Speculation on the Amazon – Simon & Schuster Deal

Whew. As a Simon & Schuster author, I have to say I’m relieved to see how quickly my publisher struck a deal with Amazon. According to several sources, the negotiations took just a few weeks and the agreement was reached with months left on the current contract. It’s a multiple-year deal, and both sides sound pleased with the results. Simon & Schuster retains the rights to set prices, and Amazon retains the ability to discount.

Everyone is speculating on the finer points of the deal and wondering why Hachette can’t come to terms with Amazon. Hints abound. In fact, the terms Amazon is seeking have been staring every self-published author in the face for years. We can even catch glimmers of confirmation in this Simon & Schuster deal.

Engadget reports that Simon & Schuster now has “a financial incentive to drop prices.”

The New York Times quotes S&S as saying that “with some limited exceptions,” the contract gives S&S the ability to dictate prices.

A financial incentive to drop prices. Limits on S&S’s ability to dictate prices. What does this deal entail?

Some commentators are hailing the deal as a return to Agency pricing, but I wonder if these are the same commentators who claim that self-published KDP authors employ Agency pricing?

Guess what? We don’t.

Our agreement with Amazon is something more like Incentivized Agency. If we set our prices between $2.99 and $9.99, we get 70%. If we set our prices outside that range, our split drops to 35%. According to our EULA, Amazon retains the right to discount our ebooks as it sees fit.

What does this mean? It means if we price our ebooks at $14.99, Amazon has plenty of meat left on the bone to discount our ebooks back down to $9.99. The customer gets a good price, and Amazon still makes a profit. That is, we the authors are punished for jacking up the prices.

Who wants to bet that this is what Amazon wants from publishers? The KDP agreement is what Amazon offers with practically zero negotiations back and forth. We should take it as their ideal agreement. The publisher (in this case, individual self-published authors) set the price. But it’s within a range that Amazon specifies, or else we lose margin.

So when Hachette cried foul back in May that Amazon was after a percentage of profits, that’s because they saw Amazon offering perhaps only 50% on ebooks priced above $9.99. Amazon has been right to say that the negotiations are about price, and Hachette has been right to say that the negotiations are about margin. That’s because margin is to be determined by price, just as it is for KDP authors.

Simon & Schuster entered into these negotiations with a greater awareness of the power of pricing. Surely they watched John Green’s THE FAULT IN OUR STARS tear up the charts at $4.99 (now higher). Or how about the fantastic HOW WE GOT TO NOW by Steven Johnson, which is new in hardback but selling the Kindle edition at $4.99? This is a Penguin book, and it’s in the top 500 at Amazon (great book, btw).

There’s another advantage to this deal for Simon & Schuster. Pressure for higher ebook prices comes from print retailers, who don’t want to be undercut. Publishers aren’t stupid; they know they can sell more ebooks at a lower price and make money doing so, but they worry about harming existing partnerships. S&S can now price some ebooks high, knowing that Amazon has room to discount, and they can go to the buyers at their major accounts with the digital list price to show their support. That is, the blame for the eventual lower sale price will fall on Amazon, which brick and mortar outlets already loathe, and S&S gets to look like a champion. Meanwhile, they are giving up a percentage of margin to help Amazon discount. Everyone wins. Especially the customer.

There isn’t a sliver of a leak about this deal that doesn’t fit the model of Incentivized Agency. S&S sets prices; Amazon can discount; there are “financial incentives to drop prices.”

The nail in the coffin comes from New York Times’ David Streitfeld. As a reporter with close ties to Hachette and its authors, Streitfeld looks for any opportunity to goad Amazon and praise the Big Five publishers. So much so that his own paper called him out for his bias. So what can we learn from his coverage of this agreement? A lot, it turns out. Pressing sources to confirm that Simon & Schuster won a major victory for all of publishers, Streitfeld no doubt wanted to hear that S&S maintained its share of income for all books sold. Any hint of this, and you can be sure he would report it. Instead, we get this sheepish admission: “While the publisher did not explicitly say the deal maintained its own share of income, a source with knowledge of the negotiations who was not authorized to speak publicly pronounced the publisher happy with the terms.”

