walkitout (walkitout) wrote,

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.
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