Godzilla vs. King Kong ~ Or Negotiating in the Electronic Age
Posted by Victoria Adams, Content Editor
If you are an author or a publisher it is difficult to not be aware of the titan battle going on between Amazon and Hachette. On one hand we have the biggest bookstore in the world. On the other we have one of the largest publishing and media operations in the world. As in any situation neither side is 100% right; but then that is what negotiating is supposed to be about.
What are the main points?
Amazon is pushing a concept called elasticity of demand. A fancy economics term which basically attempts to calculate at what price do you sell more of product X and, therefore, make more money on volume than on simple margin. It is an important concept. Everyone that puts a book up for sale actually makes an attempt to judge this number even if they don’t know that is what they are doing. At what price am I likely to sell more books and make more money? However, elasticity is not an independent function of market performance. There are such things as market saturation, vertical markets (focus on special needs of one kind or another such as books on economics), the economy in general, and the need to determine what particular items sell best in what particular format. There are also opportunity costs (what does it cost to put money here rather than there) and project costs (vs. cost of a specific item). This is a fluid problem and even Amazon’s vaunted algorithms may not always nail the answer.
Hachette, on the other hand. is a publisher with a very real grasp on the cost of getting a title to market. Their letter (reprinted below) indicates that they “invest heavily” in a title to get it to market on top of the $2-$3 per book costs of manufacturing, warehousing and shipping a print book. For the small press this cost goes to $4-$5 per print copy. From experience as a publisher, I can tell you that the initial investment in a book — without advances — can easily exceed $2,000- $2,500 for a small press, let alone for a well known name or heavily researched, illustrated or otherwise annotated volume. That’s before marketing support of any kind. And it doesn’t include what it costs to produce the print version and get it in the hands of a reader. And then there are those royalties that authors work so hard to gain. It’s not cheap. Basic industry calculators will tell you that to recover that benchmark of $2,000, you have to sell at least 1,000 copies. Very few titles hit that mark and fewer still go beyond. The titles that miss the mark add to the burden of making a profit on the ones that do well. And then there is the overhead; you know, rent and stuff. Perhaps you can understand why small publishers and self-published authors alike shudder at the thought of a 55-65% discount to get a book in a book store. If the profit is less than $1 per copy, how long will it take to recover that initial investment AND market the title? Oh, and eat.
The dispute, then, is really two differing interpretations of the market dynamics of selling books. Amazon does know how to sell books. Obviously Hachette does well picking ones that will sell. So, where’s the beef?
No one is faulting Amazon for their decisions on how to price their inventory. At least no one should. Every retailer and wholesaler on the planet makes that decision every day by taking into consideration their market and their costs. What does raise some flags in this situation is the attempt to set the list price; the price on the flyleaf. This is spooky because it controls not only what Amazon sells the book for, but what 100s of other ebook retailers sell it for. Personally I am not terribly comfortable with that proposition. As a publisher and an author I still want the freedom to set my price where I will and take the consequences, whatever they may be. Retailers can decide what pricing structure they want based on the discount I am willing to provide.
Hachette, on the other hand. does have some rather pricey ebooks. I do understand the reasoning behind recovering the cost of that title vs. that format. It wouldn’t hurt, however, to draw on the vast experience that Amazon has in the pricing of genre, format, and market value (big bestseller author vs. little self-published newbie). Perhaps an option would be to add a few bells and whistles to the e-format to make it worth more. Perhaps an offer for a discount on the print version if you purchase the ebook at full price. Again, these are points of negotiation and that is where these companies need to be — at the negotiating table.
Reprinted here, for your comparison, is the full text of both the Amazon email to KDP Authors and the Hachette response to the call to action. Our call to action? Understand the details of the battle, make your own decision regarding where you are on the issues, and communicate with others in the industry to keep the industry strong — not tearing itself apart.
Amazon’s letter to KDP authors:
Dear KDP Author,
Just ahead of World War II, there was a radical invention that shook the foundations of book publishing. It was the paperback book. This was a time when movie tickets cost 10 or 20 cents, and books cost $2.50. The new paperback cost 25 cents – it was ten times cheaper. Readers loved the paperback and millions of copies were sold in just the first year.
With it being so inexpensive and with so many more people able to afford to buy and read books, you would think the literary establishment of the day would have celebrated the invention of the paperback, yes? Nope. Instead, they dug in and circled the wagons. They believed low cost paperbacks would destroy literary culture and harm the industry (not to mention their own bank accounts). Many bookstores refused to stock them, and the early paperback publishers had to use unconventional methods of distribution – places like newsstands and drugstores. The famous author George Orwell came out publicly and said about the new paperback format, if “publishers had any sense, they would combine against them and suppress them.” Yes, George Orwell was suggesting collusion.
Well… history doesn’t repeat itself, but it does rhyme.
Fast forward to today, and it’s the e-book’s turn to be opposed by the literary establishment. Amazon and Hachette – a big US publisher and part of a $10 billion media conglomerate – are in the middle of a business dispute about e-books. We want lower e-book prices. Hachette does not. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there’s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out of stock, no warehousing costs, no transportation costs, and there is no secondary market – e-books cannot be resold as used books. E-books can and should be less expensive.
Perhaps channeling Orwell’s decades old suggestion, Hachette has already been caught illegally colluding with its competitors to raise e-book prices. So far those parties have paid $166 million in penalties and restitution. Colluding with its competitors to raise prices wasn’t only illegal, it was also highly disrespectful to Hachette’s readers.
The fact is many established incumbents in the industry have taken the position that lower e-book prices will “devalue books” and hurt “Arts and Letters.” They’re wrong. Just as paperbacks did not destroy book culture despite being ten times cheaper, neither will e-books. On the contrary, paperbacks ended up rejuvenating the book industry and making it stronger. The same will happen with e-books.
