The Shatzkin Files


Tim Ferriss’s deal with Amazon is both an outlier and a harbinger


News of the 7-figure Tim Ferriss deal with Amazon that hit the news this (Wednesday) morning must have leaked out to the press yesterday (Tuesday) because I got a call from a reporter asking for comment on Amazon’s “big new hardcover” book deal. The question confused me yesterday, but seeing the announcement about Ferriss today featuring the hardcover makes it clear what the trigger was for that call.

I’d call this deal both an outlier and a harbinger.

It’s an outlier because Ferriss clearly did it for reasons that weren’t strictly financial. According to The New York Times and Publishers Lunch, Ferriss called Amazon seeking the deal. Ferriss decided he’d rather be with a technology company than a publishing company. Ferriss is excited by the unenumerated opportunities he sees having a publisher that has direct relationships with the ultimate consumers.

To analyze the competition between the big publishers and Amazon, I think we need to think about four components of the deal and the publication.

The first thing on many authors minds is the advance against royalties they can get for signing a contract. This deal is reported as 7-figures. We know that Amazon has deeper pockets than any publisher. So they can compete with advances. Since Crown (a division of Random House) had reportedly paid 7-figures for Ferriss’ last book in 2008, perhaps Amazon offered only a sensible competitive number here. But publishers, all too aware that Amazon competed in the ebook marketplace by selling big titles at a loss, have to be concerned that they might be willing to sign some big authors at a loss as well.

The other components to think about are the main channels of sale for the book. I will stipulate in advance that this is a bit over-simplified but I think simplification here promotes understanding (and unncecessarily complicating things would obscure it).

Ferriss is a non-fiction author. For big non-fiction books today, the largest sales channel is usually print sold in stores. Generalizations are dangerous (and generally wrong), but it would be reasonable to think that Ferriss sells 50% of his books that way. If so, that’s a problem for him with Amazon because store sales of print will be the hardest for Amazon to get. Barnes & Noble recently made clear that they would only consider stocking an Amazon-originated title if they could sell the ebook (Nook) edition as well as the print. Amazon hasn’t stated a policy on that, but, to my knowledge, all the publishing deals they’ve made have required ebook exclusivity for the Kindle.

At our on-stage conversation at the Publishers Launch BEA show, Barry Eisler — who had just done his own book deal with Amazon for a substantial advance — admitted that Kindle exclusivity was the one part of the deal he wasn’t crazy about. More on what that means to ebook sales further down in this post, but it would appear that ebook exclusivity is blocking print store sales at the largest possible outlet. Unless Amazon has some distribution cards up its sleeve that we haven’t seen yet, the loss of brick store print sales (and exposure) would appear to be the biggest negative for Ferriss in doing this deal.

It is likely that Amazon expects to sell a lot of those hardcover books through the next channel to consider, print books sold online. In this case, Amazon has a very high percentage of the total market, perhaps in the 80-to-90 percent range. Given their ability to give a book of theirs exposure and perhaps even using that direct customer knowledge that Ferriss seems so intrigued by, it isn’t unreasonable to think that they can sell more than their fair share of those books. It’s also seems likely (generalizing again) that 25% of Ferriss’s publisher-generated revenue could come from print sold online. Maybe Amazon is paying him a higher royalty than the standard on that as well.

Of course, the main commercial reason for both sides to do this deal is for sales of the ebook, the Kindle edition. On the one hand, Kindle sales are said by publishers I’ve spoken with to have fallen from 90% to 50-60% of the total ebook sale. (Barnes & Noble’s Nook is credited with the lion’s share of the rest.) But the publishers don’t know how much of Kindle’s sale (or Nook’s sale or Kobo’s sale) is consumed on the proprietary device. If I read on a Nook and Kindle has an exclusive on a book, I’m stuck. But if I read Nook books on my iPhone or iPad and Kindle has an exclusive on a book, I can just switch over for that one book without a problem.

