Kindle Sales Outstrip Dead Tree Books: Nobody Makes Money

Amazon announced this week that for the first time sales of Kindle ebooks have outstripped the sales of hardcover books. Is this a surprise? Not particularly. Amazon have been flogging their ebooks to death since the release of the Kindle, they’ve done a fantastic job getting publishers on board, and have the biggest range of ebooks of any store on the web. If it was going to happen to someone, it was going to happen to them. However, the news comes with some pretty massive provisos.

Firstly, the question of how much money is being made here is completely opaque. I know it’s gauche to wonder about the money – but for there to be a future to this ebook game (or any book industry at all) we need to know if there’s money and how much of it is being made and for whom. Amazon has been incredibly tight-lipped about sales of both the Kindle reader and ebooks. They’ve reported that the Kindle itself is now the single highest selling item on Amazon, but that doesn’t give us a clear idea of whether they’re making money from it. The prices for the readers are dropping, but all this proves is that Amazon is getting increased competition from Barnes & Noble’s Nook and to a lesser extent from Apple’s iPad. Despite the shift to the agency model, many publishers are still selling their books for the $9.99 price that Amazon set for Kindle books more than a year ago. What this shows is that, just as they did for selling dead tree books online way back at the beginning of the decade, Amazon are willing to be loss leaders to capture market share. As I’ve mentioned before, maintaining a profitable industry is a mug’s game when it comes to technology – market share is where it’s at. The fact of the matter is, if Amazon were making truckloads of cash on ebooks and Kindles, they would be reporting that, not the proviso-riddled fact that they have sold 143 Kindle books for every 100 hardbacks.

So is this announcement, as the New York Times said, ‘one for the history books – if those will even exist in the future’? Not quite yet. Don’t get me wrong, it’s quite impressive that Amazon have managed to increase sales of ebooks to such a huge extent so quickly. But this isn’t the death knell of the dead tree book – or even of the hardback. Until someone starts making a lot of money from ebooks – and can show that the money will keep flowing – the ebook will remain the poor second-cousin of the mighty hardback*.

*Australian readers can feel free to substitue trade paperback for hardback here, but it doesn’t sound as good to say ‘mighty trade paperback’.

The agency model: hot or not?

The Agency Model: A lot more boring than     this picture.

I’ve implied in the past that ebooks are likely to change the way we buy, sell, read and perhaps even write books in the future. One of the ways things are already changing is the way that publishers supply ebooks to booksellers. This is what’s called the ‘agency model’. The agency model has the potential to fundamentally change the way that publishers interact with people who read books, so it’s worth knowing the basics.

To understand it, though, you first have to get an idea of how dead tree books are sold now. In the current dead tree publishing model, the company sells a certain amount of books to a bookshop and ships them out in dead tree boxes. The bookseller tries to sell as many as possible. Whatever is left can be returned to the publisher. There is a recommended retail price (RRP), but the bookshop decides how much to sell the book for – and they’ve demonstrated a lot of flexibility in doing so. In Australia for example, the big discount stores (K-Mart, Target and Big W etc.) will sell books for a fraction of the recommended retail price. Borders, on the other hand, has been known to increase the price. In other words, books are sold pretty much like any other product.

The agency model is something that has come out of selling ebooks – specifically when Apple came on the scene with the iBookstore and the iPad. Basically what it means is that instead of the bookshop selling digital products directly to you, the bookshop becomes an ‘agent’ (hence ‘agency’ model) of the publisher. The publisher sets the price of the ebook and then give the bookshop a license to sell ebooks on their behalf.

I’ve covered the reason for this change in a previous blog, but the consequences so far have been steady prices for readers (Amazon have increased the prices of ebooks by a few dollars, but other ebook stores will eventually drop their prices). It also means that no single bookshop (I’m looking at you, Amazon) can artificially prop up a price point that no other store can match. This is essentially what K-Mart, Target and Big W do in Australia with dead tree books. You can get very cheap books in these stores, but not a big range. Smaller bookshops around Australia have closed as a result, and the sales for midlist authors (authors who don’t always sell in the big discount chains) aren’t as good as they used to be.

So, the questions is – is the agency model hot or not? As with all of these kinds of questions the answer is that it’s complicated. Do you prefer a good range or a good price? The prevailing wisdom is that the cheaper books become, the fewer risks publishers will be able to take on new and interesting authors. Having said that, ebook stores do not have the physical limitations of their dead tree cousins – the range of books they can supply is almost infinite. What do you think? Sound off in the comments.

Why Amazon May Not Take Over The World After All

The comprehensive article by Ken Auletta over at the New Yorker this week about the Amazon vs Apple vs Google ebook free-for-all has prompted me to consider how close Amazon came to dominating the publishing industry – particularly when it comes to ebooks.

Now, I don’t want to point fingers or choose sides here. I believe that almost any company in the unique position Amazon has been in for the last few years would have done the same. But there’s a very good argument that what Amazon was trying to do was at least a little bit evil.

Amazon made a tactical error when it remotely wiped copies of 1984 from its customers’ Kindles. This did not prove to anybody that they were not evil.

Basically the story is this: Amazon had a virtual monopoly on the sale of ebooks with the Kindle. And to an extent, they still do. Although there are plenty of other ebook stores, none have the reach, connections, range, consumer trust and reliability that Amazon does. Amazon was trying to set the standard price of ebooks at $9.99. They did this by taking a loss on almost every ebook they sold. But Amazon has deep pockets, and the Kindle to sell, so it was worth it to them to try and grow the industry.

Unfortunately, looking forward, publishers the world over could see that this price point was unsustainable. They feared that as Amazon gained more power over the ebook market, they would force the wholesale price of books down. To quote from the New Yorker piece:

Traditionally, publishers have sold books to stores, with the wholesale price for hardcovers set at fifty per cent of the cover price. Authors are paid royalties at a rate of about fifteen per cent of the cover price. On a twenty-six-dollar book, the publisher receives thirteen dollars, out of which it pays all the costs of making the book. The author gets $3.90 in royalties. Bookstores return about forty per cent of the hardcovers they buy; this accounts for $5.20 per book. Another $3 goes to overhead costs and the price of producing and shipping the book—leaving, in the best case, about a dollar of profit per book.

Obviously these aren’t the exact same margins as in Australia, but they’re very similar, and illustrate my point. What the argument ultimately came down to was this – what is a book really worth? When you take away the cost of printing, which ebooks don’t incur, what should you reasonably pay for a book, and – perhaps more importantly – what does the industry need to receive in order to remain profitable and be able to keep producing books?

The number the industry came up with was $US14.99. They forced Amazon to accept this with the help of Apple and a liberal dose of chutzpah. Google, when it gets into the ebook selling game in the next little while, will help solidify this higher price point.

So, industry saved, right? Right? What do you think? Do you pay too much for books? Would cheaper prices lure you into buying ebooks? Is $AU16 too much for an ebook?