Amazon loses about $2 for every e-book

http://www.tbiresearch.com/e-readers-should-drive-profits-for-both-distributors-and-book-publishers-2009-11

by prakash • 17 years ago

30 29 17 years ago

chl• 17 years ago

That'd help explain why they aren't paying affiliate commissions for e-books. Apparently being able to sell at $10 is seen as more effective at building a customer base.

cstross2• 17 years ago

Money shot: In any event, in order for the e-reader market to thrive publishers must lower their wholesale prices so that distributors can turn a reasonable profit. We believe that if the price is lowered enough publishers may earn less per unit, but could ultimately earn more in overall revenue and profit through a greater number of sales.

Except they can't.

I gather (can't cite my source) that amazon were leaning on British publishers to give them an 80-90% discount off list for Kindle books. Normal trade discounts are in the 40-55% range; anything over 60% is harsh, 70% has the publisher losing their shirt (making a loss). Remember, about 10% of the cover price of the book goes to the author, and the publisher takes another 10% to cover editorial/marketing/production costs, even if you don't include covering chunks of dead tree with ink (another 10%). (Unfortunately, the "physical" production costs don't go away if you switch from paper books to ebooks -- publishers still have to run a royalty accounting system for authors who expect to be paid a percentage cut per book sold.) The other 70% of the cover price goes to the supply chain, or is split between the supply chain (aka Amazon.com) and that nice 30% discount Amazon gives you, the customer, for shopping with them. If they're lucky, the publisher can keep 10-15% of it for themselves -- and that's the profit their shareholders dine out on.

The major publishers are between a rock and a hard place over the ebook discount setup. Relatively nimble small players and startups such as Baen's webscription subsidiary (www.webscription.net) can add new boilerplate to newly signed book contracts that free them to pursue more ebook-friendly business models, but how do Penguin re-negotiate every contract for a backlist of on the order of 40,000 titles?

Amazon have built a business model on disintermediation -- they've replaced wholesale distributors and the bookstores they feed with a single hybrid entity, and therefore take the tranche of profit that would formerly have fuelled both those earlier types of business. But there isn't enough slack left in the supply chain to let them cut prices further -- not without eating into the author's cut (long-term fallout: fewer books get written), the publisher's cut (long-term fallout: fewer books get published) or the reader's wallet (books cost more).

I bloviated about this back in 2007 ... much less has changed since then than most people seem to believe:

http://www.antipope.org/charlie/blog-static/2007/03/why_the_...

Retric• 17 years ago

If Amazon can sell a paperback book for 8$ and they are they are taking a hit at 10$ per ebook then clearly there is a mistake somewhere on the supply chain.

wmf• 17 years ago

Maybe you're confusing a "hardcover ebook" with a "mass-market paperback ebook". :-)

But seriously, I found the answer in Stross's full blog post: "Right now, many of the largest publishers charge a cover price for ebooks that is 80% to 100% of the hardcover price." One would think that once a book goes from harcover to paperback the publisher would reduce the ebook price to match, allowing Amazon to sell ebooks marginally cheaper than paperbacks without losing money, but maybe they aren't doing that.

cgranade• 17 years ago

What I don't understand about all this is where the savings of lower marginal manufacturing cost per book go. Once a Kindle or Nook is out there, the materials cost of adding another book to it is nearly zero compared to printing and shipping a dead-tree edition, so why doesn't that lower the cost that Amazon pays? Is there a similar dynamic behind Amazon MP3 that's causing them to lose out for every album sold at near-zero marginal cost?

patrickgzill2• 17 years ago

Your percentages are WAY off.

Bookstores get 40% off, distributors such as Ingram or Baker and Taylor get 60%. So distributors have to run all aspects of billing and order fulfillment and shipment in return for 20% .

Anything over that you have to buy non-returnable or do via special sales (book clubs for instance get more of a discount but buy non-returnable and minimum order size 5000 or 10K books at a time) usually direct from the publisher.

10% of the cover price does NOT go to the author, unless he is a bigshot (famous/celebrity) or has a surefire franchise (Stephen King level).

