April 20th, 2011 by Mike Fulton
Posted in eBook Publishing

A sad trend that’s developed recently is for the eBook edition of a new book release to cost a little more than the hardcover edition. For example, the pre-order page on Amazon for the upcoming new release in Charlaine Harris’ Sookie Stackhouse series (aka True Blood), Dead Reckoning, shows a price of $14.99 for the Kindle edition, while the hardcover edition is going for $14.70. Granted, it’s not a big difference, but as we’ve discussed several times before, it just doesn’t make sense for the eBook version to cost more.

On Amazon, when this sort of disparity exists you’ll often see a little notice next to the price, saying “This Price Was Set By The Publisher“. Or, as I like to think of it, “Yes we know it’s stupid but it’s not OUR idea.

The reason for this disparity has to do with a difference between how books are sold wholesale. For physical editions, the publisher typically sells each book to the reseller, such as Barnes & Noble or Amazon, at a wholesale discount from the cover price. The discount percentage may vary depending upon volume, payment terms, or a variety of other factors, but ultimately it typically falls in the area of 50-60% off the cover price. So if a new hardcover edition is priced at $26.99, the wholesale cost to the retailer was probably between $10.79 to $13.50.

This is how most products are sold, although the wholesale discounts involved vary quite a bit depending on the product involved. However, the one thing that’s the same across the board is the fact that once the original manufacturer (like a publisher) has set the wholesale price they’re charging the retailer, their involvement in the pricing process is finished. They often have a “suggested retail price” but the retailer can set whatever price they want. They can offer a 50% discount, a 30% discount, or no discount at all.

The situation with eBooks is different. Some eBooks are sold via the traditional wholesale model, but for certain categories, like new fiction releases or new major non-fiction releases, the market has been shifting to what is known as the Agency Model. This is where the publisher sets the final price for the end customer, and the retailer gets a fixed percentage of each sale. The prices always are the same from one reseller to the next.

Thus: This Price Has Been Set By The Publisher

You may think, isn’t price-fixing illegal? Yes, normally, but they’ve found a loophole. In this scenario, Amazon (or Apple or whomever else) is acting as a sales agent for the publisher, and you’re actually buying the eBook directly from the publisher, not from the retailer. In exchange, the agent/retailer gets a particular percentage of the sale as a commission. That’s why it’s called the “Agency Model”.

Smells a bit fishy to me, but apparently it satisfies the legalities involved.

One has to wonder why the retailers would ever agree to such a system that gives them virtually no control over pricing. My thought is that while this shift was caused by Apple to some degree, the situation that let them do it was caused by Amazon.

I know that many people think Amazon has been backed into a corner and that they’re holding the short end of the stick in the current situation, together with the end customer. I think that’s true to a certain degree, but I think we got here because Amazon was a bit short-sighted with regards to pricing policies in the first place.

Kindle Pricing In The Early Days

When Amazon first introduced the Kindle, instead of the usual wholesale pricing used for physical books, they decided it would be a good selling point if all new releases were priced at $9.99. Amazon would keep 65% and 35% would be split between the author and publisher. Basically it was not that different from the agency model mentioned earlier, but turned on its head, with Amazon setting the prices rather than the publisher.

If you look at the early advertising for the Kindle, it’s clear that Amazon thought that the $9.99 price for new releases was a major selling point. And it does sound pretty good at first, until you noticed that you were spending $400 (the original Kindle price) to save $5 or $8 on a book. Granted, not everybody does the math before they buy, but that sort of thing is pretty obvious. Those who actually did the math would realize they might have to buy 50 or 80 books before they broke even on the hardware.

It should have been obvious to Amazon that the convenience factor of an eReader was really the bigger selling point. And in fact, if you look at later advertising, you’ll see that the focus shifted from the price of new releases to the convenience of having a library you could hold in your hand.

Unfortunately, the $3.49 cut of the $9.99 price that went to publishers & authors was less profit per copy compared to a hardcover edition. I’m sure that Amazon hoped that the sales volume would ultimately grow to the point where the reduced per-copy profit was more palatable. However, early on when the installed base of Kindle users was still fairly small, it was essentially just a sacrifice for the publisher & author.

