Who Wins The Ebook Wars?

This article, from Roger Theriault, originally appeared on True/Slant on 2/3/10 and is reprinted here in its entirety with his permission.

The recent e-book dispute between Amazon and Macmillan is far from over.
Macmillan books, both e-book and traditional paper, are still unavailable at time of this writing on Amazon.com, except through Amazon’s third-party sellers. And Macmillan e-books, and the iPad, are not yet available for sale from Apple, Inc.
Who will prevail? Will e-book prices go up? Will book pricing be controlled by a few publishers? Will consumers buy fewer e-books? Will this help authors? Is this even legal?

First, some e-books background
I’ve been watching the media coverage, blog postings, and comments over the past week, and it seems there’s a lot of noise and confusion among the facts of this issue. Even before the problem blew up and Amazon pulled Macmillan books from its inventory, authors and readers were weighing in on the question of fairness with recent e-book pricing and availability.
Author Douglas Preston, who has written several books, even went so far as to comment in response to a one-star review of his latest book, Impact, published by a Macmillan imprint, weeks before the latest controversy:
I’m just trying to write good books, earn a living and support my family like everyone else in this crazy world. Please give me a break.
Preston later posted a mocking take on the “shrill, angry posts by Kindle users here and elsewhere”:
I am the American consumer. I am entitled. I want it now. I want it at the cheapest possible price. And if I don’t get it I’m going to lash out in protest and I don’t care who I hurt just as long as those greedy publishers and authors take notice!
Perhaps some were shrill, but most seemed quite polite, while making their point:
Mr Preston,
I feel you are missing the point here. You are losing many more sales of your book because of your publishers decision to delay the Kindle version release date than because of a negative customer review on amazon.com.
These complaints and negative reviews and discussions stemmed from several publishers’ decisions late in 2009 to delay the release of the e-book by one or more months, as the Guardian reported:
HarperCollins is not the only publisher delaying release of its ebooks. Last year, leading publishers Simon & Schuster and Hachette Book Group both told the Wall Street Journal that they would delay ebook editions – which are generally priced significantly lower than the hardback – by up to four months for some titles in 2010. “We believe some people will be disappointed. But with new [electronic] readers coming and sales booming, we need to do this now, before the installed base of ebook reading devices gets to a size where doing it would be impossible,” Simon & Schuster chief executive Carolyn Reidy told the WSJ.
Amazon.com pointed out at the time that “authors get the most publicity at launch and need to strike while the iron is hot. If readers can’t get their preferred format at that moment, they may buy a different book or just not buy a book at all.”
Impact’s Kindle version was delayed by 4 months. While paperback readers are used to waiting for a smaller, economical version of the hard cover book, for the past 2 years most e-book releases have been simultaneous with the hardcover version. And many e-books have been priced by Amazon at $9.99, while discounted hardcovers sell for about $15 at Amazon, Costco, and Walmart. In December, several new hardcover releases were even sold for $9.00. So Kindle owners have been used to being able to read their favorite author’s new book at release time for under $10. Many refuse to pay more, and say that their alternative is the library or a used bookstore. When e-books are priced close to the price of a paper book, they can’t comprehend the logic:
The $9.99 price point made it so – for the first time EVER – I bought new releases with some regularity. I won’t spend more than that on ANY book, let alone one that I can’t re-sell/trade/donate for secondary benefit.
Neither can the Wall Street Journal:
Raising the e-book price to $13 or $15, as reportedly contemplated in Apple’s discussions with publishers, isn’t the way to embrace the digital future. A price of $15, for instance, is close to the hardcover book price charged by discounters like Costco.

