The Shatzkin Files


Hats off to Amazon


When the story of how Amazon came to dominate the consumer book business is written ten years from now, there will need to be a chapter entitled “September 6, 2012″.

Of course, that was the day that Judge Cote approved the settlement agreed to by HarperCollins, Hachette, and Simon & Schuster and began the process of undoing the publisher price-setting regime that was established by the agency model. This is actually designed to unleash broad and deep discounting in the ebook marketplace and I think we’ll see evidence very soon that it will succeed in that objective beyond anybody’s wildest dreams. (I have repeatedly expressed my concerns about what I think are inevitable consequences of that achievement.)

But that’s not all Amazon accomplished on September 6, 2012. It’s not nearly all. In fact, the only thing that wasn’t good for Amazon about the Judge’s announcement was that it stole a lot of the attention from what they can accomplish without the government’s help.

One day after scrappy competitor Kobo tried to upstage them by announcing their own updated suite of devices, Amazon did a combination of outperforming and underpricing the device competition from them, as well as from NOOK, Apple, and Google. Even the device innovation wasn’t what most impressed me. There were several other innovations that raise the bar substantially for everybody competing with the Kindle ecosystem.

1. Leveraging their ownership of Audible, the dominant player in downloadable audiobooks, Amazon has introduced a Whispersync feature that enables seamless switching between reading an ebook and listening to the audiobook version. One of my sisters-in-law, who is both a teacher of reading-challenged kids and an adjunct professor teaching others who do the same, had asked me a few months ago why nobody had done this. I asked around and was told “it is complicated.” Publishers can’t do it because they don’t control the delivery ecosystems. Other ebook retailers can’t do it because they don’t deliver audio.

Only Amazon could do it. Now they have.

1A. In addition to the use of Whispersync to allow seamless toggling between reading and listening, Kindle introduced a feature called “Immersion Reading” that allows you to read and listen at the same time.

Does everybody notice that this creates a real reason to buy both an audiobook and an ebook of the same title? Seems like that is something all authors and publishers can celebrate.

This specific innovation is particularly ironic if we remember some history. In the early days of the Kindle, Amazon wanted to put in a text-to-speech capability that would deliver an audiobook by automation of every ebook. Agents and publishers balked because of the obvious rights issues; audiobooks are a separate profit center for everybody and nobody with a commercial interest wanted to see that threatened, even though others thought that the automated delivery wouldn’t really satisfy an audiobook customer.

Nobody will have a problem with this solution, though. The consumer buys twice.

And, incidentally, somebody else can write a whole blog post on how this suite of capabilities can be used as an opportunity-creator in the college and school markets!

2. Leveraging their ownership of IMDb (the movie and TV database), Amazon is enhancing the experience of watching video by making information about the film and its personnel available at a click. Last month bloggers were explaining that Google bought Frommer’s from Wiley because they wanted to turn content into metadata. Now Amazon is clearly demonstrating exactly why that’s useful and important.

3. Leveraging their publishing capabilities and their role as the only retailer with an audience large enough to deliver a critical mass of readers all by itself, they are introducing serialization by subscription with Kindle Serials. The initial foray is modest: a selection of eight very low-priced serial novels delivered in chunks of at least 10,000 words. But this “tests” the model of getting people to buy something up front knowing in advance that it will come in stages.

(When I explored the viability of subscription models for ebooks, I speculated that the only one that could really pull it off for general reading would be Amazon. Consider the camel’s nose to have now officially penetrated the tent.)

On one hand, this recalls the success of the self-published novellas-cum-novel called “Wool” by Hugh Howey. But it also could be the foundation for something like Dominique Raccah’s “agile publishing” model, which is an active experiment now at her company, Sourcebooks, with author David Houle. Amazon would have the great advantage of a much larger audience to “invite” into an experiment of that kind and, when you are doing something dependent on participation for success, having more people to appeal to at the outset is a huge advantage.

4. Amazon is subsidizing all their devices with ads served as screen savers. They were initially planning to change the previous practice of offering higher pricing that enabled consumers to avoid the advertisements. Their first announcement was that Amazon had gone all in with all their devices coming with advertising and without a “pay more” option to avoid it. Although the initial reaction to this apparently forced a change, and they’re now offering the Kindle Fire without ads for $15 more, this still opens up a series of other thoughts and questions.

How can anybody compete on device pricing with a competitor that not only has the most direct contact with buying-and-paying customers but which is also bringing in ad dollars to subsidize a cheaper retail price?

Does this mean that Amazon “knows” that by far most consumers elected to save the money and don’t care about the ads?

Are they building a priceless communication network to promote content and to charge content creators for the next generation equivalent of store windows and front tables?

I thought Google was the champion of advertising. Why didn’t they figure this out first for the Nexus 7?

5. Amazon’s X-Ray feature, which basically collects core metadata (characters, scenes) from books and movies, is a building block to ultimately deliver summaries and outlines that could be an exciting additional unique capability of the platform. It could perhaps even be a start on generating automation-assisted “Cliffs Notes”-type content that could ultimately command a separate purchase fee.

6. Amazon has built a parental control capability into their Kindle ecosystem called FreeTime so that kids can use the device and even obtain content but only in approved ways. There are fledgling initiatives like Storia from Scholastic and the longstanding PBS brand Reading Rainbow for which one of the core propositions is creating a reading environment for kids with adult controls. These kid-centric platforms are obviously designed to present environments that parents and teachers will find superior to what they use themselves for the purpose of enabling kids’ reading. They suddenly have some serious competition from the most popular platform already out there.