These pricing issues made many publishers upset, and eventually several of them rebelled against Amazon over pricing issues in early 2010.

At the time, Apple’s release of the iPad was imminent, and they were making deals with publishers for their new iBookstore. Furthermore, Barnes & Noble had just released the Nook and were in the process of making their own deals.

Apple wanted to ensure was that eBooks sold through their new iBookstore setup would not be available at lower prices from other resellers, at least for high profile new releases. However, there’s really no way to guarantee that with a traditional wholesale model, so they started signing agreements with publishers to sell books using the agency model. This allegedly included the provision that the publishers had to set their prices such that nobody else was selling the same book any cheaper than the prices on iBooksstore. Apple may not have been completely happy with the idea of giving up all control over pricing, but they must have figured that as long as nobody else’s prices were lower, it wouldn’t really matter.

Once publishers started signing up with Apple using the agency model, they had leverage to use with Amazon. Since Amazon was no longer the only game in town, the publishers were able to push through new deals based on the Agency Model. Amazon resisted the change for awhile, but eventually they agreed.

I have to wonder if the irony of the situation occurred to anybody at the time. The publishers essentially ended up reversing the same deal Amazon had originally done with the $9.99 pricing.

And that’s basically where we are today. The eBook segment of the market keeps growing, so most of the players are mostly content, but I can’t help thinking it would be even bigger if we had just adopted a regular wholesale model across the board in the first place.

Amazonian Missteps

The Kindle is a great example of a product that was so good, and the marketplace so ready to adopt, that it was able to survive and prosper despite a variety of mistakes and missteps along the way.

To those who followed the Kindle early on, the first big issue was simply availability. Amazon sold out of the first batch of hardware pretty much immediately and the device was perpetually sold out for the next 5-6 months. On the one hand, that makes sound like the device was selling great, and I’m sure it was by most standards. But just imagine if they had been able to meet the demand. Might they have sold twice as many devices? Three times? We’ll never know, but maybe they would have sold enough units that the sales volume for those $9.99 new releases would have been high enough to keep the publishers happy.

When I said Amazon was short-sighted earlier, I meant that they should have planned for the day when there would be some real competition, and they should have realized that publishers would have the option of jumping ship when that day arrived.

Amazon seemed to be relying on the idea that increased sales volumes would ultimately make their $9.99 pricing more acceptable to publishers, but it doesn’t seem they had contingency plans in case that didn’t happen fast enough.

They almost certainly should have given publishers a bigger cut of that $9.99 price early on, as incentive to get with the program and push the platform.

One has to wonder where things would be now if Amazon had went with a more traditional wholesale model for all Kindle eBook pricing from the start. Maybe some people might have missed out on a few good $9.99 deals those first few years, but I think maybe we would have been better off in the long run.

Not All eBooks Are Created (or Priced) Equal

Oddly, or maybe not really so much, these pricing issues seem mostly confined to fiction and or major non-fiction like political commentary. It mostly seems to be books that come from the old, traditional publishing houses.

If you look at other categories of non-fiction books, like computer books, for example, it would appear that eBook versions are sold more or less through the basic wholesale model. And for the most part, the pricing makes sense. Most telling is the fact that you never see an eBook edition that is priced higher than a physical edition.

Why they can’t manage to do the same thing for other categories of book escapes me, except that I can’t help noticing that we have mostly old traditional publishers on one side of the equation, and mostly newer, more tech-savvy publishers on the other side. Hmm…

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February 27th, 2011 by Mike Fulton
Posted in Bookstores

Last week, Borders Books & Music announced that they were filing for bankruptcy and would be closing approximately 1/3 of their 600+ stores. While it’s a shame, it’s also not really a huge surprise. When you get right down to it, the situation with retail book sales is very similar to that of retail music sales, and most of the speciality music retail chains that were around 10 years ago have since disappeared.

I cannot pretend to know all the factors that ultimately contributed to the situation in which Borders finds itself, but there are a couple of things that keep coming to mind.

