

Amazon, Macmillan: an outsider's guide to the fight - barry-cotter
http://www.antipope.org/charlie/blog-static/2010/01/amazon-macmillan-an-outsiders.html

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barry-cotter
If you don't read the post

Publishing is made out of pipes. Traditionally the supply chain ran: author ->
publisher -> wholesaler -> bookstore -> consumer.

Then the internet came along, a communications medium the main effect of which
is to disintermediate indirect relationships, for example by collapsing supply
chains with lots of middle-men.

From the point of view of the public, to whom they sell, Amazon is a
bookstore.

From the point of view of the publishers, from whom they buy, Amazon is a
wholesaler.

From the point of view of Jeff Bezos' bank account, Amazon is the entire
supply chain and should take that share of the cake that formerly went to both
wholesalers and booksellers.

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Lazlo_Nibble
I disagree that pricing is irrelevant to this battle. Pricing is the only
reason they're _having_ this battle.

Amazon is trying to drive the prices down to $10 or less because they believe
that the eBook market will stagnate if titles are priced much higher than
that. They're gambling that lower prices for eBooks will lead to higher sales,
and that the increased volume will make up the difference for everybody.

Macmillan is trying to drive the prices up so they can still recoup their
fixed costs _given current sales numbers for eBooks_. They're not gambling at
all -- they're trying to structure prices so if the eBook market stagnates
they still break even, which has the very pleasing side effect that if eBook
sales increase even slightly (something the iPad is threatening to help
happen), all the revenue from those additional sales will be pure profit.

I can see points on both sides here. I agree with Amazon that the eBook market
is dead in the water unless eBooks cost significantly less than physical
copies, but publishers like Macmillan would be _insane_ to give Amazon any
control over the actual "list" price that drives all the percentages.

(Pricing rant: In order to succeed, eBooks have to be priced competitively
with the actual _street prices_ of the print versions, not the list prices.
Bestseller prices need to be competitive with Amazon and Costco, and backlist
prices need to be at least _nominally_ competitive with used. Particularly for
titles have have been in print for decades -- I think you're recouped your
costs on the _Foundation_ trilogy by now, guys; it's not my fault you keep re-
typesetting it so you can bump up the page count to make the ever-increasing
cover price look "reasonable".)

------
po
So in this article he states:

Traditional chain: author -> publisher -> wholesaler -> bookstore -> consumer

Then he says that Amazon is acting as wholesaler to the publishers and
bookstore to consumers. That would give us this:

Amazon's chain: author -> publisher -> Amazon -> consumer

What I don't really get is what's so different between that and what apple is
proposing:

Apple's proposal: author -> publisher -> fixed-price distributor -> reader

The only difference I see is that apple hasn't started going after the
publisher's profits (yet).

What am I missing here?

~~~
asdflkj
According to the article, Amazon wants the power to set the price for ebook
edition. Amazon has other priorities besides selling your book for as much as
possible, such as pushing the adoption of Kindle. So if Amazon decides that
your book is gonna be a loss leader, you're stuck.

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raganwald
It can't possibly be good for consumers that any one middleman is so powerful
that they can lay a major hurting on MacMillan like this. I really dislike the
arbitrage model where the middleman tries to capture all the profit at the
expense of the supplier and the consumer. I like the fixed margin model (like
Apple's). I think it's good for everybody.

~~~
patio11
_It can't possibly be good for consumers_

Amazon wants to sell me a book delivered on day 1 for $10. Macmillan wants me
to choose a book delivered on day 8 for $30 or a book delivered on day 180 for
$15. Remind me why I'm suppose to back Macmillan again?

~~~
raganwald
If Amazon is writing the book, fine. But if Amazon is saying that somehow
magically they will sell you a book for $10 when MacMillan needs $12-$15 to
make money, then MacMillan or the author are going to starve while Amazon
makes all the money.

That is not a win for anyone except Amazon.

~~~
patio11
It isn't magic: Amazon takes a loss on certain Kindle books with the goal of
changing customer behavior, in much the same way that WalMart loses money on
most new titles it sells to bring customers in the door. MacMillan would
rather they dictate prices to Amazon so that they can avoid channel conflict.

