July 20th, 2010

Amazon sells a lot of ebooks

Big news from Amazon re Q2 2010 kindle e-book sales: they sold more e-books than they sold hardcovers. What exactly does this mean?

My first reaction was to be utterly stunned: I hadn’t expected that threshold to be crossed for a while yet. My second reaction, after listening to tidbits from R. from NYT and other coverage, was to get tremendously distracted by this quote from the LA Times coverage:


"We don't know the economics of these e-books," said Colin Gillis, an analyst with BGC Financial. "In our opinion, they are losing money on a lot of the bestsellers sold as e-books."

I haven’t pursued who Gillis is or what BGC Financial is (altho Gillis is apparently in a lot of people’s address books, because he gets quoted on techy companies a lot in the news); maybe I’ll go pick on them later. In the meantime, this quote was a little too ripe to ignore. “a lot” is a sufficiently vague term that you can’t tell whether Gillis means “most” or merely “many”. If Gillis means only “many”, then the comment is a ridiculous one: retails _everywhere_ _routinely_ decide to lose money on “many” transactions. There are terms for that, “loss leader” being one of many.

Presumably, Gillis only said what he said because he thinks that this is more than just “loss leader” stuff -- someone is at least hoping the listener or reader will jump to the conclusion that in general, Amazon doesn’t make a lot, if any, money on e-book sales. Is this a plausible thesis?

My first response to that question was open derision: after 5 of the big 6 forced the agency model, e-book-retailers everywhere were guaranteed to be making money on all e-books sold under the new agreement. That's what the publishers traded for controlling the price point. (If you're thinking, why would they do that? Well, I can't figure it out either.) Thus, only bestsellers which were published by Random House or predated the new agreement would be loss leaders -- and Random House just doesn't dominate the bestseller lists to that interesting a degree. In my efforts to explain this to R., we realized that R.’s and my understanding of what books are currently bestsellers were severely at odds with each other (he was thinking Dan Brown was still on the list somewhere, and that the lists were routinely composed primarily of books which had been out for months if not years). I initially went to the NYT Bestseller list and started tracking imprints and pub dates, but then I realized that was using a bad proxy when I had good data: I went straight to Amazon’s own bestseller list in books (probably should have tracked down a kindle specific book list, but more on that in a moment) instead. And what I discovered there shocked me. First a bit of background: that list (unlike NYT) doesn’t distinguish between fiction or non-fiction, and it doesn’t distinguish between hardcover, trade paper or mass market. And for purposes of understanding whether Amazon is making money on an ebook, that is a difference that makes a difference. A really big difference.

I went down the top 25, and could only identify 2 books which had ebook pricing at < 40% of current list price: #1 on the list, Stieg Larsson’s conclusion to the trilogy, and the latest by Jennifer Weiner, both published at $9.99, both otherwise only available as hardcovers. In the case of Mr. Larsson’s book, the publisher is an imprint of Random House; Amazon is almost certainly losing slightly more than a dollar on each and every kindle download of that book (altho they might not be -- on a really megaseller like that, publishers have occasionally sold it to retailers for less than 40% of list in hardcover; depending on the details of the agreement with Random House, such a hypothetical price point might then apply to the e-book as well -- but that would merely make the argument that Amazon is actually making money on ebooks that much stronger). The other instance -- the Weiner novel -- is an imprint of Simon & Schuster, which has an agency agreement with Amazon. I don’t know _why_ it had a kindle list price of $9.99. Perhaps Amazon has “gone rogue” (or had a bug or feature on the pricing of it); perhaps Simon & Schuster decided to give Ms. Weiner a little push during the first weekish of release in hopes of attaining a good position on an NYT list, with the intention of raising the price later.

But 2 out of the top 25 does not a solid case for losing money make. Worse, R. correctly sensed that a lot of top sellers (particularly under Amazon’s inclusive definition) are books that have been out for a while. However, books that sell well and have been out for more than a year are often out in trade paper if not mass market, and many of _those_ entries on the list had prices at or below $9.99 for the kindle edition -- but well above 40% of cover price. In other words, to take a specific case, for every third entry in the trilogy that Amazon is selling, there are two earlier entries selling only very slightly less briskly -- and they make as much or more per copy on each of those two than is being lost per copy on the Hornet’s Nest.

