Revisionist History – Salon & Amazon’s Evil eBook Motives

7220884274_9d8c0128f9[1]Amazon is an evil, evil company that is out to rule the world, Just ask the NY Times, which earlier this week claimed Amazon was evilly trying to turn a profit by selling books.

Or you could read this in Salon, which earlier this week posted an article titled Everything you need to know about the great e-book price war in which they claimed that:

The most popular theory by far holds that Amazon intended from the start to totally dominate the e-book marketplace. By using its wealth to subsidize the sale of e-books at a loss, it could drive any competitors out of the market.

Chris Meadows tipped me to this piece (I hadn’t read it) and I am un-amazed at how many facts the writer got wrong.  (Salon’s coverage of ebooks and indie pub is best described as dreck – no lie.)

I decided that this Salon piece was worthy of a little fact checking to expose the many, many flawed assumptions misstatements of fact, and outright factual errors. Let’s start here:

The most popular theory by far holds that Amazon intended from the start to totally dominate the e-book marketplace. By using its wealth to subsidize the sale of e-books at a loss, it could drive any competitors out of the market.

Fact check: When Amazon launched the Kindle in 2007 there were no serious competitors in the market.

Fact check: There was no market to drive competitors out of, either. The IDPF estimated that the wholesale US ebook market was worth around 32 million dollars in 2007 (the overall book market was worth billions). The ebook market only began to grow after Amazon launched the Kindle Store.

 Bricks-and-mortar chains like Barnes and Noble and online start-ups like Kobo (both of which would introduce their own e-reader devices) or device-neutral rivals like Google would simply not be willing or able to bleed cash as long as Amazon could.

Fact check: B&N and Kobo both entered the ebook market after Amazon enacted this pricing policy. Either these companies are run by very stupid people or they took the less simplistic view that Amazon’s pricing policy wasn’t the dire threat many mistakenly believed it to be.

 And because the Kindle is a “closed platform” — Kindle e-books can only be read on Kindle devices or apps — the more Kindle e-books a customer owned, the more reluctant she’d be to switch to a different device.

Fact check #1: Unless we want to switch to a smartphone or tablet, thus making it possible to read multiple formats with minimal hassle.

Fact check #2: Unless we chose to remove the DRM, which really isn’t that hard.

Obviously, however deep its pockets, Amazon would not be able to go on selling e-books at a loss indefinitely.

Fact check: The DOJ has concluded that there is no evidence that Amazon is selling ebooks at a loss (link).

But once Amazon was cemented in place as the uncontested sovereign of e-book retail, it could do whatever it wanted: force publishers to reduce their own prices, and/or raise prices on consumers.

Fact check: I’ll grant you this one could still happen in the future. Amazon has not done this, but given their behavior towards suppliers in other markets (the POD blackmailing of 2009 springs to mind) it is certainly possible.

Book publishing is a low-margin business to begin with, and the mammoth retailer seemed poised to scrape even those minimal profits away.

Fact check: At that time ebooks were sold under the wholesale model. Amazon was subsidizing the low prices out of their own pocket, not from any publisher profits. The same is true today.

And last but not least, I would like to bring your attention to one of the lead paragraphs from the piece:

With the launch of the Kindle, Amazon promoted a low baseline price of $9.99 for most e-books. That meant that Amazon was selling virtually all newly published e-books at a loss. For example: A new book with a hardcover list price of $29.95 would be given an e-book price of $23.95 — 20 percent less to account for the publisher’s savings in printing, binding and distribution. The publisher would sell that e-book to Amazon for $12, and Amazon would retail it for $9.99, taking a $2 loss.

Funny, I can clearly recall buying ebooks on the Kindle in 2008 that cost a hell of a lot more than $10, including new titles.  But that does not surprise me. This writer has made the same mistake that I have seen many others make. She set up a single ebook as an example and then assumed that it was a valid model for the entire ebook market.

Yeah, that doesn’t work. When you focus on a single ebook that is deeply discounted you are simultaneously ignoring all the ebooks that aren’t being discounted.

It’s simply not possible to model a complex system with millions of variables by using a single data point. To do so would be to oversimplify the complexities of the ebook market as a system to the point that the argument has no relevance.

This has actually come up before in the comments section of this blog so I will simply quote what I wrote before:

If you want to make generalizations about the ebook market you will first need to build a model with a thousand bestsellers and another thousand backlist titles, each with their own price point at a half dozen retailers.

Change the prices of all 2 thousand titles over a 2 year 6 month period, and once you’ve done that you will be able to make generalizations about ebook pricing. Your new model might not be as complex as the real thing but at least it won’t be irrelevant.

