Saturday, January 30, 2010

The Ebook Wars have begun

Today, McMillan's books are no longer available at Amazon's store. This is not just e-books, but paper books as well. Science Fiction authors John Scalzi and Charlie Stross have already weighed in, in favor of their publishers, of course.

The dispute in question is as follows. MacMillan would like to move away from the wholesale/retail model to an agency model. The wholesale model basically had Amazon paying MacMillan the whole sale price of each book (typically $15-17), and since Amazon was selling best-sellers at $9.99, meant that Amazon was subsidizing each best-seller at about $5 to $7 a pop. Note that Amazon didn't subsidize all books (if you're not a best-seller, you don't get such treatment), but my guess is that Amazon could continue subsidizing best-sellers indefinitely.

The agency model, by contrast, would eliminate Amazon's freedom to use best-sellers as a loss-leader, but forcing pricing of those books at MacMillan's choice (again, typically $15-$17), while granting Amazon 30% of the retail price (which would now be set at MacMillan's desired level). The net result is that Amazon would make more money on those best sellers, but also cripple the ebook market. Why would this happen? Consumers instinctively think that ebooks are worth less than paper books. That's because you can't resell an ebook, or loan it to your friend (mostly because of DRM---again, publishers could opt out of this, but they won't). Pricing an ebook at $15-17 would eliminate all ebook sales because hardcovers with a retail price of $24 would be discounted (under the wholesale/retail model) by 30% to about $18, which means that the ebook would have no price advantage. On top of that, Amazon would no longer be able to compete on price, which I would guess Amazon considers to be a major strategic issue for them.

Who's going to win this battle depends entirely upon whether other publishers join in the fight. Amazon cannot afford to cut off all book sales of more than a couple of major publishers. On the other hand, by being the first to force the issue, MacMillan will be taking the brunt of the loss of sales. I myself haven't bought a paper book from a major publisher for years, and losing e-books would simply mean that the consumers with Kindles and other e-readers will be trained to use the DarkNet rather than legitimate sources.

Ironically, the best thing that could happen to MacMillan and the publishing industry was if they lost this battle, and Amazon keeps the retail/wholesale model of sales. E-book readers are not going to go away, and training a new generation of users to pirate books by pricing them insanely high will not be good for the next generation of authors. I will note that the existing authors like Scalzi and Stross could easily sell their own ebooks online at their web-site, and given that their sites already get gazillions of visits, I think that they are already past the tipping point where their incomes would get major boosts by firing their publishers.

Marion Maneka wrote a piece over on slate about how demand for a book was inelastic. I think she's missing the picture. The audience of book readers is pretty small, and getting smaller. Even avid readers like me have to choose between reading a book, watching a movie, playing a video game, or going out hiking/cycling/sailing, etc. While slowing down the ebook market would have the effect of generating more revenue in the short term, in the long run, the entire book market (all authors and publishers) lose much more if I get fed up with the publishing industry shenanigans and decide to buy a Nintendo DS Lite instead.

Wouldn't the book publishing industry do much better with the next generation of readers hooked on $5 ebooks and paying for those?

[News Update: MacMillan is being even more evil than that: they're trying to force all ebook vendors to adopt the new contract, while forcing authors to accept a below industry average (20% vs. 25%) on ebook royalties.]
[New Update: Amazon capitulates. Book publishers will now commence shooting themselves (and the ebook market) in the foot]
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