Here’s Why Amazon Won’t be Cutting KDP Payment Rates to 35%

There's a 6540927485_b37108f20d[1]frightening what-if nightmare going around indie publishing circles this week. It's scaring the children, giving many heart palpitations, but actually has very little chance of ever happening.

The "sky is falling" scenario originated over at KBoards, where one author wrote:

Once B&N fades to black, there is Apple and Kobo. But Amazon will likely have the vast majority of sales, and with it, market share.

I believe at that point, it will do something nobody wants to contemplate, but which makes perfect sense: It will double its bottom line revenues overnight from indie publishers.

How?

Cut the royalty rate from 70% to 35% on all self-pubbed books. Presto. Double the net margin on the majority of their sales with the flick of a switch.

I first read that Thursday morning (6 days after it was written), and after thinking about it for a few hours I think I have figured out why it's not going to happen any time soon.

My arguments reach an entirely different conclusion from Hugh Howey's, who argued based on a publisher/retailer relationship, and that of the comment section at The Passive Voice, which pointed out that the move would embolden Amazon's competing ebookstores.

All of this is true, but I have yet to read a rebuttal that looked at this scenario and considered the effect it would have on the whole of the publishing industry. Most seem to have considered the effect on retailers, or the effect on indie authors. Many of the conclusions reached about the possible outcomes and how Amazon would benefit are true, but only on a small scale.

When I played this scenario out on the scale of the entire publishing industry I quickly realized that the 35% scenario will very likely never happen.

To put it simply, the 70% option doesn't just forestall competing ebookstores, it doesn't just build up the number of indie authors, and it doesn't just give Amazon a direct relationship with suppliers.

All of this is true, but the 70% payment option also acts to fragment the publishing industry. And that's why it's not going away in any drastic fashion.

In order to understand why the 70% option won't be going away, let's go back to when it began. Amazon launched the 70% payment option on 20 January 2010. This was about a week before the iPad was unveiled, which means that Amazon might have launched it as a response to the blackmail pressure exerted by the 5 publishers who conspired with Apple. I think that view is a tad Machiavellian, but let's skip it and consider the effect.

The possibility of earning more money inspired new authors to jump in, and it inspired existing authors to ask for their rights back so they can take existing titles and go indie. This is a huge financial incentive to not deal with a legacy publisher or distributor but to instead go it alone.

And that's not all.

I might have missed a comment here or there, but all of the comments I read on this scenario missed at least one important detail. This 70% payment option affects more than just indie authors; there are small and medium publishers of all stripes that deal directly with Amazon and reap the financial benefit of the 70% payment option.

Consider, for a moment, how the 35% scenario would affect the indie publishers. The drop in income would cause them to lay off staff, pass on contracts, and tighten their belts, but that's not all.

The reduced income would also make the indie publishers more amenable the next time they got a buyout offer from one of the Big 5.  And do you know what? It would have the same affect on indie authors.

If an author is only earning 35% from a sale in the Kindle Store and S&S comes along and offers 20% of retail price (not as crazy as it sounds), a lot of authors are going to seriously consider taking S&S up on their offer.  It's not that much less money, and if S&S really puts some marketing muscle behind a launch the author might even make more than they did as in indie.

That 70% payment option is Amazon's carrot for keeping power from concentrating in the hands of a few major publishers. Take it away and the major publishers will have a much easier job at signing authors and acquiring smaller publishers.

Amazon might not have planned for the fragmentation effect, but I would bet that they are aware of what would happen if the 70% payment option went away. And that is why I seriously doubt that it will ever happen.

What do you think?

image by Foglienere

25 thoughts on “Here’s Why Amazon Won’t be Cutting KDP Payment Rates to 35%

  1. I agree with you. I feel it’s not likely to happen. Keep in mind there’s a test, of sorts, going on at Amazon. At certain stores (India, Japan etc) authors only earn a 35% royalty unless their book is enrolled in KDP Select. Authors in Select will earn 70% at those stores. I’m quite sure they look carefully at enrollment rates. It’s data to analyze over time.

