John Scalzi had some smart things to say about the contractual dispute brewing between Amazon and Hachette regarding how to price eBooks.

I read through all the comments on the piece and I’m pretty sure I didn’t actually see anyone bring up what I think is the real justification for why Amazon is pushing for this contractual change. I don’t think it has anything at all to do with publishers, authors, or even customers.

First of all, it’s completely rich that Amazon wants to put this pricing model in place. There was an email from Steve Jobs that came out during the recent “collusion” trial that predicted that Amazon would do exactly what they are proposing (taking 30% of $9.99) because “They have shareholders, too.” Based on this week’s events (both Hachette and Wall Street), the guy was nothing if not prescient.

Here’s the deal: Amazon really does believe that $9.99 is a magic price for books. (Probably all books, but definitely eBooks.) It’s clear they have some data that seems to prove that sales are particularly good there. And the comments on John’s site anecdotally back that up. Quite a few folks have stated that they simply won’t buy a book for more than $9.99. (Really? $10 is a bridge too far, I guess. And $10.99? That’s just crazy!)

Anyway, under the traditional “wholesale” pricing model publishers state a list price, but then sell the book to retailers like Amazon at a discount from that. It used to be 45-50% off for print books. Since the eBook settlement, the model is kind of a hybrid. Publishers set the price (as in the currently forbidden Agency model) but retailers are permitted to discount from that with some limitations. Discount percentages are much less – in the 20%-25% range.

To use a real example here, John’s new eBook appears to have a list price of $11.99. Using the (somewhat theoretical) 20% discount, that means Amazon’s cost is roughly $9.60. And they’re selling the book today for $10.67. So their cut is something like $1.07. But to sell this eBook at their preferred $9.99 price, Amazon would only be making 39 cents — maybe not covering their costs. (To make this a simple example, I’m ignoring publisher payments for placement, promotion etc.)

For some books Amazon is probably willing to take a loss to get to their magic price point. Or they might not be willing to take a loss on a particular book and so they price above $9.99. This probably really upsets their number crunchers.

And of course today Amazon’s profit changes based on the list price of the book and their chosen discount. For a few eBooks they might make $3, for most others much less.

Now look at the new reverse-Agency model that Amazon is proposing: Amazon sets the list price ($9.99) and gives the publisher 70% of that ($6.99). There is now no question of Amazon’s cut. It’s a nice consistent $3. I’m betting that that’s a whole heck of a lot higher than their average take on eBooks up to this point.

So with this proposed model Amazon gets what they want — probably more sales (on average), but, more importantly, more money per sale (on average). And customers generally get a consistently lower price on new, best selling, books. Publishers are the only folks who don’t appear to get what they want here (control over how their products are priced, especially for new hot-selling titles). Depending on how you view the future of writing and publishing this could be viewed as good or bad.

And true to Steve’s old email, I’m betting that moving to this pricing model would make Amazon’s shareholders a little happier than they were this week.

 

Leave a Reply

Your email address will not be published.