And Amazon has built in what is perhaps a killer app that the others probably can’t even contemplate: they can apparently control the amount of time a kid can spend doing various activities on the device, so parents can mandate a ratio of reading time to movie time to game-playing time. I’m sure more than a few parents will say “wow!” to that.

********

Judge Cote’s decision is also very good news for Amazon, and it was what reporters called to talk about on the day of the press conference that announced all of the above. Michael Cader’s very thorough analysis (on which I have written a few more words below) spells out what we don’t yet know about the speed and complexity of implementation, starting with whether an appeal will be heard and whether implementation will be delayed pending that appeal.

But it would seem that the chances are good that many of the controls that prevented Amazon from discounting high-profile books for the past 18 months will come off a month, or maybe two months, before Christmas.

I think that Amazon will discount aggressively. Their “brand” is, among other things, very much about “low prices for the consumer”. And they have always used price as a tool to build market share. Expect them to lead the way.

The price-setting won’t be done by humans; it will be done by bots and algorithms, responding to what is happening in the marketplace among their competitors every day. Amazon is very good at this; they’ve been doing it for years. Presumably, BN.com has a similar set of skills and tools. Presumably everybody except Apple had to price at least their wholesale-purchased books competitively.

Apple was protected by the MFNs that remain in place for all but the settling publishers. But without that protection, how will Apple compete? They’ve never had to do competitive pricing of commodity products before. I will be very impressed if Apple can get through the price fights about to take place without an obvious black eye. They haven’t been training for this.

Overall, this should mean another surge of growth in the ebook market, which had seen a serious dropoff in its growth rate over the past year. We won’t be seeing ebooks doubling share annually again, but we’re about to see digital priced aggressively in ways that will make any regular consumer of print wonder whether they should consider making the shift that so many heavy readers have already made.

When the settlement is implemented, the three settling publishers will have their book prices cut by retailers, whatever they decide about setting list prices and however they negotiate the next round of commercial terms. But the three publishers still permitted to use agency pricing — Random House and the continuing litigants Macmillan and Penguin — will probably find that they are forced to lower the prices they set to keep their big books competitive. At least that would be my expectation. It will be beyond interesting to see how this plays out over the next few months.

Pardon a plug here for my Publishers Launch Conferences partner, Michael Cader, and his skills as the indispensible reporter on the publishing scene. His four posts on Friday: on the Judge’s ruling, on what happens next as a result, on their new hardware, and on the various reading and consumption features that were the subject of most of this post, comprised — by far — the clearest and most thorough explanation of a staggering array of complex information. Of course, Michael is more than a reporter on the industry; he’s been a player in it for 25 years.

I really don’t understand how reporters who don’t have the benefit of that background can justify not reading him. (You hit a pay wall it takes $20 a month to scale if you are not a subscriber. Just about everybody making a living in trade publishing has no trouble with the value proposition.) They’d all certainly be doing their jobs better if they did.

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  • http://www.facebook.com/people/David-Wilson/100002273565449 David Wilson

    Before you get too caught up in that whispersync audio / ebook magic, note the pricing. If someone buys (currently) a $2.99 eBook they can get the audiobook (normally priced at $10-30 for $1.99. That’s a great deal for the consumer, and a little extra for the author, but considering how many of these books are also created by the ACX system – also owned by Amazon – it’s death to the narrators counting on a royalty share of books. I hope that the $1.99 price is only a tease to get people interested, because if audiobooks are going to sell at $1.99 a pop they are suddenly far too expensive to produce.

    David Niall Wilson
    Crossroad Press

    PS – other than that, though, the notion of seamless reading between media types is a win.

    • http://idealog.com/blog Mike Shatzkin

      Presumably if the narrators can’t get a good enough deal, the deal will have to change. You can’t make audiobooks without narrators and you can’t hide a bad narrator very well.

      Thanks for the insight from a more knowledgeable perspective about audio than I brought to the conversation.

      Mike

      • http://twitter.com/opaqueentity opaqueentity

        Or you find someone else that IS capable and willing to do the job for less. Abroad perhaps? Yes they wouldn’t be the known names but it doesn’t mean that they couldn’t be replaced by someone

      • http://idealog.com/blog Mike Shatzkin

        Actually, you’re more likely to find hidden talent here domestically, not abroad. You are reading, remember, You need unaccented English. Low-wage countries aren’t the place to look for that talent.

        Mike

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  • kwn2196

    Frankly, I don’t understand the publishers’ consternation over the text-to-speech implementation, which many Kindles have (but not the newest Paperwhite model). The robot voice is no threat to audiobooks; no one would listen to it as an alternative to reading unless reading was difficult or impossible. But it does offer a benefit to those for whom reading IS difficult or impossible– the visually impaired and those with learning disabilities. I am sad that Amazon killed it in the Paperwhite, but actually the Keyboard model is more useful if you need to use the read-aloud feature. I have heard some folks say the Paperwhite not having TTS is an effort to push Audible, but I think it’s more from the fact that the competition never bothered with it.

    • http://idealog.com/blog Mike Shatzkin

      It wasn’t just or primarily the publishers who objected; the agents really hated the idea.

      I take the point that automated voice doesn’t cut it. But that’s today. Automated voices are getting better and better and, in fact, can ultimately be any voice you want it to be that you have enough of a sample of. I suspect that some of the people objecting might have been doing something they are seldom accused of: thinking ahead.

