Monday, February 1, 2010

Amazon, Macmillan and agency based relationships

As has been widely reported, Amazon is restocking their virtual shelves with Macmillan published books after a very publicized and somewhat vocal dispute between the two powerhouses.

The fallout is very interesting, since the model that Macmillan wants to move towards (the so-called Agency model) would actually bring less revenue to Macmillan and allow Amazon to make a profit on more bestsellers.

Amazon presumably prefers the old method, since they enjoy selling books, yes, but also Kindles, and generally just increasing their marketshare. What better way to get you to try a Kindle than to offer a $25 MSRP hardcover that sells for $17-18 in a store for $9.99? The short term problem was selling that title at a loss in many cases. Amazon gets a fixed percentage off MSRP, anywhere from 50% to 70% is reported. By selling all titles for $9.99, on the titles with a higher MSRP it's very easy to end up selling at a loss.

When you switch the model to Macmillan settings books at a price of $12 to $15, but keeping only 70% of the selling price rather than the hardcover MSRP, they would see their per-book gross drop to $8.40 to $10.50 - less than 50% of a $25 book! Amazon no longer buys books at a fixed price and sells them at a different point, but rather grosses 30% of the book - always a profit!

So why is the publisher lobbying to make less money and Amazon lobbying to continue to make little to no money? Simple: market share!

If people merely shift from buying $15 to $25 books in a store or mail order and instead move to buying $9.99 titles for an eReader, this damages Macmillan long term. It makes a new release priced closer to the way an older release coming out in paperback is priced. Paperback is not something they look forward to, those are all the people that found a way to wait a few months rather than buy it when it first comes out, and they make less money. The cost savings in printing a paperback don't equal the cost savings to the consumer in buying a book for $6 to $12 rather than $15 to $25.

If you can grow the market, however, and get people to either stick with hardcovers or buy an electronic reader with similar margins, but the absolutely convenience causes them to subtly buy a few more titles per year, this is preferably. They don't want to dilute their position in the market long term by keeping growth stagnate, but shifting readership to cheaply priced content.

Amazon, however, is in a different position. While they sell a lot of books online, their stranglehold is in eBooks. They have an iPod like share of the industry, and unlike the iPod which has music store competition by way of mass market music being sold without DRM, they have a stranglehold on the sales of content to those users. They continue to grow the industry by offering these dirt cheap titles, but they are growing it in a way that's detrimental to their publisher's goals, especially their gross margin goals.

Amazon is threatened, however. Sony invented the American consumer eBook market, but Amazon took over it overnight (this is no different than MP3 players, where Apple came in virtually overnight and redefined the industry as a mass market one, taking the majority of the customers along the way). Now, however, there are new competitive products from Sony, wireless is becoming ubiquitous across all major vendors' product lines, Barnes and Noble is gunning for them, Skiff, Que, Alex and others are looming and at the low end are a ton of generic, similar looking products that inevitably cost a bit less than their Amazon-branded counterparts.

Oh, and Apple is entering the market. Apple is not acting evil by sleeping with the enemy here. They aren't getting into bed with Macmillan to systematically drive the price of books up to wreck havoc on Amazon and take over the industry. They may wish to wreck havoc on the competitors and take over the industry - but not through price fixing. The reality is, Apple runs the iTunes Store (music, music videos, movies and TV shows) at a slight profit. That's always been their stated goal, and it's worked. It drives sales of their hardware devices, and let's face it - is there an easier way to get last night's episode of The Office onto a phone or video player?

But Apple is not one to have a loss leader. They aren't going to sit back and sell a few million books at a $2 or $3 loss to grow their market. They are going to find a way to not lose money on their store, still sell millions of books, and more importantly meet that goal of selling 10 million iPads in the near future.

If along the way, the publishers see that the realities of this agency deal are also good for them, of course they are going to try and make that the new standard for selling eBooks.

Would I prefer $9.99 new titles? Honestly, no. If all other things were equal, of course I would. But I don't like delayed access to eBooks. To me, the perfect model is a new titles out the day the hardcover hits the store, and a price that's mildly competitive. Sure, it should cost less. No, that doesn't dilute the mindshare of the expensive hard cover title. Everybody understands that printing and shipping has a cost associated to it. Is that cost half to two thirds the cost of a book's MSRP - no, I doubt that very much.

On the heels of that, should be an immediate drop in price simultaneously with the release of the paperback. Did the cost of the eBook drop by then? No, but early adopters always pay more. I paid $599 for my first iPhone. Lots of people paid a lot more than $259 for their first Kindle. There is a premium to get content quickly, this exists in print as well. Half a year or more later, those people who couldn't wait already have read the book and it's appropriate to begin discounting.


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