Thoughts on Amazon’s 70% cut for books priced at $2.99 to $9.99

While all the attention has been focused on the new Kindle DX and the Kindle and Nook price cuts it’s the introduction of 70% royalties by Amazon that will probably have the most impact on books and publishing.

It’s Apple that started the trend when it agreed to give Publishers 70%. However, it has much stronger consequences now that Amazon has implemented it. Most of the serious ebook buyers and readers are on Amazon’s Kindle platform - as are most of the independent authors. Amazon has apps for most platforms and it might still have 80% or so of ebook sales.

10 Things Amazon intends that will happen

At its base level this is a move by Amazon to try to impose both an upper and lower bound on ebook prices and also get itself a fair deal. Here are the parts that will work out well -

  1. Apart from the big Publishing houses everyone else will go below $9.99 (if they aren’t already there) and stay there. Most books outside the Agency Model will cluster below $9.99 - simply because 70% of $9.99 is still more than 35% of $15 and equal to 35% of $19.98.  
  2. A small section of Publishers will set $2.99 as their lower bound. This will have a small and eventually meaningless impact on the lower bound of ebook prices.  
  3. Some authors will start going with Amazon directly, through their agents, or through new Publishing Houses. A lot of authors will start asking their Publishers for a bigger cut of ebook prices – This is already happening in the US and UK where Agents are holding out for 50% on ebook rights (Courtesy The Bookseller).

    Wiley … planned to set up a company on behalf of his clients to license unallocated e-book rights “directly to someone like Google, Amazon.com or Apple.”

    Georgina Capel of Capel & Land welcomed Wylie’s comments, saying she thought he was “completely right and completely brilliant on this”. She said: “We believe 50% is the right royalty rate and in most cases we are asking for 50% on backlist titles. We are not agreeing to anything less than 25% on new titles, and we believe it will be 30%–35% soon.”

  4. Publishers will be put in a very interesting position – They will be forced to give 50% to authors for ebooks and even more for backlist titles. Their business model will literally collapse as the share of ebooks increases.
  5. Authors and Publishers will start to play the volume game, start trying out lower prices, and will experiment a lot more. Readers will start buying and reading more ebooks as prices become more reasonable.
  6. The shift from Physical Books to eBooks will be hastened as lots of authors and Publishers will rush to digitize their backlists and make 70% on them.
  7. More authors and publishers will enable Text to Speech and other special features Amazon enables for the Kindle Platform down the line. The Big Publishers will still stay away from this as they can still get 70% under their Agency Model deals. 
  8. There will be more respect for the concept of ‘ebooks should be cheaper than physical books’. Authors and Publishers will be forced to keep ebook prices at 20% or more below physical book prices.
  9. Readers will like Amazon more. It’s a clear message to readers that Amazon is giving authors a better share (70% is way better than 8-15%) while also keeping prices low for readers.
  10. Authors will like Amazon more. It’s a lot of freedom and it means a lot when the company that controls 80% or so of ebook sales introduces such high royalty rates. It also causes the entire market to move in the direction of 70% royalty rates.

This is a good, strong move that will do a lot of good. However, it’s almost impossible to get humans to behave the way we’d like them to behave – especially in free markets or in big groups. That brings us to the likely unintended consequences.

11 Things Amazon hasn’t planned for or didn’t intend that will happen

Please note that this post is implying that all of the following will happen within the next 9 to 12 months. 

  1. Independent Authors will shun the $2.99 option and stick with $1 books. We will not get a new floor at $2.99.
  2. There will be a new tier at $2.99 which will be disproportionately represented and will include almost everyone who is currently between $3 and $7. Smaller Publishers will start using $3 instead of $5 and $6. Backlist books will start appearing in the $3 to $4 range. Basically, Amazon want to make $2.99 the new $1 and $9.99 a stable price-point for established authors – Instead we’ll see $1 stay the lower bound and $2.99 threaten to replace $9.99.
  3. There’ll be a lot of problems due to the ‘you can’t sell the ebook cheaper anywhere else – even if there’s a promotion’ clause. Imagine being an author who now has to match any offer on any retailer site for their ebook - you’re keeping tabs on prices everywhere, you’re going to Amazon Kindle DTP and changing prices, and then you’re changing them back. It’s a nightmare and most authors will not do it. Also, how exactly are Amazon going to track all of this. The ’20% lower than any physical edition of the ebook’ clause will cause similar problems. In this case it’ll be virtually impossible to track prices. 
  4. The breakdown of the concept of territorial rights for newer ebooks. By specifying that books need to be available in all territories for which Author/Publisher has the digital rights Amazon are putting a lot of pressure on the rights owner to simplify things. It’s intended to ensure that Publishers don’t selectively parcel out their territorial rights - However, it’ll lead to the end of territorial rights since it’ll just be simpler to have all rights in one place. This would have happened anyways – However, the 70% royalty hastens the demise of territorial rights.  
  5. Numerous PR and legal issues. The first set of issues will be due to the pricing clauses and the second will be due to the provision that any new features added to the Kindle platform must be enabled for ebooks to earn their author/publisher 70% of royalties.
  6. Authors will choose new Publishing Houses instead of Amazon. The intricate provisions and the amount of things to look out for means that Authors will still shy away from dealing directly with Amazon. There’ll be a layer of middlemen that will handle the Amazon-Author relationship – They’ll take 10% to 20% and pass on 50% to 60% to Authors. 
  7. Amazon feel the new rates will be very good for independent authors and in theory they ought to be. However, we will be in an almost free and very competitive market and we’ll be left with $1 Independent authors competing against Publishing Houses getting 70% at $2.99 and $5. The rich might not get richer but the poor will definitely get poorer.
  8. The total amount of profit on books will go down despite higher sales volumes as $1 and $2 will still remain and book prices will migrate down to $3, $4, and $5. Amazon’s ebook profits will be affected by conflicting factors – they are no longer taking a hit per book, there now ought to be more ebook sales, and at the same time they’re now giving out 70% to smaller Publishers and authors.  
  9. Defection to other Platforms will be slowed but won’t stop. Firstly, it’s easy to match 70% royalties. Secondly, most other companies are desperate (except for Apple) and will not put in so many restrictions for authors and Publishers to get 70%.
  10. The bestseller lists will morph and Amazon might soon (by end 2010) have to introduce lists for ‘Top 100 Books over $5′ or ‘Top 100 Highest Grossing Books’.
  11. There will be reader fatigue and a much bigger need for recommendation systems and reviews and buying guides. We’ll be in a book world where most books are between $1 and $5 and it’s tough to know what to go with.

