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Amazon Is Doing to Publishers What Apple Did to Record Labels

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UPDATED: If you’re interested in books, either the old-fashioned kind or the electronic kind, you’ve probably caught wind of a major dustup going on between Amazon and book publisher Macmillan over what price Macmillan should be allowed to charge for its e-books. Macmillan took out a full-page ad in the magazine Publishers Lunch to inform authors, retailers and readers that Amazon had yanked all of its books from the company’s electronic store.

According to several reports — the most detailed (if confusing) of which comes from author Charlie Stross — Amazon didn’t take kindly to Macmillan’s proposal for a new book-pricing structure, which would see new books, both printed and electronic, priced at $14.99 and then gradually dropping in price over time. Amazon is apparently not impressed with this idea at all, and would like virtually all of its e-books to be priced at $9.99 or lower. [digg=]

In fact, the new royalty rates that the retailer offered to authors and publishers in advance of the Apple iPad announcement requires them to guarantee that their books will not be priced any higher. Amazon seems miffed that Macmillan is not only proposing to raise prices, but is also playing footsie with Apple about book sales on the iPad.

As Amazon and Macmillan retreat to their respective corners, with Apple waiting in the wings, authors have been taking sides on the dispute, and many of them seem to be siding with Macmillan, including John Scalzi and Cory Doctorow of BoingBoing. Why not let the publisher charge more, or have a more flexible pricing scheme, they argue? It’s better for the consumer, etc. (there’s another good overview of the fight here).

One thing no one seems to be talking about, however, is how similar this is to the strategy employed by another large consumer technology company whose name begins with an A. In effect, what Amazon is doing — trying to maintain a fixed, low price for e-books to help stimulate the market, both for e-books and the Kindle — is almost exactly the same as what Apple did several years ago, when it was putting the screws to the major record labels on music prices through the iTunes store.

Virtually every major record label tried to boost prices for their songs, or at least get Apple to agree to a variable-pricing model, which would let them charge a higher price for the current hits that customers wanted most, and lower prices for older songs from the “back catalog.” Apple repeatedly refused, until a year or so ago, when negotiations began to modify prices in just such a way. The two sides reached an agreement a year ago.

So why did Apple not get criticized the way Amazon is now? Perhaps because not enough musicians had blogs, and authors do. Or it could be that no one in their right mind would have thought of supporting a record label — one of the most reviled corporate entities of the modern age — whereas many feel more kindly towards a book publisher. In any case, the issue is the same: The labels wanted to charge more to preserve their profit margins from the compact disc, and Apple wanted to charge less to spur market growth.

If you’re trying to decide which side is right, ask yourself this question: Why should consumers support the right of book publishers to charge whatever they want for their product? Since when does the manufacturer or distributor of a thing get to set the price? Surely the retailer is the one that should be allowed to determine the price, based on market demand and a host of other factors (including what price the manufacturer charges him to supply it). In this case, that retailer — or the closest thing to it — is Amazon.

Wal-Mart doesn’t charge whatever Kimberly-Clark says to charge for its toilet paper; the store charges whatever it thinks the market will bear, or whatever it needs to charge. Admittedly, toilet paper and books are somewhat different (depending on whose book you are reading) but the principle is the same. If MacMillan wants to have its e-books on the Kindle, or its printed books in Amazon’s online store, then Amazon gets to decide what to pay for them. Even if a quasi-monopolistic situation has developed with the Kindle, Apple’s iPad should ensure that it is shortlived.

Update: According to a post in Amazon’s Kindle Community forum, the company has decided to capitulate to Macmillan and allow the publisher to charge higher prices for its books. Obviously having Macmillan books in its stores means more to the retailer than winning a price war. The somewhat passive/aggressive post states:

Dear Customers:

Macmillan, one of the “big six” publishers, has clearly communicated to us that, regardless of our viewpoint, they are committed to switching to an agency model and charging $12.99 to $14.99 for e-book versions of bestsellers and most hardcover releases.

We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books. Amazon customers will at that point decide for themselves whether they believe it’s reasonable to pay $14.99 for a bestselling e-book. We don’t believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative.

Kindle is a business for Amazon, and it is also a mission. We never expected it to be easy!

Thank you for being a customer.

