Amazon’s Hachette Job
BORING ALERT – This is a long, long blog post about e-book pricing and has quite a lot of financial jargon in it – if this stuff bores you, you are advised to go back to that previous website you were just looking at with the good recipe for chicken katsu curry
This week I was one of the many authors who received an e-mail from Amazon, asking me to complain to Michael Pietsch, the CEO of Hachette, (one of the world’s largest publishers) about their dispute with Amazon over book pricing. For those of you not following the news, Amazon and Hachette are having a bit of a tiff at the moment. Amazon wants to sell e-books at a cheaper price, saying it is in the interest of the retailer, the reader and the author if e-book prices were lower. In their e-mail they quoted some figures saying that the price elasticity of demand of e-books (the extent to which volume is impacted by a shift in price) is 1.74, meaning that if the average price of an e-book was dropped from $14.99 to $9.99, the reader would pay less, but the increase in volume would more than compensate for the lower revenue earned per unit sold, making all parties with a financial stake in the market better off. Everyone’s a winner, right?
This is a very tricky topic, and one where it is very fashionable to side with Hachette. After all, Amazon are always the ones demonised by the press. They are the ones bringing about the death of the high street. They are the ones who supposedly use their scale to illicit better terms with suppliers. However, Amazon argue that they are doing this in the best interests of their customers, and that authors will earn higher royalties if prices drop and readership increases.
So what do I think? Well in short, I think Amazon are wrong. I take the side of Hachette. Now, this may surprise some of you. After all, being a relatively unknown author, I have a lot to thank Amazon for, right? Without Amazon I would not have a major outlet for my work, and thanks to them, anyone around the world can buy a copy of Time Rep or Note to Self, post a three star review and buy another independent book. But that’s not the point. From an impartial perspective, I have some major issues with Amazon’s argument, and they are as follows:
1) Amazon’s numbers do not stack up
I don’t think I’ve mentioned this before, but in a past life I used to be a buyer for a major UK supermarket. I was responsible for looking after some pretty major categories turning over hundreds of millions of pounds a year, and as such I like to think I have some experience in the field of predicting consumer dynamics. So let’s take a look at the principle behind the Amazon’s logic. Remember, prices goes down, volume goes up, customer pays less, and everyone makes more money.
Now if there’s one thing I know about retail growth, it is that it has to come from somewhere. Yes, the book industry may be an expandable market, but there are certain factors that I do not think Amazon are taking into account with their argument. In my view, their predicted financial model in which everyone benefits is closed-minded and very short-term in the way it is presented. Behind the scenes I believe they have a longer-term plan at play (which I will come onto later), but in the meantime, let me deconstruct Amazon’s face-value argument by asking you to consider the following:
- People only have so much time in the day to read. Readers may buy more books at first, but since books are not like cake and do not go off, over time this will create a backlog on people’s Kindles, since you can’t ‘magic up’ more hours in the day to read. (If you do, you have to stop doing something else, which I will come onto later). At first, book revenues will substantially increase as the cheaper price encourages people buy more of them, but this volume cannot be sustained. People’s kindles will become saturated with unread books, and as a result, volumes could actually dip lower than present levels at certain times of the year as people stop buying books for a while to get through the glut of novels they already have. Next thing you know, you are creating more peaks and troughs in your sales curve, which no trader likes to manage, and this in turn makes it harder for a publisher to know the optimum timing for books launches, promotional activity, etc. In short, you introduce instability to the market, which is bad.
