouthpiece for traditional publishing, wrote a rather surprising blog on Monday about this very thing. Surprising, because for the very first time, Shatzkin is admitting that the industry might be in trouble due to its own behavior.
So the sometimes startlingly high publisher-set prices are prevailing. And, aside from the Hachette numbers that were reported, we’re hearing widespread but totally unofficial reports that big publisher ebook sales are dropping noticeably when their new higher agency prices are activated.
He—and the publishers he’s been talking to—are finally beginning to realize that the indie publishing movement has had a major impact on the sales of traditional publishing’s books:
What is definitely true is that the share of the reading market held by commercially-minded publishers (not just commercial “for profits”, but also university presses) will diminish as both successful self-published authors and hundreds of thousands of others who don’t succeed (and maybe don’t even care) take their content to market on their own.
It has only taken 5 years, but traditional publishers are beginning to see a leveling, a flat-lining of their sales due to the loss of authors, the rise of indie publishing, and the fact that velocity (selling a lot of books quickly) can’t be manufactured any longer.
In fact, velocity is almost impossible to build these days. This summer, one wag joked that the only books which are selling the old-fashioned way (meaning through media coverage and velocity) are by two old-fashioned authors—Harper Lee and Dr. Seuss. There’s an element of truth to that.
So let me step out of the details now and get back to my original point. I’m starting to get a handle on the screaming.
Traditional publishers are screaming about Amazon because they’re still at war with Amazon. The war is a price war, with both sides sustaining losses to prove their point. The losses aren’t huge, since books are still being sold at a gross profit by both sides. Although I would argue that traditional publishers’ net profit on hardcovers is probably slimmer than it used to be, given the growing costs of warehousing, shipping, and manufacturing even as hardcover book sales are decreasing.
When traditional publishers scream about something, their cries of agony echo through the canyons of New York. Agents pick up the cry, and relay it to their writers.
But agents and traditionally published writers are also seeing something they haven’t seen in a long time. They’re seeing reduced royalties and lower sales. Plus, the sales that do occur are often at deep discount.
According to my royalty statements, 80-90% of the books I’m selling through my traditional publishers are at deep discount. I’ve heard other authors say the same thing. When they drill down into the numbers on their royalty statements, these writers find very few paper books (hardcover or mass market) selling at full retail price.
According to an Association of American Publishers study released in June, trade book sales have remained steady—and that includes paper books. So the number of books sold remains the same (or has grown slightly), but the venues which sell the books have changed enough that the books are being sold at a discount (rather than full retail).
Discounted books mean less money to the writers.
Publishers can’t pay less rent on their warehouse space, or decrease their employees’ salaries (quickly anyway). The shipping costs continue to rise. But publishers can pay writers less, through reduced royalties and lower advances. And publishers are doing that.
Add to that the problems caused by charging ridiculously high ebook prices and getting paid less money for those high-priced ebooks than if the books were properly priced, and the traditionally published writers, who receive 25% of net ebook royalties, are really losing money here.
A lot of money.
So those screams in the canyons of New York, the ones from the publishers, get heard by the people who are actually taking a bath because of these new policies—the writers (and their agents). The publishers are blaming Amazon, so the writers (and their agents), seeing reduced revenues, believe what the publishers are telling them, instead of looking at what’s really going on.
Right now, traditional publishing is going to do what all businesses do in a time of transition: they’re going to tighten the belt where they can and adapt to the new reality. If they refuse the change their policy on e-book pricing, the only way they can continue to make a profit on their books is by squeezing writers even more.
I’m hoping that this week’s Shatzkin article shows that publishers are beginning to realize how stupid their ebook policies are. But I’m an optimist.
I’m also different from some of my indie writer friends: I don’t want traditional publishing to wither and die. I like having the option to publish books on my own, through a small company, or through a larger one. I like being a hybrid writer.
But I don’t want to see my friends getting screwed either. And I think that as long as traditionally published writers hear those screams in the canyons of New York— think echoey versions of Damn you, Amazon! (accompanied by hundreds of shaking fists sticking out of high-rise windows)—and believe that the bad guy is Amazon, then this behavior won’t change.
Yes, as far as traditional publishers are concerned, they have a problem with Amazon. Amazon is tweaking them, just like the traditional publishers are tweaking Amazon.
At some point, one of those two parties will blink. And from Shatzkin’s post, that party might be the traditional publisher.
But traditionally published writers, stop repeating the party line. The problem isn’t Amazon. The problem is that your traditional publishing company is still fighting with Amazon for dominance over the marketplace.
The problem is that traditional publishers don’t know a damn thing about the way price works. They haven’t had to know: they’ve had a monopoly for nearly five decades. Now that they need to have retail and pricing experience, their executives aren’t able to pivot and make those decisions.
Amazon knows everything about the retail marketplace and more. So when it adjusts prices, those adjustments have a real effect.
Right now, that continued war between Amazon and the publishers is like two chess players at a table in Washington Square Park. The chess master, who really knows how the game is played, is toying with the old-timer who was once reigning champion of his high school chess team.
At some point, the old-timer will realize he’s outgunned. I think that Shatzkin post is the first glimmer of hope I’ve seen for traditional publishers.
Whether it translates into anything, only time will tell.
And a lot of writers will lose money, will lose sales, and will lose audience because they’re the pawns in this great chess game.
It’s a shame, really. I almost feel guilty about my $13 Sara Paretsky hardcover.
I use the word “almost” because I’m as price-conscious as everyone else who lives in the real world. Much as I want to support my fellow writers and independent booksellers like Powell’s, I would rather buy two hardcovers for my $28 than one. And if I’m really price conscious, I’ll buy 5 ebooks at $4.99 each, and then get a latte to drink while I’m reading them.
Everyone has their price, everyone knows how much they’ll spend for something, and much as we agree or disagree about each other’s motives and politics, we will ultimately behave as self-interested consumers simply because our money—and our time—happen to be finite.
I wish I were a disinterested party in this price war between the traditional publishers and Amazon. I’d break out the popcorn. But every time I see a Kindle price higher than the hardcover, I wince a little. I know that the person getting knocked around in that tussle is a writer—a writer who hasn’t yet realized that they’re being injured. That realization won’t come for a royalty statement or two or three—anywhere from 9 months to 18 months from now.
And it’ll be impossible to trace the bruises back to a tug-of-war in August of 2015, because there’ll be a whole new battle being fought. One that will suck all the air out of the room.
Just like this one has.
There’s a lot of business news this week, and I hope to get to more of it during August. Usually summer is a slow time for publishing, but that hasn’t been true these past two years.
I know we’re still in vacation season for most of you, so I value those of you who show up each week even more. Thanks for the comments, emails, links and donations. They mean a lot.
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“Business Musings: Price Wars and Victims,” copyright © 2015 by Kristine Kathryn Rusch. Image at the top of the blog copyright © Can Stock Photo Inc. / shandrus