Publishers not happy

It seems the publishers have not been happy with this. In 2009, the “publisher’s list price” or “cover price” of e-books generally rose to match that of the hardcover, squeezing Amazon’s profit margins on e-books. Some speculate that Amazon is losing money on some e-book sales. But in retail, loss leaders are a competitive strategy, and price adjustments help move inventory and generate profits. Under a traditional contract, publishers still receive an average of 50% of the cover price. So increased sales should be a boon to publishers.
But publishers seem to be concerned with a loss of “apparent value” in their product. And they seem to have convinced authors that retail discounting will be the beginning of the end. Some have resorted to accusing Amazon of bullying:
This isn’t good for those who care about books. Without a healthy ecosystem in publishing, one in which authors and publishers are fairly compensated for their work, the quality and variety of books available to readers will inevitably suffer.
Amazon, it appears, overreached. Macmillan was a bit too big a foe, and Amazon’s bullying tactics were a bit too blatant.
True – but what is “healthy”? And who bullied who?
Some authors claim that publishers are not the good guys. They state that authors receive a small fraction of the selling price of a new book, publishers need to change their business practices, and that book authors should remember that the publisher is only trying to maximize their own profits, and not those of authors.      

Author J.A Konrath weighs in in an aptly titled blog post, Selling Paper:

I’ll earn almost as much on a $2.99 download than I earn on a $24.95 hardcover.
Konrath has the e-book rights to some of his back-list titles, and sells them directly, without a publisher.
Writer Carolyn Jewel puts the pricing logic in further perspective:
There are several things wrong with this. The first is the assumption that but for the availability of the Kindle version, book buyers would buy the hardback. This appears to be an egregiously wrong assumption. There is, to my knowledge, no evidence that a Kindle owner would be a hardback buyer if she didn’t own a Kindle.
I think it’s much more likely that a Kindle owner, if she didn’t have the device, would wait for the MMP rather than buy the hardback. The MMP would be priced at $7-8. But the Kindle owner, instead of waiting for the MMP, pays a bit more for the book right now. Instead of waiting. By the time the MMP comes out, she’s not going to want to pay $9.99. So what’s actually happening is the Kindle buyers represent BRAND NEW customers with respect to this release. MORE people buy this brand new book because there are two formats. And the cheaper one comes with some well known and much hated limitations.
Twisted facts
But for every Joe Konrath, there seem to be dozens of authors with a contrasting viewpoint. Fast Company, a magazine I subscribe to and generally love, surprised me with this blog post by writer/author Kit Eaton titled Amazon Revealed: It Hates You, and It Hates Publishers that sticks up for authors and publishers while revealing scant business sense:
Amazon, of course, operates something like a supermarket giant does in the food industry–leveraging its huge size to force suppliers to sell to it at wholesale prices. This tactic has caused issues in the food market, and now its doing the same in the books market: Amazon refused, and without warning pulled all Macmillan books from its store.
Mr Eaton must have stayed with the J-school curriculum and missed the econ 101 class where kids learn that retailers indeed do buy stuff from wholesalers at wholesale prices, and then set their own retail prices. He confirms it with this gem:
Firstly it refused to see eye to eye with a key publisher–one of its major suppliers–and preferred to stick to its bullying tactic that eats into the revenue of the publisher, and subsequently authors themselves, by basically insisting that it decide how much to pay them for their product. (emphasis mine)
Wow! Such blatant disregard for basic business sense in a business magazine. Reading both Macmillan and Amazon’s public statements, Amazon never “insisted that it decide how much to pay” publishers. What seems to have happened was, Macmillan told Amazon, a retailer with a huge investment in online and warehouse infrastructure, customer base, and staff to keep it running, that it should act as a cashier, and leave the pricing to Macmillan.
Macmillan statement:
I gave them our proposal for new terms of sale for e books under the agency model which will become effective in early March. In addition, I told them they could stay with their old terms of sale, but that this would involve extensive and deep windowing of titles.
Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digtal media businesses). The price will be set for each book individually. Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time.
Agency means retailers simply sell the products as an agent of the publisher, with no say on pricing, discounts, etc.
Amazon’s eventual response (emphasis mine):
Macmillan, one of the “big six” publishers, has clearly communicated to us that, regardless of our viewpoint, they are committed to switching to an agency model and charging $12.99 to $14.99 for e-book versions of bestsellers and most hardcover releases.
We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we 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.
Perhaps worst of all, Amazon clearly doesn’t care what its customers think (despite thanking them in the blog post) because it acted to axe Macmillan’s texts without explaining why or giving any warning. And though it tries to portray itself as championing customer rights, what its actually doing is trying to manipulate an entire industry to working how it wants everything to work, squeezing everybody from authors to other booksellers.

