Amazon losing money on $9.99 e-books

Found via Twitter from @Hadrien: the Conversational Reading blog remarks on a Publishers Weekly article confirming that Amazon is, indeed, losing money on every $9.99 Kindle e-book that it sells.

As the articles point out, Amazon has to pay the same wholesale price to the publishers for e-books as for print editions of those books—more or less half of the print edition price. (So do other e-book vendors; this is why even Fictionwise must charge excessive rates for books from publishers such as Random House, though they do they best they can to bring the prices down with discounts.)

Amazon then can choose to sell it for however much Amazon wants: whether it comes out ahead on the deal is entirely up to it. Thus, Amazon sells it at below wholesale, as a “loss leader”—breaking even or losing money on the deal to promote sales of the Kindle and grow its share of the market. (Giving away the blades to sell the razor, as it were.)

Thus, if a hardcover book has a suggested retail price of $24.95, Amazon pays the publisher about $12.50 for the e-book version—and loses about $2.50 when it turns around and sells it for $9.99. But Amazon doesn’t care: people look at those Kindle discounts and say, “Golly, that e-book gizmo would pay for itself in savings if I only bought a few dozen e-books.” And they buy the Kindle instead of some other reader.

This habit of Amazon’s of throwing its money away to build the Kindle market has publishers very worried. For one thing, it will get consumers used to paying $9.99 for e-books. (And indeed, there already is a movement afoot to “Boycott all [Kindle] books over $9.99!!”)

This is a strategy that could backfire on Amazon if they are unable to negotiate better rates with the publishers and eventually have to raise their prices. But it could also hurt the publishers as consumers put pressure on them to lower their prices so e-books are $9.99 everywhere.

What’s more, if Amazon corners the e-book market, it will become the “Wal-Mart of e-books”—able to dictate terms to its suppliers, and cut the suppliers off from the majority of customers if they refuse. Which will mean publishers will earn less money, and could mean authors earn less money, too.

To listen to publishers, they are squeaking by on a razor-thin margin already, and this kind of squeeze could mean the end of the publishing industry. Even though e-books do not have the printing and shipping costs associated with a book, publishers insist that these are only a fraction of the cost that goes into a book:

“The pricing in publishing has very little to do with manufacturing costs and most to do with the cost of author talent. That does not go away when you sell an e-book,” the head of one house asserted.

In light of this, it seems odd that Baen is able to sell all of its e-books, including e-books of brand new hardcovers, at $5 each (or less when they are bundled together with three to five other books and sold as a month package for $15). But then again, Baen tends to consider its e-books to be first and foremost promotional materials for selling print books—they may be treating the e-books as “loss leaders” themselves.

I was having a Twittered discussion with ArachneJericho the other day in which he asserted Amazon’s actions, as perceived by me, do not make sense from a business point of view.  “[They] own Mobipocket,” he wrote. “Eating into their own store isn’t something anybody would do, nor spend dev time on.”

Still, I see Amazon doing as much as possible to shut competitors’ e-books out of its device, and even out of devices it has some influence over such as the iPhone. And it is trying to make its device irresistible to the e-book-buying populace with loss-leader pricing. From the point of view of a business that wants all the marbles—and has huge amounts of money to throw at making that happen—it makes perfect business sense.

I’m not saying Amazon shouldn’t try it—after all, capitalism is one of the principles this nation was founded on. More power to them. But by the same token, everyone else should see what Amazon is doing so they can try to counter it.

In a conversation with ArachneJericho right now, he said, “What I wish for most is for publishers to take a look beyond what Amazon is doing and do something smart. […] Come up with strategies. If you only chase Amazon you will go nowhere. I kinda ran out of pity a while ago.”

I can certainly agree with him there. I hope publishers will come up with effective strategies, because it would not be good for the market to be dominated by any single player no matter who it is.

22 Comments on Amazon losing money on $9.99 e-books

  1. Great article. I agree that it makes perfect sense for Amazon to “invest” in cheap ebooks. Amazon has 10% of the physical book market. The long term goal is to get 100% of the digital book market, hence the closed platform and prices that competitors can’t match. Any revenue from hardware sales is just a bonus.

  2. as they sure Amazon is paying the same dollar amount for p and e books? I’ve seen other analysis from Citi that asserts the margin is the about same but the absolute wholesale cost to Amazon of an e book is significantly less than a p book. Additionally if Amazon is not making money on the e books (and other publications) they are not making money in this category as the Kindle is probably breakeven at best.