P.S. Folks, I freely admit that I only know 3 or 4 things about retail economics and related pricing strategies. But that’s okay because many people (including the writer of the Salon piece mentioned above as well as every single person who has used a single ebook example to explain the ebook market) know even less.

image by sslyb

11 thoughts on “Revisionist History – Salon & Amazon’s Evil eBook Motives

  1. An Amazon exec remarks in that Kindle Single “The Battle of $9.99″ that the idea, or at least one of the ideas, behind the $9.99 price point was to attract people to a new cheap book, then sell them on some of the long-tail paperback/backlist e-books, that were priced such that Amazon could make a profit on them.

  2. I take exception to the idea that $9.99 is a “cheap” price for an ebook. It is only cheap when compared to a newly released physical book from a traditional publisher. When considered on their own it may be that a $1.00 ebook is not even especially cheap given that the cost of production and distribution is essentially nil. Plenty of independent authors, working without mainstream publishers, are selling ebooks for a buck and making a good profit.

    Mainstream publishers have done a good job of controlling the narrative regarding ebook pricing. They desperately need to keep ebook prices artificially high in order to protect their legacy market selling physical books. So they are happy whenever ebook prices are only discussed relative to physical book prices.

    The only way to discover a reasonable retail price for ebooks would be to examine digital only publishers and see what price they need to sell at in order to build a sustainable business model. Unfortunately, the current ebook pricing narrative revolves almost entirely around traditional publishers who have huge incentives to keep ebook prices artificially high.

    1. The data is accumulating and it seems there is a broad range from $2.99 to $6.99 where sales volume and per-unit revenue comine to maximize income; the low-end for indie titles or unknown autors, the high end for established authors with a following.
      In other words, $4.99 +/- $2.00 is what both consumers will tolerate without grumbling and it seems the smaller (low overhead) publishers can live in that band.

      Over time I think that range is going to harden and become a defacto standard.

      1. $6.99 sounds about right for an ebook novel by an established author. At that price point, assuming I could find stuff I want to read (unfortunately, most seem to be at the $10-$13 range to match the paperbook price :/), I’d be buying regularly rather than spending $5 to take the bus to the nearest used book store and buying half a dozen paperbacks at $3-$5 each every couple of months.

    2. It’s worth noting (though by now it should be more than apparent) that $9.99 (to $11.99 or so) is just the price for the new hardcover-equivalent e-books. E-book prices for books available in paperback tend to be closer to $6 or so.

  3. Those folks simply don’t know anything abut modern (i.e., 20th Century) retailing and refuse to try to educate themselves because they’d rather live in the world of their unchanging myths than in the real world where things change every other week.

    Concepts such as price elasticity, basket pricing, loyalty programs, all lie blissfully beyond their conception, much less understanding, and are magically waved away as outright lies. Publishing is a special snowflake beyond those things.

    Consider the counterintuitive (to them) idea, that Amazon could possibly *make* money by eating shipping costs, offering free ebook reads, and offering unlimited free video streaming. Yet they are so evil they do exactly that. In fact, they make almost exactly as much *added* profit as they charge for the Prime subscription:

    http://business.time.com/2013/03/18/amazon-prime-bigger-more-powerful-more-profitable-than-anyone-imagined/

    _______________________________________

    Sure, Amazon “pays” for all the shipping on Prime orders. A 2011 investigation estimated that the average Prime member used $55 worth of shipping and $35 in digital content annually. That’s $90 total, so Amazon was “losing” $11 annually by collecting its $79 membership fee.

    Regardless of what might seem like a net loss, Amazon Prime has been and continues to be a hugely profitable enterprise for the e-retail giant. A Prime member now makes $1,224 in Amazon purchases each year, on average, compared with $505 for non-Prime customers. After factoring in costs incurred for shipping and streaming, the average Prime member yields Amazon $78 more in profits than other customers, according to Morningstar. Yep, it’s nearly equal to that $79 membership fee.
    ____________________________________

    Amazon is in business to make money and they have no problem spending money to make money. And the ways they spend their money help them make money in ways their detractors could never imagine. Even *after* seeing it done.

  4. “Funny, I can clearly recall buying ebooks on the Kindle in 2008 that cost a hell of a lot more than $10, including new titles.”

    Me, too. The first ebook I purchased was UNDER THE DOME and I bought it after it passed its window as a new release. If I recall correctly, I paid $17 for it. While it was still a new release, I bought it for $9 in hardcover (the list price was $35) at B&N.

  5. Yeah, I think you missed the very basic critique of what “at a loss” means. As a publisher, the only way you make a loss is by failing to cover any sales costs there might be (and I don’t think there are).

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