An American Editor

June 18, 2012

The Value of eBooks: Is $2.99 The New Value

One excuse the big publishers used for going to the agency model of pricing was that Amazon’s $9.99 price for certain bestsellers was undervaluing the books and would establish expectations in ebookers regarding maximum pricing. So, if that is true, how do these very same publishers justify putting certain ebooks on sale for $2.99 or less?

This question popped to mind when Little, Brown, a subsidiary of Hachette, put City of Veils by Zoe Ferraris on sale for $2.99. This is the second mystery book by Ferraris featuring the same Saudi Arabian investigative team. (Although this is not a review of the book, it is worth mentioning that it is a 5-star book that offers both a fascinating insight into Saudi culture and a great mystery.) City of Veils is neither the first nor the last ebook by one of the Agency 6 to be put on sale for $2.99 or less; such a sale seems to be a regular happening. (The first book in the series, Finding Nouf, is listed as discounted to $11.16 from the list price of $13.95, with neither price being a price I would pay for a fiction ebook.)

Which makes me wonder about the “value of ebooks” and whether we are seeing the erosion of price to where, eventually, Agency 6 fiction ebooks will be regularly priced at $7.99 or less and frequently on sale for $2.99 or less.

There has to be something magical about this $2.99 price point. Why $2.99 and not $4.99? Or $3.99? Both prices would be substantial discounts off the list price and even off the standard 20% to 25% discount price. I suspect the answer lies in what experience is rapidly showing as the price point for maximizing volume of sales. I also suspect that publishers are finding that ebookers are unwilling to pay more than $2.99 for an introduction to a previously unknown author. Yet, I don’t see any evidence that after the introduction to a new author, ebookers are running to spend $11+ for other ebooks by the same author — I know I am not.

But regardless of the motivation, isn’t this $2.99 price point setting an expectation among ebookers as to what the correct price for an ebook should be? I find that it cements my belief that ebooks should be both DRM-free (which Tor, a Macmillan subsidiary, will be doing shortly) and list priced at no more than $5.99 and frequently discounted to $2.99 (or less). These Agency 6 discounts are also cementing my belief that I will only rarely pay more than $2.99 for any ebook.

The price point problem is exacerbated by other steps publishers are taking. I recently preordered Spycatcher with a bonus excerpt by Matthew Dunn, published by HarperCollins, one of the Agency 6, for 99¢. (The bonus excerpt is from Dunn’s forthcoming new novel Sentinel, which can be preordered for a whopping $12.99!) At the same time, Spycatcher without the bonus excerpt is available for $9.99. This type of discounting with bonus material included happens regularly. My question to publishers is this: Why would I ever consider buying Sentinel for $12.99 or Spycatcher for $9.99 — neither book nor the author being previously familiar to me — when I expect that at some future date I will be able to buy them for significantly less?  Doesn’t your offering one of the books for 99¢ create an expectation in me, the ebooker? And even if I can’t buy them in the future for $2.99 or less, why would I buy them at all — regardless of how good a read the introductory book is — at a price that has already demonstrated as far too high?

If there is any validity to the complaint of Amazon’s $9.99 price point setting consumer expectations at a price that is unsustainable by the publishing industry, how are publishers fighting that expectation by offering ebooks for $2.99 or less? Why is the publisher’s tactic sustainable but not Amazon’s?

Valuing of ebooks is difficult. Yes, there are costs that can be objectively measured but those per-unit costs diminish with volume sales. I grant that each ebook cannot be looked at in isolation as best-selling ebooks need to subsidize those that do not sell well so that overall there is an industry profit. Yet, where previously the argument was that no ebook should be sold below a price that sustained the industry, which price was somewhere north of $9.99, Agency 6 publishers belie that argument by demonstrating that at least some ebooks can be sold for significantly less without damaging the industry. That action reraises the issue of what is an ebook worth?

The industry has put itself into a straitjacket of its own making. Originally publishers planned to window ebooks. Windowing of ebooks allegedly would let publishers subsequently publish the ebook version of a pbook at much reduced price, more in line with ebooker expectations. But after much protesting from ebookers, publishers ultimately went to simultaneous release. Unfortunately, with simultaneous release, publishers decided they could not price the ebook much lower than the pbook for fear of cannibalizing pbook sales, losing money, and devaluing the book.

Then to shore up the value of ebooks, agency pricing was instituted. It was touted as necessary for the health of the publishing industry — from author to publisher. Now, within the past year, these same publishers are regularly pricing some ebooks at $2.99 or less, shattering the justification for the higher agency pricing.

In the end, I think publishers will find that $2.99 is the magic price point for ebooks. The combination of the self-publishing phenomenon that ebooks have produced, the use of the $2.99-or-less price point by self-publishers, and the apparent willingness of at least some of the Big 6 publishers to discount ebooks — even if for just a limited time — to that price point, will create an expectation in ebookers that publishers will be unable to combat. We may be a few years away from seeing that magic price point, but I suspect it is coming on fast.

April 23, 2012

The Department of Justice vs. eBooks II

As I noted in the first part of this article (see The Department of Justice vs. eBooks I), the settlement proposed by the DOJ raises a lot of issues but doesn’t attack the central premise that agency pricing is okay.

I mentioned in part I that publishers could raise the list/wholesale prices of not-yet-published ebooks. But there is another option that could prove to be even more effective: Publishers are not obligated to give ebooksellers a 50% or higher discount as the wholesale price. Publishers could limit the wholesale discount to 30%, which would reflect the current 70-30 split that comes from agency pricing.

And there is nothing preventing publishers from limiting the format that an ebook can be sold in.

The point is, publishers do not have to think of themselves as helpless. I expect publishers will look at the situation as if they are helpless. They aren’t, but they need to be creative, something they are not known for. As the current debacle demonstrates, publishers are being led, they are not leading.

Let us not forget that the settlement proposed by the DOJ effectively separates book sales into two distinct markets: pbooks and ebooks. This could be important because one of the reasons the publishers gave for agency pricing is that they want to keep the brick and mortar stores alive. (It is worth noting that recent data show that even with the growth of ebooks, pbooks sales still account for 80% of all book sales.)

