Hugh Howey

Bestselling author of Wool and other books. Currently sailing around the world.

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More Thoughts on Hachette / Amazon

There’s not much I can say about the Hachette/Amazon negotiations that David Gaughran hasn’t covered here. David injects some much-needed rationality into what has been a bizarrely irrational debate, especially since we’re all simply guessing at what terms Hachette and Amazon are offering one another. Knowing who to blame here is impossible at worst and premature at best.

I’m more interested in what Mark Coker has to say over on the Smashwords blog. I have mad respect for Mark. He gets far more right than wrong, and he’s been an excellent spokesman and business leader for the self-publishing movement. If I could sit in a pub with ten publishing peeps and clink drinks, Mark would be near the very top of the list. But as the owner of Smashwords, Mark is Amazon’s direct competitor. His post practically concludes with a pitch for his services. That should serve as one warning. The bigger warning is that Mark doesn’t seem to understand Amazon’s current relationship with Hachette. He states:

If Hachette doesn’t have the power to maintain 70% earnings, how will million-copy-selling New York Times bestselling indie authors have any power when Amazon decides to put the squeeze on them?   And how about the rest of the indie community which has even less leverage over Amazon?

The problem is, Hachette does not get 70% of the list price the way indies do. Hachette gets paid a set discount on the digital MSRP, just like bookstores pay a set discount for physical books. This is why Hachette sets the MSRP for e-books at crazy prices like $14.99. If Amazon is getting a 40% discount, their wholesale cost for that e-book is $8.99. They then sell the e-book to the customer for $9.99 and make a measly dollar, or 10%. Compare that 10% margin to the 30% they make from indies. Not to mention that Amazon sells a LOT more e-books at indies’ reasonable prices.

Now think about how this works for Hachette. They get the full wholesale price of $8.99. The author gets his or her full cut (25% of net), which is a point that many commentators don’t seem to understand. Amazon, meanwhile takes the loss! All to provide customers with a better price. Remember, they are paying Hachette and the author the full amount according to the MSRP.

So of course Hachette wants to keep this agreement intact. But there’s no way Amazon can allow it. Hachette is basically screwing its authors by pricing its e-books too high and they seem to know it. That’s why Hachette and some authors are complaining about Amazon selling its e-books for the full MSRP. Hachette wants that fat check and for Amazon to suffer its thin margins.

Mark also repeats in his post a popular and incorrect jeremiad about the dangers of monopoly and all the power Amazon wields. The purpose here is to terrify indies away from Amazon and presumably toward Smashwords. The problem is that Amazon isn’t a monopoly, and even if they were, monopolies don’t work with low barriers to entry. One college kid in his or her dorm can start the next e-book sales platform, and since indies own their work, they could flock there in an instant. That’s the new reality for tech firms. It’s why social media sites pop up every month and snag millions of users. Easy to create, easy for users to migrate.

The reason Amazon has any strength right now to negotiate with the real monopoly, which is Hachette (nobody else can provide their e-books), is because of indie authors and Amazon’s own imprints. Here’s what I think is going on in these negotiations (since we’re all making things up): Amazon is telling Hachette that they can’t afford to make 10% or less on e-book sales. Hachette is saying tough luck, sucker. Amazon is asking for them to lower digital MSRP to $9.99, and then let Amazon discount to whatever they see fit and take the hit. Amazon still pays 60% of MSRP. Maybe they’re even bumping that up to 70% (it’s what I would do).

Hachette is refusing, so Amazon is making their margins by simply stopping the current discounts and selling at the price Hachette stipulates to begin with. Amazon can afford to do this because they have plenty of reasonably priced offerings from indies and their own in-house imprints. In fact, higher prices on Hachette books are making Amazon’s high-margin indie and A-Pub e-books look more attractive to consumers.

Mark raises the monopoly canard to make indies think they’ll be next to incur Amazon’s wrath. But indies are already giving Amazon what they want: a healthy 30% wholesale discount (65% discount on many titles) plus reasonable MSRP. What’s to fight for? You see, Mark makes the classic mistake of seeing the 70% that authors keep as a royalty. It isn’t. Royalties are what authors earn from publishers. But self-published authors are publishers, and they are handing over ready-to-sell products. In exchange, they provide a 30% discount and keep the rest.