  3. Sorry but I’m NOT going to pay the big publishers the same price for an ebook that is a 5 second digital blip to transfer to my device as I pay for a print book that is printed and bound and shipped and warehoused and retailed.

    If ebooks cost $2 each I’d buy hundreds of them. But with the current pricing I buy maybe 4 or 5 a year. I’ve stopped buying print books completely because it’s clear that ebooks are the future. But, for now, I mostly hunt up free ebooks to put on my kindle. Even $9.99 is excessive for something that has fundamentally zero cost of production and distribution and can’t be resold or traded.

    Free ebooks on the kindle and trips to the library is my plan until the ebook market sorts itself out. So the publisher’s greed is causing them to lose at both ends with me.

  4. “everyone else should see what Amazon is doing so they can try to counter it.”

    Amazon is trying to become the walmart of publishing. I hope they get there, people crap needlessly on Walmart. The thing is before Walmart came around people were getting ripped off by small town merchants, now they are actually able to save money on purchases. Publishers are just like those small town merchants in that they have ripped off average consumers for far too long. I think new lines of production must come with lower costs sooner or later and 9.99 and under is enough for an author to make handsome profit. If a book sells for $6.00 and the author takes 35% of that $6.00 it works out to considerably more then some $20 book that doesn’t sell and that limits the author to only a 10% take. $2.20-2.40 (self published author using Amazon DTP) VS. 2.00 at less frequency with a major publishing house. THE ONLY PEOPLE LOOSING ARE OBSOLETE PUBLISHING HOUSES!!!

  5. Logan Kennelly // May 13, 2009 at 9:31 pm //

    Alex, this article seems to be implying that they are not taking the Walmart route, though. Walmart would have gone to the publisher and said, “We are going to pay you $7. Make it work.” Obviously Amazon isn’t yet large enough to do this, but if they are putting pressure on the publishers, then it isn’t entirely obvious.

    Amazon may, however, be engaged in a massive campaign to change consumer expectations.

    We’re just re-hashing what the fine article said, though. :-)

    If the publishers really wanted to do something crazy, though, and make an insane amount of the money in the process, they would sell their books directly to the customer in a DRM-free open format (cut out the Kindle monopoly), make their catalog easily available to third parties, and offer small (10-15%?) referral fees.

    Recent discussion here indicates that customers like a single storefront and won’t shop around at a dozen publishers’ web sites. (I’m the same way. I go straight to Fictionwise to purchase what I’m interested in because it’s easy.) So give them what they want! Allow people to create “stores” that don’t collect money, don’t offer content, and don’t have support issues. Then these “false storefronts” can’t justify a 65% fee, and the publisher takes the lion’s share of the retail cut.

    This is probably not too far off what Stanza was (is?) attempting to build (common catalog format with profit from referral fees), but it unfortunately requires multiple companies to agree to work toward a common goal, and I believe that any entity strong enough to direct publishers toward such a goal would not use its influence in such a manner.

  6. Dont forget, when buying the book from Amazon you never really own anything. You only rent it as long as Amazon is happy to support and sell the book.

  7. Chris, I think new Baen ebooks are $6 – so 75% of the MMPB type price. An O’Reilly person maybe mentioned 80% at the IPDF thing yesterday?

    It is the older ones that are $5 or $4 as standalones, I believe. Makes sense to me.

    There is no chance the publishing industry ends, of course.

    A few big slow publishers might die, but companies die all the time.

    The two are not the same thing at all.

  8. @Logan: What I’m saying is, they’re trying to get big enough to be able to say “We are going to pay you $7. Make it work.” At that point, they will be doing the same thing Wal-Mart does to its suppliers. Hence, the “Wal-Mart of e-books”.

  9. I don’t understand why anyone is buying ebooks for the same price as pbooks. It doesn’t cost the same to make and distribute them, and you don’t get the same value as owning a real book. Is this how it’s going to be? The publishers are going to keep pretending they cost the same and charging the same? If so, when I run out of free ebooks I want to read, I’ll get reaquainted with my local library.

    I think they’re being incredibly greedy and fearful (drm and other attempts to restrict use) and are losing themselves a lot of potential customers. Then I wonder why ANYONE is paying stupidly high prices for drm ebooks. C’mon people, stop paying them to do this and maybe they’ll get a clue.