My guess is that Streitfeld learned the split is dependent on price, but he doesn’t want to be the one to break that news. Eventually, it’ll be public knowledge that Amazon pays a higher rate when wholesalers provide ebooks at a sane price. And people will be shocked. Except for self-published authors, who have been pressured by Amazon to keep ebook prices in a reasonable middle range for years.

The one statement we have from Amazon about this deal claims: “Importantly, the agreement specifically creates a financial incentive for Simon & Schuster to deliver lower prices for readers.

So there you have it. Congrats to both parties for putting this together.

 

 

COMMENTS (40)

Excellent analysis and reading between the lines, Hugh. Thanks.

Wow, great job, Hugh! Your analysis make perfect sense.

But what I don’t understand how while writing multiple books simultaneously, formulating insightful blog posts like this one, and keeping up with Author Earnings you have any time for sleep.

Thanks!

Because Hugh isn’t a single character; he’s a composite of a dozen different authors, the like of which even Patterson can only dream.

I happen to know Hugh doesn’t write anything, he pretended to be an agent and got his best 5 submissions to come meet him, he gave them a tour of his silo and locked them in. There they still sit, typing like crazy. He set up a screen to fool them, they think the world is ended and they are writing stories for the other survivors. Someday i will find his silo and let them free, well, after they write me some good stuff first…

It types the words on the page or it gets the hose again

This post makes me wish so badly for some kind of like button. lol

Yes, wow, well done analysis. And Concise (I like concise… when possible).

Your reading of it makes a lot of sense. And you know what? It makes a lot of sense for just about everyone.
Except, of course, those unwilling to see how things are going in this modern world, and who are holding out for a retrograde step while at the same time trying to smear Amazon at every turn.

Amazing, right? This deal took around three months from start to finish and both sides claim to be satisfied. Here’s hoping this can serve as a model to the rest of the Big Five and we can all ‘reunite’ and move on.

I thought an article I read said 3 weeks and not 3 months.

Let’s hope the real lesson learned here is that this is what you get when you illegally collude to fix prices and the U.S. justice system actually calls you out on your crime. That’s what reset all these negotiations: the fact that the big five illegally colluded and got caught, forcing them to renegotiate their contracts. If the Big 5 hadn’t been acting like the monopolists they accuse Amazon of being, none of this had to happen. They got off easy because they should probably be in jail.

Yes you’re correct. They broke federal law and were lucky they weren’t brought up on charges. You’d think with such a close scrape the publishers would learn from their mistakes, but what we hear is that the judgement/settling is “unfair” and the judge was “clearly wrong”. Simpletons.

What staggers me are the journalists and authors who try to articulate their views in moral terms–Amazon the evil monopoly and the publishers the guardians of culture–when many are close to or even work for companies that broke the law. To screw customers with high prices. Doesn’t even get mentioned in all their howling. Talk about moral relativism.

Well put.
Writers for the big 5 need to realize i am not alone, I will never pay 15 dollars for an ebook, no matter who you are or what awards you have won. I rarely ever go above $6.99, and that is rare. There is so much good stuff for less. Recently i have collected a number of boxed sets, from 99 cents to 2.99, so i have hundreds of books to read. The last S King book, the last Patterson, the last paper book I read came from the library where no one made any money, or from Amazons used books, where again the writer made nothing… I would pay 4 bucks rather than go the the library anyday, the big 5 need to see that, they are losing a fortune with their high prices.

The big five are all about protecting their print oligopoly. They’re scared to death that if they lower ebook prices consumers will stop buying print. Some will still buy print but most will eventually go the cheaper route. As more and more book stores fall by the wayside the big publishers will have to finally see the light or go the way of the dinosaur.