Thumbnail photo courtesy of Flickr user bass_nroll. Post photos courtesy of bass_nroll and Flickr user gadl.

42 Responses to “Amazon Is Doing to Publishers What Apple Did to Record Labels”

  1. I just had a look at News Corp (HarperCollins) profits. Perhaps it was the Palin effect (#2 on Kindle), but book publishing is back at News Corp! Best revenue quarter since 4Q 2007. Oh yeah, the 17.1% operating margin was better than 4Q 2007. I know this is pre-Kindle devastation (or is it – we’ve had the Kindle 2 out for a year), but shouldn’t News Corp be in the tank on both revenues and margins? Or is it a “we would have been even better had it not been for the Kindle?” How do we true this up? More on

  2. Dynamo Hom

    “Since when does the manufacturer or distributor of a thing get to set the price”

    Since they get to target a profit margin on their item, that’s when. They can up their cost to the distributor (aka the store) if they want to maintain a specific profit level. “MSRP” is MANUFACTURER’S SUGGESTED Retail Price. Just read about retail pricing on Google, it’s not my bag baby, but I think the author is a little shaky using this specific argument on what is otherwise an excellent article.

    • Thanks for the comment. The MSRP is called the “suggested” price for a reason — retailers are free (in many cases) to sell those items for whatever they wish, provided they pay the distributor the wholesale cost. Very few manufacturers can dictate what someone should charge for their product, although Macmillan seems to have accomplished it — for now at least :-)

      • This is where the book business is different. The traditional book publisher/distributor to book seller model is based on discount from “list price.” List price is that price you see printed on the cover and is determined all the usual ways (price points, costs, etc.) by the publisher. Generally speaking, bookstores get a 40-45% discount off the list price depending on volume, terms, etc. and libraries pay 20% off. If you see a book being sold for less than list it is usually for one of three reasons:
        1. Non returnable – most books are returnable so stores never need to clear inventory. Book stores sales are to drum up business, not clear stock. If a store buys no returnable (Costco) they get a bigger discount and usually pass that along to the consumer.
        2. Remainders – books that the publisher needs to clear out (the publisher does “hold inventory”), usually at very low prices. Like deletes used to be for records, and the $2.99 DVD bin.
        3. Discount/Loss leader – some booksellers (Amazon) choose to sell for less than list to attract business, usually to sell something else. In essence they are taking their discount off list and giving some of it to the consumer.

        The key to all this is the publisher sets “the price” and the bookseller determines the discount. Very similar to the car business. We all know MSRP, but also know what we paid. Here, Macmillan is going to the pure “agency” model (for not just Amazon, but all ebooks from any vendor) which is a standard distributor model. Macmillan determines the price and the agent gets a cut (in this case, 30%). They key is Macmillan, and other IP owners in all types of business, much prefer a list price of X with a 100% discount than a list price of $0. The difference is very important – if stuff changes (and it always does) raising prices is a lot harder than reducing discount. Further, setting a low price reduces the perceived value of the item, whereas a big discount on a high price increase the “I got a deal” factor while maintaining a high perceived value.

        A bit rambling, but I hard pressed to see how Macmillan is in any way being unreasonable. This standardized, “all books should be $x” seems ridiculous to me no more than all journalists should be paid $1/word (the good old days). Perhaps somethings are worth more than others …

        Disclaimer: worked in a publishing company and in a bookstore and now in neither.

  3. Richard Orlin

    Everyone’s missing the point here. The publisher’s cost to produce an e-book is negligible. The book is already in an electronic format before it’s printed as a paper book. There are no distribution costs as there are with paper books. There are no returns either since it a virtual “print-on-demand”. Whatever money publishers are making on e-books is pure profit and so are the royalties paid to authors for e-book sales pure profit to authors. Total e-book sales are minimal compared to total paper sales.
    Publishers, specifically Macmillan, also claim that low priced e-books lower the value of the paper book. Of course an e-book has a lower perceived value than a paper copy: you can’t loan it, you can’t resell it and you can’t give it away. Therefore, it is worth less than a paper book.
    It’s all about greed: on the part of publishers AND Amazon and the customer be damned!

    • Umm, ever heard of overhead and royalties. What happens when the book industry flips to more electronic than paper (inevitable I would argue). Consumers will have “gotten used to” the lower prices and will not tolerate a raise in prices to now cover the fully-burdened ebooks. Publishing books is not cheap and one check of most publishing houses’ (big and small) financials will tell you they are not rolling in cash personally or corporately.

