March 10th, 2012

Amazon contract coverage at Publishers Lunch and a bit more

At least when I looked at it, it was not behind a paywall.

http://lunch.publishersmarketplace.com/2012/02/two-distributors-do-sign-with-kindle-and-pay-ebook-coop/

I saw someone else refer to this (or at least the negotiations that it describes) elsewhere. I've been trying to track that coverage down for parts of two days and I can no longer find it, probably because I was sick and not paying enough attention when I saw it the first time. Oh well. h/t somebody, right?

Here's what caught my eye:

"Also indicated in one client notification is that Amazon has also increased the ebook conversion fee they charge publishers who provide only a print book or PDF and want Amazon to produce the book file. That charge is now 8 percent of digital list price, up from 5 percent previously."

(1) I had NO idea that Amazon was providing this service. Period. End. When I was busy moaning about the horrifyingly bad conversion of Gail Collins otherwise excellent book about political gossip, I entertained the idea more than once -- and dismissed it as implausible and I-would-have-heard-if-they-were. Well, they are.

(2) Something about, well, publishers really aren't planning on providing digital services to their authors, are they? To be fair, the publishers being described are rollups: Perseus Book Group and National Book Network, that is, not precisely publishers at all. And the underlying publishers they represent are often so small they're only moving one or a few titles. Total.

Coop dollars have never made any sense to me, and I've known about them for a long time. I know what the rationale is, and I have a theory about what they are, but whenever I float my theory, people get annoyed with me so I won't bother. Most people are smart enough to figure it out anyway. The fact that kindle books have moved from the no-coop to the coop category is a solid indicator of where the balance of power lies in the industry. That is, once, Amazon was desperate to increase the amount of content they had. They are no longer.

This: "It is expected that, as Kindle wins coop allocations, Barnes & Noble will impose a similar policy." is one of the most reasonable sentences I've seen in any article about e-books. Ever.

"we heard multiple reports from professional and/or academic publishers who sell to Amazon on traditional "short discounts" that they have been asked to radically restructure their terms of sale." I had been wondering about this. The discount structure for professional and academic publishers has historically been much less than for trade books (translation: the price paid by the retailer to the publisher is a lot closer to the list price for academic books than it is for "normal" books. Academic books does NOT mean textbooks in this context). I've known for a long time that Amazon moves academic books in a way that traditional bookstores never did/could (long tail effect and an artifact of the audience they drew as a result), however, once academic publishers started allowing their books to be offered as e-books, _everyone_ seemed to have been surprised by how fast they moved. Once an academic or professional book is moving the way a trade book moves, there's no longer a justification for a short discount. Once large chunks of the category are moving the way trade books move, all that extra juice going to the publisher starts to look worth going after.

The concluding paragraph is particularly awesome, especially in the context of talk of anti-trust action, and includes a quote from the IPG blog.

It is times like these when I really wish more people would talk about what killed Rocket eBooks. Because what killed Rocket eBooks was ultimately very simple, and it wasn't crappy technology. It was brutally obvious, then as now, that ebooks _could_ be sold at a far lower cost all along the chain than pbooks (if for no other reason than the savings on returns and retail square footage). So the question became, who gets the new juice? The Authors Guild wanted it for their people. B&N bought Rocket, IIRC, in an effort to improve their position. And publishers wanted it, too. Rocket died because everyone figured customers would pay the same price for an ebook as a pbook and thus there would be new juice for the rest of the players. It only sort of worked, because while there _are_ customers who will do that, there probably weren't enough (altho we'll never know, because the players in ebooks prior to Amazon did not produce a Truly Excellent Ecosystem so disentangling the effects is pretty much impossible). The margins people are crying about on ebooks are where pbooks have been for a while now.

I lack sympathy.

ETA: Here's what that last paragraph at Publishers Lunch was referring to:

http://www.ipgbook.com/why-ipg-has-not-been-able-to-agree-on-terms-with-amazon-news-32.php

A couple observations.

(1) When the kindle launched, it was with a commitment to most e-books being $9.99 or less. The Agency Model is what led to general rise above this price point. Here's what the CEO at IPG has to say about an appropriate price point for a $14.95 trade paperback: "Deduct these specifically print related costs from the price of a printed book and the minimum price for a straightforward e-book comes to about $10.00—less than the price of the print version but not some small fraction of the print price." I'm trying to figure out whether he factored in returns. I think he didn't, which I think is at least somewhat dishonest. Also, I don't see that he's in any position to calculate what the savings on margin for an ebookstore should be vs. a bricks-and-mortar store (which isn't obviously the correct comparison anyway, since pbooks are sold online too) and think his $2/book savings is on the low side.