      Mike

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  • http://twitter.com/thDigitalReader Nate the great

    Did you see the launch video on Youtube? Jeff was explicit in saying that content was the profit center for the Kindle hardware. The devices were cheap because Amazon expected to make up the difference with content sales – a model they’ve been using ever since the Kindle Fire launched.

    How would you justify your belief that Amazon will discount ebooks when we know that Amazon is depending on ebooks for their profit margin? I would think that the money losing deep discounts would be out of the question now, though I could be wrong.

    That’s a point I raised over here:
    http://www.the-digital-reader.com/2012/09/07/did-the-agency-model-lead-to-cheap-ereaders/

    • http://idealog.com/blog Mike Shatzkin

      Lots in that comment, Nate.

      1. I find it highly ironic that Amazon says that they won’t make money on * their* creativity (their devices) but they *will* make money on other people’s creativity (the content they sell.) Not exactly responsive to your point, but it is worth pondering.

      2. According to my understanding, Amazon *always* “made money” (as in “made margin”) on the content. I was told by am Amazon executive before agency that 4% of the titles were discounted below cost and they constituted 25% of the sales. The margin made on the other 75% of the sales more than compensated for the “losses”. That’s what they said and I don’t disbelieve them.

      3. There is already a stipulated (but impossible to enforce) “cap” on the margin a retailer can give away; they’re not allowed (theoretically) to lose money on the whole body of ebooks they sell from any particular publisher over the course of a year.

      4. The cost of device development and distribution is also borne by B&N and Kobo, the relevant competitors here. (Apple makes money on devices, of course, but they’re in a different league. And I don’t know what Google’s financial relationship to the Nexus 7 is, but I doubt that the book business constitutes the major portion of their thinking about it.) My hunch is that Amazon will compete their butts off on both fronts: device quality and pricing *and* pricing and business models for content.

      5. You ignore one very important aspect of Amazon’s strategy to make their money selling the content, which, as I pointed out at the top, is other people’s creativity. You make money by buying for less than you sell for. If you’re a big player in any market, you try to gain an advantage for buying for less than your competitors buy for. Do you need any more of a roadmap than that to see where this might go in the future?

      Your post is interesting but, I think, circular. Perhaps you’re right that Amazon moved the promotional $s they would have spent making ebooks cheaper to instead make devices cheaper and maybe that even drove some device makers out of the market. But if there had been no agency, I am pretty sure there wouldn’t be nearly as much device innovation and competition coming from B&N and Kobo, who are really the only competitors aside from Apple (and maybe, lately, Google) that are making a dent in Amazon’s market share. So I don’t see that the agency model diminished competition; in fact, I think it enabled the shifts in market share that we saw with some other players eating into Kindle’s share.

      In any case, we won’t have to wait long to find out about what discounting will take place when the shackles come off, will we? If anybody but Amazon leads the discounting charge, I’ll admit in advance that I’ll be very much surprised. Apparently you are admitting in advance that you’ll be surprised if they *do*!

      Mike

      • http://twitter.com/thDigitalReader Nate the great

        Mike,

        First, I find it curious that you fault Amazon for having their way with other people’s creativity, considering that publishers do exactly that. This industry would not exist without authors, so I don’t see how any single company can be blamed more than the rest for trying to turn a profit off their labors.

        That’s the first time I’ve ever seen someone define what Amazon was actually doing with deep discounting. Thanks.

        But considering that it isn’t much different from Amazon’s usual pattern of selling some items as cheap as possible (and possibly even at a loss) I’m not sure I’d call it a deep discount. It looks more like the way they built their customer base over the years than it resembles anything scary. In fact, , I can recall Amazon following this pattern with paperbooks sometimes.

        Where’s the bogeyman, again?

      • http://idealog.com/blog Mike Shatzkin

        What bogeyman? Did I say there was a bogeyman? I said it was *ironic* that they make money on what others create rather than on what they create. I didn’t say it was *wrong*.

        Let me make this very clear: I don’t think it is Amazon’s job to save the book business. Amazon’s job is to do right by their stakeholders, which means the owners of their stock, their customers, and their employees.
        But, having said that, I’m also saying I don’t expect Amazon to think about what’s best for the book business, which has its own stakeholders: primarily authors and readers. And they don’t. It is in their best interests as a publisher today to get authors to work with them directly (and, if possible, *exclusively*) and it is in their competitive interests to cut prices to the bone for readers as well because their most significant competitors probably don’t have the ability to match them.
        It is not their concern that by taking the profit out of publishing they will create a world where fewer high-risk books will be financed in the future and ultimately one where I believe the pool of money for authors will be reduced as well. I don’t like the Justice Department that works for all of us making the decision that publisher-set pricing is bad, because it isn’t. But that’s a different thing than saying Amazon is doing something “wrong”. I don’t think they are.

        As for the explanation of how the deep discounting played out, I quoted it straight from the Amazon executive who told it to me. I’d love to take credit for the explanation, but all I did was repeat it.

        Mike

      • http://mindtherant.blogspot.com/ MindTheRant

        If I can jump in here for a minute — a few observations:

        1) Amazon’s a publisher *and* a self-publishing platform, so the money they make from authors isn’t necessarily from authors laboring in other publishers’ vineyards.