To enforce this, they told Amazon that if Amazon doesn't play ball with their
dictated prices, MacMillan will use their strict legal monopoly on sale of
MacMillan books to make it impossible for Amazon to sell them in the crucial
post-release window. Amazon said "Two can play at that."

(MacMillan doesn't "need" $12 to $15 to make money, but if they demanded it,
Amazon would pay $2 a book during the new release window to make boku bucks on
the hardware, midlist/backlist titles, and non-book services.)

~~~
cstross
_MacMillan doesn't "need" $12 to $15 to make money_

Actually, you'd be surprised.

The author's cut is a royalty based on the suggested retail price, which for a
hardback offering would be 10-15% of $24, or for a first ebook at $15 would be
25-30% of $15.

The production cost of an ebook is non-zero; there's a lot of editing, copy-
editing, proofreading, typesetting that goes into it, not to mention
commissioning cover art (arguably obsolescent) and other marketing activities.
Rule of thumb is $7000-$20,000 for a book, which must be recouped somehow.
Typical book sales are _much_ lower than most folks imagine -- midlist
hardcover SF novels sell 3000-8000 copies at $24 discounted to $16, paperbacks
sell 15-30,000 copies at $8 discounted to $6 (but with a hideous level of
wastage such that typically 20-50% of the print run will be pulped due to not
selling within 90 days).

Suppose the $15 ebook somehow sells as many copies as the $16 (after discont)
hardcover. The iBook cut is 30%, leaving $10. The author's cut is another 30%
of $15, leaving $5 for the publisher. They then have to defray $7-20K of
production costs before they're into profit; an expensively produced book that
sells for $15 but only moves 4K copies is thus a _loss_.

You want to know the grisly truth? Right now, ebook sales are lucky to make it
into three digits. Even Baen, who are Doing It Right, are happy to shift 4000
ebooks at $6 each.

And Amazon isn't taking only 30% of the cover price: they're wanting 30% _with
a cap of $10, and they get to set the retail price_ , or _70% of retail price_
(current books).

Let me say it again: in publishing, about 70% of the revenue stream is soaked
up by rent-seeking intermediaries between author/publisher and reader.

~~~
patio11
Charles Stross! I flew to America to buy a copy of Merchant Princes. Well, OK,
not really: I tried to buy it in Japan from my Kindle with the intention of
reading it on my annual trip back, and I was denied because of some licensing
agreement your publisher had. I eventually bought it while passing through
Detroit Airport.

Despite the fact that this is ridiculously convenient for argument I am about
to make, I am actually telling the truth:
<http://news.ycombinator.com/item?id=1002315>

When you say"rent-seeking intermediaries" I think of a different player than
you do. See, Amazon makes my reading experience awesome. Your publisher? They
have not made my experience awesome. I know they spend a lot of money on,
e.g., typesetting and wood pulp. That must suck. I am having a hard time
mustering up sufficient sympathy to back your publisher's attempt to charge me
more so that I can subsidize the continued practices which result in 50% of
print runs getting pulped.

Is Amazon's contribution to total awesomeness worth 70%? Eh, I don't know. I'm
a software vendor. Google takes fifty cents out of the last dollar of sales
for me (for advertising), despite the fact that I do all the "actual work". I
use the scare quotes because if the last couple of years have taught me
anything it has taught me that making the sale -- which is what Amazon does
for you -- is a non-trivial bit of the business equation.

I don't see my profit split with Google as a moral issue -- I see it as a
fairly simple business decision. To whit, I sure like getting that last fifty
cents. I think I managed to get about $20 of your books on my trip to America.
Now, I don't know whether you see $1 or $3 of that at the end of the day, but
either is a darn sight better than $0, which is what your publisher is pushing
hard for you to get from me.

~~~
cstross
The publisher's contribution is invisible, but awesome. Trust me, the books
wouldn't be the same without them.

Amazon's visible contribution is ... well, there's something rather nasty
happening behind the stage curtain.

Agreed, the mass market channel for paperback distribution must die --
everyone in publishing agrees on this (the 50% wastage is grotesque) ... just
not until there's a replacement way for injecting cheap books into readers'
eyeballs.

~~~
Poiesis
What am I missing here? Ebooks aren't fitting the bill? Because of low
adoption?