Well, the b&m stores rely on pbook sales, not ebook sales. Even Barnes & Noble relies on pbook sales. The only major bookseller of pbooks that doesn’t have b&m storefronts is Amazon. If publishers want to help ensure that the b&m stores continue to be competitors to Amazon, the simple way to do so is to not only insist that every bookseller get the same wholesale discount (there is no law that requires volume discounting) but then to supplement the b&m stores with higher co-op payments for displays, which would enable them to have additional funds for discounting to compete pricewise with Amazon.

The law requires that similar parties be treated similarly. So if Amazon wanted co-op money, it would have to open b&m stores. In other words, publishers could help level the playing field without straying from the requirements of the DOJ settlement.

It has been stated on numerous blogs and forums that the key to fighting Amazon is to do away with DRM. Without DRM, people would navigate to the ebookseller with the best pricing and service. I do not think that is true in the absence of devices that can handle different formats. Most Kindle owners will continue to shop at Amazon because Kindles can’t handle ePub in the absence of conversion and side loading. Similarly, Nooks can’t handle Amazon’s proprietary format without conversion and side loading. The question isn’t whether converting and side loading are hard to do — they aren’t — but whether most ebookers would do so to save a dollar or two. I think not.

What Kindlers and Nookers always cite in defense of buying from Amazon or B&N, respectively, is the ease of buying and then seeing their purchase appear on their device effortlessly. Right now they could buy a lot of the indie books that they buy at Smashwords in the DRM-free format of their choice. But they don’t because then they would have to side load the ebooks; they aren’t automatically loaded onto their device. Why would habits change?

Ultimately, the real keys to ensuring competition remains are a single, uniform format that is device agnostic (and if DRM must be, then the DRM also be uniform) and agency pricing.

I can hear the uproar as I write about agency pricing, but consider that many of the electronic items we buy are either agency priced or have the same effect through resale price maintenance agreements. Every ad I see for an Apple iPad gives the same price. Every ad I see for a Kindle Touch lists the same price. Yet no one complains that there is no price competition for these items (where is the DOJ’s proconsumer department in these cases?); the complaints are all directed at ebooks.

Of course, the answer is that Kindles don’t compete with Kindles, they compete with Nooks and each vendor independently decided to set the prices. But it is the blind person who fails to see that there is really no difference in effect for the consumer and the purpose of the antitrust laws, ultimately, is to protect competition for the benefit of consumers. Whereas the DOJ recognizes that the Kindle and the Nook are not the same, it insists that the Stephen King and the Dean Koontz novels are the same, at least in book form.

And if the DOJ were really focusing on the effect on the consumer, it would take a look at the various formats and DRM schemes that lock most consumers into a particular eco system. How much more anticompetitive can one be than to capture an audience and make it difficult for them to stray elsewhere?

Here is another question: Where are the authors in this dogfight? The Author’s Guild has come out against the DOJ settlement, but where are the indie authors? Based on comments I read elsewhere, most indie authors are pleased by the settlement because it will make Amazon even stronger and the majority of their sales are at Amazon.

In the short-term view, the stronger Amazon is, the better it is for the indie author. But is that true for the long-term? I can only speculate, but based on Amazon’s attempting to squeeze publishers for more money, I think it is fair to expect that eventually it will turn to squeezing indie authors. The more dependant an indie author is on Amazon, the less the indie author can refuse whatever terms Amazon wishes to impose. And it must be remembered that Amazon owes its obligations to itself and its shareholders, not to its suppliers. Amazon is the Walmart of ebooks.

There is also one other potential negative effect to the settlement. If Amazon succeeds in establishing the $9.99 price point, indie authors who have not yet found a large audience for their books will be squeezed into even lower pricing than currently. More of their ebooks will be priced at 99¢ and free because the reading public will not see them as being worth more when one can by the well-established and well-known author for $9.99 or less.

How this will all turn out is of great interest to me. I am pleased that Macmillan and Penguin have the moxie to fight the DOJ settlement, as I do not think the settlement is in anyone’s best interest over the long-term. It may be of benefit over the short-term, but somewhere along the continuum, in the not-so-distant future, publishers, authors, and consumers will face a different reality.

What do you think?

April 18, 2012

The Department of Justice vs. eBooks I

As most of you already know, the U.S. Department of Justice (DOJ) has filed a lawsuit against Apple and 5 of the Big 6 publishers alleging collusion in the establishment of agency pricy pricing (see “Justice Dept. Sues Apple and Publishers Over E-Book Pricing; 3 Publishers Settle”). In several of the forums I participate in, ebookers are celebrating the expected lower ebook prices.

Yet, there are several things worth thinking about and noting. First, Random House, one of the Big 6 publishers, and Smashwords, the leading indie author distributor, both of which have agency pricing, are not named defendants in the DOJ lawsuit. That signals to me that the problem is not with agency pricing, but with the collusion aspects.

Second, the 3 publishers that settled with the DOJ, which settlement, it is worth noting, is not effective until approved by a court, are restricted from instituting agency pricing for 2 years, after which they can reassert agency pricing as long as they don’t agree over dinner to do so. This, too, indicates to me that agency pricing is not contrary to the law or necessarily thought to be anticonsumer by the DOJ.

The third notable matter is that the publisher with the greatest moxie, the one that first stood up to Amazon, Macmillan, is not settling with the DOJ and intends to fight, as do Penguin and Apple. That means that the DOJ case is not so strong that it cannot fail once tested. And should it fail, so will the settlement agreements with the 3 settlers fail. It appears that in Macmillan’s case, CEO John Sargent is alleged to have attended only 1 meeting with his fellow CEOs, which means that the DOJ will have to demonstrate that it was at that meeting that the collusion occurred, not an easy task unless the settlers will testify that that is when the collusion came to fruition and that Sargent was present when the decision was made. Hachette, one of the settlers, claims there was no collusion, so it makes me wonder how the DOJ will sustain its burden of proof. Allegations are one thing, proof is another. Simply that there was an opportunity to collude doesn’t prove there was collusion.