… & Music

I’ve always enjoyed shopping at Borders, but the one thought about their stores that keeps popping up over and over is how BIG most of their stores are. Sure, they vary in size, but even those which are relatively smaller are still pretty decent-sized. And in some cases, it simply doesn’t seem like the space is being used efficiently. Many of their stores are so HUGE so one would think that costs for things like rent, heating, and so forth, would be a rather significant part of their overhead.

Having a big store is not a problem as long as the items you keep on the floor are generating a good sales volume, but I’ve always been skeptical that this was the case for Borders.

Case in point is that Borders typically devotes a huge amount of floor space, perhaps as much as 40%-50% of the total, to the display of video and music. There’s nothing wrong with Borders wanting to sell these items, but they never really seemed serious about it, especially when it came to pricing. Yesterday I went to a local store which is included in the 200 that are being closed. I wanted to take advantage of the big clearance sale. I grabbed some magazines but didn’t see anything else that was discounted enough to make me buy it in paper format instead of eBook. While in the checkout line, I saw a copy of the movie Men Who Stare At Goats on BluRay. That’s not even a new release any more, but it was priced at $39.99, full list price. Who sells these at full list price? By comparison, Best Buy has it at $29.99, Fry’s Electronics is at $24.99, and Amazon has it for $20.99!

This sort of price difference has been typical, in my experience, for other BluRay and DVD videos. And it’s pretty much the same for Music on DVD or CD. Because of this, I cannot imagine any but the most ignorant or lazy of shoppers buying these items at Borders. If I’m right about that, it means that perhaps as much as half of their overall floor space in a typical location is generating only minimal income and losing money that has to be made up elsewhere. It also means that they were having to pay a lot of money for inventory and shipping on products that weren’t providing much return.

Note that this observation applies in large part to Barnes & Noble as well, although they don’t seem to devote quite as much floor space to music & video. My completely unscientific observation of the stores I personally frequent is that B&N also seems to generate more foot traffic, so maybe their sales volume supports it better.

Left At The eBook Starting Gate

Another thing that I’m sure is a factor in this equation is that Border’s has adopted a level of support for eBooks that is best described as “me too”.

Amazon has never had any retail stores, so they probably had, as a company, the fewest psychological hangups about integrating the sale of non-physical products into their business model. The effect of digital downloads on brick & mortar sales is simply not a factor for them. And even though they have their own dedicated hardware, they recognize that selling content is ultimately the point and have also created reader apps for most popular smartphones and desktop computer operating systems.

Barnes & Noble is mostly a brick & mortar company, but they’re also long-time rivals with Amazon for online book sales. Like Amazon, they were also quick to realize that digital distribution was coming to the bookselling world with as much force as it had a few years earlier with the music industry. Amazon may have beaten them to market with the Kindle reader, but B&N refused to simply stand back and let them have the market. In response, they jumped in with their own Nook reader. Like Amazon, they recognize that content is really the income generator, not the hardware, so they have also created reader apps for a variety of devices.

While both Amazon and Barnes & Noble have created reader apps for a variety of devices, they also recognize that having their own reader hardware is an important part of the overall message. This is where Borders steers a different path. They came late to the eBook party, and didn’t bring a date. Meaning that while they have started selling eBooks too, they don’t have their own dedicated reader hardware. Instead they support a variety of 3rd-party readers like the Kobo reader device, as well as models from other companies like Sony and Velocity Micro.

The Kobo hardware is pretty similar to both the Kindle and the Nook, and the user experience isn’t really all that much different. The Velocity Micro models offer color screens. The problem is that the lack of dedicated reader hardware means that Borders doesn’t have a singular focus point for their marketing efforts. If one hears “Kindle” or “Nook” there’s a pretty good chance you’ll think “Amazon” or “Barnes & Noble”, but if you hear “Kobo” or “Sony eReader” you simply don’t get the same association with Borders.

The Good News

The good news is that Borders has filed chapter 11, not chapter 13, meaning they’re planning to stick around. They are going to reorganize and try to turn things around. While they may be closing your favorite local store, they’re not going away altogether. I’m hoping they’ll figure out something that will help carry them forward into a more successful future.