      And for those that want Amazon/Apple to publish books, that’s great, but hope you plan on doing you’re own editing. Even the best authors suck at all levels of editing – copy editing, fact checking, then good old fashion real editing (length, focus, storeyline, etc.) Any author who has worked with a real editor can tell you how invaluable they are (and grossly underpaid). Also, for those that think laying out a book is easy, please go ahead and try – Word doesn’t cut it.

      Bottom line there are real and hard costs in making a book, even if you don’t print and ship it, and I think its reasonable for publishers to say that they need to cover those costs plus profit. Society, the US in particular, seems obsessed with making everything cheaper with absolutely no regard for the impact on their surroundings. Hey, while I’m at it, can I get you to work for less? I need to lower costs, and there’s always someone who can do a good enough job for less …

    • Actually, Richard, the publisher’s cost to produce an ebook is not negligible, or at least it won’t be. Most of the money spent on a book goes toward acquiring, editing, copy editing, setting, and marketing it; the amount spent on paper, printing, and shipping isn’t exactly negligible, but it’s much lower than people tend to assume. (Think in terms of economies of scale — a publisher is buying a lot of paper and ink in big batches, and shipping a lot of books in big batches.)

      More to the point, you have to understand how the book industry works. First, publishers have long made a sizable profit on hardcovers, and have counted on high sales in hardcovers when a book is first released because a lot of people don’t want to wait until the paperback comes out. Unless ebook consumers are willing to wait months for a digital version of a new bestseller, which I don’t see happening, those profits will start to disappear rapidly as ebooks become more popular. Additionally, with print books, retailers contracted with a publisher to buy a certain number of copies and then returned those they couldn’t sell for a small percentage back. That meant publishers could count on making money even if a book flopped. Obviously, that won’t happen in an ebook market.

      So, publishers are trying to come up with a long-term strategy for survival as ebooks make up more of their sales. Because for quite some time, they’re going to have to continue to produce print books, with all the expenses inherent in them, while seeing how the ebook market develops.

      Publishers can’t let themselves get stuck locked into a price of $9.99. Amazon is selling books at that price at a loss right now, but in five to ten years, if Amazon is controlling the bulk of ebook sales and those numbers are much higher than they are today, what’s to stop it from turning around and saying to the publishers, “We’re not paying you $12 a book anymore”? What are the publishers going to do? Once they’re entrenched in the ebook market, they can’t just pull out and go back to selling only print books. They’d be a lot more subject to Amazon’s wishes at that point than they are now.

      It’s nice to shout about greed and the customer be damned, but the economics involved are quite a bit more nuanced.

      • Ho, ho, ho. That paragraph above that begins, “More to the point, you have to understand how the book industry works”? Apparently, I did not understand how the book industry works when I wrote it. Publishers do, in fact, take books back from retailers when they don’t sell, and credit them to the retailer’s account. The other stuff I wrote should be taken with a grain of salt, too, says the person I apparently did not listen closely enough to before commenting. Sorry!

  4. James Bogard

    You’ve got this wrong. Amazon is doing to publishers what Napster did to record labels. Apple will resuscitate publishers the way it resuscitated record labels.

    • Record labels have been resuscitated? I’m sure they’ll be excited to hear that (if there’s anyone left).

      Apple doesn’t care if anyone makes money selling content. Apple makes money selling hardware at 50% gross margin. If you think Apple won’t squeeze publishers in exactly the same way Amazon squeezes publishers than you have not been paying attention to the way Apple does business.

  5. Amazon may have been trying to keep prices low, but as the Amazon press release below illustrates how they were raping the authors and publishers, and why publishers might be revolting against Amazon:

    And, a snippet from the above release:

    Delivery costs will be based on file size and pricing will be $0.15/MB. At today’s median DTP file size of 368KB, delivery costs would be less than $0.06 per unit sold. This new program can thus enable authors and publishers to make more money on every sale. For example, on an $8.99 book an author would make $3.15 with the standard option, and $6.25 with the new 70 percent option.