So let’s assume that Amazon does lower “royalties” in the future. To what? 30% of gross? The worst Amazon might do is still more generous than what the Big 5 currently offers. Why fear a hypothetical bogeyman when there are real ones? Here’s what would happen if Amazon demanded a 70% discount on wholesale from indies instead of the current 30% discount: Indies would concentrate all their promotion efforts on Kobo, the iBookstore, and Google Play. They would at the same time raise their e-book prices on Amazon so a sale there netted the same profit. This would keep earnings the same while driving consumers to other retailers. I would price WOOL at $13.99 instead of $5.99 and make my normal $4.20 per sale. I would have fewer sales on Amazon, but those I did get would pay the same. Most customers would go get it elsewhere. I would start linking primarily to other stores, blogging about how awesome some competitor is, and never promote or deal with Amazon again.

Despite what Mark Coker and others think, Amazon isn’t this stupid. If you ask me, Hachette is bungling the hell out of these negotiations. They are harming their authors, first by not informing them of these negotiations back in November when they started, and more recently by not providing information to authors like Michael Sullivan, who wants to know details about book shipments.

Hachette may even be fighting for the agency pricing scheme that landed them and others in hot water with the DOJ. That’s where they set the retail price, and Amazon isn’t allowed to discount. You know, like practically no other retail agreement in any other industry. The reason Hachette wants this? To protect their relationship with bookstore chains, namely Barnes & Noble. I have spoken with publishing heads who have admitted to me that they can’t lower their e-book prices without damaging relationships with brick and mortar stores. Those stores will cease ordering books.

There’s a whole lot more to this game than most people realize. Me? I’m pulling for Amazon as an e-book customer. I hope they win the right to continue to be able to discount e-books so they remain less expensive than paperbacks. Hachette doesn’t want this. Hachette wants higher prices (or at least, for Amazon to take the hit instead of them).

As an indie author, however, I wouldn’t be upset if Hachette got what it wanted. Yeah, price those e-books at $14.99. I’ll keep your readers busy with my books until you come to your senses.

91 replies to “More Thoughts on Hachette / Amazon”

A great writeup. For the past couple of years now I have pretty much only read indie authors because they write some great stuff and they price a book fairly. These retail ebook prices can be ridiculous. And when you have authors like Hugh Howey, Michael Bunker, Nathan Lowel, Mark Cooper, Randolph Lalonde, Michael Hicks, B V Larson, and Thomas Deprima to name a few, there is plenty of good reading to be had at good prices. What I love is that a majority of the proceeds go to the author directly.

You make an excellent point about the nature of a monopoly. A large market-share (like Amazon’s) does not automatically imply a monopoly. There has to be barriers to entry. Otherwise, regardless of market share, the company is powerless to raise prices. As you point out, when a kid in a dorm can make an ebook selling platform, how much power can Amazon really have? Not much, I agree.

But while Amazon doesn’t have a lot of power, it does have some. And it comes primarily from the extensive reviews it has collected from users. That’s the one thing that the kid in the dorm together with all the publishers in the world cannot replicate overnight. The only source of extensive reader reviews besides Amazon is Goodreads. And Amazon up and bought it. What is Amazon doing with Goodreads? I see no changes to the Goodreads site design, no evidence of new synergies, nothing. It’s simply a precautionary move, in case the kid in the dorm got any ideas…

I bet a smart kid in a dorm could figure out how to leverage reviews made everywhere and combine them into a meta-review, a’la Rottentomatoes or Metacritic. Bam. New and even better discovery tool. Now that kid is a millionaire.

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That “review pooling” thing is one of the ideas I plan to write in my “How to compete with Amazon on the merits” blog that I would write if I weren’t busy munching popcorn (Hachette/Amazon , EU elections, and French politics make Games of Throne seem pally in comparison…)

The problem with that Idea, is that either (e)retailers have outsourced those reviews, have no such system, or don’t want to share the data/IP with anyone else…

Yes, if there’s a way to do it without getting permissions. If you have to cut deals with everyone, it’s a quagmire.

I can imagine a site that sells books (and everything else) and takes you seamlessly to external sites for reviews. I don’t think you’d need permission.

And on the flip side, it could take you seamlessly to external sites to order. Again no permission required. No publishers need to be on board.

It’s basically a review bot + shopping bot + google wallet, seamlessly executed. And it takes a small cut (1%?) of the order.

The kid in the dorm who can make this happen will make billions, not millions.

Hi Hugh: Amazon, Costco, Sam’s Club, Staples, B&N get more like 60% off MSRP after all the back end invoice deductions are taken, which is where some serious reductions to the publishers take place. I assume print and ebooks are jumbled together when those backend 5%s are applied. Meanwhile the indie booksellers try and survive on 40%. The entire old industry is a house of cards where none of the financials work well for most in the chain. Time for new ways forward.