  10. Felix Torres // May 14, 2009 at 9:23 am //

    In breaking down cost for e-books and p-books I don’t see much mention of operational costs. It costs *amazon* a whole lot less to sell and deliver an e-book than a p-book. Regardless of the base price, the e-book has less costs added to it above and beyond the publisher’s cut and most of those costs are lumped in into a sort of overhead (maintaining the servers, paying off Sprint, etc). Publishers aren’t the only ones saving costs on ebooks.
    As for Baen, they can collect 75% of list price simply because they are both publisher and storefront on their ebooks. And their operation is, apparently, efficient enough that some authors from other publishers are bringing their e-editions to Baen.
    Big mystery there is why other publishers don’t follow suit. Is it another case of fearing the “wrath of the channel”? Which would be silly, but…

    It reminds me of the Britannicca salesmen story that led to the creation of Encarta…

  11. Richard Askenase // May 14, 2009 at 10:10 am //

    I agree with publishers that a substantial cost is author’s advances, author’s costs (i.e costs for research on non-fiction books) and editor’s fees. (I am a HUGE believer in the importance of a good editor for ALL authors.) Other than marketing (a separate factor), these are all the costs associated with developing a book into its final form. After that, it’s printing, warehousing and shipping.

    I do NOT accept the proposition that these costs are diminimus. Each book is warehoused at least twice (publisher and distributor), often a third time(distributor for a retailer), and shipped at least twice (publisher to distributor then to retailer).

    There is NONE of that cost with an ebook. There is a small cost to convert it (software), and to proof it (human cost), and a small cost to store it on a server. Then it’s done. No further costs. So, an ebook costs MUCH less than any printed book. Any other position is, as Spock would say, “illogical.”

    There is also no cost to Amazon, other than maintaining large servers, certainly MUCH less cost than warehousing and shipping an item.

    So, what we have here is a tug of war between Amazon and publishers (nothing new there) but regarding a different subject- ebooks and their pricing. I think that the consumer resistance (boycott) to pricing over $9.99 is both well founded (and logical) and effective. Prices on Amazon for Kindle editions are dropping to that level, and Amazon appears to be selling plenty of Kindle books. That means that the publishers ARE GETTING MONEY FROM THEIR EBOOKS. Hello!! Isn’t that what they want?

    But the publishers are ridiculous in their ebook listing price (matching them to pbooks). So, I do expect Amazon to start putting pressure on publishers to lower their prices on Kindle ebooks. And that is logical since the publishers prices are too high, as I said.

    So where is this going? In time, I expect the publishers to lower their ebook prices, that Amazon will lower its prices a lttle (maybe the benchmark price will be a little lower than $9.99), other e-tailers will match that price, publishers will downsize (they do NOT need the expensive Manhattan locations, for example), and they will sell a greater portion of their books as ebooks.

    And all of that appears to me to be the right direction. And, guess what, everybody profits!

  12. Everyone is assuming that the only cost associated with publishing a book is the actual physical production of the book. While production is certainly a portion of the cost, it is by no means the entire cost of the book.

    One must break down the cost of a book in the following way:
    1) Advances to authors (of which agents also get a cut and therefore are motivated to get as large an advance as possible) and subsequent royalties
    2) Editors. While many people who advocate that authors are who matter and editors do not actually edit, readers might not feel the same if they have to wade through manuscripts to shape a book as well as cleaning up spelling, grammar and punctuation mistakes.
    3) Publicity. In this age, a book will not hit big without having publicity and marketing people ensuring that a book receives some notice, be it in print, on the internet, radio, or tv interviews. All this requires people dedicated to the sole purpose of pushing a book.
    4) Production. Whether a book is online or in print, the book has to be typeset to make it easy to read. Again, all one has to do is compare reading 600 pages of reading manuscript pages in regular word documents as opposed to a finished typeset book. The finished typeset book, if set well by a good interior designer, should be less strain on the eye.
    5) Support staff. These include assistant editors, financial people, rights departments, permissions department, those who handle contracts.
    6) Overhead. This includes physical buildings such as offices and warehouses. If/when ebooks completely take over, warehouses might not be needed. But until then, publishing houses must find a way to maintain a warehouse with all the staff that a warehouse needs (and it’s quite a large staff). And even if warehouses will no longer be needed in the future, if ebooks become the only way of buying a book, then a publishing house will have to hire a team of data architects to keep up all the ebooks.

  13. Logan Kennelly // May 14, 2009 at 1:49 pm //

    S: I don’t see people assuming that at all. What people are assuming is that all of the costs of dealing with a physical book are not under $1 as some people seem to claim, and the discount from a paper book should reflect that.