    “Today, authors often receive royalties in the range of 7 to 15 percent of the list price that publishers set for their physical books, or 25 percent of the net that publishers receive from retailers for their digital books,” said Russ Grandinetti, Vice President of Kindle Content. “We’re excited that the new 70 percent royalty option for the Kindle Digital Text Platform will help us pay authors higher royalties when readers choose their books.”

    So, you can see under the OLD royalty rate Amazon was paying about $3.15 on a $9 ebook, to the publisher, of which about 80 cents goes to the author, with about $5.84 going to Amazon.

    You gotta laugh, when the VP of Kindle Content says, “We’re excited that the new 70 percent royalty option for the Kindle Digital Text Platform will help us pay authors higher royalties”

    So, what stopped Amazon from paying authors a higher split in the past?

    I want to see books cheaper, and I think they will get cheaper, but the royalty rate that Amazon had been paying to the publishers and authors has been beyond ridiculous.

  6. Matthew,

    What had a lot of people up in arms wasn’t that Amazon was insisting on the $9.99 price… it’s that they removed almost all of the Macmillan books from including paper editions. Had Apple removed all of the record labels songs and albums as a stunt I suspect they’d have been savaged by people too.

    I think you also missed that Amazon is a large percentage of online sales which as a sizeable portion of book sales in some genres (SFF notably). In contrast, CDs are still 80% or so of them music sales market (though that market has shrunk due to piracy).

    • Jim,

      I’m not sure about ALL as in every single one, but yes, they removed, if not all, the vast majority and in editions other than Kindle. It’s as if Apple had become the largest seller of CDs, launched the iPod and become dominant in downloadable music and then, because they had a pricing issue with EMI, removed all of the EMI albums from both their downloadable store and the CDs.

      I agree with Matthew that the pricing issue is very similar – but it’s the way the two companies handled it that generated different reactions.

      And, frankly, why do I need Amazon? Why can’t Macmillan or any publisher place Kindle titles on, Powells, the online store of my local independent? Why can’t readers download that Kindle title and place it on their Kindle reader? After all, I can buy MP3s from Amazon and sync them to my iPod…

  7. Steve Johnston

    How can Amazon be doing what Apple did?

    As I understand the terms of Amazon’s 9.99 pricing, NO distributor can sell e-books for more than 9.99. Did Apple ever tell the labels that they couldn’t sell digital tracks at another store for more than they sold it at Apple’s iTunes?

    Amazon sold MP3 tracks without DRM before Apple did, and there was nothing Apple could do about it. A contract that aims to prevent a part of the supply chain from selling at the price the market will bear is not good for the consumer, even if it means lower prices in the short term.

    If customers think iTunes is priced too high, they can vote with their feet and buy a Kindle. At no point should Amazon dictate what another company charge for an e-book. Using market position as contractual leverage to do what it can’t accomplish is not in the consumer’s benefit, and it is not what Apple did at all. Apple exerted maximum control over it’s own storefront. Nothing more, nothing less.

  8. There are major differences in what Apple did and in what Amazon is doing. Apple had the benefit of huge margins for digital music, where a fixed price of $0.99 was not necessarily a detriment. However, as you state in your article, Apple eventually capitulated, and now there is some variability in digital music pricing in iTunes.

    Ebooks are at much lower volumes, and until publishers are routinely making back their investment, they must adjust their pricing for the current environment. $12.99 to $14.99 is only a few dollars more; for consumers not willing to pay more than $9.99, they have only to wait for the scheduled price drops to reach that price point. In a few years, when volumes are much higher, then there will be pressure on the top price charged for new ebooks.

    Macmillan’s offer seems to have been fair; Amazon’s action was bullying. Fortunately, Amazon quickly came to understand (if grudgingly) they were wrong to take such an action. In the meantime, consumers won. The future of ebooks seems to be much brighter today!

      • I think consumers will pay more for some e-books, and only until volumes rise high enough in the coming years for $9.99 new ebooks to be fair to both publishers and consumers. In the meantime, those of us who are more price conscious can refuse to pay $14.99 and wait until the ebook drops to a more affordable price.

        I’m only speculating here (having not seen Macmillan’s exact pricing schedule), but the majority of new ebooks will probably come in closer to $12.99 than $14.99, and the drop in price to $9.99 will take place in less than a year. Waiting a year to read a book to save $5.00 is reasonable; nothing demands that we read everything right this minute. :)

      • Dave Bell

        Authors have to eat too.