And the final, most fascinating twist of all this, is that there’s likely to be one main beneficiary of Amazon’s shenanigans, and it’s one Amazon will deeply resent over the next year or so: Apple, with its new iPad.

I’m glad he mentioned Apple, because I was about to. But first, what DO Amazon’s customers think? Fortunately, Amazon’s discussion threads shed some light, with thousands of posts in the past few days:
J.P. = Reader: To me the issue is the Publishers price controlling across the board at the expense of the consumer. I will also vote with my dollars in protest of their tactics. Sadly, I have to believe the other Publishers probably aren’t far behind.
nabrum: So let’s say the list price of the print edition is $26. Under the old model Amazon paid the publisher $13 and sold the ebook for $9.99. Amazon takes a loss of $3.01. Under the new model the publisher sets the price of the ebook at $15 and gives Amazon a 30% commission. 30% of $15 is $4.50. So the publisher gets $10.50 and Amazon gets $4.50. Under the old model the publisher/author et. al. get $13 to split between them. Under the new model they get $10.50, or $2.50 less. How does the new model allow the publisher and author to profit more from their work than the old model did?
What got this started?
Interestingly, the mention of Apple and the $12.99 to $14.99 prices remind me of Apple’s iPad launch, where Apple announced iBooks would sell for – you got it – $12.99 to $14.99. And that was just a few days before all this kerfuffle.
Some speculate that there’s no coincidence here. And a telling video exchange between Apple CEO Steven P. Jobs and Wall Street Journal columnist Walt Mossberger suggests Jobs knew something about this before it happened.
Here’s All Things D. writer Kara Swisher’s video, and Business Insider’s transcript of what was said on January 27:

Walt asks Steve, “Why should she buy a book for $14.99 on your device when she can buy one for $9.99 from Amazon or Barnes & Noble?
Steve responds somewhat knowingly, “That won’t be the case.”
Walt says, “You won’t be $14.99 or they won’t be $9.99?”
Steve says knowingly, “The prices will be the same.”
Then the video cuts, then Steve says, “Publishers are actually withholding their books from Amazon because they’re not happy.”
How can Steve Jobs know something that’s happening between Amazon and publishers?
Apparently the agency concept was developed in discussions that Apple had with a number of publishers in January. And Macmillan seems to like it so much, they are asking Amazon to follow suit.
But if publishers control the retail price of e-books, is it legal? Under US laws, such as the Sherman Antitrust Act, some forms of retail price fixing, or collusion to fix or control prices, is illegal. This issue hasn’t been raised in reporting, but perhaps it should be explored.*
*Edit: this morning, in an online exchange, Washington Post business reporter Steven Pearlstein had this to say:
In fact, what the FTC should be looking into is the potential collusion among all the publishers to “set” the price of e-books at $15. They didn’t get in a room and collude but they colluded through their new “agent”, Apple, with one following the lead of the other. It’s an old story that we’ve seen many times over the years in many industries. But at the least the FTC should put these folks on notice that any attempt to fix the retail price (as opposed to setting a standard agency percentage fee) would be suspect if it appeared they were acting in concert.
So who loses?
On the Guardian’s website, a commenter suggests who the winners may be – and it doesn’t seem to look good for authors or readers:
Between them, it looks like Apple and the big publishers are keen to screw as much money out of the reading public as they can, even while they’re driving their own costs down by switching to electronic rather than paper books.
I’d bet that little, if any, of their increased profit will be going to authors; I know from one friend that he gets 5% extra royalties on an eBook that costs 20% more than the paperback.
And finally (although this isn’t anywhere near over yet) an apt prediction from the Washington Post:
My guess is that in the not-so-distant future, best-selling authors such as John Grisham and Malcolm Gladwell — along with unknown authors peddling their first books — will publish their own works, contracting with independent editors and marketers and selling directly to consumers as much as possible.
Other authors will turn to smaller, more specialized publishing houses that will offer smaller advances but bigger royalties and will be built, as they once were, around great editors.
In the short term, though, it looks like consumers are being asked to pay more, and Macmillan’s authors are seeing their sales plummet. It will be interesting to see how this falls out.