There are other problems with the lawsuit. It has been too many years since I last practiced antitrust law (last time was nearly 30 years ago), so I’m not current on the state of the law and I admit that I’m not sure exactly what the DOJ must prove to prevail, but it is clear to me that the Republican-dominated U.S. Supreme Court doesn’t look favorably on these lawsuits. It was a Republican court that upheld resale price maintenance agreements, which has the same effect — setting a floor price below which goods cannot be sold — as the agency pricing system.

An interesting legal question, which may or may not be relevant to the DOJ lawsuit, is this: What constitutes the market? If all ebooks constitute the market, then ebooks are interchangeable commodities, an idea that is resisted by publishers and authors and even by many consumers. If the market is an individual title because you cannot substitute Dean Koontz for Stephen King, then wouldn’t the DOJ have to prove collusion among publishers to set the price for Stephen King, not collusion to set the mechanism for pricing of all ebooks? Of course, there are numerous variables to the market scenario, but they make for a fascinating legal chess game.

But all of this aside, the bottom line is that agency pricing is not illegal even in the eyes of the DOJ. Which leaves a lot of questions. For example, will Random House abandon agency pricing or continue with it? What about Smashwords? (Smashwords has already announced it will retain agency pricing and oppose the settlement agreement during the comment period.)

A more important question is this: Several of the Big 6 have — so far — refused to sign renewal contracts with Amazon because of demands made by Amazon. In the absence of agency pricing, will some or all of the Big 6 refuse to renew agreements with Amazon? Would such a refusal affect both pbooks and ebooks or just ebooks? If they do not renew the agreement, what can Amazon do about it?

The settlement agreement says that publishers cannot prevent a retailer from discounting the publishers ebooks except that it can require the retailer to make a profit across the publisher’s line. I find that an interesting proviso. Consider how secretive Amazon has been about how many ebooks it really has been selling. Amazon has only been forthcoming with broad numbers and in a few cases announcing that an author has joined the millions club. Will Amazon, who is not a party to the proceedings, voluntarily share sales information? I doubt it.

Yet the sharing of that information is necessary to make the exception meaningful. If the wholesale price, that is, the price the ebooksellers have to pay the publisher, of the new James Patterson ebook novel is $13 and Amazon sells it for $10 and sells 1 million ebook copies for a $3 million loss, somehow Amazon must sell enough other books in that publisher’s line to overcome the loss. How is that going to work?

Will Amazon offer the first 10,000 units of Patterson’s ebook for $10, the next 10,000 units for $16, the next 10,000 units for $13, and so on? Customers will be thrilled. Especially if they can buy the same ebook someplace else for $13 when Amazon wants $16.

Another problem with the settlement is that it does not — and cannot — establish a wholesale price for not-yet-published books. The DOJ could say that current agency-priced ebo0ks’ wholesale price is 70% of the current agency price, because that is what the publisher has been willing to accept. But what about future ebooks? The DOJ is not in a position to dictate individual pricing, so there is no reason why publishers cannot raise list prices to $30 and set wholesale prices at $15. The settlement speaks to discounting, not to setting of wholesale price.

There is more to say, but it needs to be said in another installment of this article, so this will be continued in my next post.

April 11, 2012

The Amazon Conundrum: Competition in eBooks

On several forums that I visit, there has been ongoing discussion about Amazon and monopolies and how no one need worry because if Amazon were a monopoly and did raise prices, a new competitor would instantly appear. The discussions often also evolved to criticising anti-Amazon posters for not having a solution to the problem, just whining about the problem.

I think those who do not see a potential problem with an Amazon ebook monopoly for authors, publishers, and consumers are simply fooling themselves. The ebook market is not like the TV market. Unlike TVs which all meet certain standards so that a Sony can be substituted for a Samsung, which can be substituted for a Panasonic, ebooks do not meet a set of standards and a Kindle-compliant ebook cannot be substituted for an ePub-compliant ebook without some finagling and without removing any DRM.

Consequently, should Amazon drive out of the ebook business its primary national competitors, the likelihood of someone coming along and overnight becoming a major competitor is nearly nil. Consider the cost of duplicating Amazon’s already-in-place infrastructure. Plus, how would a new competitor break the Amazon eco system? The only way competition might have a chance at surviving would be with Department of Justice intervention.

Picture the ebook marketplace with Sony, Apple, Kobo, and Barnes & Noble gone, leaving just Amazon. If Amazon raised its pricing to insure profitability (or, alternatively, followed the Walmart practice and instead kept pricing stable but squeezed authors and publishers), what could be done about it? Not much. To say that a new competitor would see an opportunity and exploit it is naive.

The new competitor would have to build a business from the ground up. How likely is it that Amazon would sit back for a few years to give such a company a chance to gain a foothold? How likely is it that venture capitalists would be willing to fund the necessary billions for such a venture? And if the new competitor was ebook focused, for how long do you think they could underprice Amazon? Remember that Amazon has other, well-established divisions that could support a money-losing book division, something that a new competitor wouldn’t have.

To think that with the fall of the current crop of competitors new competitors would rise that could compete with Amazon nationally is simply wishful thinking with no basis in reality. The response is that Walmart didn’t raise prices, but ignores that Walmart has strong national competition in companies like Costco, Kmart, and Target — once you eliminate Sony, Kobo, and B&N, Amazon doesn’t. Apple is currently a weak ebook competitor and no one thinks much of the Google ebookstore’s competitive status.

This problem with Amazon was brought about originally by publishers who didn’t look beyond their noses when giving Amazon significant product discounts in the early years. The problem is being compounded by the same publishers’ inaction and by authors scrambling to join the Amazon exclusivity club. If publishers and authors do not take steps to halt the rise of Amazon, there soon will be no outlet but Amazon for national exposure.

The question is what can publishers and authors do? For authors, the only option is not to give Amazon exclusivity and to actively promote other ebookstores where their books can be found. If you promote Amazon primarily, you are feeding the problem, not starving it.

Publishers really are in the stronger position to halt Amazon’s dominance; they just lack the willpower to do more than whine. Agency pricing (which is legal; the Department of Justice is investigating whether there was collusion to impose agency pricing, not whether agency pricing itself is legal) was a first step but as done by publishers, insufficient.