        2) The Kindle Fire (I have a first-gen model) doesn’t just sell books — it sells periodicals, music, video, and apps that include video games. So Amazon’s profitability — and the profitability of its new lineup of Fires — won’t rely solely on how it prices ebooks,

        3) Indeed, I expect to see that the new Fires have also been designed to make it easier to shop for all the non-media (e.g., garden tools, digital cameras, shoes, jewelry, and so on) Amazon sells — something that’s not terribly easy on my first-gen Fire

        I’m sure plenty of data goes into those Amazon ebook pricing algorithms, and, like Mike, I’d be surprised if Amazon doesn’t indulge in some pretty deep discounting — especially during the upcoming holiday season.

      • http://idealog.com/blog Mike Shatzkin

        Thanks. You are helpful again. As usual.

        Mike

      • Christian K

        “I don’t think it is Amazon’s job to save the book business.”

        You are assuming the dead tree business is saveable. And frankly that “books” (meaning bound printed paper) are something that’s desirable.

        “It is not their concern that by taking the profit out of publishing they will create a world where fewer high-risk books will be financed in the future and ultimately one where I believe the pool of money for authors will be reduced as well.”

        It sounds like you are assuming that 20th century style publishers are necessary. It’s a very bloated business model for creating commercial text.

      • http://idealog.com/blog Mike Shatzkin

        It’s not an argument I really feel like having at the moment. While there is, no doubt, bloat, there is also a large failure of understanding of what the publishing industry, which will be largely restructured, contributes. There will be important books not published in this restructured industry. And far fewer writers will make a good living. But a lot of books a lot of people read will get cheaper.

        Here’s one attempt I’ve made to present an alternative to your very popular and actually fashionable point of view.
        http://www.idealog.com/speeches/2012/07/how-the-dojs-misunderstandings-could-destroy-publishing-and-why-its-worth-saving/

        Mike

      • Scott Nicholson

        I disagree. I think it will be easier than ever to get out “important” books and “small” books and unpopular ideas. Indeed, it’s already happening. Self-publishing takes care of every supposedly sacrosanct job of the publishing industry (which it rarely fulfilled to any broad degree, driven as it is by profit motive). To every argument you can make on behalf of their alleged ideals, I will respond “Snooki.”

        You come from a publishing family. And I’m sure bakers think pies are essential to the harmony of humankind. I understand it. But it doesn’t make the publishing industry necessary.

        I don’t feel a need to condemn the publishing industry. I simply care as much about it as it cares about me, which is pretty much zero.

      • http://idealog.com/blog Mike Shatzkin

        I don’t think *controversial* books will be challenged. You’re right; we’ll have more of those than ever thanks to self-publishing.

        I think *expensive* books will have a problem. Think of the recent biography of Steve Jobs by Walter Isaacson; it won’t get financed and won’t get written. Like the biography of George Washington by Ron Chernow, which must have taken 5 or 10 years plus a staff to write. Advance was probably 7 figures and it probably made money. It wouldn’t make money as a $4.99 book and without a publisher to sell in all channels at high prices, it won’t get financed either.

        Many won’t miss what we don’t have.

        Mike

      • Christian K

        Couldn’t you say however that the greater per unit profit of a self published book would make it easier for authors to publish more challenging and important books?

        Yes, big budget media properties require publishing companies. Biographies of Snooki, Jobs, Washington. Movies like Star Wars Episode I, Avatar, or Transformers. Yep, those are expensive. I don’t think that they will be gone, but it will only be the “big budget” items that will be shipped by publishing companies. Not competely sure I’d miss them if they are went.

      • http://idealog.com/blog Mike Shatzkin

        Big budget fiction will be fine. It is big budget non-fiction that won’t. Unfortunately, that’s a lot of what I read.

        Mike

      • Christian K

        “There will be important books not published in this restructured industry.”

        I agree with that. However that doesn’t mean they won’t be published, just that they will not be published by “this restructured industry”.

        I’d also state that most of the really important books were not published but the old “pre-restructured” industry, at least not in my estimation. Of course, I wouldn’t call the Jobs boi “important”.

        “And far fewer writers will make a good living.”

        We’ll have to see on that one. I do agree that many writers are useless as business people without a publisher helping them out. Here’s to hoping they learn!

        “While there is, no doubt, bloat, there is also a large failure of understanding of what the publishing industry, which will be largely restructured, contributes.”

        The publishing industries have made great contributions to the art of milking a property of revenue, though I will admit not nearly as much as the movie and music industries, but they are trying… *cough*Harlequin class action*cough*

      • http://idealog.com/blog Mike Shatzkin

        Whether or not you think the Jobs book was important, or even the Chernow bio of Washington, you’re wrong to say these books will get published some other way. If they don’t get financed to the tune of hundreds of thou or millions, they don’t get *written*. Self-publishing has accomplished some amazing things, but it won’t create ebooks out of stuff that doesn’t get written!

        Mike

      • Christian k

        You seem to think there will be no scholarship without large media conglomerates, I disagree and believe that history is on my side. I also see no reason why, if these books are so important and profitable, there couldn’t be other business models (which may be even more profitable for the author).

        I agree that the current publishing business model is easy and familiar, but it’s also bloated, punitive and a little lazy. Yes, I am being unfair and judgmental. The only intellectual property business that has made the 21st century transition with even a little bit of success (success being defined as a growth in profits and market share) has been one part of the software business, and even then they needed Apple and Google to popularize webpages as “Apps” for it to work on a consumer platform. Publishing will fail until they lead. Then they can milk authors like a Hollywood studio. :) Until they can get that right they won’t get the power back and Amazon will “win”, at least until someone better comes along.