I see a future where certain books will be marked by Amazon as ‘premier’, or something like that. Once the big 5 are gone, Amazon will partner with qualified editors who will work with writers and create books for self publishing. Then when we shop on amazon we will see two seperate kinds of books, regular self published and premier. This is how the market will settle, if the big 5 doesn’t wake up.

I don’t know about that scenario, Johnmonk. Your talking about gatekeepers again, about creating another class system where some get to ride high on the wave and others stay down in the gullies. Amazon allows all to publish for a reason. The best gatekeepers are the readers. If a book sucks they’ll let you know. In a truly democratic system (which I realize doesn’t actually exist anywhere) the cream will rise to the top naturally. When Amazon starts marking some books as premier and some as less than premier then we might as well bring back the publishers.

There is already a robust freelance editing industry. Good independent authors already use good editors, and Amazon is not the sole outlet for independent publishing.

While the big publishing houses circled the wagons refusing to face reality, freelancers and financing outlets like kickstarter made them obsolete.

Even Amazon can’t put the genie back in the bottle.

I agree with Johnmonk about prices. If an ebook is priced too high, I’ll download it from the library. If it’s not available from the library, I put it on ereaderiq.com. They’ll send me an email when it reaches my price point. Many times, when I get the email, I can’t remember why I wanted to buy the book.

The only point I want to make is that libraries do pay for all the books they are able to lend or download to readers. In fact, libraries pay considerably more for their ebooks so publishers do make money on them.

I’m with you. If I see an ebook priced above $10 I refuse to buy it, no matter the hype. I figure I can wait for a library copy.

Excellent post.

It’s too bad that many self-published authors do not take time to understand their industry and the different pricing systems, among other things. I believe the more of us learn the ropes of publishing, be it traditional or self pub, the better our industry will become in the end.

Great analysis, Hugh. You would make a great publishing columnist if you didn’t have your little writing business keeping you kinda’ busy! :-)

Isn’t “Incentivized Agency” kind of what folks such as you and Joe have been suggesting Amazon probably wanted all along?

It makes perfect sense to me. Amazon Incentivizes lower prices but does not dictate them. Publishers can still price high to protect their new hardcover releases if they are willing to sacrifice e-book profits to do so.

Yeah, I’ve been saying this since June. I think it’s occurred to quite a few people.

Hugh, thanks for the report and for reading between the lines. I hope that if/when you do open your own “Bella’s Books,” you’ll be able to enjoy a reasonably even playing field for purchases and profit margins. The future for independent bookstores is looking better and better.

It was such fun seeing you and hearing your insights this weekend at the James River Writers Conference. But who was that foreign woman you were with?

Way to go, Hugh!

I think S&S also deserves a thumbs up for sending a note to authors last night announcing the deal. That’s good author service.

Much to my surprise it looks like your optimism might actually be paying off, Hugh. I admit I had not even considered the possibility that the next publisher up to renegotiate with Amazon would actually negotiate in good faith and make a deal. This is somewhat astounding to me. I have been convinced for months that the fix was in and the game plan would be carried out in lock-step:

One by one the traditional publishers would refuse to make a deal with Amazon, continually accusing Amazon of all the usual stuff. Then when the last one came up to bat, they would all walk away from the table entirely. The theory being that all of them would suffer for a while financially, but Amazon would take a huge hit in market share because they would no longer be able to sell books from any of the superstar authors. People looking for Patterson or Roberts or King would say, “Screw this, I’ll get it on itunes, or switch to Kobo, or whatever” – and Amazon would be left with only indie authors.. which would still sell, but come on, not 65% market share, probably not more than 30.

Retailers would be duly put in their place and the paper oligopoly would be protected by inflated ebook prices across the board. And eventually it would all fall apart anyway because so many authors tired of getting screwed would self publish, and such a huge percentage of readers would have switched to digital that paper distribution would all but collapse, making it unprofitable and forcing ebooks to be priced at a reasonable level.