What really needs to be done is for publishers to decide that their ebooks can only be sold in the ePub format and only with Adobe adept DRM (i.e., essentially social DRM like B&N uses). Once you break the Amazon closed eco system, everyone can compete on the same terms. Combine this with correct agency pricing, and the playing field becomes perfectly level. Now ebooksellers will have to compete on other factors, such as customer service.

If Sony’s ebookstore went under, it would go under because of other factors, factors that were within its control, rather than because of format wars.

The forcing of ePub and one type of DRM doesn’t directly address the exclusivity problem, but it could do so obliquely. If competitors to Amazon began to increase market share, the incentive to be Amazon exclusive would diminish.

One other thing to consider: I see no reason why, now that Amazon is a direct competitor of traditional publishers — it has established its own publishing houses to sign on authors for Amazon exclusives — traditional publishers can’t simply refuse to sell their books — both p and e — to Amazon. It seems to me to be illogical to require them to provide the means to fund their own funerals.

The longer the publishers dawdle in taking action against Amazon, the more power they devolve to Amazon. The point will soon arrive when publishers will be able to take no effective action against Amazon and we will be writing their obituaries.

The same is true of authors who sign up for Amazon exclusivity and who promote Amazon. There will soon come a time when the only game in town will be Amazon and you will be at Amazon’s mercy. You will find that no one will stand beside you should you decide to fight at that late point in time — publishers won’t because they will be powerless; consumers won’t because all they are interested in is lowest available price; other ebooksellers won’t because they will be nonexistent.

The time to fight to prevent monopolization of the ebook marketplace is now. The way to do it is to encourage publishers to only permit the sale of their ebooks in ePub format with a standard DRM and for authors to not give Amazon exclusivity. In the absence of such action, we can wear the lemming label.

October 24, 2011

How Do You Do It? Amazon vs. Publishers (I)

I have been following the story regarding Amazon’s foray into publishing. It reminded me of an old (early 1960s) hit by Gerry and the Pacemakers called How Do You Do It? So let’s set the question with Gerry and the Pacemakers.

As the song asks and says, “If I only knew, I’d do it to you.” And that is the crux of the matter in the latest nose thumbing by Amazon.

If publishers cannot figure out what is happening, cannot see the upheaval that is coming, then perhaps they should fold their tents and slither away in the night.

The truth is that the publishers do have an ultimate weapon, a “nuclear bomb” so to speak, at their disposal if they are willing to stand up and use it now, before it is too late.

It is clear that the future lies in ebooks. eBook sales are growing, paperback sales are declining, and hardcover sales seem to be remaining steady. Although I think publishers should begin to pull the rug out from under paperbacks, perhaps it is too soon. But the one thing that it isn’t too soon for is to put an end to the ebook format war.

By format war, I mean both the underlying format and the DRM wrapper. It is time for publishers to go the route of DVD producers and enact a single standard that all ebooks adhere to and that all retailers must abide by. Doing that now is the only way to tame the Amazon tiger.

In no other field has a retailer been able to set its own standard. If you notice, the DVDs that Amazon sells, just like the TVs it sells, adhere to the same format and copy protection scheme as those sold by Best Buy, Barnes & Noble, Walmart, and any retailer you can name — but not ebooks. In ebooks, we have two different formats — ePub for everyone except Amazon; mobi or a derivative for Amazon — and multiple copy protection schemes — a base Adobe DRM for everyone except Amazon; a proprietary scheme for Amazon.

Now that Amazon has decided to challenge publishers at their own game and has begun signing authors to Amazon exclusives, the publishers need to strike back while they can. For now, as Amazon’s dispute with Macmillan over agency demonstrated, Amazon needs the publishers more than the publishers need Amazon. Yes, Amazon has the largest market share, but that can be changed. Publishers need only to find some backbone.

Once Amazon starts signing frontlist authors to exclusive contracts, publishers will be in trouble. The way to head that off is to make it mandatory that every bookseller sell ebooks only in ePub and only with a standard DRM scheme. Doesn’t matter what the DRM wrapper is as long as everyone uses it, just like it doesn’t matter what the copy protection scheme is for DVDs because everyone is using it.

Amazon is at its most vulnerable now. That status vulnerability will change, eventually disappearing, as Amazon expands its publishing base. Amazon will become a vertically integrated company that handles ebooks from beginning to end. When that occurs, there will be no need for the traditional publisher and other bookstores will be at Amazon’s mercy.

Yet it is now that publishers can act to preserve themselves and bookstores by simply leveling the playing field. Just as publishers were able to force feed Amazon the agency system, they can modify that agency system to require that ebooks be sold in ePub with a publisher-approved DRM wrapper. Amazon needs content to survive and it is in the process of developing its own content. Because it is just starting the process, now is the time to strike.

Following this path has one other benefit. It will allow the publishers to create the ebook version themselves and be sure that errors aren’t introduced in Amazon’s conversion process (or if there are errors, that they appear universally in all ebookseller versions). Of course, this would mean that publishers would need to proofread and edit, but there is always hope that they might do so. This would just be an incentive to do so.

Alas, I expect publishers to wring their hands, palpably worry about their future, and do nothing. Their past practice indicates that they always do too little too late, and there is no reason to expect otherwise now, even though they can see their future demise if they open their eyes.

September 22, 2011

The Survey Gives a Lesson?

A few days ago, Harris Interactive released the results of a survey on ebookers and ereaders (see “One in Six Americans Now Use E-Reader with One in Six Likely to Purchase in Next Six Months”). Personally, I didn’t find the results unexpected because, as I’ve noted in previous articles, the survey results simply mimic my own habits.

The survey omits some important questions and definitions – for example, how many of the “purchased” ebooks were freebies — but it does highlight two important trends: first, that electronic reading is here to stay, and second, that smart publishers will jump on the ebook reading trend with both feet and both arms rather than toe by toe.

The survey spoke a lesson to me. Well, not really a lesson, I suppose, but it made me immediately think: If I were a publisher, how can I harness this increased interest in reading volume? That’s the real issue: the volume.