      • http://idealog.com/blog Mike Shatzkin

        Christian, this will all work better if you don’t paraphrase me into something I never said.

        Lots of scholarship doesn’t require subsidy from a big publisher. LOTS of it.

        But lots of really big commercial non-fiction books do.

        Publishers will never be able to “milk authors like a Hollywood studio”. And neither will anybody else until the day comes that books routinely make money like movies do.

        I won’t hold my breath waiting for that.

        And publishers’ profits *have* grown. That’s part of the irony. And big publishers have grown their market share. So your metrics aren’t applying comfortably to this situation.

        Mike

      • Christian K

        I will concede that you seem to be saying that big commercial non-fiction isn’t scholarship. (Just kidding) Actually, I think this a shows a bit of your bias. You have a love of large commercial non-fiction. There is nothing wrong with that.

        You would call 17% on ebooks or half of 6% (harlequin shell game) fair and equitable? I think publishers are quite the practiced milkers.
        Every book could make a profit, if you lower costs and removed bloat, but you have to be creative.
        A rising tide lifts all boats, even those taking on water or heading toward icebergs.

      • http://idealog.com/blog Mike Shatzkin

        I was equating “scholarship” with “academia”. And that is subsidized by the university and will continue to exist, whether U Presses do or not.

        The fact that some publishers are extortionate about their ebook royalties certainly creates some resemblance to a Hollywood studio in that way. So I guess that makes your “milk the authors” statement sometimes true. But I don’t think there’s a long-run play there because most authors (not Walter Jacobson with Jobs…or those like him, but others) have an easy alternative to a publisher if they have some brand and marketing reach. For somebody writing a script, they still need a lot of investment and a lot of help.

        Mike

      • Christian K

        I was using scholarship in a more the liberal sense meaning deep exploration of a subject or body of knowledge, and more specifically the sharing of the findings.

        Not sure why you think that Walter Jacobson is particularly disadvantaged, I would be interesting on hearing more on that subject.

        If you define the time frame for a “long-run play” as over a year but under 10 years, I’d think the publishers behavior will worsen (particularly given the current settlement and related trial). If you are talking about something over 10 years from now, I don’t think we will be talking about kindles or ebooks and when we say publisher we will mean something slightly different.

      • http://idealog.com/blog Mike Shatzkin

        I totally agree that our picture of what a publisher is will be very different 10 years from now.

        I didn’t say Jacobson was disadvantaged, I said the book wouldn’t have gotten written. You have to figure that Jacobson needs a minimum of $200-300k a year for his time (and that’s almost certainly less than “replacement value” — what he earns as an executive), that it took him a couple of years to do the book, and that he had staff and travel expenses to cover as well. If he didn’t get a million bucks as an advance, which I imagine he did and which I also imagine that S&S and other publishers around the world got back in spades, you’re asking him to make an enormous investment for an individual in the project. He wouldn’t even think about it.

        Furthermore, since an ultimate consequence of the disruption now taking place is that books for reading are going to get cheaper and cheaper, the revenue side of the equation won’t look nearly as attractive. Books like Jobs and George Washington will *never* sell the numbers of Fifty Shades of Gray. The economics of them work because a relatively small number of people — 200,000 or a million, not 10 or 20 or 50 million — are willing to pay 10 or 20 or even 30 bucks to read it.

        High-investment non-fiction won’t happen. It will be, like the death of newspapers, a disinvestment in serious investigation of the world we live in.

        Mike

      • Christian K

        Why on earth should Fifty Shades of Gray and the Jobs biography share the same pricing space? Look at other digital products: you have 99 cent games and $150 games, you have free operating systems and $4,000 operating systems, you have free youtube movies and $30 movies. You can still charge $25-$30 for a “book” and those 200,000 will still buy it, that hasn’t changed.

        We do live in a world where McDonald’s and Ruth Chris both exist, which should not be read to denote the quality of any work of fiction or non-fiction only pricing structure.

        What has changed is that now you could charge $200 dollars for that book, if you think that only 2,000 people would actually be interested. Sure, they would have to be VERY motivated but you are talking about world class scholarship (look at the number of technical manuals that are in the 60-150 range). People are just now realizing that you are no longer tied to the same physical form, the more expensive product doesn’t need to be bigger or nicer, it just needs a better value proposition. (which could be “read the new best seller by xyz before anyone else” or “startling and insightful look at xyz”)
        Also you no longer have to split 50/50 with the retailer, that “deal” has moved to 70 for publisher 30 retailer. (Expect new entries into the market to play with the number more) So until 70% < 50% you will more profit per unit.
        Newspapers are dying because publishers are idiots. Sorry, but it's true. People will pay for information, just like they will for entertainment, and high value information has always subsidized unprofitable but necessary information. Why hasn't some savvy news organization started selling analyst reports on the side(just as an example)? The skill sets needed are very similar, it's just that the audiences are vastly different.

      • http://idealog.com/blog Mike Shatzkin

        The point about differential pricing is well-taken, but not really reflected in the strategies we’ve seen employed by either publishers or retailers in the digital world so far. In print, the actual physical package (bulk) was influential; it still applies a bit in ebook because there is still a point of reference to the print version.

