The Justice Department settled lawsuits yesterday with five of the Big Six book publishers (everybody but Random House, who were not part of the original suit) over allegations that they tried to fix the price of ebooks a few years ago, in alleged collusion with Apple (which was named in the suit and has not settled as yet).
Almost every article mentions the publisher’s fear of an Amazon monopoly over bookselling in this country. I’ve mentioned that possibility myself disapprovingly a few times in the recent past, not because I have anything against Amazon but simply because I’m uncomfortable with monopolies or quasi-monopolies in general.
What almost nobody mentions is why Amazon did what it did – how we ended up where we are. It’s an interesting story that says a lot about competition and paranoia in the marketplace and about how much of life gets decided out of unintended consequences.
The traditional model for over a hundred years was for book publishers to wholesale books at half the cover price and let the retailer charge whatever it wanted. When ebooks came out, publishers sold many of them for $9.99 and expected the same approach. Amazon surprised them by deciding to sell some ebooks at $9.99 or even less, taking a loss to push sales of their new Kindle e-reader (useful background and analysis of the actual complaint here).
Publishers were afraid that Amazon would force them into a $9.99 price point for ebooks, instead of the higher prices they wanted and that Amazon might eventually begin publishing itself, cutting them out of the gatekeeper position. So they were looking desperately for an alternative.
Enter Steve Jobs. The iPad had come out and was inciting a whole new wave of interest in e-reading. And Jobs wasn’t interested in publishing books or selling them on the wholesale model, mostly because he felt there wasn’t enough profit in it. So he proposed the publishers adopt a model of pricing where the ebook price was just a bit lower than the hardcover price and Apple would just take 30% of the sale. This would keep ebook prices around $12-18, pleasing publishers and not coincidentally establish iTunes (or the iBookstore) as a real powerhouse in the book retailing world.
By the way: none of this wheeling and dealing offered anything to benefit actual authors. Authors would have continued to receive their traditional royalty, 35% of the wholesale price (which usually worked out to about 15% of the actual sale price), all this while the production cost of an ebook to a publisher was roughly bupkis.
So let’s understand where this would have left Amazon. Books are still their trademark product, one reason they’re seen as a trendy place instead of an online Walmart. And, if you look at the home base for ebooks they’ve created in their universe, it’s far more effective, comprehensive and welcoming than anything Barnes and Noble, a dedicated bookstore chain, has done. When my ebooks were on sale everywhere online (before the Kindle Select program), I sold 30 or 40 books on Amazon for every one I sold on BN.com or Smashwords and for good reason – Amazon makes it easy for people to find you. Their continuing efforts are all out of proportion to the amount of money books actually generate for a company of Amazon’s size. It really almost seems like (dare I say it?) someone at the top really loves books.
So, faced with the danger of being hemmed in by the publishers and Apple (if you want to know about the power of Apple, ask music industry executives about iTunes and watch them shiver), Amazon made a daring counter-strike: They announced that, if an author would publish ebooks directly on Amazon with a price between $2.99 and $9.99, Amazon would pay them a 70% royalty. It was a brilliant move, because Apple lost interest in books altogether at those price points and the book marketplace exploded.
BAM! Within six months to a year, there’s a thriving marketplace in independently-published ebooks all over the place, all venues matching Amazon’s royalties to writers and the price of traditionally-published ebooks also comes down, to the point that $9.99 is toward the top and $12.99 feels silly. Even those prices seem high to readers, who understand that the cost of an e-version of a book to a publisher is (as I’ve said before) virtually nothing.
This pisses off book publishers, who see their chance for big profit flying away. And they’re right – Amazon is sacrificing their business model in favor of its own, selling Kindles (reportedly for less than they cost to produce) in hopes of dominating a huge new marketplace of ebooks. And I worry, like every sensible person does, about what might happen once Amazon has no competition – will prices rise? Will authors continue to get such a lovely (though entirely fair, considering the zilch costs of production) royalty on their work?
But the key point is that Amazon acted in reaction to a threat to its core business, where a huge and formidable competitor was (allegedly) colluding with virtually the entire book publishing industry to tilt the marketplace in a different direction.
And here’s why all this matters (stats courtesy of Christopher Maselli and note that they date to Oct 2010 but I think are still entirely valid):
- 53% of those who buy ebook readers state that they now read more books than they did before. Source
- 51% of e-reader owners increased their purchases of e-books in the past year.
- 9% of consumers increased their purchases of hardcover books in the past year.
- 2.6 Average number of books read by e-reader owners in a month.
- 1.9 Average number of books read by print-book readers in a month.
- 176% Increase in U.S. electronic-book sales in 2009.
- 1.8% Decrease in U.S. book sales in 2009 from a year earlier.
- 86% of e-reader owners read on their device more than once a week.
- 51% of e-reader owners read on their device on a daily basis. Source
So the bottom line is: this new ebook market is not cannibalizing the old. It is increasing the number of readers and the number of books read. It is allowing people like myself, who couldn’t get the time of day from the existing gatekeepers, to find a readership.
‘Mindbenders’ was the Number Two paranormal Kindle book in England for three weeks back in February. It’s lingered in the Top 100 for months there. I’m just one example and by no means the most egregious – there’s an awful lot of good writing out there that was totally neglected because the marketing people couldn’t find a neat category for it.
So we now have a new and bigger world, all because of Amazon reacting, possibly in panic but certainly in self-defense and simply being smarter and more nimble than their competition. I’m against monopolies but when a company’s competitors keep shooting themselves in the temple, it seems a bit unfair to condemn them for being the last man standing.