Many inside the echo-chamber of the industry often draw the box too small. They think books only compete against books. But in reality, books compete against mobile games, television, movies, Facebook, blogs, free news sites and more. If we want a healthy reading culture, we have to work hard to be sure books actually are competitive against these other media types, and a big part of that is working hard to make books less expensive.
Moreover, e-books are highly price elastic. This means that when the price goes down, customers buy much more. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000. The important thing to note here is that the lower price is good for all parties involved: the customer is paying 33% less and the author is getting a royalty check 16% larger and being read by an audience that’s 74% larger. The pie is simply bigger.
But when a thing has been done a certain way for a long time, resisting change can be a reflexive instinct, and the powerful interests of the status quo are hard to move. It was never in George Orwell’s interest to suppress paperback books – he was wrong about that.
And despite what some would have you believe, authors are not united on this issue. When the Authors Guild recently wrote on this, they titled their post: “Amazon-Hachette Debate Yields Diverse Opinions Among Authors” (the comments to this post are worth a read). A petition started by another group of authors and aimed at Hachette, titled “Stop Fighting Low Prices and Fair Wages,” garnered over 7,600 signatures. And there are myriad articles and posts, by authors and readers alike, supporting us in our effort to keep prices low and build a healthy reading culture. Author David Gaughran’s recent interview is another piece worth reading.
We recognize that writers reasonably want to be left out of a dispute between large companies. Some have suggested that we “just talk.” We tried that. Hachette spent three months stonewalling and only grudgingly began to even acknowledge our concerns when we took action to reduce sales of their titles in our store. Since then Amazon has made three separate offers to Hachette to take authors out of the middle. We first suggested that we (Amazon and Hachette) jointly make author royalties whole during the term of the dispute. Then we suggested that authors receive 100% of all sales of their titles until this dispute is resolved. Then we suggested that we would return to normal business operations if Amazon and Hachette’s normal share of revenue went to a literacy charity. But Hachette, and their parent company Lagardere, have quickly and repeatedly dismissed these offers even though e-books represent 1% of their revenues and they could easily agree to do so. They believe they get leverage from keeping their authors in the middle.
We will never give up our fight for reasonable e-book prices. We know making books more affordable is good for book culture. We’d like your help. Please email Hachette and copy us.
Hachette CEO, Michael Pietsch: Michael.Pietsch@hbgusa.com
Copy us at: firstname.lastname@example.org
Please consider including these points:
– We have noted your illegal collusion. Please stop working so hard to overcharge for ebooks. They can and should be less expensive.
– Lowering e-book prices will help – not hurt – the reading culture, just like paperbacks did.
– Stop using your authors as leverage and accept one of Amazon’s offers to take them out of the middle.
– Especially if you’re an author yourself: Remind them that authors are not united on this issue.
Thanks for your support.
The Amazon Books Team
P.S. You can also find this letter at www.readersunited.com
And Hachette’s response:
Here is Pietsch’s entire email response below, provided to Digital Book World by a Hachette spokesperson:
Thank you for writing to me in response to Amazon’s email. I appreciate that you care enough about books to take the time to write. We usually don’t comment publicly while negotiating, but I’ve received a lot of requests for Hachette’s response to the issues raised by Amazon, and want to reply with a few facts.
• Hachette sets prices for our books entirely on our own, not in collusion with anyone.
• We set our ebook prices far below corresponding print book prices, reflecting savings in manufacturing and shipping.
• More than 80% of the ebooks we publish are priced at $9.99 or lower.
• Those few priced higher—most at $11.99 and $12.99—are less than half the price of their print versions.
• Those higher priced ebooks will have lower prices soon, when the paperback version is published.
• The invention of mass-market paperbacks was great for all because it was not intended to replace hardbacks but to create a new format available later, at a lower price.
As a publisher, we work to bring a variety of great books to readers, in a variety of formats and prices. We know by experience that there is not one appropriate price for all ebooks, and that all ebooks do not belong in the same $9.99 box. Unlike retailers, publishers invest heavily in individual books, often for years, before we see any revenue. We invest in advances against royalties, editing, design, production, marketing, warehousing, shipping, piracy protection, and more. We recoup these costs from sales of all the versions of the book that we publish—hardcover, paperback, large print, audio, and ebook. While ebooks do not have the $2-$3 costs of manufacturing, warehousing, and shipping that print books have, their selling price carries a share of all our investments in the book.
This dispute started because Amazon is seeking a lot more profit and even more market share, at the expense of authors, bricks and mortar bookstores, and ourselves. Both Hachette and Amazon are big businesses and neither should claim a monopoly on enlightenment, but we do believe in a book industry where talent is respected and choice continues to be offered to the reading public.
Once again, we call on Amazon to withdraw the sanctions against Hachette’s authors that they have unilaterally imposed, and restore their books to normal levels of availability. We are negotiating in good faith. These punitive actions are not necessary, nor what we would expect from a trusted business partner.
Thank you again and best wishes,
Love to hear from you – no rotten tomatoes, though, gums up the electronics.
VICTORIA ADAMS is an accountant and financial analyst by profession, but numbers can get numbing. Not in a mood to allow her mind to glaze over, she has always found ways to be creative in her business career by helping in the growth, development or startup of many different kinds of enterprises. That creative spirit extended to many of her leisure activities where she pursued such things as pottery, needlepoint, gardening, and well just about anything that is creative. Her professional background has also made her a perpetual researcher. In this way she developed a deep love of philosophy, religion, history, archeology and anthropology. What she learns she loves to share so she has been a teacher and occasional speaker. For many years her husband tried to get her to share through writing. Now that she has tested the waters with her first book, which ironically was about the first year of learning to live with his dementia, she is ready to reach further and write the things he always wanted to see.