        Whether there will be a premium space where people will be willing to pay five or ten times as much for an X hours reading experience because of the quality of the research is something we’ll learn in time. And whether audiences will do that consistently enough for there to be a business for publishers investing that success is another question. You seem to think technology and the market will solve all our problems.. I never question what people accept on faith, but I can’t say I believe…

        Mike
        ————————-
        Mike Shatzkin
        [email protected]
        Founder & CEO, The Idea Logical Company, Inc.
        Conference Chair, Digital Book World
        Partner, Publishers Launch Conferences
        212-758-5670
        http://idealog.com/blog

      • Rebecca

        For me, as a reader, print books are 100% essential. I won’t read e-books, If they stop making print (and I think it would be idiotic to not at least keep print on demand), I STILL won’t buy e-books – I just won’t spend my money on new books anymore. I hate e-reading and consider e-books the absolute worst thing that has ever happened to publishing. And considering 70% or so of revenue comes from print still, I can’t be the only one that has no interest in switching to e-books.

      • http://idealog.com/blog Mike Shatzkin

        As I said, don’t be concerned. There will always be plenty of print books for you to read.

        Mike

      • J. Tanner

        ” I don’t like the Justice Department that works for all of us making the decision that publisher-set pricing is bad”
        Did they say that anywhere? I believe they said Agency is fine. (RH was not sued for adopting Agency, and Agency is still being allowed with certain conditions.) What they said was a problem was colluding (through selected higher price points and MFN status for Apple) to raise prices for consumers.

      • http://idealog.com/blog Mike Shatzkin

        Right. They can set prices but they can’t enforce that the price be honored across retailers. That’s not effectively setting prices.

        Mike

      • Christian K

        No, what they can’t do is set prices across publishers, that’s illegal. They got caught and now their companies suffer. Rather like a drunk driver that has to pay fines, take classes and perform community service or risk jail time.

        This was not a civil settlement, it was a criminal settlement and as part of that settlement their freedoms are restricted. The non-law-breakers (i.e. those that are not criminals) are free to form whatever agreements they choose.

      • http://idealog.com/blog Mike Shatzkin

        Actually, Christian, that’s not clearly established as what they “can’t do.”
        Random House, which was not seen as part of the alleged collusion, was allowed to continue as they have been and they DO set prices across retailers (which is what I believe you meant).

        The key to this was an allegation of “collusion”, not “price-fixing”. But all of the settling publishers explicitly said they were doing so because they wanted to avoid legal bills and uncertainty. Of course, you don’t believe them. I don’t believe the DoJ allegations of collusion, which strike me as exceedingly weak for reasons I’ve discussed in the past.

        We’ll get a chance to learn more about who’s right if Penguin and Macmillan actually go to trial as they now apparently plan to do.

        Mike

    • Christian K

      Amazon will discount some books. Mr. Shatzkin has explained how retail works, while being vaguely offended by the notion, oddly. Some stuff is on “sale” or discounted to drive buyer behavior other stuff is either not discounted or is over priced to make a profit.

      In the grocery store tomatoes or Coke are on sale while dry goods are typically “over priced”. In a digital world it matters less which specific books are “on sale” vs “over priced” it could be Hunger Games or 50 Shades. The point is that the discounting of one product will drive sales not only of the devices but also other products.

      • http://idealog.com/blog Mike Shatzkin

        Absolutely right. And the other thing that discounting does — or is *supposed *to do — is to convey an impression to the consumer of what they can expect to be paying for things they don’t really know the price of or haven’t shopped elsewhere for. That’s why the high-profile, most-searched stuff is most likely to get the biggest discounts.

        I understand how merchants work in their own interests. But not always. Seen any big discounts in your local electronics retailer lately on Apple products?

        Mike

      • Christian K

        I am sure the iPhone 3gs is actually free and not discounted at all. :)

      • http://idealog.com/blog Mike Shatzkin

        And you can find used books for a penny at yard sales all over America.
        Mike

      • Christian K

        Sorry, that iPhone 3gs is brand new. Also note that the $900+ iPhone 4s is generally sold for $199.

  • http://twitter.com/emmittc emmittc

    “we’re about to see digital priced aggressively in ways that will make
    any regular consumer of print wonder whether they should consider making
    the shift that so many heavy readers have already made.”

    given the above – any thoughts on the ABA/Kobo arrangement which puts e-reading front and center in those stores displaying the devices – esp considering that stores will make 5% on devices and average about 8% on ebooks sold…..should they really even bother – are they hastening their potential demise? – it doesn’t seem that it can save them which appears to be the thinking….

    • http://idealog.com/blog Mike Shatzkin

      I would never suggest not trying, but it strikes me as a very hard challenge for indie booksellers.

      If Kobo is handling all the pricing — which means they’ll have bots and algorithms to monitor and compete with Amazon — and indies *still get* 8% of ebook sales, I’d say that’s a damn good deal. But if the 8% depends on selling at full margin, then I’d say it is hard to see them making much money at all.

      Of course, not everybody believes Amazon will discount heavily. (See the comment from Nate above.) Maybe I’ll be wrong about Amazon’s intentions. Maybe they’ll leave plenty of room in the market for everybody to sell ebooks and make margin. I don’t see any historical precedent to support that idea, but until it happens, it’s conjecture.