That means that some big part of the 40-50% of the ebook market that isn’t Kindle is accessible through the Kindle reader on an iOS or Android device. It’s a guess, but I think a reasonable one (maybe even a very conservative one) to say that 35% of Kindle reading is done on non-Kindle devices. Adding those people in would suggest that the Kindle store has meaningful access to anywhere from 67% to 75% of the total ebook marketplace.

And we’d assume that Ferriss is getting a 70% royalty from Amazon on those sales, four times what he’d get if a publisher gave him 25% of the ebook royalty (because they’d be dividing the same 70%.)

My bottom line on this is that Ferriss would get a sliver of what would be half the business (print in stores). He could well get as little as 10 percent of that potential (or 5% instead of 50% of what would have been his total publisher revenue.) Depending on the royalty structure, he’ll get at least as much and perhaps a bit more on the online revenue piece, so let’s call it 30% instead of what would have been 25% of his total publisher revenue. So on those two pieces, he’d be getting 35% of the former total whole, rather than 75%, or a bit less than half.

But on the ebook side, he’ll get about 4 times the royalty on about 70% of the sales, or 2.8 times as much revenue as he would have gotten from a publisher. If that had been 25% of revenue of the former “whole”, it would be 70% of the former whole now. Added to the 35% he’s getting from what would have been the other 75%, that back-of-the-envelope set of guesses delivers him 105% of what he would have gotten from a publisher, even giving up almost all the print store sales.

And, of course, he has high expectations for what he and Amazon can do together with all that customer knowledge. If he’s right about that, he could do considerably better.

This is sobering math for the big publishers. The numbers would look better for Amazon if we were generalizing about fiction, where the percentage sold as ebooks is somewhat higher. But, more important, the segment of the business where Amazon is disadvantaged — print in stores — is shrinking inexorably as a total of the whole. When we run this same exercise a year from now, the percentage assumptions we’ll be making will be lower for that component and higher for the other two.

So it’s clear why the deal is both an outlier and a harbinger. Giving up the store sale is a difficult thing for any author to do, particularly when the math works out to be so close to breakeven (and we haven’t factored in the marketing impact of books in stores, which is real.) It took an author with a particular personal bent to pursue that choice. But it is a harbinger because the math would appear to be moving in Amazon’s direction. The one way I can see for publishers to improve their chances of looking good in this calculation is to raise their ebook royalty percentage. Of course, there’s no reason that Amazon couldn’t do the same thing.

If you’re going to Frankfurt, you must consider attending one of our Publishers Launch Conferences events there. On Monday, October 10, we’ll present “eBooks Around the World”, which will include lots of original data, talks from every major global ebook retailer, the scoop on the growing importance of collective licensing, documentation of the benefits that a medium-sized publisher got from a digital workflow, an instructive presentation connecting metadata quality and sales results, and (as they say) much, much more.

On Tuesday, October 11, we’ll deliver a half-day event called “Children’s Publishing Goes Digital”, chaired by Lorraine Shanley of Market Partners, which will explore creation, marketing, rights, brand new product types and brand new players in what might be the fastest-changing part of our business.

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  • Bob Mayer

    Very interesting.  One does have to do the math very carefully these days.

    • /blog Mike Shatzkin

      Highly speculative, incomplete, and plenty of room for error, but I thought it was worth laying out the paradigm of the three principal components. So far, that’s the best way I’ve come up with to analyze it.

      By the way, you have just won the all-time Shatzkin Files award for the comment registered fastest after a post was published. Feels like I JUST hit the send button!

      Mike

  • Jack W Perry

    Good piece. Ferriss and Amazon will need to ensure distribution of physical books into Wal-Mart, Target, airports, Costco, etc in addition to traditional outlets (Amazon and B&N). I’m sure they will figure out a method but this extensive distribution is something publishers still excel. This type of ‘pop-non-fiction’ usually gets broad distribution into non-bookstores.

    • /blog Mike Shatzkin

      It will be interesting to see what they can arrange with the mass merchants. Remember, many of them are no fonder of Amazon than B&N is!