        Yes, I know people who could write a book in a week. In the past, when books were shorter, they’ve even done it in a day. Maybe it’s time for a revival in the fortunes of Leo Brett or Pel Torro.

    • That was the argument I was making. The precedent here is with “first run” movie theaters. They have “no special discounts or passes” for the first few weeks, but then discount – significantly. But they have also found new revenue-generating sources. Show me the innovation of a 3D movie experience in publishing.

      Mathew, were you able to discover how many books are lent out/ libraried today as a % of total books (vs ones kept with only one individual). The concept of “loaning” seems to be a big hindering factor, but I haven’t been able to find out how many books circulate

  9. Good article. Actually, several of us were kicking around this question (Who sets the price?) and came to the conclusion that except in limited instances (Lacoste shirts, certain types of perfumes, LEGO in the pre-Wal Mart days) the retailer sets price. If the retailer uses a product as a loss leader, so be it. My question is “Will new authors skip the traditional publishers and move to these independent labels and self-publishing?” Seems like good product and a good marketing agency (Facebook, Twitter, a friendly NYT book editor) could do the trick. Could the publishers be trying too hard to establish a “first 90/180 days” price floor?

      • ‘without the benefit of a publisher’ …well, aren’t amazon and itunes the new publishers in that case?

        Writers can only go so far without professional marketing / trade chains pushing their products. Amazon and itunes are (planning to be) that trade chain.

    • I think making a single product or brand a loss-leader (whether temporary or permanent) is a lot different than making an entire industry a loss leader to force the wholesale producers to drop their prices.

  10. Suzi Steffen

    Mathew, great post. I’ve thought about it from both sides. From observing my author friends’ comments on Twitter, I believe it’s the Kindle dominance + DRM that made the authors (even those not with Macmillan) side with the publisher. In addition, if Amazon had only removed the Macmillan ebooks, I think the outcry would have been much smaller. Taking the print (hardback, trade, mass market) books off the site fueled anti-Amazon-monopoly fire on Twitter. Finally, Amazon’s #amazonfail of last April probably primed the anger pump at Jeff Bezos and the company.

    That said, I see this only as a skirmish in what is surely a Kindle/iPad war (one I suspect the iPad will win handily; the Kindle doesn’t show video, doesn’t have color, doesn’t hook up well to the Internet, etc. blah blah blah — you know all of the arguments). What infuriates me is that authors get caught in the crossfire. It’s funny to see Cory Doctorow taking the part of the publisher since he’s happy to provide such a range of price points on his books, but I know his anti-DRM and thus anti-Kindle argument (and it’s a solid, pro-author AND pro-reader argument).

    One more thing: The authors I follow on Twitter, of course, are doing a lot to further their own careers. They blog, cultivate active online communities, interact with librarians and bookstore owners, promote other authors and take part in discussions about writing, technology and market forces. They understand that midlist and literary and genre authors need to promote their own work. That means they can keep afloat for a while even when publishers/Amazon pull stunts like this. I worry about the other authors who don’t have that kind of access, energy or marketing plan. I don’t have answers for those authors, just curiosity about what will happen as these tech dominance wars go on.

    -Suzi Steffen (@suzisteffen)

  11. Seems to me you may have missed one of the biggest reasons Apple wasn’t criticized the way Amazon now is.

    In the absence of any workable legal alternative, tens of millions (hundreds of millions?) of songs were illegally downloaded every day. Apple was in a real sense a savior of the record companies, albeit on Apple’s terms.

    Books may well be in that place some day, but they’re not now. In fact, much of this confrontation is testimony to how much is now different. It’s a fairly robust market, with room for differentiation and experimentation.

    • In addition to the risk of piracy being so great that a simple, standard price needed to be found, I see a few differences. First, we now have variable pricing thoughout music — sure, Apple preserved single pricing for quite a while, but markets developing after the fact don’t get the benefit of going back in time. Also, from the very beginning, the studios knew what they were getting wholesale and knew that the retail price was at least greater: Apple wasn’t paying the studios $1.40 and then taking a loss, creating a retail price below wholesale while telling the studios, “See the consumer is accepting this lower fee; in the future, we’ll pay you even less and you can’t do anything about it.”