Usually, assuming the publisher is fair, the author gets a percentage of the NET amount the publisher gets. Royalties are easy to calculate these days thanks to software for publishers that keeps track of that. Example: $19.95 retail, publisher gets $12.00, author at 10% gets $1.20 (not $2.00 ). Sometimes foreign language rights are handled differently, sometimes they are the same.

Amazon is making the argument that ebook pricing is highly elastic - that if ebooks on LISP programming were 1/10th the price, I would buy 10 times as many of them.

Yet books and ebooks have to compete for time and attention against TV, Internet surfing, movies, and my need to sleep; which no doubt explains publishers' wariness.

eru• 17 years ago

Real books do not necessarily have to compete against TV, Internet surfing etc. Nobody cares whether you read the books you buy. And most people seem to have a backlog of unread books in their shelves.

netcan• 17 years ago

You put your finger on it. Price elasticity. That is the claim Amazon is making.

Personally I think they are right. There is some elasticity. If I could buy books at 3-5, I would buy a lot more. @ $20+, I think abut it.

michael_nielsen• 17 years ago

You might want to check who you're replying to. cstross isn't as famous as Stephen King, but in science fiction he's one of the best-known contemporary authors.

Personally, I'm in a very different sector of the book market than cstross, but what I know is entirely consistent with what he said.

socratees• 17 years ago

I also think eBooks piracy is rampant. Unless people consciously choose to buy eBooks rather than download them illegally, it is difficult for the eBook industry to make profits.

tl;dr: Ebook piracy is everywhere. Its important for the industry to figure out a way to monetize eBooks.

xcombinator3• 17 years ago

In the next years, any good book is going to be pirated in the net.In fact, it is today for those that know how to search.

Finding books are going to be easier as copying a book is made simpler and more people want to do it because they have e-reader hardware(people in the hundred of millions instead that in the thousands).

So people will have two options: 1)Decide to pay what the publishers want. 2)Decide it's too much and pirate it.

In the publisher wet dreams people don't have objection to pay the same quantity of money for something that has distribution cost, material cost, manufacturing cost that for something that has virtually null copy cost. People are not stupid.

What I think it will happen is this: Authors will start selling directly, as with music there is no need for publishers now.

xcombinator3• 17 years ago

In fact I bet my two dollars Apple is going to start the authors ebooks market with the Apple tablet making it outdoors-friendly and using their app store tech.

Estragon• 17 years ago

  any good book is going to be pirated in the net.In fact, 
  it is today for those that know how to search.

How?

araneae• 17 years ago

Google. You can usually find a torrent or something on megaupload.

I just got a bunch of e-books I had been trying to take out of the library for years, unsuccessfully (all the copies were missing or somesuch; they were kind of rare.)

antipaganda• 17 years ago

#bookz on IRC, undernet.

687• 17 years ago

http://gigapedia.com/

cstross2• 17 years ago

Authors will start selling directly, as with music there is no need for publishers now.

I wish there was no need for publishers. Unfortunately, publishing is not isomorphic with printing/distribution. Editorial services and book design are pretty much vital to the process of turning a manuscript into something people are willing to pay money to read, and marketing is necessary if you want to convince folks to read your book, rather than Dan Brown's.

We may see a realignment of the way publishing services are applied to books (e.g.: author hires editor and PR folks to work for them, or literary agents hire editors and turn into virtual publishers -- they've got the accounting infrastructure to handle royalty payments), but we already have authors selling directly, and there's a reason most readers usually avoid self-published books.

xcombinator3• 17 years ago

You are right when you say marketing is important and some very good writers are very bad at it. But there are people that could do both too. There are other books that need artists(text books of history, biology...) and other support people too.

When I say there is no need for publishers I mean the hard logistics and financial experts that today are needed. Other people will be needed, like web store experts, but you don't need to have a minimum of 20000 readers to print like today.

Today, like yesterday CD labels, publishers hold the rights because they have access to the physical market and you can't sell without then, they then get all the money and no cost in ebooks. This is going to change when writers don't need physical market because people buy digital.

vijayr• 17 years ago

I am not sure of this - In the next years, any good book is going to be pirated in the net

There is so much junk published these days (how do they manage to make money with such junk, is beyond me), so if I find a good book, I want to spend money and buy it (assuming of course, that I can afford it), just to encourage the author/publisher. The quality of publishing is going to go down even further (just take a look at clickbank and other sites advertising "how to make money with ebooks").