- People only have so much money to spend on stuff. In a market of high price elasticity of demand, when you lower prices, people buy more of what is being sold. But unless this move coincides with all your customers getting a pay rise (which is a tad unlikely), they will not spend more money overall. In reality, they will just not buy something else, like a DVD. Or a video game. This links back to what I was saying about people having to re-allocate their time to read more. And let’s not forget the fact that the sales of physical books would also be impacted. On this point, I think it’s quite telling that Amazon’s numbers do not take into account a scenario where increased e-book sales negatively impact physical books sales, because that would undermine the argument that authors benefit from lower e-book prices. (And before you argue that authors would benefit from this dynamic by virtue of the fact that royalties are higher for e-book sales, don’t worry – I’ll deal with that later). In short, one industry usually grows at the expense of another. This is known as the zero-sum total – nobody benefits. Funnily enough, since Amazon currently sell quite a few physical books, DVDs and video games, this theory applies to them as much as anyone. This leads me to think that as a business, Amazon are structured in such a way that they only think in silos; they do not see the relationship between one arm of their business and another, which is typical in a company of Amazon’s size. You therefore have to assume they haven’t considered other impacts of their proposed pricing model, such as…
- E-book sales cross-subsidise the physical book business model. This one is a bit of a guess, but I would be surprised if it wasn’t true. One of Amazon’s major arguments for lower e-book prices is that the costs involved in selling an e-book are much lower than that of a physical book. After all, there is nothing physical to produce, so there are no manufacturing costs, raw material costs, waste management, supply chain logistics, cannibalisation of sales from the second-hand market, etc etc etc. But in any business, margins are usually high in one area to compensate for lower margins elsewhere. In trading, we call this “managing profit within the mix.” In short, if margins on e-books are squeezed and volume growth hurts physical book sales, the price of physical books will increase. This is not to the benefit of customers who do not own an e-book reader, and they may feel compelled to buy an e-book reader. Like say… a Kindle. All this brings me on to my next major suspicion in all of this, which is…
2) I would love to think that Amazon’s position on e-book pricing is solely motivated by the benefits to its customers, but…
…The reality is, Amazon has the most to gain out of a drop in e-book prices, over and above the supposed benefits afforded to their customers and authors, and it is at this point that you must consider what their end-game strategy is. Through launching the kindle, Amazon has positioned itself to absorb growth from e-book sales, which would increase their dominance over publishers, and reduce competition. Now, if there’s one thing that benefits customers more than anything, (including short-term price drops), it is competition. It’s amazing how companies do things in the best interest of their customers when those customers have the choice to spend their money elsewhere, and it is equally amazing how attitudes towards customers change when their options to go elsewhere are reduced. Imagine a scenario in ten years where 90% of the world’s books are sold through Amazon. It would be lovely to think they would maintain such a benevolent attitude towards authors, readers and publishers, but if they felt like making a bit more money for their shareholders (who are already starting to get a bit agitated by the current earnings ratio to growth), who is going to stop them?
3) Shock horror – the more people who make money from my books, the happier I am
One of the biggest temptations as an author to side with Amazon when reading their e-mail is the idea that through all of this, the author makes more money. Remember – according to Amazon’s price elasticity of demand figure of 1.74, the relationship between volume increases and retail price decreases is supposedly sufficient to increase the overall pot for all, meaning as an author I get 16% more money! Happy days, right?
Well no, actually. Yes, I make more money from e-book sales (and actually, a standard author contract grants a higher percentage of royalties from e-book sales versus physical books sales due to lower overheads for the publisher), so at first glance it is in my interest for this market to grow. But I always take a step back from an argument and take stock of what is truly important when someone tries to motivate me by appealing to my perceived sense of greed.
The fact is, I like the idea that other people make money from my books, no matter how small or indirect that benefit may be. It may sound whimsical and romantic, but I like the idea that the girl at the till in the independent bookshop gets a small cut. That the lorry driver delivering the books to the shops gets a small cut. That the guy packing the books in boxes gets a small cut. That the woman who sold the ink to the printers gets a small cut. That the factory workers where the paper is produced all get a small cut. That the guy who bought it, read it, and sold it on ebay gets some money back, maybe to spend on another book. You get the idea. Yes, rich people also benefit (like the shareholders of a publisher, for instance), but many other people benefit too. And yes, my sales may be tiny, but this issue goes beyond the e-book market at the end of the day, doesn’t it? The fact is, the more people who benefit from the sale of anything in any industry, the better it is for society overall.
You see, without trying to sound too altruistic, once you stop thinking about yourself and begin to think of the world as one holistic place where a broader distribution of wealth comes back round to benefit everyone, the more you begin to realise that the e-book model has its merits, but it has its issues too – it narrows the band of people benefiting from sales, which in turn puts pressure on the wider economy, which in turn damages consumption, which could impact – wait for it – book sales! Left unchecked, the system arguably is in danger of eating itself.
So there you have my thoughts on Amazon vs. Hachette. I’m sure many of you out there will disagree with my thinking, (and I may find my books are mysteriously deleted from their site tomorrow), but for me, Amazon’s attacks on the publisher are clumsy, illogical, misleading, and come with significant beneifts to them in the long term which are against the interest of the customer. The e-mail was a Hachette job, if you will.