Further, he doesn't get into what a hardcover should cost, but it is in no way obvious to me that hardcovers cost more to produce than trade paperbacks. Thus, it would seem he's kind of conceding exactly the point that so many people objected to in the early days: $9.99 as the default price point. (And a default price point that Amazon was discounting for over a decade, long before they rolled the kindle out.)

(2) "And is it obvious that independent presses should have to work at such a huge competitive disadvantage to the major publishing houses?" I'm going to assume that's a trick question, based on some confusion about how capitalism works, because confusion about capitalism, competition and how prices are set seems rampant in the book industry.

(3) His closing sentence is clever, but undercuts his argument. Perhaps he's feeling a little martyred. Independent publishers "are the reason why in America almost no good author goes unpublished." Nice little homage to "no good deed goes unpunished", right?

I'm having a lot of trouble figuring out why IPG walked away from the table. Is this really all about coop for ebooks?

Unfortunately, still more about coop money

http://publishing.about.com/od/BookPublishingGlossary/g/Cooperative-Advertising-Funds.htm

and

http://www.answers.com/topic/cooperative-advertising

The first is specifically about coop money in book publishing. I would describe that as "paying the bookseller for prominent placement of my book(s)" but would also agree to "booksellers getting a deeper discount from the publisher in exchange for better placement".

The second entry quotes Barron's Marketing Dictionary, and along the way says, "It enables the manufacturer to advertise at the local rate for media, since all advertising is placed by the local retailer." and "It is estimated that 75% of all cooperative money is spent on newspaper advertising, while 12% is spent on broadcast (8% on radio and 4% on television)."

About a decade ago there was an accounting change in the way cooperative advertising funds were handled (specifically, were they to be treated as a reduction in the cost of advertising or the cost of inventory).

http://www.revenuerecognition.com/content/experts/9007.asp

My recollection of that event is dim, and primarily limited to me sniggering at some coverage on CNBC (I think).

I'm now having a little trouble remembering where I was going with this. Oh, right! I mentioned that you can see the balance of power has shifted, when Amazon stops begging for content for the kindle and starts hitting the publishers up for higher conversion fees and coop dollars for ebooks. I'm sure there are people saying, see, we were right! Amazon is going to soak the publishers once this thing is established.

Which raises some interesting questions. If coop money is what I think it is, obviously Amazon should be getting some for ebooks. If coop money is what everyone else seems to think it is (any definition in the links above), what's a plausible structure for coop dollars? And if Prime is mostly a customer acquisition tool, isn't that marketing?

Can Amazon use coop money for Prime? Okay, probably not. But I'm sure they can use it for the recommendations engine. And aren't they getting into the ad business in a big way, too?

ETA: Stumbled across this:

http://www.ftc.gov/speeches/other/boastmollys.shtm

Bunch of stuff in it about the music industry using minimum advertised price rules in conjunction with coop candy to preserve their margins and how they got slapped with a consent decree over the practice eventually.

ETAYA: Not exactly coop money, but the related "slotting fee" from the grocery business:

http://www.ftc.gov/opp/global/slott.shtm

I found this bit particularly interesting:

"One thing is clear - there is a legal obligation for the manufacturer that pays a slotting fee to one retailer to then pay the same fee to other retailers. By law, the manufacturer must offer that same "discount" to the retailer's competitor. The same problem exists for the retailer who requires payment from certain manufacturers for premium shelf space and does not offer the same or comparable deal to competing vendors in the same product category."

And while I'm wandering far, far afield, here's what the FTC has to say about predatory pricing (remember, that's the rationale for the Agency Model and the deal with Apple and all the rest of it: if we _don't_, Amazon will wipe everyone out and then raise prices):

http://www.ftc.gov/bc/antitrust/predatory_pricing.shtm

"Pricing below a competitor's costs occurs in many competitive markets and generally does not violate the antitrust laws. Sometimes the low-pricing firm is simply more efficient. Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses."

If there's a net gain to the consumer (that is, if the discounting firm never recovers to the point where it does as well or better than if it hadn't done the discounting in the first place), it's not predatory -- even if it wipes out the competition. At least, that's what I'm getting from this.

I think the people who are deploying cultural value arguments to protect bookstores/publishers from Amazon's pricing strategy have figured out that they aren't going to win with the anti-competitive argument.

Here's what the FTC has to say about single-firm monopoly:

http://www.ftc.gov/bc/antitrust/monopolization_defined.shtm

So, market dominance and exclusionary/predatory behavior only make you a monopolist if there _isn't_ a business reason for that behavior. Yikes.

There's a tricky balance to find between convincing regulators your scary competitor is a monopolist and making your scary competitor look less dominant to customers (we're picking up market share! They only have 60% now, not 80%+!), whether it's entirely true or not. This is especially the case if consumers are reluctant to buy into a larger system when they don't know if it will survive and/or have available all the things that the more popular system has (think Wintel vs. the world, back in the day). If you _are_ the scary competitor, there's a lot of really good reasons to keep your numbers to yourself; they can only get you into trouble.