      Mike

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  • JodyRein

    Ahhh–well, at least Amazon and the DOJ will trigger one predictable mini-boom in job creation: accountants. Best path to a career in book publishing? Sorry, fellow English majors; content may be king but valuable only if you can count it, discount it, aggregate and cap it, and algorithm it. Curate it? Edit it? Folks will still laud those skills in public, but in the big leagues,as it is for those swimming in the mighty Amazon–publishing halls will be more populated than ever by the financial/analytical guys. And quality control—of books? Wait a minute, is that pity I see in your eyes? No, I don’t believe in Santa Clause, what makes you think I do? Oh…Hey, Mike, has anyone graphed the employee makeup at the Big 6 over time, by expertise? That will be interesting to follow over the next 6 months or so…

    • http://idealog.com/blog Mike Shatzkin

      Jody, I don’t know anybody who has “graphed” the skillsets in the big publishers over time, but the time has definitely arrived when a computer science degree will trump an English major for most jobs. Publishing houses always had a lot more positions besides “editor” but now that’s about the only one where a high degree of literacy and literary knowledge is at a premium. Marketing and publicity once were, but I suspect not so much anymore.

      Mike

      • JodyRein

        Ummm, interesting picture over here–that’s not me. She’s pretty, though. Anyway, yes, I know, I know–I was a young editor at BDD when Alberto Vitale first called books “units” and I thought THAT was the end of the literary world. I would, though, strongly disagree that marketing and publicity were ever a premium in-house; that’s always been a huge problem and remains so. And I would say that now, marketing and promotion (not publicity) are more of a premium especially at the more forward-thinking houses–provided that means innovative online marketing, which brings us back to web analytics, which brings us back to algorithms (Google, now), which brings us back to..egads. More jobs for accountants.

      • JodyRein

        (Sorry–I see you mean literary acumen was once valued in marketing and publicity, and now not so much. I might argue with the first point, but not the second..)

  • William Ockham

    One minor correction. Amazon is not offering the Kindle Fires without ads for $15 more. They are offering to let you pay $15 after you register your Kindle to remove the ads. You might think that is the same thing, but it isn’t. Look at the product pages for the non-Fire Kindles. You can choose up front on those Kindles whether you want ads. The difference in price is $20. Now, look at the product page for the Kindle Fires. You have to click a link to see that you get remove the ads after you buy and register.
    Amazon is betting $5 per Fire that nearly everyone will end up keeping the ads. This is an example of how smart and powerful Amazon really is. They understand the power of the default option. Remember, the Kindle Fires are really just swag for Amazon’s best customers. They want those customers to see those ads, so they make it the default. I wouldn’t be surprised if the whole “no you can’t remove the ads, oh, ok, you can” was planned in advance. I don’t know that it was, but it worked out exactly the way Amazon wanted. A whole bunch of people get to believe that they made Amazon back down and Amazon still gets ads on every Fire.

    • http://idealog.com/blog Mike Shatzkin

      Thanks for the clarification and amplification. Very helpful.

      Mike

  • http://rehunter.org/ R. E. Hunter

    Now we see why Amazon removed the text-to-speech capability—to force people who want audio to buy the audiobook. It didn’t make sense until I read that.

    • http://idealog.com/blog Mike Shatzkin

      Nah. They removed it a few years ago because the battle with agents and publishers wasn’t worth fighting.

      Mike

      • http://rehunter.org/ R. E. Hunter

        It was (and is) still on the Kindle 3 that I bought less that three months ago.

      • http://idealog.com/blog Mike Shatzkin

        Yes, but it doesn’t work on most commercial books. Right?

        Mike

      • http://rehunter.org/ R. E. Hunter

        It’s worked on the half dozen I’ve tried it with. But I don’t have a lot (or any?) from the big publishers, so some may be restricted. But I was referring to the fact that the entire capability has been removed from the new Kindles, according to the reviews I’ve read.

      • http://idealog.com/blog Mike Shatzkin

        Thanks for continuing the tradition of good information coming from the readers of this blog.

        Mike

      • Christian K

        Correction, some publishers, a few years ago, didn’t allow text-to-speech to be used on their books. The capability was always available on the kindle, and the kindle apps.

      • http://idealog.com/blog Mike Shatzkin

        But are they allowing it now? I don’t think so…

        Love to get clarity on this.

        Mike

      • Christian K

        I would love to see some statistics as well. I can say that on the rare instances I have tried to use the feature it has been available. So, there is a data point of one. :)

  • Rebecca

    As someone with a VERY strong preference for print – I am 100% unwilling to read any ebooks – this terrifies me. There is nothing on earth that would make me read an ebook, and I prefer having Barnes & Noble to buy from since they have physical stores. Will what I love even be around in 10 years? I really hate the DOJ right now for privileging one class of customers over another. Why do e-book readers matter so much more?

    • http://idealog.com/blog Mike Shatzkin

      I think you’ll always be able to get print books, Rebecca. Print on demand is going to be more and more ubiquitous. By 10 years from now if there are no more bookstores, you’ll be able to get bound copies of most things at a Kinko’s. Or from Amazon.

      Mike

      • Rebecca

        Oh please not Amazon ugh. I hope if bookstores go away there’s another internet retailer. I think I’ll always resent them for what they’ve done to bookstores. I really want bookstores to be around for my child who (if things go as planned) will be born in 2014. My parents took me to the bookstore a lot to pick out books (the library too, but I loved picking out a book I got to “keep”) as a young child and I think that’s a big reason why I love to read so much. Picking out a book from a computer screen is just not the same.