If I were a publisher, I would start thinking about how I can increase the number of ereading devices in use because there is a clear correlation between the growth in devices and the growth in number of books read and purchased in a year. If I were a publisher, I would also start thinking about how I can open — not further close or constrict — the ebook eco system.

Publishers have learned neither the lesson of the music industry nor of their own foray into agency pricing. The absolute worst thing that can happen as ebook reading expands geometrically, is for most of that expansion to occur at Amazon. The more dependant ebookers become on the Amazon eco system, the more power Amazon will be able to exert over pricing, taking us back to where we were before agency pricing. With the Harris results in front of them, publishers should be thinking about how to combat the Amazon eco system before they can’t.

That was the lesson that the music industry didn’t learn when it didn’t combat the iTunes eco system early enough, focusing instead on the Napsters of the world. Apple is really just a more sophisticated Napster, smart enough to throw some placating crumbs the music industry’s way. Now the music industry is at Apple’s mercy; soon publishers will be at Amazon’s mercy, at least in the United States, which remains the largest book market.

One thing publishers could do is agree on a standard format that every book would have to be “created” and sold in. Publishers could say that their books can only be sold in ePub format and with a standardized DRM. Doing so would best serve consumers even if it would make competition among booksellers more keen. This would probably cause some near-term drop in revenue for publishers, but in the end it would give publishers better control over the marketplace. It would also work to eliminate the possibility of one retailer becoming so dominant that it could dictate terms to the publishers.

If every reading device was able to read a particular book, consumers wouldn’t care where they bought the book unless there was a price differential. The Stephen King bought from Amazon is no different, content-wise, from the same title bought from Barnes & Noble.

Publishers need to demonstrate some gumption and adopt such an approach while they still can. As Amazon and B&N grow their own publishing services, they will be able to feed their own eco systems. At some point, authors will care more about being in the right eco system than about being with a traditional publisher. When that point is reached, Amazon wins and the publishers lose — game over!

From a consumer perspective, the sad thing is that Amazon holds all the cards because it is willing to lose money today to rake it in tomorrow, whereas publishers are so conservative and turtlesque, the value of the cards they do hold decreases by the minute. Consumers would be significantly better off with a standardized format and DRM than the current system, just as was the case when the Betamax vs. VHS war ended with a single standard.

And the time for publishers to act is now before the growth of ebook devices and ebook purchasing stabilizes. The more mature the market and the more a single vendor owns a large portion of the mature market, the more difficult it is to make changes.

But then, perhaps the real intent of publishers is simply to rollover for Amazon and hope for the best. I guess we’ll know the answer in the not-too-distant future.

May 16, 2011

The Buying Conundrum: pBook or eBook?

In a recent post on the Teleread blog, Joanna, a contributor to Teleread, vented about being tired of pbooker’s “economic snobbery.” She wrote,

If you read any ‘ebooks versus print books’ article, you’ll soon come across the print fetishists. These are people who acknowledge the rise of ebooks—grudgingly—but then insist that ‘real’ book lovers surely prefer paper, or that paper is ‘nicer’ or a ‘better experience’ or in some way superior. I am starting to get really annoyed with these people! Overlooking the obvious ‘print and pixel really can co-exist and there is no need for an either/or mentality’ argument, I am starting to grow a little offended by the economic snobbery that I perceive in some of these arguments.

What I think a lot of these ‘paper is superior’ people fail to consider is that even in this modern day and age, having a large paper library is still an economic luxury.

(For Joanna’s complete post and the comments it generated, see Print Fetishism, Economic Snobs and the Price of Real Estate at Teleread.)

Needless to say, I couldn’t keep my fingers off my keyboard and so I wrote a response. But after thinking about it, I decided that a more expansive response here at An American Editor might be appropriate, so here it is.

Joanna essentially makes a generational argument. She is in the same generation as my children, those just starting their careers or a few years into it, whereas I am at the other end of the spectrum. I agree that this makes (or should make) a difference from the financial perspective. But that has always and will always be the case.

When I was Joanna’s age, decades ago, I learned to prioritize how my money was spent. At her age, I didn’t make a fortune and had to decide between, say, spending a few dollars to see a movie or to buy a book or not spending it at all. Yet even in those hard-pressed days, when I lived in a studio apartment whose rent surpassed 50% of my net income, I bought books. Unlike spending money to watch a movie, I never considered book buying to be frivolous — reading was (and is) the primary method for learning.

I am not dismissive of the economic woes and realities of my children’s generation, but everything has to be dealt with in perspective. I remember my parents, for example, paying a mortgage of $30 a month, at a time when they earned only $15 a week. Gas also cost less than 25 cents a gallon, the New York Times was a nickel, you could buy a Coke for 5¢, and so it went — and the take home pay reflected that cost of living. I don’t know anyone today who has a mortgage or rent of $30 a month!

Of course, in those days, ebooks existed only in the imagination of science fiction writers. Personal computers hadn’t yet come on the scene and the Internet, as we know it today, didn’t exist. To buy a hardcover book required a significant investment. In proportion to earnings, hardcover books were luxury items back then and a bargain today. Paperbacks were the “poor person’s” access to literature. How things have changed with the passing decades.

eBooks are the next step in the evolution of personal libraries. Some day — but not today — pbooks will be a true luxury item and part of antiquity. Someone will recall them but be unable to produce in hand an example.

eBooks have lots of benefits for readers today, but not financially. Yes, they are the way to build a collection when you are hard pressed for real estate to house a pbook library, but that problem existed 25 years ago, 50 years ago, 100 years ago — some people had homes large enough to house vast libraries whereas others lived in cramped studio apartments, some less than 100 square feet in size with everything communal but sleeping quarters. Yet, people read, bought books, and endured. And they learned to love the pbook, especially the paperback, which brought reading to the masses by making it more affordable.