When Amazon says, we sold more kindle books than we sold hardcover books, that is in some ways much, much less impressive than it might seem. After all, hardcover books are only a minority of book sales, albeit a ridiculously high-margin one for publishers. Paper covers constitute a much larger fraction of book sales. And, it turns out, books in paper covers are priced in a way that lets Amazon make quite a bit more money than I had realized -- while still providing a good value to the customer. If you fail to recognize the difference between “hardcover” and “books in general”, you might produce a paragraph like this one from the LA Times:

“About 80% of the priced e-books go for $9.99 or less, according to the company, significantly lower than the approximate $25 average for hardbacks.”

That’s a dumb thing to say. After all, trade paperbacks and mass markets are priced significantly lower than the approximate $25 average for hardbacks. Many of those ebooks (and more every day) are books also available in softcovers.

The perceived value to the customer in this area is interesting. It is often the case that the kindle pricing is lower than trade paperback list but higher than that particular book is selling for as a discounted trade paperback. Worse, I ran across a boxed set of the first 8 Sookie Stackhouse mass markets. List was $60 something, discounted to $35 or so. But on the kindle? Still above $50. I blame the publisher.

When the kindle first came out, it was positioned (I’m boring myself, even, writing this yet again) to attract readers who consume 2 or more books a week/triple digits over the course of a year, many or most of those books new in hardcover, discounted or otherwise. The pricing of the device and the pricing of the books readily justified the transition for this group of readers. However, with the lower price point on the reader, and as existing owners of the device feel the powerful pull of Not Having to Wait Much Less Store All Those Books, books also available in paper at lower price points are also being bought in volume for the kindle. And in the end, _that_ is where the money is going to be, for Amazon, and for everyone else.

I'm not sure why Gillis thinks there isn't enough data to make sense of this model. If he's waiting for quantitative sales data broken down by format, price sold to customer and price paid to publisher, he's not much use as an analyst. I don't know how he could have done the analysis described above and _not_ come to the conclusion I came to -- a research exercise that took less than an hour to execute and less than an hour to document. I'm thinking Gillis might be one of those people who is a lot more reliable in producing a quote with attribution than he is in actually supplying useful analysis or advice.

Incidentally, while it is obvious from the above discussion that the way I researched this veered off a bit from my starting point (switching from NYT to Amazon's bestsellers, switching from a a priori understanding of the agency model and when it was adopted to a book-by-book analysis of what the list was, what the kindle price was, and how that compared to an assumed 40% of list paid to the publisher -- which is very, very conservative), it is perhaps less obvious that the conclusion I reached differed substantially from what I expected to reach. I _expected_ to find that Amazon was losing money on around a quarter to a third of their bestsellers -- and I expected hardcovers to be much better represented on the bestseller list than they actually were. In practice, Amazon is losing money on less than 10% of their top 25 bestsellers -- and possibly none at all. Weirder still is how much they seem to be making on bestselling trade paperbacks.

Amazon sells a lot of ebooks, redux


This is at least an interesting piece of analysis. But it's still a little dippy.

Ms. Holmes' first objection to the more ebooks than hardcovers comparison is to point to all the cheap but not free ebook only books Amazon sells.

"There are many that cost a dollar, or 99 cents, and they're all being counted."

However, if one goes down the list of the top 50 paid kindle items, there is only a single one on the list selling for a dollar: _Sunday's Child_ by Tom Lewis. There's also one $1.99 book being sold (the next up in price) -- it's the Bible. If super-cheap non-free books are running up the numbers, then they aren't running up the numbers on particular titles to a greater degree than people are running up the numbers on particular titles that are otherwise only available from the big 6 in hardcover.

Holmes' second objection is one I made in passing in a previous point; Holmes' does so in a more organized fashion:

"Obviously, paperbacks represent an even bigger limitation to what these numbers mean...not only does the price advantage shrink when you compare to paperbacks rather than hardcovers, but many of the other possible advantages do, too. What that suggests to me is that it will take exponentially longer for the digital book to dent the paperback than it will for it to dent the hardcover business."

Exponentially? I'm not sure what that would even mean in this context. It took under 3 years for ebooks in general to beat hardcovers in specifically -- does that mean it'll take under 9 years to beat physical books? Specifically, just over 7 and a half years? Perhaps she had in mind a smaller or larger exponent? Or maybe this is another metaphor embedded in a word and all she meant was "a lot longer"?