I’ve noticed some very small improvements to the Goodreads site. Things so small that I can’t now remember exactly what they were. (I have a terrible memory.) But as I’ve listed giveaways, added books, and (simply) signed in, I’ve encountered minute changes that make all of those tasks easier. Much appreciated by me.

Anyone here with a better memory than mine who noticed and remembers some of these niggling details?

Of course, the changes might just be ordinary site maintenance and improvement initiated by the Goodreads staff. I’m not in a position to know the origin of the changes. :D

I love that Hachette getting upset about Amazon pushing prices up to *their* recommended price. It’s all a bit bonkers.

I enjoy the fact I can release an eBook of equivalent quality, set the price at $2.99, and pocket as much as a much higher priced Hachette book. I win and my readers win. Sounds good to me.

If Hachette is that upset, they can always set up their own distribution network for their e-books. However, something tells me they know that their stuff wouldn’t sell at those ridiculous prices, and having an already established distributor – Amazon – is in their best interest. Amazon discounts the e-books to reasonable, and Hachette gets to gripe about it while secretly enjoying having someone else set the price to consumers.

Oh boy. When will we wake up and see the big publishers for what they are? Of course they are huge businesses and of course they are governed by seeking to maximise their profit margins.

As readers and writers, books are special to us and we like to picture Dickensian gentlemen in frock coats fussing over a manuscript for the good of humankind. But it’s time to throw that image away.

Yes, Amazon is a huge business too and not without fault, but to survive in the cut-throat world of ecommerce, it must constantly innovate and find new ways to offer value to customers and authors. Amazon disrupts the marketplace in order to create opportunities. Trad publishers try to maintain the status quo.

I know which I prefer.

Mark Coker had done a lot of great things for indies. But it often times seems like his best argument to use Smashwords is, “Hey, We’re not Amazon.”

I think we’ve got a better argument than that. :) The best argument to use Smashwords is because we help you sell more books. I’ve always advocated that every author should be on Amazon. I advocate *against* exclusivity. Too many authors treat their choice of retailer like their choice of sports team or religion. You don’t need to choose only one. Play the field. Diversify. That’s all.

Agreed. Over-dependance by writers on any link in the services providing chain (editing, cover design, distribution, etc…) is always a strategic mistake (just ask any Hachette author). I’m an Amazon fan, but they still are just another link in that chain, so the rule applies to them too. Smashwords is one way to mitigate that risk.

Hugh, brilliant insights. Learning about the MSRP changes things considerably. And Amazon deliberately kicked off the indie revolution by launching KDP at the same time as the Kindle. They’ve always supported indies. I can’t see that changing. They’re too smart to do something that dumb.

@Hugh Great post.

I’m actually surprised Mark was the one who said this. If Amazon did drop it’s royalty down to 30%, it’d be GREAT for sites like Smashwords and Amazon competitors. They still offer authors 65-75% of their cover price, which would drive more authors to use those alternative distribution sites and in turn encourage their readers to use those sites.

What Mark really should be afraid of, is the exact OPPOSITE of what he is describing here.

If I were Amazon and I wanted to eliminate my competition (not saying they are), I’d simply give authors a % cut that my competitors couldn’t compete with. Imagine if Amazon gave an author “royalty” of 95%. Would Smashwords meet it? It would pretty much have to, don’t you think? And that’s a huge bite of Smashwords revenue.

And if Amazon really wanted to play hardball — it could give author’s 100% “royalty” sit on its deep pockets (weird mixed metaphor) and just wait for its competitors to be unable to cover operational costs.

That’s what I’d be more afraid of. The race to the bottom, isn’t a race to the bottom for authors. He’s looking at it upside down imo.

“They would at the same time raise their e-book prices on Amazon so a sale there netted the same profit. This would keep earnings the same while driving consumers to other retailers. I would price WOOL at $13.99 instead of $5.99 and make my normal $4.20 per sale.”

You also hit the nail on the head with what would happen for authors who want to continue making the same amount if Amazon dropped their royalty. The funny thing here is that in addition to helping digital eBook distributors, Amazon dropping the author royalty would actually be helping brick and mortar stores and traditional publishers as the price differential would be much smaller between current Indie cover prices and traditional publishers MSRP.

But it will never swing that far. As long as someone can always make a platform to distribute eBooks, Amazon will never be able to force people to accept a bad %. The market will correct itself. (Wow, can’t believe I actually said that, as I’m not a firm believer in the market correcting itself because it is so prone to manipulation). But in this case — it would. Amazon always has to be somewhere between the two extremes of: 1) Publishers being able to physically distribute and place their product in physical stores and 2) Entrepreneurs being able to create a startup online eBook distribution platform.