I admit I actually prefer ebooks to pbooks for reading. If I could, I would buy every nonfiction book that I buy in hardcover also in ebook form so that the hardcover could go on my library shelf and I could read the ebook. But pbooks do have seven things that ebooks currently do not have:

  1. When I buy a pbook, I own it; when I buy an ebook, I rent it.
  2. pBooks are resaleable on a secondary market and/or rise in value as they become scarce; ebooks are never scarce and have no secondary market in which I can recoup some of my investment.
  3. Nonfiction pbooks tend to be less expensive to purchase than the ebook version and are available for significantly less on the legal secondary market, which includes the legal remainders market.
  4. pBooks can legally be cooperatively bought, thereby reducing the price to individuals even further (I have bought in cooperation with my son several books over the years that we have shared the purchase cost of).
  5. My pbooks can be lent to other readers innumerable times; if I’m lucky, an ebook can be lent once for 2 weeks to another reader (after being lent that one time, the ebook cannot be lent again to anyone).
  6. Once I buy a pbook it remains mine; unlike the ebook, no one can remotely remove the pbook, replace the pbook, or do anything that interferes with my ownership of the pbook.
  7. As my collection of hardcovers grows, I, too, may run into the space situation. At that point, I can reevaluate my pbooks and remove some from my collection, and I either sell them on the secondary market (see 3) or, more likely, I can donate them to my local library, which is happy to obtain them as they are in pristine condition, giving me a charitable contribution deduction on my taxes at the fair market value, which is the average price in the used book market. I can’t sell or donate no-longer-wanted ebooks to anyone, let alone to my local library.

The day when ebooks have a universal format and DRM scheme, like videos do, some of these pbook advantages will disappear. But at least from a purely economic perspective, pbooks — at least those from the Agency 6 — have a greater economic value and are a better bargain than ebooks. eBooks shine on portability and ease of reading on the electronic device, but that’s about it — ebooks often cost more, sometimes much more, than the hardcover, so from an economic viewpoint, ebooks are no bargain.

It seems to me that the person struggling with finances would be better off buying a pbook version than an ebook version of an Agency 6 publication. The initial cost and the subsequent ability to recoup some of that cost seems to me to create an unbeatable combination for the frugal. Of course, free and low-priced indie ebooks change the calculation, but then those aren’t the pbooks I buy.

Joanna is right only in the sense that real-estate challenged readers have a hurdle to face and overcome with pbooks that they do not have with ebooks — the storage problem – but she loses the argument when she dresses the problem in economic terms. For the real-estate challenged reader whose disposable income is limited, the person Joanna describes, buying less-expensive pbooks is a better deal than buying the ebook because the pbook can be read and then sold on the secondary market. No need to tie up valuable real estate with a pbook collection, plus you pay less to begin with.

Seems to me rather than being peeved at those of us who still like pbooks, she should be thinking about how to maximize her purchasing power by buying and reselling pbooks. (I will concede, however, that once we move away from the Agency 6 and from the economic issues, ebooks are the better choice.)

May 4, 2011

In the Era of eBooks, What Is a Book Worth? (III)

Discussion among commenters regarding the prior two installments of this series, In the Era of eBooks, What Is a Book Worth? (I) and In the Era of eBooks, What Is a Book Worth? (II), continue to focus on interchangeability of authors, with some commenters agreeing with the idea and others (the majority) disagreeing.

I don’t intend to rehash this argument in this final installment, but I would refer readers to On Books: Murder Down Under, in which I review the mysteries of Australian author Vicki Tyley, as an example of an indie author who I consider the equivalent or near-equivalent of some well-known traditionally published mystery writers. Similarly, I would refer readers to On Books: The Promises to Keep Quartet, in which I review Shayne Parkinson’s ebooks. Parkinson is another indie author who I consider the equivalent or near-equivalent of some well-known traditionally published historical fiction writers.

I will note, however, that if authors are not interchangeable, then ebookers are buying a unique, potentially scarce, commodity that is not replicable in the marketplace, justifying high pricing. Additionally, as a unique item, there is no reason why pricing shouldn’t be even higher. In fact, it might be worthwhile for publishers to create an artificial scarcity by limiting the number of ebook versions of a particular novel that can be sold, which, when combined with the lack of author interchangeability, could drive pricing even higher.

However, because I do find authors to be interchangeable, in this final installment I will attempt to determine just where in the continuum of book pricing ebooks should fall.

The publishing business, until recently, began with the hardcover. Publishers set a suggested retail price against which they charged booksellers a wholesale price. Until the advent of discounting of books about 50 years ago, booksellers sold the hardcovers at the suggested price. But to publishers, the selling price didn’t — and continues not to — matter much. Regardless of how much a hardcover is discounted, the publisher gets a “fixed” wholesale price. If the wholesale discount is 50%, the bookseller pays the publisher $15 on a suggested retail price of $30; the bookseller then retails the hardcover for any price between 1¢ and $30 (or more), either making or losing money on the sale.

The fly in the publisher’s ointment, however, has been and continues to be returns (see, e.g., It’s Raining, It’s Pouring: Returns in an eBook Age and A Modest Proposal: A 21st Century Publishing Model). When setting the price for a hardcover edition, the publisher needs to consider myriad costs, including returns of unsold copies. Although not a perfect science, production and return costs of the hardcover can justify the hardcover’s pricing, at least to a reasonable extent.

In addition to the hardcover production and return costs, it is the hardcover sales — because it is traditionally the first available edition of a book — where the publisher tries to recoup all of its expenses plus make a profit. The publishing of a paperback version, traditionally, was for long-tail profits.

An interesting thing about print book pricing is that publishers recognize — and have recognized for decades — that even though the production and return costs of paperbacks and hardcovers are quite similar, the publisher cannot charge readers who buy the paperback the same price, or even close to the same price, as is charged for the hardcover. The gap, which is better described as a chasm, between hardcover and paperback is enormous, with the paperback often having a suggested retail price as little as 20% to 25% of the hardcover’s suggested price, and selling for about 50% of the discounted hardcover’s real selling price.

Yet with these enormous differentials staring them in the face, publishers are satisfied — until it comes to ebooks. Suddenly, then, the perspective changes and discounted pricing is a bugaboo because it threatens to “devalue” books.

There is no sense in repeating all the things (and the arguments pro and con) that differentiate ebooks from print books, such as restrictive licensing (lease vs. own), DRM, reproduction costs, warehousing costs, no returns, etc. It suffices to say that whereas publishers see no devaluing of print books that we own and can freely disseminate and even resell when print books are discounted, they see devaluing in discounting ebooks, even though we cannot do any of the same things legally.