Publishers/Authors can complain all they want, but the truth is we simply do not have authors like we had before (Frost, Dickens etc).

I can't speak for others, but if I find a good author/book I want to spend money on their books.

nraynaud• 17 years ago

Don't worry, they will make up with the volume :)

anurag• 17 years ago

We ran some numbers comparing Amazon's ebook pricing to BN, Sony and other retailers, and found that Amazon's prices were the lowest (or matched the lowest) for 74% of the 11K ebooks we looked at: http://inkmesh.com/blog/2009/11/30/amazon-barnes-and-noble-s.... So not only is Amazon losing money on ebooks, it is also competing mostly with itself in pushing ebook prices even lower.

Also worth mentioning - 92k of the 350k Kindle titles available on Amazon.com are priced above 9.99, so Amazon might not be losing as much money as the original study suggests.

mattmaroon• 17 years ago

People always apply the laws of supply and demand oblivious to other factors. They say "well if we just lower the price, more people will buy these books".

That isn't necessarily true because people can only devote so much time to reading. Much of the investment a person makes in a book isn't money (at least not directly) it's time.

It's entirely possible that the price of books is set by other factors, such as competing books. People may largely decide they want a book, then shop around, and buy one. Which one they buy may have to do with pricing, in fact that may be the key factor in pricing (if I'm on the fence about two books, I'll go with the one that costs lest).

So you can't simply assume that "if the price is lowered enough publishers may earn less per unit, but could ultimately earn more in overall revenue and profit through a greater number of sales." It's quite probably untrue.

I'd actually argue that if you want to sell more books, you should make them shorter. Fewer pages will get the reader through it faster. I'm sure this will only work to a point, as nobody wants to pick up a "book" that feels more like a "pamphlet" but perhaps digital media (where all of your ebooks weigh the same as the Kindle you read them on) will change that too.

lmkg• 17 years ago

While the number of pages being read may remain relatively constant, that wouldn't mean that ebook pages are basically constant. It means that paper books and ebooks are in a zero-sum game with each other, and the price of ebooks could influence the balance between them.

bokonist• 17 years ago

Part of the risk in buying a book, is in buying a book that you don't want to invest the time in, and that will end up sitting on the shelf. What Amazon really should to is charge by the page read. This will allow people to have a more enjoyable experience per page read (since they'll start reading books they might not have bought otherwise, and will not feel obligated to finish books they bought but do not like). If they have a more enjoyable experience per page read, they will be willing to spend more. $.05 a page read for non-fiction, and $.02 a page for fiction would be a good price.

ktrough• 17 years ago

This article says that as wholesale ebook prices drop (the predicted trend) authors will as a result make less money. I'd like to point out that this is an incomplete statement. They should have said authors will make less money PER UNIT. It is unknown if the overall ebook price reduction will result in a similar overall number of units sold, or whether the ebook price reduction will allow the author to penetrate the market more effectively getting improved sales numbmers. This could easily result in MORE money to the author for the title even though the royalty per e-unit is less.

I'd rather sell an ebook to everyone who reads english for $1/e-unit royalty than have a New York Times number one bestseller print book with a good contract even with the massive royalties that go with print. Electronic distribution simply cannot be beaten.

eagleal• 17 years ago

Don't Amazon covers the loss from ebooks with Kindle (ca $250)?

If Amazon sells 500.000[1][2] Kindles at $250, and sells 1 million ebooks with a loss of 2$ at piece:

$120m in Kindles

-$2m in ebooks

1. http://mediamemo.allthingsd.com/20090203/citi-says-amazon-so...

2. http://www.businessinsider.com/2009/2/amazon-sold-500000-kin...

billswift• 17 years ago

The article was pulling at least some of the numbers ($2 loss per ebook, authors take 10%) out of thin air (I almost wrote somewhere less polite), which destroys any value to his "analysis".

psyklic• 17 years ago

I don't understand why it is assumed that the author's royalty should DECREASE for e-books. If anything, the author's words are even more important than before! I suppose that e-books give publishers an opportunity to renegotiate contracts in their favor, but won't author royalties creep back up again?

Amazon loses about $2 for every e-book

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