There’s not much I can say about the Hachette/Amazon negotiations that David Gaughran hasn’t covered here. David injects some much-needed rationality into what has been a bizarrely irrational debate, especially since we’re all simply guessing at what terms Hachette and Amazon are offering one another. Knowing who to blame here is impossible at worst and premature at best.
I’m more interested in what Mark Coker has to say over on the Smashwords blog. I have mad respect for Mark. He gets far more right than wrong, and he’s been an excellent spokesman and business leader for the self-publishing movement. If I could sit in a pub with ten publishing peeps and clink drinks, Mark would be near the very top of the list. But as the owner of Smashwords, Mark is Amazon’s direct competitor. His post practically concludes with a pitch for his services. That should serve as one warning. The bigger warning is that Mark doesn’t seem to understand Amazon’s current relationship with Hachette. He states:
If Hachette doesn’t have the power to maintain 70% earnings, how will million-copy-selling New York Times bestselling indie authors have any power when Amazon decides to put the squeeze on them? And how about the rest of the indie community which has even less leverage over Amazon?
The problem is, Hachette does not get 70% of the list price the way indies do. Hachette gets paid a set discount on the digital MSRP, just like bookstores pay a set discount for physical books. This is why Hachette sets the MSRP for e-books at crazy prices like $14.99. If Amazon is getting a 40% discount, their wholesale cost for that e-book is $8.99. They then sell the e-book to the customer for $9.99 and make a measly dollar, or 10%. Compare that 10% margin to the 30% they make from indies. Not to mention that Amazon sells a LOT more e-books at indies’ reasonable prices.
Now think about how this works for Hachette. They get the full wholesale price of $8.99. The author gets his or her full cut (25% of net), which is a point that many commentators don’t seem to understand. Amazon, meanwhile takes the loss! All to provide customers with a better price. Remember, they are paying Hachette and the author the full amount according to the MSRP.
So of course Hachette wants to keep this agreement intact. But there’s no way Amazon can allow it. Hachette is basically screwing its authors by pricing its e-books too high and they seem to know it. That’s why Hachette and some authors are complaining about Amazon selling its e-books for the full MSRP. Hachette wants that fat check and for Amazon to suffer its thin margins.
Mark also repeats in his post a popular and incorrect jeremiad about the dangers of monopoly and all the power Amazon wields. The purpose here is to terrify indies away from Amazon and presumably toward Smashwords. The problem is that Amazon isn’t a monopoly, and even if they were, monopolies don’t work with low barriers to entry. One college kid in his or her dorm can start the next e-book sales platform, and since indies own their work, they could flock there in an instant. That’s the new reality for tech firms. It’s why social media sites pop up every month and snag millions of users. Easy to create, easy for users to migrate.
The reason Amazon has any strength right now to negotiate with the real monopoly, which is Hachette (nobody else can provide their e-books), is because of indie authors and Amazon’s own imprints. Here’s what I think is going on in these negotiations (since we’re all making things up): Amazon is telling Hachette that they can’t afford to make 10% or less on e-book sales. Hachette is saying tough luck, sucker. Amazon is asking for them to lower digital MSRP to $9.99, and then let Amazon discount to whatever they see fit and take the hit. Amazon still pays 60% of MSRP. Maybe they’re even bumping that up to 70% (it’s what I would do).
Hachette is refusing, so Amazon is making their margins by simply stopping the current discounts and selling at the price Hachette stipulates to begin with. Amazon can afford to do this because they have plenty of reasonably priced offerings from indies and their own in-house imprints. In fact, higher prices on Hachette books are making Amazon’s high-margin indie and A-Pub e-books look more attractive to consumers.
Mark raises the monopoly canard to make indies think they’ll be next to incur Amazon’s wrath. But indies are already giving Amazon what they want: a healthy 30% wholesale discount (65% discount on many titles) plus reasonable MSRP. What’s to fight for? You see, Mark makes the classic mistake of seeing the 70% that authors keep as a royalty. It isn’t. Royalties are what authors earn from publishers. But self-published authors are publishers, and they are handing over ready-to-sell products. In exchange, they provide a 30% discount and keep the rest.
So let’s assume that Amazon does lower “royalties” in the future. To what? 30% of gross? The worst Amazon might do is still more generous than what the Big 5 currently offers. Why fear a hypothetical bogeyman when there are real ones? Here’s what would happen if Amazon demanded a 70% discount on wholesale from indies instead of the current 30% discount: Indies would concentrate all their promotion efforts on Kobo, the iBookstore, and Google Play. They would at the same time raise their e-book prices on Amazon so a sale there netted the same profit. This would keep earnings the same while driving consumers to other retailers. I would price WOOL at $13.99 instead of $5.99 and make my normal $4.20 per sale. I would have fewer sales on Amazon, but those I did get would pay the same. Most customers would go get it elsewhere. I would start linking primarily to other stores, blogging about how awesome some competitor is, and never promote or deal with Amazon again.
Despite what Mark Coker and others think, Amazon isn’t this stupid. If you ask me, Hachette is bungling the hell out of these negotiations. They are harming their authors, first by not informing them of these negotiations back in November when they started, and more recently by not providing information to authors like Michael Sullivan, who wants to know details about book shipments.
Hachette may even be fighting for the agency pricing scheme that landed them and others in hot water with the DOJ. That’s where they set the retail price, and Amazon isn’t allowed to discount. You know, like practically no other retail agreement in any other industry. The reason Hachette wants this? To protect their relationship with bookstore chains, namely Barnes & Noble. I have spoken with publishing heads who have admitted to me that they can’t lower their e-book prices without damaging relationships with brick and mortar stores. Those stores will cease ordering books.
There’s a whole lot more to this game than most people realize. Me? I’m pulling for Amazon as an e-book customer. I hope they win the right to continue to be able to discount e-books so they remain less expensive than paperbacks. Hachette doesn’t want this. Hachette wants higher prices (or at least, for Amazon to take the hit instead of them).
As an indie author, however, I wouldn’t be upset if Hachette got what it wanted. Yeah, price those e-books at $14.99. I’ll keep your readers busy with my books until you come to your senses.