------
nhebb
The writer states: _book publishing is notoriously, uniquely unprofitable,
within the media world_

Is he kidding? Macmillan occupies the famous Flatiron Building on Fifth Ave.
in Manhattan. (It's the narrow triangular building shown in a lot of movies
and TV shows.) If they can run their operations out prime real estate like
that, then they are either profitable or mismanaged.

~~~
cstross
Ahem:

 _Tor_ (who are my publisher -- I've visited them there) occupy _one_ of the
22 floors of the Flatiron, along with their fifty staff (total) who publish
300 books a year. They rent, the building's been bought, and they've been
served an eviction notice of sorts -- the lease almost certainly won't be
renewed; they can't compete with the hotel chain who want to turn the Flatiron
into a des. res.

The Flatiron may be famous as the first steel-framed skyscraper (and the view
from Tom Doherty's office at sunset is awesome -- the Empire State Building,
backlit!), but it's an elderly and rather badly maintained building.

------
lionhearted
> Amazon are going to fight this one ruthlessly because if the publishers win,
> it destroys the profitability of their business and pushes prices down.

Wait. This guy is claiming that publishers are trying to push book prices
down, and Amazon is trying to keep them up. This doesn't jive - Amazon has cut
the prices of books so incredibly heavily since they came along, and had a
very good shopping experience with reviews, excellent customer service,
shipping, and so on.

I think people are afraid of any company getting too powerful because of the
abstract concept - but myself, I'm starting to get comfortable with companies
like Google and Amazon taking large share by being the best. If they get
corrosive later, they'll have a few year window where they're still on top,
but then someone will come and take them out. But I think the current
leadership of companies like Amazon and Google is good enough that they won't
make shortsighted bonehead decisions against their customers.

~~~
cstross
No, what I'm saying is that, of the $16 net price you pay for a hardback, you
might _think_ that the lion's share goes to the publisher and the author gets
10%, but the _reality_ is that 70% goes to the distributors and booksellers
while the author and publisher split 30%.

What Amazon have done is to sneak up on the distributor/bookseller pipes and
merge them into one lucrative hose, and now they're playing both ends for
their own benefit.

Amazon squeeze their suppliers, just like Wal-Mart. Amazon is _already_
corrosive -- if you're a small supplier.

~~~
Lazlo_Nibble
That hardcover which I paid $16 for likely has a list price of between $25 and
$30. If the publisher was only paid 30% of that $16 sale ($4.80), that means
they sold it to the distributor at a wholesale discount of _over 80% off
list_.

Are any publishers _really_ offering those kinds of terms, even to Amazon?

~~~
cstross
Hardcover list prices are pretty much pegged at $24 in the USA, ever since
word went out within Borders (or was it B&N?) about eight years ago to stop
buying hardcovers with SRP over $24.

Yes, Tesco (in the UK) and WalMart can and do demand discounts up to 70%. I
have heard hearsay reports (I can't cite sources, due to confidentiality) of
Amazon demanding 80% discounts off ebooks from British publishers -- which is
why they only launched Kindle in the UK about three months ago: nobody would
take them up on it.

~~~
Lazlo_Nibble
But even if some resellers _are_ getting titles for 70% off list price, that
doesn't translate to them retaining 70% of the revenue from the sale unless
they're selling the title at list price. No reseller with the market muscle to
demand a 70% wholesale discount is selling those titles at list price!

Personally I think your figures ($24 list price, 70% wholesale discount) are
edge cases, and don't represent a typical sale. But even if we take them at
face value, in your example the publisher/author get $7.20 of my $16 and the
distributor/reseller get $8.80. That's a 55/45 revenue split, not a 70/30
split.

This also assumes I'm buying at 1/3 off list, which is on the low side. Amazon
is discounting bestsellers by at least 45%, with a select few going for 60%
off or more. Example: _Going Rogue_ , list price $28.99, sale price $13.50
(53% off). If Amazon's getting a 70% wholesale discount, HarperCollins gets
$8.70 and Amazon keeps $4.80. That's a revenue split of 65/45 in the
_publisher's_ favor.

So: when I buy a hardcover that's been discounted down to $16, the actual
_reality_ is that the distributor/reseller is _not_ making twice as much on
the sale as the publisher/author -- it's more like a 50/50 split.

None of which is to say I support Amazon OR Macmillan's position in this
particular battle (they're both wildly overreaching, IMO). I just think your
example inappropriately conflates two different things.

