For some weeks now the news in the technology and business news pages has featured updates about an argument between online retailer Amazon and Hachette Book Group, a ‘traditional publishing’ house. The fracas seems to be based on Hachette wanting to charge the customer whatever it wants for an ebook, while Amazon is arguing that it is charging too much and sharing too little with its authors.

If you know anything about me and my beliefs, you’ll know I agree with Amazon’s viewpoint. Here’s why …

A little background on royalties and print publishing

Traditionally, in Australia at least, a publishing house would pay a first time author 10% of the cover price (the list price, the RRP) for each print book sold. So a book retailing at $24.95 would earn the author $2.495 every time a copy sold, regardless of how much it sold for.

If the book was a success, then the 10% might be increased on the next print run to 12.5%, then 15%. When the author released their next book, the starting price of 10% might be negotiated to a higher rate, or not. But this is how it used to work, in general.

Somehow, publishing companies were able to make a profit on this print publishing model, although it’s my understanding that many titles would run at a loss or break even, while the few successful titles would subsidise those. So the bottom line is, print publishing has always been a gamble – it’s been about trying to pick the ‘winners’ and hoping the odds would be high enough to cover the losses on the other nags. (Sorry, did I say that out loud?)

And introducing … the ebook!

Over the last 10 years, and basically due to Amazon and their innovative Kindle ebook reading device, the ebook industry has risen up to challenge the concepts of traditional print publishing. Amazon and their KDP (Kindle Direct Publishing) program have opened the doors to publishers, publishing facilitators and self publishers (writers happy to bypass the traditional publishing system), enabling them to sell electronic titles to a worldwide audience. To say this has shaken the publishing industry up would be an understatement. Although you have to give the traditional publishers their due, they’re still hanging onto their traditional models, no matter how outdated they may be!

The hatchet job on Hatchette

From what I can see, it would appear that Hachette Book Group is paying its authors 25% of net revenue on ebook sales (if this article here is correct: http://www.nytimes.com/2014/07/13/technology/amazon-a-friendly-giant-as-long-as-its-fed.html).

Amazon argues that publishers should be paying authors more than 25% of net revenue on ebooks, and I have to agree with this. (See their statement here: http://www.amazon.com/forum/kindle/ref=cm_cd_tfp_ef_tft_tp?_encoding=UTF8&cdForum=Fx1D7SY3BVSESG&cdThread=Tx3J0JKSSUIRCMT&tag=viglink20362-20)

To my mind, for a publisher to take 75% of the net proceeds on sale of an ebook is just plain greedy. Yes, the publisher foots the bill for editing, layout, production and marketing. But if they need to take 75% of net revenue from an ebook to make a profit on development of that book, then why? Did they spend too much on development – editing, layout, cover design? Did they spend too much on marketing? Are they unable to sell enough print copies to cover the cost of creation?

You see, the thing is, selling ebooks is not limited in the same way as selling print books is. You don’t need to foot the upfront costs of printing, packing and shipping to a retailer, then waiting for – or worse still, chasing them for – payment. You don’t need to worry about warehousing unsold stock. You don’t need to try to work out how many to get printed, where to get them printed, the optimum page size to deliver the optimum number of pages. And you don’t need to worry about refunds for returns of unsold books. There is so much time, effort and material resources saved with so few decisions to make.

And then when you ship the print books, unless you have an international reach, you will probably only be able to afford to ship them within your own country. So you have to negotiate to sell the rights to another publisher in another country, for them to organise printing and distribution etc in that country.

When that’s all said and done, let’s say you get 5,000 copies printed. You have to sell those 5,000 copies, to the retailers where the mostly likely people to buy them are likely to see them, to get your money back. What are your chances?

If, on the other hand, you develop an ebook, you can retail that anywhere in the world online. You are not limited to selling 5,000 copies. You might only sell 5 copies, but you also might sell 50,000. Or perhaps 500,000. The population of the USA is currently in excess of 315 million people. Why would you opt to try to sell 5,000 print books if perhaps just 1% of those people (3.15 million) might buy one of your ebooks?