    That said, I’m not sure I fully understand Amazon’s strategy with KDP Select. No author with a fan-base or who is selling in significant numbers can afford to be in Select especially since Amazon changed the impact of those free days. Authors who are also/were also traditionally published tend to bring a more diverse fan base to their self-publishing efforts and for many of them Select is not a good business decision.

    And, that said, the 25% of eBook net that traditional publishers offer to authors who don’t get hardcovers (ie, genre authors, including the powerhouse of publishing, Romance) is still inferior to even just 35% from Amazon. There are a LOT of expenses that get deducted before there’s a net to pay on. Those traditional contracts are not at all competitive with Amazon’s 70% rate, but they’re also still not competitive with the 35% rate, either.

    If Amazon did cut rates to 35%, there would be extremely compelling reasons for other vendors (B&N, Apple, Kobo and the like) to continue paying a higher rate and if that happened, Select would be even less attractive unless Amazon only paid 70% (across all stores) to those in Select. But you see the problem there . . . In such a scenario, there would be a compelling reason for authors to forgo Select, take 35% at Amazon and higher rates at other vendors.

    So, yes, I agree that 70% will be around for a long while yet.

  2. I know when they started, 35 percent seemed like a good enough deal to attract authors. After all, most trad authors were making about 25 to 35 CENTS per mass market title sold. So you put up a book for 99 cents and you make that 35 cents right there. But at that time, Amazon was also encouraging the 99 cent price–they wanted READERS as well as writers. They wanted writers to entice more and more readers.

    I do think their priorities have changed. I agree that they wanted backlist authors to feel it was worth getting the old book out, dusting it off, scanning it in and promoting it. Indie authors do a huge amount of what is basically free advertising for Amazon products. Any author who wants to sell is likely advertising for Amazon to some extent.

    I think Amazon is still embracing the “free” and then go to 2.99 or 3.99 price model at the moment. But I think it isn’t working as well. So I expect another change of some sort as they try to figure out how to continue to entice buyers/readers/loyalty. Will it be a subscription model? Will it be their audio/print/ebook bundling? Or something else entirely?

    The 70 percent commission could be in danger at any time, but I don’t think they will do it soon. I certainly hope not. A lot of indie authors are struggling and it’s a bit early to pull that plug. We have to eat and if we have to work part time or full time at other things besides writing, that is less product for Amazon. I’m not sure they are ready to go that route just yet. I think they are still focused on sorting and trying to figure out how to spot the best sellers–before they become so popular the author turns down a deal.

    They are constantly evolving however. That is what has made them strong. So I expect changes.

  3. Well I sure hope it doesn’t happen, but anything’s possible. 35% is a bit drastic, what if it was 50% or so? That might make the choice a lot harder for many, which I think all boils down to whether you want to stick only with Amazon or not.

  4. I agree but I think you missed the main incentive for leaving the 70% RR alone from Amazon’s standpoint.

    If they lower it, authors will be in their rights to raise their list prices to make up for the loss. Should “greed” cross any reader’s lips, they’ll be promptly redirected to Amazon (hello, bad PR). Thanks to amazon’s price matching algorithms, they’d have to raise prices on every other platform, though.

    That would be awful news for Amazon because it would further stall ebook adoption. The reason they’ve been investing so much energy into the maket is carrying print books is manifold costlier, between handling, shipping, warehouse space and stock management. All factored in, I’m sure their 30% cut on ebook beats their 50% or dicount on print by a wide margin.

    And of course, the more people read ebooks, the less they’ll be buying physical books at brick and mortar stores.

    1. You raise a good point, though this isn’t quite accurate:

      “Thanks to amazon’s price matching algorithms, they’d have to raise prices on every other platform, though.”

      Under the current rules Amazon forcibly can’t price-match ebooks sold under the 35% option (not without eating the difference themselves). That means that an author could charge twice as much in the Kindle Store as they do elsewhere.

      Now that is something Amazon doesn’t want. They want the lowest prices and the happiest authors, and that means keeping the pricing rules the way they are.