With interchangeability of authors, a no-returns policy (i.e., no consumer returns and no ebookstore returns), and the DRM-imposed restrictions on ebooks, there is no justification for pricing an ebook above the price set for the lowest suggested retail price for the paperback version. In the era of ebooks, an ebook is not worth more than a paperback; if anything, it is worth less.

It is worth less because the only thing an ebook provides that a paperback or a hardcover version do not is portability convenience. Once that is eliminated from the equation, an ebook provides nothing else that is superior to the print version. In fact, I’d daresay everything else is inferior. Certainly, quality control is inferior and when I buy a print version that is riddled with errors, I can return it to the bookstore, which can return it for credit to the publisher — something that cannot occur with ebooks as there is nothing to return.

If scarcity were a factor, as it can be with print books; if resale value were a factor, as it can be with print books; if the marketplace set the final retail price, as is the case with print books; if authors weren’t interchangeable; if I could lend an ebook as often as I wanted to whomever I wanted, as freely as I can with print books; if quality control for ebooks equalled that of print books, or even came close; if I owned an ebook like I own a print book; if myriad other advantages of print books were at least nearly approached with ebooks, then higher pricing would be justifiable — but they aren’t and it isn’t.

In fact, what has occurred is just what publishers feared: books have become devalued. But the devaluation has come about as a result of the absurd ebook pricing instituted by publishers, notably the Agency 6. Whereas before readers like me would willingly buy print books at relatively high prices, largely because we saw some value in doing so, we have now been converted to ebooks and are shopping for books at the under $4.99, and often free, price point.

Publishers fought the $9.99 bestseller price that Amazon tried to impose. But what they failed to recognize was that the $9.99 price point was applied to a limited number of ebooks and because ebookers were psychologically happy with that price point, they also bought, without much complaint, ebooks at higher price points — ebookers didn’t actively restrict themselves to ebooks that did not exceed a significantly lower price point. The imposition of agency pricing by the Agency 6 altered buying habits. Now instead of being satisfied with a $9.99 price point, many ebookers, such as myself, have set a significantly lower price point and actively look for ebooks that do not exceed that price point. For us author interchangeability is fact. Whereas before I might have bought a Stephen King novel, now I ignore King and find low-price equivalents, of which there are many. Similarly, I buy Vicki Tyley mysteries rather than mysteries by P.D. James or Martha Grimes, and I buy Shayne Parkinson historical novels rather than those written by Philippa Gregory or Elizabeth Chadwick.

A restricted ebook, such as is published by the Agency 6, is simply not worth more than the lowest suggested retail price for the paperback version, which is usually 25% to 30% of the suggested retail price for the hardcover. It is time for publishers to stop devaluing their books with unrealistic agency pricing for ebooks and let the marketplace determine ebook pricing, as is done for the print versions.

February 28, 2011

Never Give a Sucker an Even Break!

In 1936, in the movie Poppy, W.C. Fields tells his daughter, “If we should ever separate, my little plum, I want to give you just one bit of fatherly advice: Never give a sucker an even break!” It appears that Apple has adopted it as its motto for the 21st century, at least in regards to ebooks and publishers.

I’ve got to give credit where credit is due, and Apple deserves credit for great design. Apple’s approach is like wrapping a Volkswagen Beetle in a Lamborghini shell and proclaiming the new car to be a $100,000 car. Apple gives you a great shell but the components are often mediocre at best. And when a design flaw is caught out, the usual response seems to be it’s the customer’s fault — never give a sucker an even break!

Let’s face it – the iPad is really a so-so device. Pretty to look at, but not a great computing experience, especially when compared to notebooks that permit multitasking. Perhaps this will be cured in the forthcoming version 2, but even if it is, Apple still will be a company that treats its customers and partners as suckers — suckers who will part with hard-earned dollars in exchange for good design, mediocre performance, and anticonsumer restrictions. Just consider Apple’s recent insistence on getting a cut on all ebook sales.

The initial culprit in the current ebook fiasco was Amazon who spread its tentacles to far too quickly, giving Apple the opening it needed to give false hope to publishers and consumers that there would be another, better way. Regular readers of my blog may recall my post from 9 months ago, The Decline & Fall of the Agency 5, in which I wrote:

April 2011 is the month to prepare for armageddon in ebookdom. It is when the 2010 agency model pricing scheme will be buried by publishing’s 2010 savior, Steve Jobs and Apple. You read it here first.

All the stars and moons and planets will align and the caterwaul of panic will be heard throughout ebookdom, because that is when the Agency 5 — Macmillan, Simon & Schuster, HarperCollins, Penguin, and Hachette – will realize they have been snookered by the snooker master.

In April 2011, publishers will discover that the iBookstore is a losing proposition. Oh, Apple will have sold many millions of iPads, fulfilling expectations for a successful tablet, but the buyers, it will soon be discovered, either aren’t buying ebooks at all (maybe 1 or 2) or what they are buying they are buying from Amazon or Barnes & Noble or Smashwords.…

Well, I wasn’t spot-on, but pretty darn close. iPads did sell millions and the iBookstore is a loser. iPad owners who are buying ebooks, emagazines, and enewspapers are buying them through the Amazon, Barnes & Noble, Kobo, and publisher apps, not from the iBookstore. But Apple has moved to close down any pipeline that bypasses the iBookstore by making it impossible for those apps to remain in the Apple iOS system.

So, tell me again how much of a friend Steve Jobs and Apple are to publishing and to readers. How did Apple become the publishers’ white knight? How did Apple save publishers from the clutches of Amazon?

Publishers certainly have had their comeuppance. What was supposed to save the industry has turned out to be less a saving grace and more of another poke in the eye. The Agency 5 can sit back and be satisfied that what ebooks they are selling they are selling at their dictated price. But if they look at Random House’s ebook sales (remember that Random House was the only one of the big 6 not to embrace agency), they must look with jealous eyes.