Again, I’m flummoxed that Mark took that stance. That dude is so on the money about so much.

Amazon would add exclusivity like they do with Kindle Select to make your idea more successful.

Agree. Imagine this announcement: ‘Enroll in KDP Select and you’ll receive a 90% royalty rate.’ KDP would crash with all the authors signing up.

Amazon’s terms of service state that the price you list your book on Amazon at must not be higher than where you list any other book, though. So instead of pricing higher at the Zon, we would have to pull our books off the Zon, for the scenario to play out that way.

That’s what I was wondering about. I do know that authors of Hugh’s stature have different deals with Amazon than smaller time folks, so maybe they can price high at Amazon and lower everywhere else. But for small time folks, I remember there being some sort of term saying you can’t price higher at the ‘Zon than elsewhere.

I’m not so sure.

I’ve learned long ago that you should never underestimate either what a massive corporation is capable of or what they’re willing to do. They will push the envelope as far as they can and then push it some more if they see potential profit in it.

In your scenario, that’s exactly how Amazon could eliminate the competition. In several international markets, Amazon already says “if you want 70%, you have to enroll in Select. Otherwise you only get 35%.” Imagine they did this in all markets. Or, as Greg said, if they offered a higher royalty for enrolling in Select. I think the vast majority of indies make more money from Amazon than from all other markets combined.

Now imagine this strategy enables Amazon to successfully eliminate or severely marginalize those other publishers. Suddenly it’s a lot easier to say, “y’know what, we’re going to drop that royalty.”

I’ve got no love for the traditional publishers, and the only reason I have a writing career is because of Amazon. But I don’t believe for a second that they’re the good guys.

I think you’re giving Amazon too much credit. Remember, the only reason they give indie authors 70% now is because they feared competition from Apple. Without real competition amazon will start treating authors like they do all their employees (see The Internet for examples).

I agree.

Amazon is a business. They’re not your friend. At the moment, indies and Amazon are heading in the same direction, so everything works fine. But if the time ever comes, where there is little or no competition Amazon will do what is best for Amazon.

The thing is — you aren’t beholden to Amazon. If they screw with their %s to the detriment of the author, it opens up a revenue stream for some go-getters to start a eBook distribution system/platform that offers a better %.

Amazon also tends to use game theory quite extensively in their business operations. They WANT competitors. Because competitors help their business as well. What they don’t want are competitors to try and take their #1 spot — so they’ll do what’s necessary to stay on top.

Smashwords has been very smart in this respect. Smashwords hasn’t tried to go toe to toe with Amazon. It hasn’t tried to drop its %s to favor Smashwords over Amazon. It’s a non-threat to Amazon, so Amazon shares the marketspace.

If Smashwords dropped their % to say 95% author share, you can bet Amazon will respond. And most likely it would respond in a way that would make it painful for Smashwords to keep doing business. So instead of direct competition, both keep the status quo. And both are happy.

And honestly, I think that’s what Mark Coker is more worried about. Amazon’s muscle to push businesses around. They can and do.

Great post, Hugh. The free market always works. If Amazon becomes greedy then another company will seize the initiative and provide a better service for authors and readers, and we’ll all jump ship and go there. It’s as easy as tapping fingers on a keyboard.

I think that’s why large companies become cozy with government regulators, so they can keep their dinosaur firms going and not get eaten by the furry little mammals scurrying around their feet. Go mammals, I say. Let the dinosaurs adapt, or die.

Okay, I didn’t think much on this post when it was originally posted. But something happened and a piece of the puzzled automatically in place. First let’s get it out of the way that Amazon is not a monopoly. If anyone can’t understand why they need to go back to school. Amazon is a leading Distributor (retailer, whatever you wanna call it) and it continues to innovate and experiment which positions it miles ahead of its competitors. But Amazon is not just a distributor. It is so much more. Countless other businesses rely on Amazon for a lot more than just distribution.

Over in the neighboring blog, Joe Konrath is “fisking” some author named Charlie. Mr Charlie had complained that his readers will suffer because his publisher cannot print the books because they cannot be pre-ordered on Amazon. And that got me thinking. The print-runs (production schedules) of traditional publishers rely heavily on information provided by Amazon. Pre-orders on Amazon provide the BEST sales forecasts for new books. Until recently, Amazon was providing market forecasts for free. But it doesn’t have to, does it? It can charge a premium (over and above distribution) for forecasting sales of goods with RELATIVELY thin profit margins.

Information is power. The entire financial sector makes money from information asymmetries.