      P.S. It’s still early for me so please excuse me if I read the KDP rules wrong.

      1. Nate, the situation currently is that if Amazon detects a lower price anywhere the author will get a threatening letter telling them to lower the price on the other platform or they will have their books de-listed at KDP. The exception is Amazon UK where it was ruled illegal for Amazon to conduct this price bullying.

        On a separate note, Amazon introduced the 70% option in response not to the iPad but to Apple offering 70% to authors.

        While you’re right that Amazon is unlikely to change the existing 70% rate in the foreseeable future it seems very likely they will use it as a carrot to entice authors into Select for any the new stores they may open internationally.

        1. “Apple offering 70% to authors”

          Pish and tosh. For the record, Apple doesn’t care about content sales; they make their money from hardware sales. And Apple doesn’t give a damn about indie authors; you can tell that from Apple’s insistence that content must be uploaded from a Mac. The hoi polloi who can’t afford a Mac can deal with an aggregator.

          Amazon “will use it as a carrot to entice authors into Select for any the new stores they may open internationally”

          Actually, that hasn’t happened. The 70% option now includes all (most?) of western Europe and NZ/AUS, but there is no requirement for exclusivity.

          And can you help me find one of those threatening letters? I want to see what it says and try to understand the context.

          1. Yes, it does require exclusivity, at least on my dashboard. There are a few that were grandfathered in, but all new countries going up require exclusivity. Brazil, Japan, Australia and most of Europe.

            Apple doesn’t care, but when they offered 70 percent, Amazon matched it to PREVENT authors from running over there and MARKETING for Apple. Because if you tell me I can make 70 percent at Apple and 35 at Amazon, guess where I’m going to be sending customers? I’d be blogging HARD for apple. They stopped that from happening by matching.

      2. Nate, they can change that contract anytime and we either sign or take our books down. They hold a lot of the cards in this game and hold more every day.

        As a side note: I had a price match occur under the 35 percent target–they price matched and I ate the difference. That was fine with me. I was changing the prices everywhere, but it took a while for it to all catch up. Sometimes they are very quick to catch things and others it can be days or weeks.

        1. Okay, I went and checked to be certain. I think that page is wrong, but I was wrong as well. My apologies.

          MOST of Europe is indeed in the 70 percent.

          Brazil, Japan, Mexico and India are exclusive only.

          So really I was more wrong than right. I think the key is that as new countries are added, they are generally exclusive, but that doesn’t hold entirely as Australia appears to be 70 percent. I had that completely wrong in my head.

          The rules for exclusivity get pretty confusing and with new countries being added, I obviously lost track.

          1. You may have been thinking of the “out of area” provision in the KDP program. Where authors receive 35% (instead of 70%) when a customer purchases your book from a different country probably to save money.

            Example is a KDP book in US $3.99 but £1.25 ($2.06).

  5. Increasing their margin will create a reason for competition and a reason for indie authors to go there. Amazon might trim the margin a bit, but that’s all, and probably not directly. It would ultimately be self-destructive.

    1. Amazon seem to have no problem being self-destructive by imposing ridiculous surcharges on international customers, deterring sales now and sending potential customers to other international and domestic ebook retailers.

      Amazon seems to forget that its not the only show in town any more.

  6. Amazon does not have to cut royalties to level the playing field more (or squeeze the indie more). Amazon has been gradually turning its attention toward more established and bigger brands. They have been phasing out the importance of free books. They scuttled tags. They have shifted their algorythm to reduce the splash of single day sales pushes.

    The days of the feeding frenzy for indies in the kindle store is over. It still serves as a huge platform, but it will no longer foster the “play the system and hit it big” mentality.

    I do believe Amazon will continue to distance themselves from the coddling policies they set up to win over so many indie authors. They will shift their focus more and more to the consumer (which they have surely never forgotten).

    I believe it negligent for an author to leave Amazon as their sales/marketing strategy. Amazon can and will change its policies without the benefit of indie authors in mind. Diversification is prudent.