      Mike

  • Chris

    This makes heaps of sense because Ferris is a very different kind of author to others.

    I’ve been following his blog for several years (plus his ‘Random’ show with Kevin Rose) so it’s not a surprise that he has chased this deal. I’m pretty sure he owns Amazon stock too, so, you know, why not sign up with a company that you own part of?!

    Plus, Ferris knows how to market, he’s hardcore on analytics and he knows how to crowd-support his product(s) from his blog and speaking platform.

    The fact that he has some big time Internet Marketing friends AND big time tech friends suggests he was always destined for online focus. As for the Bricks and Mortar sales of his last book… well, I’d be very surprised if the online HC sales didn’t match them.

    Again, Tim is definitely not your average author.

    Therefore: Outlier.

    • /blog Mike Shatzkin

      Thanks for the additional info on Ferriss. He is definitely positioned to take maximum advantage of this relationship.

      Mike

  • http://freesf.strandedinoz.com/wordpress Blue Tyson

    Are those sort of books usually US only, ebook-wise?   Presumably this one won’t be.

  • Smeloa

    Why are you assuming that Ferris would get a 70% royalty rate for thee-book? He is not self-publishing this book, it is an acquisition by Amazon. Why would Amazon give him the same treatment as self-publishers? I agree that the royalty rate might be higher than 25% but doubt is as high as you estimate.

    The real key here is the Amazon’s ability to sell directly. I believe that more than trying to woo authors with high royalty rates (more than likely these will be around 25% to a max of 50%),this is what they want to use to reach out to authors.

    • /blog Mike Shatzkin

      I am not privy to the terms of the deal, but I have good reason to believe that the 70% royalty rate, which is what Amazon pays publishers on ebook sales, would prevail here. I tried to lay out my methodology; you (or anybody else) can make different assumptions, apply different numbers, and come up with a different answer. What I feel is important in this post is the paradigm: seeing clearly that there are three channels of sale to watch and that how sales are distributed among them affects the relative position of publishers and Amazon.

      Mike

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  • http://twitter.com/BooksNBuzz Maryann Reid

    This is a good move for Ferris and will have lots of authors (who can) following him.  Royalty rate is great, but that online ease of buying a book in an instant by a formidable proven author like Ferris is priceless.

    • /blog Mike Shatzkin

      What you say is true, Maryann, but his book would have been available that way no matter who his publisher was!

      Mike

  • Anonymous

    Just drew a diagram to explore your post a bit over at my blog.
    http://onewritersvoice.com/2011/08/18/when-publishing-becomes-a-technology-play/

    Interesting as always Mike.

    • /blog Mike Shatzkin

      Thanks, Mary. Your diagram is intriguing and actually covers ground I didn’t in my post.

      Mike

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  • http://www.thefutureofpublishing.com Thad McIlroy

    You write that “Giving up the store sale is a difficult thing for any author to do”. Absolutely. But even worse, I think, is giving up the store presence. A highlight for every author is walking into a good bookshop and seeing their new book prominently featured. There’s a great opportunity for independents and the remaining chains to do what they’ve always done but do it even better. More signings. More parties. More book club meetings. Celebrate the experience of physically interacting with books, their authors and their editors and publishers. It’s not for everyone, but it means a lot to many.

    • /blog Mike Shatzkin

      Let’s not mix the fact that authors benefit from store presence with the viability of stores themselves. Of course authors benefit, but stores are losing out because so much of what was store book business is moving online, both for print and, of course, for digital books.