      • Rebecca

        and yes, I already care about books for my not-yet-conceived child :-P

      • http://idealog.com/blog Mike Shatzkin

        Children’s books at retail may survive longer than big bookstores do. They can be merchandised wherever kids’ stuff is old: toys, games, children’s clothes…and physical locations for kids’ stuff will, I imagine, outlast ubiquitous bookstores by a lot.

        Mike

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  • http://www.facebook.com/InklingBooks Michael W. Perry

    Events often take a different path from those we expect and that just may be the case here. Two weeks ago, I thought this court win would mean a win for Amazon. Now I am not so sure. Amazon may have made a enormous blunder setting aside a guaranteed 30% markup, competing mostly on the benefits of their most impressive ebook ecosystem, which you describe so well above.

    Without realizing it, Amazon has just placed the success or failure of its ebook agenda in Apple’s hands. If Apple’s executives are as clever as I suspect they are, we could see the development–not of an ebook monopoly dominated by Amazon–but a duopoly of Amazon and Apple with the latter perhaps extending a bit of unwitting protection to other ebook retailers such as Kobo and B&N.
    The key issue is whether there will be a price war, with both Amazon and Apple selling some (the most popular) or all ebooks at below cost. If there isn’t, Amazon is safe. If there is, Amazon is in deep trouble. Apple can bleed them dry at little or no cost to themselves.

    The distinction lies in the two companies radically different ebook marketing schemes.

    * Amazon sells hardware ereaders at little or no markup and gives away their multi-platform apps. They plan to make their profit on ebook sales. Whatever they do short-term to get market dominance, they absolutely must return to making a profit. And given their tight profit margins company-wide, they can’t afford to subsidize ebooks sales for very long.

    * Apple makes its very large profits on iOS device sales and has very deep cash reserves. That means it can afford to sell ebooks below cost to increase the sale of iPads. It doesn’t matter what the actual numbers are, whether losing $1 on ebooks means $2 more in iPad profits or the opposite. The fact remains, it makes some money selling ebooks below cost while Amazon doesn’t.

    Now look at another extremely important fact. Ebooks you get from Amazon can run on almost any hardware and OS in existence, including Apple’s iDevices. Ebooks you get from Apple only run on Apple’s lucrative mobile devices. They won’t even display on Macs. At one time, I thought Apple was making a mistake with that, Now I wonder if it might be a stroke of business genius. Apple’s Plan B may actually be better for it than Plan A, across-the-board agency pricing.

    Assume for discussion a hot new bestseller that wholesales for $14.99. Both Amazon and Apple discount it to $9.99, so each is losing $5 on each sale. Does that mean they are competing on a level playing field?

    No, not even close. Apple’s copies only sell to those who have an iDevice, typically an iPad. Amazon’s sell to almost everyone with a computer or mobile device, including iPads. For the sake of debate, lets assume that the current 70% Amazon, 10% Apple market share holds for this ebook.

    Let’s further assume that Apple sells 100,000 copies, loosing $500,000. With $100 billion in cash reserves that’s nothing for Apple and keep in mind that Apple needs to only sell an additional 5,000 iPads to make up for this loss. Given the volume of iPad sales, that’s nothing, particularly if they can trumpet enhanced iPad editions.

    Amazon, on the other hand, has a 70% market share, so it sells 700,000 copies of this ebook. Does that mean it has ‘beat’ Apple. Hardly. It means that to match Apple’s price for just this one title, Amazon has lost $3.5 million. Whew!

    Notice the key difference. To help sell iPads, assume Apple wants the ebooks it sells to be as cheap or cheaper than Amazon. Doing that for this one bestseller has cost Apple $500,000, while it has cost Amazon seven times as much or $3.5 million. Who can keep up that competition the longest?

    Obviously Apple. It can match Amazon’s price on as many ebooks as it wants at one seventh the cost. It can have the cheapest ebooks on the planet for a fraction of what it costs Amazon to compete. And if that advantage means that Apple’s ebook market share grows to 20% that fine too because it means Apple has sold millions of iPads.

    Notice too that a busy book reader can quickly figure out that if they buy a Kindle Fire, they can’t take advantage of Apple’s low prices. But if they get an iPad, they can get the cheapest title from Amazon (vie its iPad app) or Apple. For someone who reads a lot, the added cost of an iPad could quickly be paid back, roughly a book or two a week for two years.

    Note too that Apple’s ebook discounts only subsidize iDevice sales. Amazon’s seven-fold-more-costly is subsidizing everyone’s device sales including Apple’s.

    Yes, I think that Amazon believes that by whispering in the DOJ’s ears, it has won a decisive advantage in the marketplace. I just doubt that is the case if (and this is a big if) Apple decides to flip how it plays this game. Apple already encourages Mac sales by giving away useful software such as iPhoto. It could do the same by heavily discounting their ebooks or even offer a coupon good for $100 in ebooks with every iPad they sell. The latter would get around the crazy price accounting rules that the DOJ seems to want to put into place.

    • http://idealog.com/blog Mike Shatzkin

      Your analysis is very interesting and turns a lot of the conventional thinking on its ear.

      But there is, theoretically, going to be a limitation of “all your margin” to the discounting. And the difference in market share means that Amazon can start signing up projects that really matter. Once that happens, they can stop allowing them to be sold in anybody else’s store. That would be a gambit that none of their competitors, including Apple, could match regardless of the depth of their pockets. You need market reach to play that game, and only Amazon has it.

      Mike

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