    1. I went to the cinema last night (American Hustle) and was astounded by the number of previews. People could of course stop those previews by joining together on social media, coordinating opening night boycotts, and similar tactics of mass-mobilization to thwart the studios, curtail their profits, and force change.

      Similar tactics will be taken by authors when they use the same tools to band together and unionize. Sure, Amazon will just strip the accounts of the 20% who start, but what about when 50% join, then 70%. We’re talking millions of dollars of lost revenue from a company that can’t afford to lose a fraction of that, not with their current financial house of cards.

      We’ve seen how scared of social media governments are, how long before corporations quake under it’s power as well? And who will be the first to organize and build a new company to take on the behemoths? It will begin.

  7. It won’t happen, but it will. Amazon already controls the lion’s share of the ebook market, and that’s an understatement. The company’s share is predicted to increase dramatically unless some unforeseen drama occurs on a major scale. But Amazon generally maneuvers in subtle ways, carving off slivers here and there. Authors will get a tiny bit less money in lending fees, begin to give up percentages in return for certain services they now get for “free” etc. –like the old analogy of dropping a frog in hot water — increase the temps slowly, and the frog doesn’t realize he’s being boiled to death until it’s too late.

    1. Except Amazon doesn’t control the lion’s share of all the ebook markets.

      In fact, I think we might be able to predict which markets Amazon expects to dominate based on the exclusivity requirement. Amazon doesn’t require an exclusive in France or Germany, where they don’t dominate the market. But they do require it in Japan, where Amazon does dominate the retail ebook market.

      I think we might be able to use this as a rule of thumb to judge which markets are the most competitive.

      1. More accurately it controls the lion’s share of incredibly few.

        And if it carries on as it is now with its ridiculous surcharges, ludicrous hoops to jump through to actually pay (Amazon India, for example) and its astounding disrespect for other nationalities.. New Zealander? You can shop in the Australia store. Austrian? Go to Germany. Belgian? Sorry, you’re French so far as we’re concerned.

        Not convinced about the exclusive-competitive argument, Nate. I think the reason they didn’t impose the KDP Select rule for higher royalties in France and Germany was that they didn’t think of it at the time and it would be a major climb-down to change now. The AU site is something of an exception rather than the rule.

  8. As a matter of fact, my ebooks are not for sale on Amazon at all, so I really don’t care what kind of marketing strategy Amazon employs. When I discovered the split market rate for ebooks depending on the country involved, I figured that raising the base price and then opting for the 35% rate was easier than figuring for nonexistent sales at 70%. But then, Amazon’s frequent site glitches and nonexistent sales at any price were what caused me to close my KDP account. When one is not selling books on what claims to be the biggest bookseller in the world, it means that Amazon failed me. In a world of close to 4 billion readers, no sales from Amazon means that Amazon did something to make sales fail, and that is a different can of worms from pricing for a fair royalty rate. My books are good; those who have read them have told me so. For Amazon to announce that it has sold more Kindles and tablets with no numbers to back it up means that it is practicing its usual brand of cheating on the marketplace. I no longer believe anything Amazon says.

  9. I’m a strong critic of Amazon, but even I don’t buy this claim in the short-term for several reasons:

    1. Amazon already pays 35% on books under $2.99 and over $9.99. It’s excuse for doing so, should the feds come knocking, is likely to be that it wants to keep ebook prices down. Make royalties 35% across the board and that thin excuse becomes no excuse. Amazon then has to explain why it’s thinks it can get away with paying half the industry-standard rate. Then talk of monopoly comes up.

    And yes, for the feds to intervene, given the current, covertly cozy relationship between Amazon and the current DOJ, we will probably need to have a Republican in the White House in 2016, but that’s looking more and more likely.

    2. Amazon is already screwing authors with its atrocious download charges. As best I recall, they’re charging $0.15 per megabyte, even though most ebooks go through WiFi rather than cellular.

    That works out to $150 per gigabyte. Verizon has a 4 gig data plan for $70/month or $17.50 per gigabyte. So Amazon is charging over 8 times as much for mostly WiFi downloads than Verizon charges for all-cellular ones. Creating a fuss over Amazon’s royalties would reveal just what a jerk it is about download fees.

