Of Amazon and eBooks

There’s been a fracas in the eBook market lately with the huge tiff going on between Amazon and the Macmillan group over $10 eBooks, which was a major problem in the industry for two reasons. The first was that publishers would be losing money off of eBooks (we’ll get to how later) unless they were to  do exactly what they did: delayed eBook releases by anywhere from 6 weeks to 6 months after the hardcover release.

Amazon has essentially been subsidizing its Kindle by forcing low prices on the publishing industry. This is the exact opposite practice that is frequently performed in the video game sector where Microsoft and Sony subsidized their overly expensive consoles by making more off of the game sales. With a Kindle DX costing almost $500, notably $200 more than an Xbox 360 that is no longer subsidized, you’d almost expect them to want to subsidize it.

Now, let’s get onto the pricing issues. We’ll start with the typical cost figures on a Hardcover release and why the eBooks are getting delayed so long. A typical hardback releases between $30 and $40, and for the sake of the argument we’ll take the latter (best selling authors usually have hardback releases costing $40 due to extra advertising costs and such).

• Author Royalties on Hardcover are approx. 15% of Cover Price (roughly $6 go to Author per book sold), note about 1.5% of this would typically go to the Author’s agent.
• Publisher takes anywhere between 45% and 55% on a typical book, however this includes the Author Royalties. So really only 30-40% ($12-$16) is being taken in by the Publisher right now.
• The Printing process costs, on average, 10% ($4) of the cover price of a book, this is a key part in the eBook pricing debate. So after printing the Publisher only has 20-30% ($8-$12), which goes to cover the editing, advertising and marketing expenses to break even. once the publisher hits break even, they’re making money. Depending on the size of the print run, this can be several hundred or for bigger titles, several thousand book sales before hitting break even.
• The distributor takes a nice 10% ($4) cut for shipping the books. This is the 2nd key part in the eBook debate.
• The retailer typically takes a whopping 40% ($16) cut of the cover price, this is why you can typically see many books on sale with dramatic reductions, but in fact the retailer is simply making their prices look dramatically better. People love a sale, and retailers know this, because even with 35% off they’re pocketing $2 per book.

So that’s the price breakdown for you. Now onto the eBook problem. With only 8$ shaved off of the cover price by skipping the printing and distribution costs, we’re still facing the problem of $32 in costs retailing at $10. Less Amazon’s cut in the deal, that’s $16 in publisher expenses vs $6 in income. Net loss: $10 per eBook.

This presents two problems for eBooks. The first is that publishers will be forced to release poorly edited, poorly formatted eBooks, which isn’t going to happen from the major publishers, and many independent publishers rely solely on quality to keep buyers. So again, this is an unlikely possibility, but nevertheless it would be devastating to the eBook market as no one is willing to read 250 pages of illiterate junk.

The second problem for eBooks is the delay, which is already well established in the market. eBooks are unlikely to ship until the mass market paperbacks are out, which already retail near the $10 price mark. $10 eBook packed with DRM and Region Locks, in my opinion, make the $10 paperback the clear winner, especially considering a ~$300 investment to buy a Kindle. You can’t donate a used eBook to your kids school, to the local library or even give it to a friend, this is a majorly offensive aspect to me. With the ability to sell your used books enshrined, usually on the inside cover of a book, I find it quite draconian that the free exchange of information is taking a step-backwards giving more control to the publishers and that the tech-savvy are openly approving of it with their purchases of the Kindle and Amazon eBooks.

Is Macmillan evil? No, most publishers are seen as an Angel Investors. They’re willing to hand out thousands of dollars to the Author in the form of an advance with potentially no return. $10,000 going to the author, means the publisher just spent $50,000 to bring that book to the market. Stephanie Meyer got $750,000 for a three-book deal by Little, Brown and Company, or $250,000 per book, which means Little, Brown likely spent over $1.25 million total in releasing the first Twilight book and almost $4 million for the series.

Now here’s the defining problem of the eBook market, no advances. eBooks aren’t competing with books, they’re parasitic by nature. There is a world-defining difference placed between surviving and thriving, and eBooks have taken the approach of a leech where it’s survival or death and they have given themselves no prospect of thriving.

Anyone who thinks an author will take no advance to sell their book is delusional. Especially considering it will have no editing, no advertising and no marketing making it essentially worthless crap. Authors live off their advances, Stephanie Meyer was given enough money that she could comfortably support herself for over a decade. eBooks would have given her nothing, cost her a lot and probably gotten her nowhere. It’s the self-publishing problem, in that if it actually worked we’d have endless lists of self-published best-selling authors, but it doesn’t work.

Authors by choice are doing what they’re best at. It’s stupid to think they’d want to be spending the vast majority of their time not writing.

There was also a lot of highly uninformed assumptions being lodged by people assuming Macmillan was acting like a union for its authors or that it was money grubbing. Again, Amazon was proposing to pay $6 for $16 in publisher expenses for new titles, I believe that is the definition of being a cheap bastard.

The first assumption, however, is quite laughable. The Authors Guild acts as the union between Author and Publisher, and during the entire eBook debacle between Amazon and Macmillan, the Authors Guild forced Macmillan to comply with the industry standard of 25% eBook royalties for Authors in their boilerplate contract (previously offered at 20%).

What’s wrong with self-publishing an eBook? Nothing really, it just isn’t practical for mass market. If you want to sell a million copies, you’re going to have to invest hundreds of thousands into advertising and marketing, both of which, as an author, likely isn’t your strong suit and you likely don’t have that kind of money. There are many independent publishers out there looking for authors, impress one and you’ll have credibility if you ever go to a major publisher.

With Amazon finally restoring the buy-links to Macmillan’s paper books, the issue appears to be coming to an end. However, it appears Amazon has now attracted attention from the Authors Guild with whomovedmybuybutton.com.

The hardball Amazon tried to play was dangerous, alienating publishers would be the end of Amazon. As far as I’ve been able to tell 80% of book sales are from Best Sellers, meaning that 50% of Amazon’s earnings (60% of their income came from book sales) were locked tightly within the hands of major publishers. An industry-wide boycott would have put Amazon’s net income about 10-billion into the red. Not a comfortable place for a business.

To put things in perspective, Hollywood movies make around $50 billion globally every year. Book sales in the US alone has hit $40 billion (~$25 billion from major pubs in 2008, plus ~$14 billion estimated for small publishers, of which there are ~86,000 in the US), compare this with $30 million for eBook sales. Quite clearly, books aren’t going to be replaced by eBooks for a long, long time. Assuming the 30% growth in the eBook market remains steady, global eBook sales will hit the 2008 US sales data by 2040. Not considering annual book sale growth can average 10% year on year.

For those interested global, and I can’t stress global enough, eBook sales will surpass US-only book sales by around 2055, by the figures I’ve been able to find out. They’ll meet at revenues of ~2.4 trillion by todays average market growth figures.