Hachette is most definitely negotiating for agency and no discounting. The Big 5 told us that one of them was going to do that. Check out Konrath’s latest post for my explanation.

The one concern I have is that you couldn’t raise your price on only Amazon to compensate for the lower percentage (if things did suddenly take a change for the worst). I’ve heard they do a price match and lower your price down to match other places.

I’m new so please let me know if I’m mistaken on this.

I would like to see a contract dispute between Amazon and Rowling. Rowling, bless her heart, had the foresight to create a compelling and competitive distribution platform *before* tying her e-books to Amazon. I would wager the terms of that contract are better for Pottermore than just about anyone else, since they were in a position of strength rather than dependance. It’s ironic all the worldwide conglomerate publishers, despite years of warning that this would happen, couldn’t even show any signs of a start in that direction, despite someone independantly paving the precedent.

While Amazon may be the 800-pound gorilla, Rowling carries a 1000-ton club to wield over Amazon and the other distributors: merchandizing. Toys, games, movies, branding, other stuff. The “Harry Potter” merchandizing market is worth billions. The merchandizing is worth more than her book sales.

If they wanted to continue selling and making millions on “Harry Potter” merchandise, they had to accept that she was only going to sell her ebooks on her web site. That’s the deal: play by her rules or she pulls her products from their market.

It sets a precedent for the independent writers to consider should terms go sour with retailers.

Perhaps the best post I’ve read on the subject, Hugh.

For me, I think I would withdraw my books, and replace them with excerpts, changing the covers so as to warn readers. At the end of the excerpts, I would advise to buy at other retailers to get the full book. And I will put the book at the minimal price.

“If you want peace, prepare for war”.

You would hope to. But if the time ever comes when Amazon lowers rates, it will be because they’ve already destroyed the competition. And though the analogy of the kid in the garage easily creating competition seems plausible, it would take a lot of time for readers to gravitate to that site in such an amount that authors would view it as worth the effort.

If there is competition that can’t sell your books, even though it has a higher royalty, that amount times zero would still be zero. Amazon on the other hand has the customers, they have the infrastructure, and they have the ability for the author to sell a large amount of books even at lower profit margins. Any new business venture would have a hard time competing with that.

A.R. : If Amazon destroys the competition (B&N, Kobo, Apple and Google), it becomes a monopoly. I don’t see it happen, the DOJ wouldn’t allow that to happen.

I think there may be a key point either missing or muddied here, but before I start, let me make clear that both parties are captaining their own douche-canoes.

Hachette is failing to adjust its business model to remain profitable at lower retail prices and refusing to be attractively competitive to its suppliers (authors).

Amazon is both distributor and competitor here, and people seem to be responding to the actions it is taking that more closely align it with Wal-Mart than Barnes & Noble. Wally-world leaned on its suppliers so effectively that it changed the landscape of manufacturing, and drove a lot of suppliers under because they couldn’t sacrifice quality to meet the wholesale needs of the biggest retailer on the planet (which is also not technically a monopoly, but try buying bananas somewhere else in rural USA). There are, of course, differences, but there is also the uncomfortable notion that by substituting one book for another that Amazon, that great champion of books, is treating them like interchangeable widgets, which is what the big pubs do.

Um, given the history of our noble host, his paper publisher’s dealings with Barnes and Noble, and the effect it had on sales of his books when they came out, that might not be the strongest line of argument you’ve got.

Not being familiar with these things, I would have to agree with you. But I’m not here to present a strong line of argument, but rather some possible insight into why this particular battle is so…odd. The public discussion is played out on an emotional field much more so than a logical one, because the players don’t seem to be engaged in moves that can be purely attributed to business, and the spectators watching it all unfold are also not responding to moves in a purely business-oriented manner.

Reading articles and blog posts, I feel like I’m watching a play with about fifteen different roles, but only two actors playing he parts, and most of the roles are the alternate personalities of one character, and M. Night Shyamalan wrote the screenplay, so I’m caught up in looking for the symbolism and the big shocking twist.

“One college kid in his or her dorm can start the next e-book sales platform, and since indies own their work, they could flock there in an instant. ”

Naive. A kid in his dorm room can build a nationwide network of warehousing, a deep database of millions of books, a community of reviewers, negotiate the ability to offer deep discounts, build the ereader / book publishing infrastructure and challenge Amazon.

Give that “kid” $10 million in venture capital and he might start to make an inroad. Then, like Amazon, that “kid” will have to endure years breaking even or losing money for the hope of making a razor thin profit like Amazon.