Print publishing is an extremely expensive business. Ebook publishing isn’t. And this is the point Amazon is trying to make. It is unfair and greedy of publishers to charge almost the same for an ebook as they charge for a print book. Unfair to the reader (especially when there is no guarantee that a ‘traditionally’ published book will be a better read than a self published book) and unfair to the author, especially if they only receive 25% of net revenue from the sale of that ebook.

How do ebook royalties on Amazon work?

Let’s put Amazon’s ebook royalty calculations into numbers we can understand – in US dollars.

When you self publish an ebook through Amazon, and you price that ebook at $9.99, you will receive a 70% royalty from most markets. (Some of the newer markets, such as Amazon Japan and India, only reward with a 35% royalty.) So the reader pays $9.99, Amazon keeps $3.00 and you receive $6.99 for every ebook sold.

If your ebook was published via Hachette, and they retail your ebook on Amazon at $14.99, then – on the assumption they are subject to the same royalty conditions as a self publisher – they will receive 35% of the sale price instead of 70%, because they have priced your book in excess of $9.99. So the reader pays $14.99, Amazon keeps $9.7435 and pays Hatchette $5.2465, who in turn pay you 25% of that $5.2465, which is $1.3116.

But if Hatchette were to publish your book at just $9.99, they would receive $6.99, and pay you 25% of that, which is $1.7475.

What are the ‘big publishers’ afraid of?

There is much talk about Amazon’s reach, their potential for a monopoly of the literary market etc. I fail to see how you can have a monopoly when you are enabling so many people and businesses to function.

From where I sit, it’s the other way around. For too many years, traditional publishers had a hold over the literary market. They had a hold over pricing, distribution – and who did and didn’t get published. And they have been slow to acknowledge and adapt to the change that was coming.

Although a retailer, Barnes and Noble were smart – they got in early with development of their Nook ebook reading device. This device uses the same epub format that the iPad uses. But where are the big publishers in this field? Where is the Penguin ereader? The Hachette ereader? They all wanted the distribution, but none of them wanted to invest in their authors or readers, or the future. They’ve happily sat back and let Bezos and Jobs work all that out, and now they’re complaining about Amazon being a ‘monopoly’!

In general, few ebooks should need to cost more than USD$10

I have long held a philosophy that no ebooks, other than those containing the rarest of information, should be priced above $10. With a totally open retail market, a book remotely worth its salt will find its audience, one way or another, in one neck of the woods or another, as time goes by.

To those who say that encouraging lower pricing will discourage people from buying print books, I say, ‘Garbage!’ I know plenty of people who refuse to buy ebooks, who still love the feel of a ‘real’ book in their hands. And there are certain print books I would still buy. But on the whole, for people who just want to devour the words and aren’t particularly fussed about the method of delivery, why should we be expected to subsidise the costs of printing, packing, shipping, warehousing and distributing the print version? If the print version can’t cover its own costs, then should it have been produced in the first place? And – we have no resale value on an ebook. All we are buying is a licence to read. We don’t own the digital file.

And as for authors and ebook royalties, I also believe that 25% of net proceeds is an insult, especially if there is no accompanying print version. If the publisher can’t make a profit on 50% of the net proceeds, then are they taking the right books on?

Tradition sometimes dies

The thing is, the traditional publishing industry needs to change. And they don’t want to. They’re clinging to the past, railing against those who are trying to deliver a better experience to authors and readers, without realising that they are becoming more and more irrelevant.

If they wish to survive, then, like all organisms, they’re going to have to adapt and evolve. Survival of the fittest. The fittest for purpose. Acquisition and growth isn’t going to help. Survival of the biggest does not equate to survival of the fittest. Look what happened to the dinosaurs.

Walking the talk disclaimer

I am the owner of IndieMosh, a self publishing facilitation business for Australians. We assist in the self publishing process, delivering those services for which the author wishes to pay, in exchange for 85% of net royalties. For more information please visit us at www.indiemosh.com.au

6 thoughts on “Ebook pricing: What the ‘big’ publishers don’t seem to understand

  1. Jen,

    You know I am not going to agree with you, so let’s just get that out of the way first. 🙂

    I read this article by John Scalzi this morning and he pretty much sums up the other side of the argument.

    http://whatever.scalzi.com/2014/07/30/amazons-latest-volley/

    Both sides of the argument are only in it for the money. Amazon is nobody’s friend, neither is Hachette. They both need to grow up and work it out.

