Bezos ducks the questions; Kindle e-books bleed money from Amazon

David has already remarked upon the “bathtub” quote from Deborah Solomon’s New York Times interview with Jeff Bezos. I thought that was cute, but not the most interesting part of the article.

The most interesting parts were also the most annoying parts, as Jeff Bezos coyly sidestepped a number of questions about digital content and the Kindle that consumers and pundits have been asking for a while.

For example, when Bezos talked about his dream of having every book in every language available within sixty seconds, Solomon brought up the issue of authors who refuse to authorize electronic versions. But when she asked whether J.D. Salinger was one of those, all Bezos said was “You’d have to ask him.”

And when Solomon asked about the 65% rate pocketed by Amazon for self-published works—a matter of controversy in some e-book discussions—Bezos asked her, as an author herself, “Are your royalties 35 percent?” (She declined to comment.)

In fact, it is lucky that Bezos talked about book-bathing at all, because that was one of the only places in the interview where he said anything straightforward.

Loss Leader

One particular point where Bezos was less than forthcoming was when he said that, for those books that have Kindle editions available, Amazon now sells 48 Kindle copies for every 100 printed copies. “It won’t be too long before we’re selling more electronic books than we are physical books. It’s astonishing.”

But what he did not say was that for every not-self-published e-book Amazon sells, Amazon continues to lose money. This is the subject of another interesting article about Amazon, an in-depth look at the economy of Kindle sales by media-industry research firm TBI Research.

This piece does not mince words, pointing out that Amazon loses at least $2 per Kindle title because the publishers price the e-books at the same $12 wholesale rate as hardcovers. Amazon is using these cheapened e-books as loss leaders: selling cheap to get people hooked on e-books (and on the Kindle in particular).

However, Amazon cannot continue doing this indefinitely. Unless something changes, sooner or later Amazon will have to raise its prices—and if that happens, you can bet it will no longer be selling anywhere near 48 e-books per 100 paper.

Cost Comparison

TBI estimates that manufacturing and authors’ royalties make up over half of the production cost of a paper book, and these can be dramatically reduced for digital copies. (The manufacturing cost by the lack of paper, ink, etc.; the royalties because they are pegged at 10% of a book’s price, and if the manufacturing cost falls so should the price.)

It backs this estimate up with figures, too, comparing an itemized list of print vs. digital production costs for a typical book. These are certainly more solid-looking figures than we get from the publishing-industry advocates who claim that e-books are not as much cheaper as we think.

TBI believes that, under the dual pressure from Amazon and consumers who like Amazon’s prices, the publishing industry will have to give in sooner or later.

Publishers should be able to sell e-books to distributors like Amazon at $5 and still maintain the profit margins they enjoyed on print book sales.  In turn, distributors like Amazon should be able to sell e-books at the current $9-$10 price and still enjoy a healthy profit.

However, authors may come out the losers in this equation, as they will see their royalties per book decrease (unless they renegotiate royalty terms with their publishers, who undoubtedly will not be keen to do so). On the other hand, if the number of units sold increases, perhaps the hit will not be as bad as might be feared.

It is a provocative analysis—and it has certainly provoked a number of people who have left comments disputing with parts of the report’s conclusions.

But regardless of whether you quibble over the figures, or over the “100% flip” from paper to digital on which the report seems based, one simple fact remains: if Amazon is losing $2 per e-book, it cannot continue to do so forever. And the ripples from when the irresistible force finally smacks into the immovable object could have profound implications for the e-book industry.

5 Comments on Bezos ducks the questions; Kindle e-books bleed money from Amazon

  1. The one thing that hasn’t been mentioned in this discussion is the upfront $259 — or more, since I paid more for both my Kindle 1 & Kindle 2 — that customers pay for the device. That’s no small sum of money that Amazon take in on each Kindle sold and must be figured into the overall P&L for Amazons e-book strategy.

  2. Part of the second article that I didn’t quote above went:

    Margins on e-reader hardware sales are currently low – gross profit margins are in the 20% range before costs like marketing and overhead are even taken into account. E-Book sales on the other hand can generate high margins depending on the wholesale price charged to distributors.

    I’d believe it. Those e-ink screens are pretty expensive right now.

  3. Quote: “However, authors may come out the losers in this equation, as they will see their royalties per book decrease (unless they renegotiate royalty terms with their publishers, who undoubtedly will not be keen to do so).”

    The good news is that authors will have more leverage because with ebooks a publisher is providing much less of the total package.

    Reasons:

    1. Simpler formating. Unlike printed books, which require experts to lay out, ebook formatting is little more than long strings of text. Yes, they may look ugly in comparison to a well-done printed book, but since all of them look ugly, it matters not.

    2. No printing costs, warehousing or distributing required. A single digital copy provided to some central source is all that is needed and any tech-savvy author could do that. No publisher with expertise and money to print large press runs is required. No need to warehouse those copies and no need for salesmen to get stores to carry copies or display them prominently.

    Of course, the publisher is still providing a gatekeeper role, spending money for advertising to say a particular book is worth buying and using their contacts to get the book reviewed. But a well-established author doesn’t need that and for any writer a single, well-connected agent could provide the publicity for a smaller slice of the price than a publisher with dozens or hundreds of employees.

    The above may be why many publishers seem reluctant to get into ebooks and why they want to keep prices high to keep the market small. Ebooks don’t eliminate the need for publishers, but they do reduce their role.

  4. A FEW book titles are a $2 loss, MOST of the titles offered by the Kindle are profitable. Those few titles are loss-leader bestsellers.

    That ebooks are 48% of their new book sales isn’t really that impressive. A majority of the profit/sales that Amazon makes on books are used books. In fact, Amazon was always in the red until they started touting used books which require no effort on their part except for listing the book from other sellers.

    The TBI article had a lot of nonsense in it. For one thing, they blame the publishers for high prices, but they fail to consider that the distributors are taking so much of the profit that the price must be increased so the publisher makes any profit at all.

    Get Amazon and others to lower their 55-65% percent off the top, and prices could go down.

  5. I’m not clear on that, Marilynn. If a book is priced at $12 by the publisher, Amazon has to lower their take into the negative percents to bring it down to $9.99. How can Amazon lower its own markup to bring the price that low but still make some profit?

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