But here comes S&S, validating your optimism and actually acting like a business that intends to evolve and find ways to thrive in the brave new world. This is both fascinating and completely unexpected to me. Next step: a critical mass of mid-list and even “upper-mid-list” (is that a thing?) authors switches to self-publishing, creating enough market pressure to motivate publishers to offer traditional deals that don’t completely suck. Even to select midlisters and promising first-time authors. Wouldn’t that be a sight to behold? Maybe some of the big ships actually are turning… I hope I’m not being naive.

Wouldn’t that be a sight to behold?

It would. I hope we do! :D

As I noted over at PV, the deal here is certainly incentivized Agency, but the comparison to KDP depends on the margin breaks. With KDP, the incentives are huge and almost insurmontable. 70% margins on 2.99-9.99, but 35% outside that narrow range. From the reports so far, S&S is getting at least 70% across the board, with no limits on that. The incentives, therefore, would only increase S&S margins above 70% for lower prices. The numbers aren’t mentioned, but the suggestion is that they could be significantly higher. Not just to 75% say. So this is way, way better than what KDP authors are getting.

And let’s be clear: KDP is indeed an agency pricing program, meaning that the publisher-author sets the prices. The difference is that publisher-authors don’t mind at all if Amazon discounts our books as much as they like, as long as we get the same wholesale price. Programs that do change the price we get, such as KU, are optional. But this deal with S&S seems to indicate that there’s very little discounting going on, unless the publisher wants it. So we are back to the same old problem about pricing: if the publisher wants to hold the line on pricing, it can. It doesn’t have to take advantage of these incentives at all. It can keep ebook prices as high as it needs to, to protect print distribution margins.

The question is, with incentives in place, will publishers actually be able to discipline themselves and not make use of them? We won’t know for a while. The fact that Amazon gets to offer these incentives is hardly a victory, in that it doesn’t change anything about what publishers do with their pricing/windowing models. It does give them temptations, however.

As for discounting, it looks to be that numberwise, this kind of system is creating its own built-in discounting. Depending on how deep the incentives are, Amazon is essentially eating a lot of the price-cut that comes with pricing books at 9.88 and below. Which works out to about the same as before, except that Amazon can’t selectively discount some books at or below cost. They probably have a clause in their contract that prevents S&S from giving other retailers a better deal, so they can at least price-match. But they probably won’t be able to undercut the competition on price.

It does sound like a decent compromise to me, because I’ve argued here and elsewhere that Amazon should drop its efforts to control or dictate pricing and discounting on books if that’s not what the publishers’ want.

For self-publishers, however, the deal may be a bit of a slap in the face. S&S is getting much better pricing and margins than we are, from what I can tell. We should be putting pressure on Amazon to at least match those margin incentives. Of course, since most self-publishers already use lower pricing, Amazon has little incentive to offer these better margins. Unless, of course, it sees an opportunity to offer trad-published authors a better reason to switch over.

Amazon has more promotional resources than anyone else. That’s a very powerful chip at the negotiating table. I doubt this is all about price and royalty. Amazon can also offer promotion as a function of price level. Email recommendations are controlled by price level. Lower prices and they increase. Raise prices and they decrease.

The beauty of this is price elasticity increases total revenue for lower priced books, and promotion further adds to the effect. It also opens a new avenue of competition among publishers.

And would it give publishers an additional advantage over independents? Yes.Level playing fields are a pipe dream.

Truth in posting: I’m not one of the people Bezos calls when he need advice or wants to confide. It’s not fair.

Perhaps this is the fracturing of the Big 5; the Big 4 turning on the Big 1, starting a war in New York the likes of which hasn’t been seen since the prohibition…
Also, I wonder if a level playing ground on ebook prices will affect book ratings. You have different expectations when paying $10 for a book than you would if you had paid $5.

There are no level playing fields in markets. The whole objective is to tip it in your favor.

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