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October 19th, 2010 by Mike Fulton
Posted in eBook Publishing

One of this year’s biggest new releases in the Fantasy genre is Towers of Midnight, the penultimate entry in the long-running Wheel Of Time series by Robert Jordan, due out in about two weeks. I first heard about this new release a month or so ago when I saw it listed on Amazon’s Kindle Books page. The Kindle version was shown as being available the same day as the release of the hardcover edition. Skip ahead to now, and it’s gone. It’s been pulled from Amazon’s site. I took a look over at Barnes & Noble’s site, and the Nook version has been pulled there too. The release date hasn’t just been pushed back… it now looks like there is no eBook edition coming at all.

Towers Of Midnight book is being published by Tor, which is a division of Macmillan. If you’ve been following this blog, you might start getting the idea that I’ve got some sort of thing for the Macmillan publishing company, because their name keeps coming up. Well, I don’t. At least, not on purpose. But the thing is, it seems like every single time I find out about some weird thing going on with a publisher and eBooks, it comes back to Macmillan.

Despite having originally announced the release date on their own website in addition to doing it through various retailers, I’ve yet to see any explanation from Tor about why the eBook version has been delayed or cancelled. Creating an eBook is not really that difficult, so it’s hard to imagine there could be any technical issue. In fact, the only reason that comes to mind for delaying an eBook version that’s already been announced as coming out the same day as the hardcover version is because Tor/Macmillan thinks that the sales of the eBook version will cut into the sales of the hardcover version.

Of course, they’re absolutely right about that. No question about it, sales of the eBook version would definitely cut into the sales of the hardcover version.

The REAL question is, since eBooks are more profitable than paper editions, why would Tor/Macmillan want to hold back the more profitable version in favor of the less profitable version?

The X factor is how many people will buy both versions, and how does that number change depending on which version is available first? But even here, it seems like there’s no good argument for holding back the eBook version. It may be true that some people who buy the eBook version will want a nice hardcover edition for their bookshelves, but I honestly can’t imagine that too many people who buy the hardcover edition and read it that way will be interested in getting an eBook version later. Once you’ve read the book, what’s the point? Sure, there are some people who will be interested in re-reading it over and over, and some of those will be willing to buy the eBook version for that purpose, but I’d have to think that they’re a pretty small percentage of the total.

I hate to repeat myself, but as long as Macmillan keeps repeating their goofiness it seems necessary. My guess is that Macmillan has taken the whole eBook side of the business and just kinda tacked it onto the side of how they normally do things — including their accounting practices. I would bet they’ve failed to correctly gauge how profitable eBooks really are because they’re factoring in various costs into the eBook profit equation that don’t really belong there.

The obvious example is the idea that they might factor in production costs of the paper edition and average them across other versions like eBooks. However, there’s less-obvious examples. Like marketing costs… a big percentage of marketing costs for a book like this are used for various point-of-sale displays that get setup in book stores. It’s hard to imagine these help sales of eBooks as much as they do sales of paper books, but if they’re averaging all the marketing costs across all editions, then it makes the paper version look MORE profitable and the eBook LESS.

The bad news is, it will probably take awhile for most publishers to figure out how to do these things correctly. Especially old-school publishers like Macmillan.

The good news is that writers are generally not stupid. As their existing publishing contracts expire, more and more of them will either start publishing eBooks directly or at least start insisting on publishers being more intelligent about it. Old-school publishers like Macmillan will either be forced to change how they do things, or they’ll fall behind newer publishers who aren’t stuck in the 19th century.

Addendum

I just got an email from Amazon telling me that my pre-order of the Kindle version of Towers of Midnight has been delayed by 11 months to October 1, 2011. No reason is provided… they just say “an unexpected delay has occurred in delivering the Kindle version of the book listed below“.

Frankly, it’s not all that unexpected to anybody who’s been following all the various crap that Macmillan has been pulling with regards to eBooks. Unfortunate. Ridiculous. But ultimately not really that unexpected, sadly.

We need to let Tor/Macmillan know that we’re not happy about this. Their website is http://us.macmillan.com. There are various email links there if you want to email them. You can also write them a real paper letter at:

Macmillan
175 Fifth Avenue
New York, NY 10010
(646) 307-5151

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