When I ran down the top 25 kindle bestsellers on Amazon, ignoring large print and audio books, 15 were available otherwise only as hardcover, 6 as trade paper (and possibly hardcover), 4 as mass market (and possible trade paper and/or hc). In the next slice of 25, it was 16 hc, 3 tp and 5 (and subscription to NYT, which I did not categorize).

That doesn't look like it's going to take "exponentially" longer to overtake new physical book sales in general on Amazon. That actually feels pretty linear to me.

She's cautious about her conclusions, but here is her final sentence:

"But for Amazon to sell more digital books than hardcover books, while interesting, is a long way from a print death knell."

I don't know. In the world of technology, 3 years is a long time, and a decade is an eternity. But for print publishers who are determining print runs on megabestsellers months if not years in advance, 3 years is lickety split, and 10 years is not long after. Reassuring print publishers and the physical book community in general that they can relax sounds a lot like denial.

Amazon sells a lot of ebooks, according to a startup/vc reporter at the NYT

Why would anyone assign a person doing startups and venture capital coverage to Amazon? In 2010? Does this make sense? Hello?

Oh, wait. It's the middle of July. Poor Ms. Miller was the person who isn't currently on vacation, presumably, and she sure as hell doesn't have anything on her beat happening. Whatever.

Here's the dippy quote in this coverage:

"Mike Shatzkin, founder and chief executive of the Idea Logical Company, which advises book publishers on digital change...The big surprise, Mr. Shatzkin said, was that the day came during the first period that the Kindle faced a serious competitive threat. The Apple iPad, which started sales in April" (grammar weirdness purely introduced by me attempting to summarize).

Why does Shatzkin think that the first "period" (does he mean quarter?) that Kindle faced a serious competitive threat was Q2 2010? Is he being gratuitously mean to the Nook (and poor Sony!)? Or did he just get sucked into the iPad: e-book killer meme? I'm betting the latter. Never mind that a whole lot of iPad lovers have already decided that it really is better to download the kindle app on the iPad. Apple is clearly fighting this: I get frequent questions on the iPad of whether I want to download the ibooks app yet or not. I haven't figured out how to turn it off.

But Ms. Miller is not relying solely on Mr. Shatzkin to come up with The Goofiness:

"Amazon is being helped by an explosion in e-book sales across the board. According to the Association of American Publishers, e-book sales have quadrupled this year through May."

The causality arrow on the helping is not supported by the evidence. What evidence there is (Amazon's rate is higher than across the industry as a whole) would tend to indicate that Amazon selling e-books is floating e-book adoption across the industry -- not the other way around. But here's the best bit:

"But, except for the free uncopyrighted books, Kindle owners must buy or download content via Amazon. “Every time they sell a Kindle, they lock up a customer,” Mr. Shatzkin said."

Oh come on. That is the Opposite of True. I've bought a bunch of stuff from the Baen store. Really, people. This is the New York Times. I know it is July. But who is minding the store over there? And are they stoned?

Amazon sells a lot of ebooks, but the Chronicle Is Not Impressed

Here's the link:


Doubt _that_ will work forever. What a nasty looking URL. Anyway.

As their URL indicates, they are not impressed. Here is _why_ they are not impressed: it is something I pointed out, and NPR pointed out. Hardcover book sales are not the same as the book industry as a whole. I wasn't feeling very quantitative before, but look, the Chronicle is here to help.

"According to Nielsen Bookscan, only 23% of total dead-tree book sales this year come from hardcover books. The rest are from paperback books. In other words, assuming Amazon's book business reflects the overall industry, Amazon is still probably selling twice as many paperback books as Kindle books."

If you are a publisher, and this helps you sleep at night, that is only because you are _such a fucking moron you would never survive in a real business sector_. I figure the Chronicle is doing this for complex local political reasons best known to people in the Bay Area. Oh, wait. That whole Bezos thing? That's in a different state. Ah. Perhaps I understand now.

Other tidbits of The Goofiness from this entry: they link to an article from _November 2009_ to support the contention that Amazon is losing money on ebooks it sells. Wow. The mind really boggles. Never mind that whole agency model thing that _forces Amazon to make money on virtually every ebook it sells_.

If I really believed this was one of those yeast brick things like from Prohibition years, I would just giggle and goggle and go wink, wink, nudge, nudge. But I sort of think the author meant it.

(Ok, one more bit, just for laughs: "it implies Amazon has sold around 22 million Kindle books so far this year. That's just the equivalent of 6% of the total print book market, which remains tiny." *snicker*)