Amazon Fails to See How It Punishes Authors

August 11, 2014
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Over the quiet weekend, Amazon Kindle Direct Publishing sent an e-mail to its authors asking that they essentially help the company strong-arm Hachette Book Group into agreeing to Amazon’s new terms. Those terms would drastically reduce the price of certain e-book titles. Amazon also posted a letter on a new site, called ReadersUnited.com, appealing to readers to support its position by sending a letter–complete with Amazon’s prepackaged talking points– to Hachette CEO Michael Pietsch.  

The dispute erupted when Hachette reportedly refused to lower the price of some e-books from $14.99 to $9.99, and Amazon–in characteristic fashion–stopped all pre-orders of some important  new Hachette releases. It’s not the first time Amazon has black-balled a publisher for not playing along with its demands. In fact, the latest victim is Walt Disney Co. Amazon this month blocked pre-orders for Disney’s forthcoming DVD and Blu-ray titles. 

 Today, Hachette’s CEO responded with his own message via the New York Times (read full text here). Mr. Pietsch said, in part, “This dispute started because Amazon is seeking a lot more profit and more market share, at the expense of authors, brick and mortar book stores and ourselves.”

Amazon has proceeded to support its case with some fuzzy math, which Authorlink questions below.  

The Amazon letter to authors and readers asserted that when the price of a book goes down, customers buy much more, and claims it has measured the price elasticity of e-books across many titles.

“For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99,” the company claims. “So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000 …the customer is paying 33% less and the author is getting a royalty check 16% larger and being read by an audience that’s 74% larger.” 

Now that’s real elasticity. 

For Amazon’s own authors, dropping the price of an e-book will result in a huge decline in their incomes. Let’s assume, as one example, that a Kindle Direct Publishing author has elected to  take the 35% royalty deal on his/her book to avoid being restricted to selling books exclusively on Amazon (as its 70% royalty plan requires).

Now lets run some numbers. 

The KDP author’s profit on a $14.99 book at a 35% royalty rate is roughly $5.25 per book. Profit on the same book at $9.99 drops to $3.50.  The difference equals a loss of $1.75 per book.

Amazon claims if a book price is dropped to $9.99, it can sell 74% more units than it can move at the higher price. Really? Where’s the proof? And does that increase happen only for bestsellers, or across the KDP board?  

By lowering the retail price, the author in this scenario looses $175,000 over 100,000 sold copies  (35% royalty at $14.99, less royalty at $9.99 x copies sold).

To make up for that loss, the author must sell 50,000 more books at $3.50 each just to break even with what he/she would have earned before the price drop. Then the author would need to sell another 21,142 copies ( a total of more than 70,000 copies combined) to attain 174,000 units Amazon claims it can sell by lowering the price.

We realize that publishers such as Hachette have a different pricing structure with Amazon than the KDP authors’ plan we site here, but the principle remains.  

We tend to agree with Mr. Pietch that the dispute is more about market share than pricing.

 The situation reminds us of the anti-trust action against Standard Oil Co., Inc., which was the largest oil producing and transporting company in the world until 1911 when the U.S. Supreme Court ruled that Standard was an illegal monopoly. According to Wikipedia, Standard Oil dominated the oil products market initially through horizontal integration in the refining sector, then, in later years vertical integrataion; the company was an innovator in the development of the business trust that streamlined production and logistics, lowered costs, and undercut competitors.  Anti-trust critics accused Standard Oil of using aggressive pricing to destroy competitors and form a monopoly that threatened consumers.

 Amazon already owns roughly 65% of the e-book market. They argue that lower book prices benefit readers–and no doubt, they do. But is the reader the only one who has a stake here? What about the authors and publishers who actually produce the work? And do we really want a world in which a single power controls almost everything we read and buy?

Crushing publishing companies and authors to build a monopoly doesn’t seem like a good idea in free-enterprise America. We usually thrive better on choice and market competition.  

A 2012 Justice Department lawsuit against several major publishers for so-called “collusion” sadly ruled in favor of Amazon. Wired Magazine said the DOJ settlement “sounded like an argument for Amazon’s business model.” 

Are we seeing another step in Amazon’s plan to crush traditional publishing and take the spoils for itself?  

 As a side note, we are curious about whether the recent purchase of Canada’s Kobo Books by the Japanese-owned Rakuten, Inc., might bring more competition to Amazon. Rakuten is a  Japanese electronic commerce and Internet company based in Tokyo, Japan. Its e-commerce platform Rakuten Ichiba is the largest e-commerce site in Japan and among the world’s largest by sales.

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