    Paul

  2. Of course they’re both in it for the money. I’m in business for the money. Aren’t you? But if I don’t run my business effectively and profitably, I’m not going to be in business for long.

    And that’s my point: the big publishers are bleating ‘Amazon is a bastard’ because they’re not running their businesses profitably. They’re still adhering to an outdated 20th century model and expecting the buyer and the author to pay for that inefficiency. They have been remiss about doing a risk assessment on change and updating their methods and attitudes, and now they’re all blaming Amazon for moving the goal posts!

    But it’s a free world. They don’t have to release their books on Amazon. They can create .mobi files and retail them elsewhere – on their own online shop if they want – and people can buy them and read them on their Kindle or their Kindle app, and then they can charge the reader whatever they think the market can bear.

    And in some ways, it would be a whole lot better if the big publishers did that, because then everyone would get some idea of how much an ebook should sell for. And I bet they would still charge the prices they’re charging now – and keep the royalty they would normally pay to Amazon.

    People keep referring to Amazon as a monopoly. They’re not. They’re just giving the consumer what he wants. You don’t have to buy from Amazon and you don’t have to sell to Amazon. Hachette is part of a much larger French group – there is no reason they can’t just dump Amazon from their distribution chain if they don’t like Amazon’s ideas. Let them invest in their own future and come up with a better model – better for publishers, better for readers and better for authors.

    Sorry, Paul – the dragon got poked this morning, and she’s roaring!! 😀

  3. Ah, a Sunday soapbox. What fun! I also really don’t agree with your position.
    For a start, I believe that any discussion regarding ebook royalties should differentiate between different types of books. A non-fiction book with a high development cost is a very different matter from a fiction title with low development costs. Similarly, one needs to differentiate between colour titles and black and white titles. A book that can be printed POD (and currently POD is only an effective price model for black and white titles) means the publisher can print 100 units or fewer at a time, minimising risk and changing the whole risk/return equation.
    In terms of costs, development of a title (acquisition, development, editing, design, marketing and PR) can easily cost $10,000 or more and the publisher pays all this expense, plus bears the risk. Not only that, but marketing and sales agent representation is a huge component of a publisher’s costs, and without this representation, it can be very hard getting your print book widely distributed amongst bookstores. Remember that print sales in part support ebook sales and provide a marketing platform whereby readers hear about a book, recommend a book, share a book and so on.
    And yes, you’re right, it may only be one book in three that makes a profit, and this book in part carries the rest of the titles in the list. Publishing is a form of professional gambling! This is all the more reason to create a model that spreads this risk across titles.
    If you were a publisher only getting 15% of net revenue and an ebook had an RRP of $9.99, one would need to sell a whopping 12,000 ebooks in order just to break even on a book with a development cost of $10,000. Or 6,000 ebooks on a development cost of $5,000. List me the Australian ebooks that have sold even 3,000 units or more and it’ll be a short list indeed. Especially when considering that for most titles published in Australia in both print and ebook form, ebook sales still only average 15% of print sales. (Ebook sales can be very miserable indeed, I’ve seen many titles only selling 1 or 2 units a month.)
    Ebooks are not an ancillary extra, but should now be integral to any publisher’s program. For that reason, all development costs should be amortised across both print and ebook sales.
    Finally, Hachette are actually very progressive paying 25% on net revenue – most publishers are only offering 15 to 20%. Publishers are actually paying lower royalties on ebook sales as they gain an understanding of the costs involved. As an author, I would be delighted if my publisher were to offer me 25% royalties on net revenue. I can’t say how much I receive, because I signed a confidentiality clause, but my rate is significantly less than this.