    The problem is that, in the end, it doesn’t matter! People will pay if they feel the product is worth it, and, right now, that often isn’t the case for big titles. If publishers want customers to pay more, they need to convince us why.

    Unfortunately, most publishers don’t view eBooks as a supplemental sales channel to hardcover books. They believe lower-priced eBooks will cannibalize their high-margin hardcover releases

    @Richard Askenase: I don’t think you are going to win over anyone’s hearts with the argument that publishers should downsize their operations so that customers can pay less for books. Your argument implies that profits will be lower with eBooks, and I don’t believe that to be the case at all.

    @Chris: I understand that is what you are getting at in the article. That’s why I said the comments were re-treading ground.

  14. Either way, I’d rather read the hardback.

  15. It’s not about cost. It’s about financing.

    As I understand it, the pbook distribution system is one which allows publishers to ship more books to retailers than the retailers are able to sell. But the retailers pay in advance for those books. This generates a cash flow to publishers which allows them to operate, at an effective interest rate of zero

    The problem is, this model doesn’t work for ebooks. Ebooks are sold one at a time, not in advance distribution of lots. The result is that the financing isn’t there, so selling ebooks would presumably require publishers to borrow money at the prevailing interest rate.

    So the primary barrier to ebooks has nothing much to do with the relative costs of printing pbooks. In effect, it may well be that pbooks are *cheaper* to print than ebooks, notwithstanding the fact that the consumer gets a more substantial and longlasting product if he buys a pbook.

    I know that this is counterintuitive. But I think it explains the inability of publishers and retailers to adjust to the ebook market.

  16. This highlights just how sad it is that Amazon won’t release its Kindle unit sales. They can only be lower than everyone thinks, in spite of selling e-books at a loss and providing free wireless.

    I’d hate to be an Amazon shareholder. :-)

  17. Hmmm, sounds like the publishers have too high of a fixed cost overhead from their brick and mortar operations. They would need to focus and substantially downsize to realize ebook economic efficiencies. They can’t due that while they continue to publish pbooks. Sounds like what is needed is a deconstruction: the sustained value editorial and marketing functions need to be spun off into small and independent editorial boutiques, and the remaining legacy physical publishing operations consolidated over time to realize physical scale economies. The boutiques could then “publish” directly to the ebook vendors networks while sharing the physical publishers. Hard to see that happening unless the publishers start hurting badly enough for a couple of big ones to merge physical ops and spin off editorial…

  18. No numbers would seem to be pretty SOP for the book industry, probably because as you say, lots of them are very low.

  19. I have purchased more books over the past 3 months for my Kindle than I had over the past 6 years.

    You ask that people look ahead and try to stop Amazon, but you don’t give a good reason why they need to be stopped.

  20. Amazon pays publishers substantially less than other ebook retailers for ebooks. They demand it. While they do not make much, they do make money on most of their ebooks as a result. But it is true that they are willing to sell at a loss to bleed the competition, and sometimes they do that too.

    And yes, they DO say to publishers “here’s what you get, deal with it”. Since many publishers are now dependent on Amazon for more than 50% of their annual sales revenue, what can they say in return? Anyone who says otherwise hasn’t dealt with A on a large scale. They are willing to make threats until they get what they want.

    Honest competitors in the ebook retailing space cannot compete on discounts alone in the long term. Alternative strategies do exist and will be tried, but it won’t be easy. Still, it is a big, wide market full of interesting niches for the fleet of foot, and most believe open standards will prevail in the long run.

  21. DensityDuck // May 16, 2009 at 3:11 pm //

    I’ve always thought that ebook costs were too low. Yes, I meant “LOW”. I’d rather see ebooks up at the same price as pbooks–with ebook readers given away free. Meadows mentions “giving away the blades to sell the razor”, but razor manufacturers (and printer manufacturers, and videogame-console manufacturers, and cellphone service providers for that matter) have known for years that a much better model is to give away the razor and mark up the blades.

  22. Tim McDonald // May 18, 2009 at 8:11 am //

    All I can do is relate my personal habits, which are:

    Baen Webscriptions : Several hundred dollars spent over past 3 years.

    All other ebooks : ZERO.

    I have found I like reading books on computer, it is easier on my old eyes. I still buy a few hardcover and a few paperbacks each year to read while traveling. I have not yet purchased an ebook reader, as I have about decided a netbook is a better value for me. The only issue will be availability of ebooks for the netbook, and I suspect I will be able to find compatible formats for a long time to come.

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