      I agree that the store presence is beneficial but the customers just aren’t there in the numbers they used to be. They won’t support the store network and event schedules we had 10 years ago. This is harsh reality, but the fact that many authors would be better off it were different won’t change it.
      Mike

  • https://sites.google.com/site/lynskeybooks/home Adrian White

    I think the really interesting thing here is the consistently slow response of the print publishers to the many changes that seem to be happening on almost a daily basis. They are always at least one step behind and I would love to see them for once be the pro-active instigator of some game-changing action. There’s no shortage of very clever people working and thinking for the print publishers but, unless they’re playing some long game, I think they’re losing so much ground they’ll find it hard to ever catch up.
    As an author, for example, it’s disappointing to see them clinging on to low royalty rates for digital or their insistence on owning the digital rights at all. They still seem to believe they can bully an author into signing over those digital rights on the basis that every author is so desperate to see their book in print and in store. It’s hard as an author to stand up to that and I wonder if I hadn’t already had 2 novels published in print if I’d be strong enough to not succomb on the third?

  • Anonymous

    I fail to understand the attitude of B&N and some independent bookstores who claim they will not carry a book published by Amazon because they believe Amazon is the “enemy” which has caused them so much grief.  That’s shooting yourself in the foot with a shotgun. If I want to buy the paper copy of a book and go to a bookstore only to be told they don’t carry it and I’ll have to go online to get it why would I ever go back to that bookstore?  B&N is hardly in a position to negotiate. Now, if they had a POD station in the store and could produce the book in 20 minutes….

    I have a Kindle, color Nook (rooted to Android Gingerbread with all major ereadingapps, making it  an excellent and cheap tablet), iTouch, and iPhone and am now using the Kindle Cloud reader on several laptops. After trying all of them, the Kindle software is so far superior to the others, it makes little sense to use any of the others.  (I particularly like Kindles access to highlights at Kindle.amazon.com which makes quoting for reviews really easy. Its syncing to other devices rarely stumbles unlike Kobo and B&N which mostly do not. iBook is still a joke.)  Until Amazon has some serious competition from others with regard to software, it’s a one-company business.

    • /blog Mike Shatzkin

      The downside for B&N and indies for not carrying any particular book is, as you say, that they drive people to online purchasing. On the other hand, * most* books wouldn’t be missed by most people.

      And while I find nothing to disagree with in your praise for how well Kindle works (I also have all the readers on my iPhone and find myself using the Kindle reader more and more because the shopping experience is better and, as you say, the software itself seems smoother), there are still apparently millions of people who use one of the alternatives.

      It isn’t irrational for a retailer to say “I sell ebooks too and I don’t want to carry a title I can’t sell in all the formats I sell books in.” It may be, in some ways, self-destructive, but it isn’t irrational.

      This all demonstrates that, despite agency, Amazon still has a strong hold on the ebook business. They have a hammerlock on sales of print online. Since those are the two parts of the trade business that are growing, their position would appear only to be strengthening.

      Mike
      ————————-
      Mike Shatzkin
      [email protected]
      Founder & CEO, The Idea Logical Company, Inc.
      212-758-5670
      /blog

      • Anonymous

        “It may be, in some ways, self-destructive, but it isn’t irrational.” 

         I would have to disagree. Acting in a self-destructive manner is the epitome of irrationality. Moving customers away to competitors is both self-destructive and irrational.

      • /blog Mike Shatzkin

        Strictly speaking, I suppose you have to be right. But lots of rational people do self-destructive things all the time. Keep that in mind the next time you see somebody smoking a cigarette or an overweight person having an extra beer or a dessert. In the case of stores not stocking the books of a competitor they don’t want to strengthen, the decision cuts both ways and is a lot less irrational than conduct you, or at least most people, see and accept every day.

        Mike

  • Peter Larson

    Just because someone can theoretically access the Kindle app doesn’t mean they are willing to do so.

    For me, no nook version = no sale.

    In fact- if your book costs LESS on Amazon than it does elsewhere –  no sale as well.

    • /blog Mike Shatzkin

      Peter, I admire your principled position in behalf of authors and publishers. But don’t blame them if their book is cheaper on Amazon than it is elsewhere. Amazon only extends agency pricing to the Big Six; all others deal with them on a wholesale basis and Amazon controls their prices. Makes it tricky for everybody else, as you can imagine because they operate on agency terms with Apple and, perhaps, with others.

      Mike

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