Where is the incentive in that? Where is the reward? A “kid” in his dorm room would rather make a cheap app and rake in potentially millions.

“But indies are already giving Amazon what they want: a healthy 30% wholesale discount (65% discount on many titles) plus reasonable MSRP. What’s to fight for?”

Howey exhibits a fundamental misunderstanding of business relationships. Companies want to make money. They want to make a lot of money. What if Amazon raised the discount to 40%. Are you going to abandon Amazon? Of course not. You’re still making money with them. Are you going to drop Amazon and flock to that kid? Not unless that kid demonstrates the ability to compete (and isn’t that kid already out there in the form of Mark Coker?)

Amazon has already cut the royalty on its ACX. What’s to say they won’t do it elsewhere? Why wouldn’t they? Why wouldn’t they renegotiate its deal with you? What makes you such a special snowflake that you’re protected?

A start-up does not have to compete on the whole range of what Amazon is selling. To have a good website, with great algorithms for ebooks, would suffice to draw indies there. If the website was a great experience for readers, they would come, too. More easily said then done, yes, but things can change quickly in a digital world.

Think Napster. We’re talking e-books.

I sell e-books directly from my website. Took me an hour to set up. I can live off the proceeds.

Imagine what someone who knows what they’re doing could accomplish!

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Speaking of which, (sorry for hijacking,), I should like to mention that your paypal account is set up such that it will not take CC payments from Canada.

Although, I’m not sure if paypal account impaired Canadians make up any kind of significant demographic. I don’t know why, but it seems all e-book sellers using paypal suffer the same problem. I have no trouble using paypal for any other CC purchases, just e-books.

You can indeed sell books off your website and keep the lights on with the proceeds. But for the majority of indie authors (heck, all authors), Amazon provides a critical step in discoverability that 99% of authors need. Without Amazon, the Mighty All-knowing Algorithm(TM), and its attendant ecosystem, we’re all still doing the digital equivalent of selling our stories out of our virtual car trunks. And yes, success stories can still be made outside of the ‘zoo’s influence, but they will be steeper Hills to climb, and a lot fewer in number. Amazon has done many wonderful, revolutionary things for readers and authors alike, but we are all keenly aware that this is largely due to Amazon’s benevolence, and that benevolence can be removed at any time. I’ve only been at this for 2 years, and I remember several upheavals over pricing and ranking and listing changes.

The way to survive this, of course, is to ensure that one’s inventory is available through as many venues as is possible, including one’s own website or some other direct venue.

I do feel bad for the authors whose numbers will suffer because of this, because undoubtedly, there will be little incentive for Hachette to take responsibility for the dip in sales that will trigger their own internal formulae for calculating P&L on an individual title.

Dude! I love you Huge and I still maintain that you’re one of the smartest guys I know, but calling Hachette THE REAL MONOPOLY is akin to calling Dairy Queen a monopoly.

Sure, they sell their own brand of ice cream and hamburgers, but McDonalds, Wendy’s, and Burger King all sell similar products. If the Big 5 were to have an orgy of mergers and become the Big 1, THEN you could say that. Until that happens…

If I wasn’t in deadline mode I’d say we should have a public debate for charity, or just for a beer.

Peace, brother.

The difference between vanilla ice creams is not the same as the difference between Jo Nesbo and Jeffery Deaver. When you need the next book from so-and-so, there’s a publisher out there who has a monopoly.

Amazon has far more competition for their bookselling services than Hachette has for delivering their authors’ works.

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I couldn’t help but think that if Amazon lowered the royalty for self pubbed authors, that would drive UP prices. So many people are failing to see that there end goal is to lower prices. Great post.

Too many words… Hugh, could you tell me if my math is correct?
A book with MSRP of $15 from Hachette: Amazon pays $9(60%), reader pays $10, Amazon gets $1, Hachette gets $6.75(75% of $9) and the author gets $2.25.
A book with MSRP of $6 from Indie: Amazon pays $4.2(70%), reader pays $6, Amazon gets $1.8, and the author gets $4.2.
Why on earth do we need Hachette?

If Hachette lowers the MSRP from $15 to $10, and Amazon pays 70% instead of 60%: Amazon pays $7, reader pays $8(My assumption), Amazon get $1, Hachette get $4.9 and the author gets $2.1. Now I can see why Hachette doesn’t want it.

Too many words… Hugh, could you tell me if my math is correct?
A book with MSRP of $15 from Hachette: Amazon pays $9(60%), reader pays $10, Amazon gets $1, Hachette gets $6.75(75% of $9) and the author gets $2.25.