Percentage of the Gross vs. a Flat Fee

When I googled (not in quotes in the search) "print to ebook conversion", this service was at the top. (Not the pricing page -- I drilled down slightly for that.)

http://ebookarchitects.com/conversions/services.php

I don't know the least thing about these people, but my rudimentary math and reading skills tell me a 300 page novel will cost about $500 if you hand them a paper copy of the book, say, sure, guillotine that puppy, and ask for a file that can be transmitted to Amazon for placement in the kindle store. My sense-of-the-world suggests that you aren't likely to get this done well for much less and you might have to pay more to get it done well. If you do it yourself and it takes you over a week, you'll be paying yourself less than $10 an hour to beat the deal.

I found this pbook/ebook, published by Perseus Book Group.

http://www.amazon.com/Dark-Day-Barbara-Parker/dp/1593155182
http://www.amazon.com/The-Dark-of-Day-ebook/dp/B0015DTW6O

I know zippo about it, beyond that it looks like genre fiction and is published by Perseus. Whoops! It's 400 pages. Let's call it $600.

Based on this:

http://lunch.publishersmarketplace.com/2012/02/two-distributors-do-sign-with-kindle-and-pay-ebook-coop/

We know this:

"Also indicated in one client notification is that Amazon has also increased the ebook conversion fee they charge publishers who provide only a print book or PDF and want Amazon to produce the book file. That charge is now 8 percent of digital list price, up from 5 percent previously."

And we know that that client is EITHER Perseus or National Book Network. And we really don't care; I just wanted a specific example. I have no mortal clue who did the conversion work on Ms. Parker's novel, but for the purposes of this example, let's start by pretending that it was done prior to the contract renegotiation by Amazon for Perseus. How many copies would it have to sell before Ms. Parker would start feeling like someone should have forked over the $600 instead of paying Amazon 5% of digital list price (in this case, $7.99) to do the work.

Call it $.40/copy for the 5%. The breakeven is at around 1500 copies. Up until Amazon moves 1500 copies of _this particular book_, Perseus and/or Ms. Parker got a screaming deal. After that, they are getting progressively more and more screwed (unless there's some kind of sunsetting clause). If _The Dark of Day_ were to sell, say, 10,000 copies over the next couple of years, that would be roughly equivalent to paying $4000 to do the conversion.

Now let's pretend that the digital conversion was done by Amazon for Perseus and after the new contract takes effect (almost certainly not true), at $.64/copy for the 8%. Breakeven now occurs at under 1000 copies. At 10,000 copies, it would be like paying someone $6400 to do the conversion.

If you don't wind up selling a thousand copies, then you sure as hell want Amazon to do your conversion for you, and you honestly probably don't even care too much whether you pay $.40/copy or $.64/copy. But if you sell tens of thousands of copies, then you _really_ don't want to be paying Amazon to do your conversion for you.

There is another way of thinking about this. Amazon managed to get -- maybe not from Perseus, but from Perseus or National Book Network -- an agreement to pay the _same_ royalty to Amazon for doing the conversion (from print or pdf) that the author is probably getting.

There are some other things to think about. Maybe Amazon is doing such a high quality of work that it's _worth_ that much money. (Do you think that?) Maybe eBook Architects does a truly awful job, and while Amazon's isn't worth thousands of dollars, it is enough better to make a real difference and you'd have to find someone equivalent to them (or better) and see what that cost worked out to find the correct breakeven. And of course it takes time to do the shopping around and time is money and blah blah bleeping blah, but _isn't that exactly what a publisher ought to be doing_? If not hiring the people to do the conversion, then identifying cost-competitive, good-enough quality companies to outsource to? I get that the underlying publishers are too small to do this themselves and that's why they work with National Book Network or Perseus Book Group and they're supposed to get the services they need but can't manage on their own through the sort of a publisher sort of a distributor setup. Perhaps this is purely a transitional solution? Or maybe it's only used in cases where the book isn't expected to sell, but a presence is desired?

Maybe Amazon is worth 8% in perpetuity for doing the conversion. It sure is if you're not ever going to sell very many copies and clearly, that is a component in Amazon's decision to raise it from 5% -- they could surely tell they were losing a bundle on that service, right?

ETA: I do recognize that the percentage is of the digital list price, but that the actual ebooks are sold discounted, thus making the percentage paid to conversion higher on the "actual" gross. In the case I picked, the book was being discounted to $6.39, thus, 5% = 6.25% and 8% = about 10%. I'm a little unclear on whether author royalties come off the list price or the sales price.

I absolutely expect someone to chime in saying that $500 or $600 as the case may be is a criminally low price to charge and they can't possibly be doing a decent job on the conversion.