  4. Jen, let me give you a small-scale example. I currently carry a new title in store about local history. The author has self-published it and is charging $49.50 for it. Now, I offered him the shelf space and will get a percentage of the sale price if it sells. I don’t think it will at that price, but that’s not my business. It’s not up to me to tell the author what the book will sell for – if it doesn’t sell, then it is up to him to reduce the price.

    Amazon is, for all intents and purposes, just a bookstore (for this example.) It isn’t their business to tell anyone how much they should be charging for books. Their job is to sell them. If they think the prices are too high, then do something radical – don’t carry their titles. Simple. But Amazon knows that there is money to be made in them there Hachette hills…

    Also, that email they sent to their KDP authors was disgusting. Chuck Wendig covers it here:

    http://terribleminds.com/ramble/2014/08/09/in-which-amazon-calls-you-to-defend-the-realm/

    Paul 🙂

  5. Oh man, so much to digest between you two, Veechi and Paul!

    Yes, Veechi – we’re agreed on the concept that publishing is a form of professional gambling, and I failed to make it clear that I also agree that non-fiction and fiction are different, and I really don’t have a problem with non-fiction ebooks retailing above $9.99 – to whatever the market can bear.

    I actually met a man once who had paid $100 for an ebook. I was quite startled (as I’m sure you can both imagine, knowing my thoughts on the topic!), but he explained that the book’s potential worldwide audience was very small – perhaps 100 sales – and it contained information that he couldn’t get elsewhere, but which was very valuable to him in his business. So under those sorts of circumstances, I certainly have to get off my pedestal and agree with you both that we should ‘Let the market forces reign’.

    However, I’m sadly very distrusting that market forces will be allowed to have their way after the Apple et al ebook price-fixing scandal, which you can read all about in last year’s judgement against Apple, Hachette, Macmillan etc, which found a ‘conspiracy to raise the retail price of ebooks’. You can read it here: http://www.nysd.uscourts.gov/cases/show.php?db=special&id=306

    I am not 100% convinced that the ebook prices we are seeing now aren’t still reflecting what happened back then. So while perhaps Amazon shouldn’t be trying to tell Hachette etc what they should charge for their ebooks, at least Amazon is trying to drive ebook prices down, rather than hiking them up.

    While I agree with you, Paul, that Amazon’s email should be filed under ‘whatever were they thinking?’ I think it was probably done as a knee-jerk response to having Bezos’ email address published in the NY Times by a group of authors calling themselves ‘Authors United’. (You can read it here: http://authorsunited.net/) I suppose Amazon felt it was time to punch back; they just punched harder.

    Mind you, loved Chuck Wendig’s blogpost – that fellow is brilliant and hilarious – a wonderful and rare combination! I must follow him – he made my evening! 😀

    Veechi, I agree in part with you that an ebook price should reflect a reasonable share of the development costs. My argument is that an ebook should not be priced so that it subsidises the print edition. If the print edition can’t recover its own costs, then why should the ebook readers/buyers have to subsidise it?

    And if the publisher isn’t sure whether or not a book will sell, then they can reduce their ‘gamble’ by releasing an ebook version first, which is something we encourage our authors to do. And I truly think this is one of the business practices the big publishers need to consider to move into the 21st century, to reduce their exposure to risk.

    BTW, I’m not sure where you get your 15% of net revenue from for publishers selling ebooks. Most retailers seem to pay between 60 and 75%. Interestingly, Kobo (who we no longer retail directly with), reduces their royalty rate to 38% for titles selling at $13 or more. So they do a similar thing to Amazon – penalise the publisher/author for putting too high a price on an ebook!

    I do find it very interesting the different opinions people have of the royalties publishers pay their authors. You’re admirably fair in your defence of the publishing industry and the costs they have to bear compared with the rewards they pay. Question: when you talk about the royalties on net ebook sales, does that take into account any advances? I have not taken advances into consideration when talking about royalty rates, so perhaps we’re comparing apples with oranges?

    Yes, ebooks sales figures – it would be great to have some country-wide figures, wouldn’t it? But that’s the trouble with retailing ebooks – while we can get figures on physical copies sold via Nielsen BookScan, ebooks are a whole other animal, aren’t they – as I think we’ve proven here!

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