Folks interested in the publishing industry know that Amazon, the world's largest online bookstore, has been in a pissing contest with Hachette, one of the planet's largest publishing houses, over e-book sales. The details have long been murky but all of the reporting suggested that Amazon wanted e-book prices to be lower than Hachette and other major publishers did. In fact, Hachette and four other major publishers recently settled a case in which they colluded with Apple to hike the price of e-books. (Disclosure: the founder of Amazon, Jeff Bezos, has been a supporter of Reason Foundation, the nonprofit that publishes Reason.com)
While negotiating new rates, Amazon slowed down its fulfillment of new Hachette titles (the house's labels include Grand Central, Little Brown, and Hyperion) and stopped discounting them too. That tactic earned Amazon the scorn of the literati, which likened the site to Russian autocrat Vladimir Putin and worse. Best-selling authors such as Malcolm Gladwell and James Patterson were livid at Amazon and their concerns were widely voiced by members of the elite media at places such as The New York Times. I wrote a few months ago that I thought it was really weird to see people go off on a business that was trying to keep prices low for customers. To my mind, Amazon wasn't the "bully." The big publishers and their authors were.
Now Amazon has issued a statement about the matter that lays out some numbers. It's pretty interesting reading and clarifying, too:
…e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We've quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.
The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved:
* The customer is paying 33% less.
* The author is getting a royalty check 16% larger and being read by an audience that's 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who's trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)
* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties….
That's a pretty interesting position, I think. And there's this:
How does Amazon propose to share that revenue pie? We believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30%—we did have a big problem with the price increases.
Is it Amazon's position that all e-books should be $9.99 or less? No, we accept that there will be legitimate reasons for a small number of specialized titles to be above $9.99.
One more note on our proposal for how the total revenue should be shared. While we believe 35% should go to the author and 35% to Hachette, the way this would actually work is that we would send 70% of the total revenue to Hachette, and they would decide how much to share with the author. We believe Hachette is sharing too small a portion with the author today, but ultimately that is not our call.