No. Your math is flawed because you’re confusing the Amazon sales price and MSRP.

Amazon pays 60% of $15 (MSRP) to Hachette. So Hachette receives $9 from Amazon. Hachette gets $9 no matter what Amazon does with the book.

Hachette then pays 25% of net to the author. Let’s assume there aren’t any other commissions and deductions.

So out of the $9 from Amazon, Hachette keeps $6.75, and the author gets $2.25.

Thank you for this post. I saw Mark Coker’s post earlier today and knew it was biased against Amazon (the nature of competitors) but with the deluge of news about the Hachette-Amazon melee, there was no way to know what’s true and what’s not. Thanks for explaining it much more clearly.

Hugh, right back at you with the beer and respect. I’ll have to go back and read what I wrote, but I don’t think I mentioned the monopoly word once. A company without a monopoly can wield enormous power. Based on the numbers I referenced, they control 1/3 of the market. That’s enough to give them the advantage over Hachette. My primary point of the piece was what the end of agency could mean for authors, publishers and retailers. I’m fascinated by Amazon’s moves and have nothing but awe for their scary smarts. I don’t like their tactics, but like I said in the post, that’s beside the point. They can do what they want.

We keep hearing what Amazon can do, what it will do, and how we will all be in a tub of stink then they do it.

So, who has already done it? Anyone have an example of a retail monopoly? If not, maybe there is a fundamental reason why not?

People have recently started talking about a monopsony. That is when there is only a single buyer. It’s good to talk about them because a retail monopoly also has to be a retail monopsony. If you can sell your book to another company, then they can sell it to the public, and there is no monopoly. Monopolies have to control production. Anyone have any examples? Again, maybe there is a fundamntal reason why not.

Coker tells us agency pricing is great. From the perspective of the total economy, is there some reason we should side with a small group of producers against retailers and consumers? What is it? If so, is that the recommended course for everything? If not, are books special? Why? What makes them special?

Economic fundamentals have not changed. Ebooks and eReaders didn’t change them.

And if anyone does have an example of a retail monopoly, let’s have it. We could probably learn a lot.

If Hatchett wants better rates, sell the books on his own site. Amazon has a right to create a business model that works for them, while giving their Indie authors/publishers a fair shake.

Amazon is hosting the e-books, distributing them to paying customers, handling merchant fees (costs), dealing with customer service issues, etc… so in my eyes, 30% is fair and reasonable.

I agree with you, when you said, “I’m pulling for Amazon as an e-book customer. I hope they win the right to continue to be able to discount e-books so they remain less expensive than paperbacks.”

As an e-book customer, I find it ridiculous to pay the same price for an e-book that you’d pay for a print book. The only time I’d pay more than print prices for an e-book is if it were packaged to include printables, audio files, video files, coaching sessions, etc. or it’s in an industry where the topic has yet to be covered in any real detail.

Books are overpriced. Retailers take too much margin. Publishers waste huge amounts on lavish parties and real estate. Most authors are underpaid. Digital offers a new business model that ultimately will be much better for authors and readers. Those in the middle, large publishers and large Barnes & Noble, are in trouble as these revolutionary digital changes wash through. I am proud the small digital publisher I founded, Publerati, pays our authors 80% of the royalty while we also donate from our share to help fund literacy. Controlling costs can allow more good writers to reach more readers eager for high quality and reasonably priced ebooks.

I have never understood why publishers don’t sell mobi format books directly from their websites. Tor even announced that it would start doing so last year but never followed through.

Here in Europe, Amazon are taking advantage of the tax system. It’s a market that isn’t as open from outside Europe as it seems. On ebooks, Amazon get a huge advantage by having physical servers in Europe.

David Gaughran explains this quite well. Publishers are so scared of piracy they have embraced DRM with a passion, even though it in ineffective, and that’s their problem. Here’s what David says:

While there are no restrictions on anyone selling mobi files, Kindle DRM is proprietary software, owned by Amazon. If publishers wish to place DRM on Kindle-compatible books, they can only sell those files in the Kindle Store.

Publishers’ fear of piracy was so great that they chose not to sell direct to Kindle owners or indeed sell Kindle-compatible books through any non-Amazon retailer. In other words, it’s publishers who are building the high walls around Amazon’s garden through their insistence on DRM (applying it as a choice when selling on Amazon, not a requirement). This DRM-centric approach prevents publishers from doing all sorts of other things too, such as bundling print and digital, and it often leads them to place ridiculous restrictions on their authors who want (and need) to give free copies to reviewers.