So how did Apple’s “generous” offer in April 2010 help the Agency 5? It appears to have put them against the proverbial wall and offered them a rotten carrot — never give a sucker an even break! The Agency 5 will have to pay yet again (i.e., in addition to lower sales for going the agency route) for siding with Steve Jobs when the various ebook apps, including the Amazon, B&N, and Kobo apps, disappear from the iOS. Because of their greed and reluctance to embrace ebooks, the Agency 5 have shot themselves in the foot yet again. They bet on Apple and the iBookstore and the only winner was Apple.

The harder it is for people to buy ebooks, the fewer ebooks they will buy. Yes, I know the Agency 5 would prefer to sell fewer ebooks, but they are already doing that. This latest Apple move simply makes it more difficult for a large segment of the reading market to buy ebooks, a segment that no publisher can afford to ignore in the long run. It seems that no matter what the Agency 5 do in their attempt to thwart the rise of ebooks or to control pricing and sales, someone is waiting to prove to them that they really are fools for not embracing ebooks and trying to exploit the new market to its fullest — never give a sucker an even break!

On many levels I am glad to see the Agency 5 suffer from this blow; it seems to be fair payback for Macmillan’s and Simon & Schuster’s refusal to sell ebooks to libraries and for HarperCollins’ new change to library licensing terms that restrict the number of times an ebook can be lent even though libraries are paying 60+% more for an ebook version than for the hardcover version of the same book. (One example: A library can buy John Grisham’s The Confession in hardcover for $17.37 and lend it out hundreds of times. In ebook, a single license costs $28.95 and if the new HarperCollins license terms were applied, it could be lent only 26 times. In addition, while libraries have to pay $28.95 for an ebook version, the consumer, whose taxes support libraries, can buy the ebook version for $9.99.) It also seems fair payback for the outrageous pricing the Agency 5 have imposed on their ebooks.

It is clear to me that with each misstep that the Agency 5 takes, the more likely it is that increasing numbers of ebookers will remove DRM and share ebooks. When you make an enemy of someone whose good wishes you need, you invite them to retaliate as best they can. In the case of the Agency 5, the best way to retaliate is to not buy their books, or if you buy them, to remove the DRM and share them.

When will publishers ever learn?

December 29, 2010

Question of the Year: Does Amazon Have Too Much Power?

Amazon is probably the largest bookseller, dollar-wise, in America and the world. Certainly, it is the largest ebook seller in America. And Amazon has spread its tentacles so that it is not only a bookseller, but it competes with publishers as a publisher.

Amazon has positioned itself so that, with the exception of the big publishing houses like Hachette, Simon & Schuster, and Random House, authors and publishers believe their books must be available for sale on Amazon or they will never make it. I have yet to hear of anyone cry, for example, that the failure of Barnes & Noble or Sony ebookstores to carry their ebook is a crisis. But we do hear and feel that panic when it comes to Amazon.

The result of this concentration of power is that Amazon is given the opportunity to censor. I grant that Amazon is free to decide what products it wants to sell or not sell; after all, it is not a governmental agency that must be neutral in the marketplace. But saying that begs the question because by agreeing with that proposition (i.e., Amazon is free to sell or not sell a particular book or genre of books), we are also saying that Amazon is free to dictate what an author writes, a publisher publishes, and a reader reads — at least if you are an author or publisher who believes that not being sold by Amazon is tantamount to writing death or a consumer who believes that the only place to buy a book is from Amazon.

Amazon’s Kindle has changed the worlds of reading, writing, and publishing. Although the change has been largely for the good — more books are being sold (and hopefully read) — there is also a dark side to the Kindle world. The dark side begins with a proprietary format that is designed to lock the average consumer into buying books only at Amazon. (Yes, I know that one can strip Amazon’s DRM and then convert the book to another format using readily available free tools; but most consumers do not do this and do not want to be bothered having to do it, thus the success of the Kindle. The Kindle is the market leader not because it is the best ereader but because of the ease-of-use with the Amazon ebookstore.) 

The dark side spreads to the way the device is designed; that is, it is designed to encourage users to be connected to Amazon’s servers and to automatically download updates. The problems with being connected and updates are that they allow Amazon to track the consumer’s buying habits and give Amazon access to the Kindle’s content, enabling removal or disabling at Amazon’s whim. Although a lot of Amazon fans say that Amazon will do no evil, that is really more of a wish and a prayer than a fact. Amazon has always put Amazon’s interests ahead of everyone else.

A more important dark side, however, is that Amazon uses such vague terminology that what was acceptable for publication and sale at Amazon today, may not be tomorrow — and there is little (actually nothing) that the consumer, the author, or the publisher can do about it. The only publishers with power in this battle are the big 6 publishing houses which between them publish probably 75% of all best-selling, money-making, books and whose refusal to supply Amazon with books could seriously affect Amazon’s bottom line (which is why 5 of the big 6 were able to force Amazon to accept the agency model).

In recent weeks more than one author has noticed the disappearance from Amazon of their books. The given reason was that the books violated Amazon’s terms of service but no explanation of what the violation actually was was forthcoming. Authors were left in the dark and consumers who had purchased the titles suddenly no longer had access to them (and apparently were not given refunds by Amazon).

For these shenanigans, I do not blame Amazon: instead, I blame the authors and smaller publishers who will do anything to be listed on Amazon and who then turn a blind eye when a fellow author/publisher’s books are dropped for some vague reason. The survivors hope that their turn will not come.

I also blame the consumers who are too lazy to do 2-click buying and will only shop at Amazon; consumers who are unwilling to spend a nickel more on a book at another store because Amazon is the lowest priced. Some day, in the not too distant future, that consumer attitude will haunt the consumers because as competition to Amazon disappears, the need/desire for Amazon to increase profits will raise its head and those low prices that everyone wants to grab today will no longer be available.

Once Amazon sees a decline in the growth of Kindle sales, that is, the point at which it realizes it has reached 99% saturation of its ebook market, I expect to see Amazon begin raising prices on ebooks. With millions of locked in customers, a simple 10-cent increase would generate millions more in profit, which Amazon shareholders will be expecting and demanding.

The Amazon success story in ebooks is much like the biography of a lemming.

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