Thursday, July 31, 2014

Amazon and the $9.99 ebook ceiling

As the Amazon-Hachette wars continue, Amazon reveals its ultimate game plan: The retailer wants all ebooks to be priced at $9.99 or less.

John Scalzi comments here, in a mostly anti-Amazon rebuttal

Scalzi makes some legitimate points: Amazon is trying to use its weight in the marketplace to determine pricing for everyone. (But Amazon's share of that market is far greater than the 30% Scalzi mentions: Amazon has 60% of the ebook market). 

Scalzi is also correct in pointing out that Amazon, no less than any other corporate entity, is a profit-generating, self-interested enterprise. I recently made a similar argument myself.) 

On a related note, I know of Amazon-published authors (both big names and relative unknowns) who are far too giddy about the potential demise of the "dinosaur" traditional publishing establishment. A market in which Amazon becomes a monopsony for authors' work is ultimately no better than one in which a handful of New York-based publishers perform the same function.)

Scalzi's arguments, then, aren't necessarily wrong, but they are incomplete. There are two key factors behind Amazon's $9.99 strategy that Scalzi overlooks:

1.) The perceived value of ebooks. Readers understand that the marginal production cost of a single ebook is near zero. No, this doesn't mean that "information wants to be free," and therefore ebooks should be priced for free or at $0.99.

However, there is a standard consumer expectation that cost reductions will be partially passed on to them (as is almost always the case with cost increases). For every ebook that is sold in place of a physical book, there are savings in printing, transportation, and handling inside a warehouse. This should be reflected in a significantly lower ebook cost.

2.) The competitiveness of books in the entertainment marketplace: Within the publishing establishment there is a core of writers, publishers, (and even readers) who are sentimentally attached to an industry structure based on the following: A small group of economically inefficient literary agents and publishers (based mostly in New York) release a limited number of high-priced books into the marketplace. These are sold by brick-and-mortar retailers (i.e., the overly romanticized "independent bookshops") at near list price. 

The result is a $27.99 novel--which Amazon sells at a 40% discount, but which the cozy corner bookshop cannot afford to sell at even a 10% discount, because of differences in overheard and economies-of-scale. 

Much of the hostility directed at Amazon is based on the fact that Amazon is asking the publishing industry to behave more like other industries. (Again, I wrote about this in more length the other day.) That means paying attention to real-world economic concepts that other industries (such as the automotive and electronics industries) have used to make their product offerings more diverse, more affordable, and more widely available to consumers. 

This doesn't square with the old-school, romanticized vision of publishing. 

However, one thing that all parties agree on is that both adults and children are reading less than they once did; and this trend can be directly traced to competing forms of entertainment that are technology-based and much cheaper: cable television, Netflix, the Internet, etc.

The publishing industry needs to join the 21st century and behave like other industries. Otherwise it will become a "dinosaur".

*      *     * 

Amazon is attempting to force the publishing industry into making these changes. To be sure, Amazon is also looking after its own business model and its own profits. 

The bottom line, though, is that the old cost structure of the publishing and book retailing industry--the cheese and wine lunches in posh New York restaurants with literary agents, the inefficient corner bookshops, etc., aren't conducive to an economically competitive publishing model for the digital age. 

Amazon has made mistakes; but Jeff Bezos has a grasp of business and economics that most publishing houses (and most authors, for that matter) sorely lack.

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