The usual argument is that a lot of costs of producing a book, rather than a manuscript, are the same whatever form it is sold in. Printing does cost money. but it isn’t the only cost.

And, however you look at it, self-publishing has to cope with Adam Smith’s pin factory. Self-publishing gets in the way of writing. Which are you good at?

I am inclined to the view that the publisher has a place getting from manuscript to book, and there are several problems lurking behind this affair. Since the authors are not interchangable some generic management solutions may not work. Whatever Hachette are saying to Amazon, is the argument at one of those non-working scales? There are smaller organisations which have their label on the book. It isn’t Hachette which deals with authors

But can you negotiate with Amazon if you’re not the size Hachette is?

Hachette is the wholesaler, not a publisher.

Self-publishing gets in the way of writing? I can only write for a few hours a day. What am I supposed to do with the rest of my day?

Self-publishing is allowing people to quit their day jobs. Day jobs get in the way of writing.

Publishers take a year to publish a book. They only like to publish a single novel a year. Publishers get in the way of writing.

Self-publishing liberates writers.

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Hugh, great post.

Agency didn’t land the big publishers in trouble with the DOJ. Collusion/ price fixing got them into trouble. The DOJ made clear there is nothing wrong with agency. So this could still be what Hachette wants.

Another fantastic post. After being berated by Kensington and few literary agents on the PW website for voicing my opinion (which by the way is the same as your). I’m happy to know that I’m not the only one who thinks Hachette should have kept the bickering behind closed doors for their own sake. Demonizing Amazon only brings to light the publishing industries own questionable practices. The whole thing comes off like a really messy divorce and the Hachette authors are the kids watching the whole thing unfold.

Well, of course Hachette wants a return to the agency plan! It’s also the only way of keeping an even playing field with Apple, Google, and other e-book retailers. You say the agency plan is like “practically no other retail agreement in any other industry.” You ought to get out more. It’s typical of the software industry. It’s the way everything is done in the iTunes store: music, apps, books. And enforcing MRSP in retail is hardly uncommon. Look at the narrow band of prices that Apple enforces at its retailers. That was the approach that numerous industries took toward Amazon. Read Brad Stone’s book. Publishers had bush league contract lawyers from the get-go, that’s all.

Hugh, we are normally in agreement on most things, but I do want to address one things you said: “They would at the same time raise their e-book prices on Amazon so a sale there netted the same profit. This would keep earnings the same while driving consumers to other retailers.”

You forget that indie authors can’t do this. Amazon will price match any lower price at another retailer, so indies can’t have a low price on google and a higher price at Amazon. I do agree they will find other avenues. In particular selling direct to their readers as indies are more engaged with their readership. But I just wanted to point out what I saw as a slight flaw.

Your argument seems largely centered around the idea that Amazon isn’t a monopoly. Agreed. It is not a monopoly. It doesn’t produce all of the books in the world. Heck, it barely produces any (and it does almost no work on those it does produce).

However, Amazon _is_ a monopsony. It is becoming a singular entity through which people purchase books. This is precisely why they can force publishers to push prices down with the tactics being used right now. Publishers can’t go to another retailer to make up for sales lost through Amazon.

None of this is to say that big publishers are wonderful and helpful. They are also huge and terrible beasts that are harmful to authors. But with them, there is at least some modicum of competition. If Amazon is allowed to continue to grow like this, the only people who will win will be Amazon. It’s foolish to think that customers or authors will benefit from having only one place from which books can be purchased.

Sorry Hugh – I think your insight and experience have been valuable contributions to the field, but I believe you are missing the point here.

(Since we’re all speculating) my speculation is that Amazon couldn’t care less about the details of any particular deal because the ONLY thing Amazon cares about is market share.

When indies – the group with the least negotiating clout – rally to the cause of a monopolist, you have to know that the monopolist has achieved market domination in deed if not in word. I’ve seen this dynamic in two other industries (well outside of publishing) and the end result is always the same: the market leader attains a position that allows them to effectively control and influence everything in that market, to the point where the vast majority of consumers don’t even know that alternatives to the monopolist exist.

On the other side of the coin: those suppliers and content creators who are favored by the monopolist exist, those that fight “the good fight” are equally non-existent. They simply can not penetrate the market deeply enough to represent any real sense of competition.

Suppliers (authors in this case) getting “squeezed” is an inevitable consequence of the game plan Amazon seems to be embarked on. Once they have achieved market domination (according to their own internal definition of what that means), there are only (only) two ways for the company to continue to increase their profits: 1 – raise prices. 2 – lower costs.

Given the past history of such things, it’s not unreasonable to assume that they aren’t going to raise prices.

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