    I might add that my most recent books have lots of pictures. That reduces the effective royalties I get from Amazon to about 50% versus a flat 70% from Apple. Why should Amazon risk its effectively 50% rate to get a brief period at 35%

    Also, a court case is likely to bring up what I’ve heard is true, that when Amazon added the KF9 format to mobi, Amazon combined the two, doubling the size of those downloads and thus doubling its already inflated download fee income. That’ll look most suspicious.

    3. And do another nasty bit of math. For books like mine, with a picture starting every chapter, Amazon’s effective royalty rate is already lowered by some 20-25% by those download fees. Place that on to a mere 35% royalty rate and some ebooks would only be earning about 10-15% of retail. At that point all be the most mindless of Amazon fanboys would yank their titles.

    4. Authors can react. They do get to set a retail price and could, if they wanted, double their Amazon price so ebooks sold through Amazon to return the same income to the author or publisher as other ebook retailers. I forget whether Amazon still has that ‘not cheaper elsewhere’ clause, but I suspect its lawyers would not want to go to court to enforce it given that an author’s income is the same in both cases.

    And if Amazon instead halves a ebook selling price and pays royalties only on the new price, it could set itself up for a massive class action lawsuit, that’d quite likely be retroactive and cost hundreds of millions. And class actions can take place independent of any corruption at the DOJ. All that’d be needed would be some lawyers willing to go for a share of what could be a quite huge settlement.

    All that said, I don’t think Amazon will do anything in the near future. The 70% level seems well established thanks to Apple and others. There’s still too much competition around for Amazon to risk losing authors.

    In particular, the new subscription services will soon offer Amazon some competition in the heavy reader market. Smashwords already gives access to two of them. In February, Nokbok with be debuting a $4.95 subscription service. For someone who reads a lot, just two ebooks a month by subscription will cover that cost. And the less Amazon pays in royalties, the better those subscription incomes will look. Authors can tilt heavily toward them and perhaps even release earlier through subscription, leaving Amazon with the tailings.

    And that brings up another thing authors can do. If they have a fan-base, that base will go for wherever an ebook comes out first. Release first though everyone but Amazon, wait for those initial sales to taper off, then release through Amazon for those who’ll discover the book there. As a result, Amazon will have lost a lot of sales while and author has lost almost none. In fact with those others paying twice the royalties, popular authors will come out ahead delaying sales on Amazon for a few months.

    In short, authors still have too many other ways to reach readers for Amazon to profit from slashing royalties. When authors really should be doing is concentrating on ways to pressure authors to conform to the rest of the industry–paying 70% royalties at all price levels and no download fees.

      1. I have to say that this entire dialog reflects the economic naivety of the creative, artistic population. OF COURSE Amazon will not immediately slam prices when it gets better market power. But it will, without fail, use its market power incrementally, year by year, each year justifying its gouging by citing increasing costs and emphasizing all it is doing for the marketplace.

        When cable television industry first started to compete with broadcast television, its share of the consumer’s monthly entertainment budget a very minor percentage indeed. Now it is common for the consumer’s internet and cable bill to exceed its utility bills. They did not get to this position by slamming prices upward, but rather, each year came an increase that was more than inflation, but not enough create lots of competition and resistance from consumers. The same will be true of Amazon regarding royalty rates, mark my word.

        Make hay while the 70% sun shines. It will not shine for long but it *also* will not disappear overnight in a single huge profiteering step.

  10. I came to this party a bit late. Anyway, Mr.Carew is right. As someone that’s worked with SEO companies for many years, it’s the exact same thing Google did with paid ads.

    Although people assume Google will just be a paid ad platform one day – Google relies on the strength (both in the quality of the content and the difficulty to outrank other results) to acquire AdWords customers.

    In that respect, I think if Amazon don’t work in a similar way, the platform will be ruined. They’ll need to get bigger and bigger teams monitoring who is actually creating the content and deciding whether what is being offer is actually quality. Maybe they’ll be incentive based payment structures built in for successful authors.

    Who knows?

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