Basically, Amazon are going to be very surprised by some of the things that happen due to their restrictions for authors and Publishers to get 70% royalties. This list is far less comprehensive than the prior one (which isn’t very comprehensive to begin with). All of us are going to be surprised by the changes that 70% royalties bring about and also by the various consequences of Amazon’s multiple restrictions.

Nothing could be as effective in breaking the fragile pact between Authors, Agents, and Publishers as the introduction of 70% royalties. We’re already seeing the first signs and within 9 to 12 months we’re going to be in a completely different Books & Publishing world.

Why aren’t authors getting 90% of book sales?

Current platforms offering as much as 70% to Authors is great and them letting anyone publish books is even better.

We’ve seen a jump from 8-15% royalties to 70% royalties and from publishing a book (and getting it to readers) being really difficult to being quite straightforward – All in 2 short years.

You could attribute it to a variety of reasons –

The Internet, eReaders, eBooks, the Kindle, Sony, Competition from Nook, Threat of competition from the iPad.

However, before going into that it’s worth wondering why authors seem to be blind to the 70% option. 

Why are authors still happy to get 15% or 25%?

The majority of published authors are happily ambling along with a royalty rate from decades ago.

What makes authors so amenable to being exploited?

  1. Developers get 70% from Apple and still complain that Apple takes weeks to review their apps.
  2. Bloggers complain non-stop that their blog (which is free on the Internet) sells for $1 and they only see 30 cents.
  3. Sellers on eBay complain about the listing fees and the miniscule commissions eBay gets.
  4. Meanwhile authors happily take 15% (or 25% for ebooks) and thank their lucky stars.

Perhaps it’s a function of being used to 10% royalties for so long. Perhaps its inertia.

How essential are Publishers now?

At some level authors have to be seeing the changes around them – What do they need Publishers for?

  1. Publishers are no longer gatekeepers. 
  2. You can set-up your own website and sell directly to readers.
  3. You can sell in the Kindle Store and the App Store and perhaps in the iBooks Store.
  4. Print on Demand is making it more and more possible to print and sell books on your own.  
  5. eReaders are exploding and readers are coming online to search for books.  
  6. You can use Twitter and Facebook and Forums and social media to reach readers. 
  7. You can start your own blog and have an ongoing discussion with your readers.

What’s left are three key elements -

  1. Financing authors.
  2. Book creation expertise.
  3. Book marketing expertise and budget.

Publishers can add a lot here – However, is that amount of value worth them getting all the control and giving authors just 15 to 25%?

eReaders and eBooks have made 90% revenue-share a possibility

Two of the biggest reasons Publishers have lost their power are eReaders and eBooks.

  1. eBooks take away the advantage Publishers have with physical distribution, retailer tie-up, and so forth. 
  2. Publishers’ economies of scale become much less relevant.
  3. eBooks greatly reduce the amount of risk involved in bringing books to market - negating probably the biggest contribution of Publishers.
  4. eReaders create a direct channel to the reader – a direct channel that Publishers do not control. 
  5. eReaders allow for getting books instantly and from anywhere – weakening stores and distributors.
  6. eReaders let authors reach readers instantly and cheaply.

These changes transfer more and more power from Publishers to readers and the platform companies.

Only three relevant parties – authors, readers, and enabling platform

If we can figure out a way to spread out the marketing, financing, and book expertise between authors and the platform we can eliminate Publishers completely.

Think about it -

  1. The writer who reads the book. 
  2. The platform that enables the book to be sold to readers (including informing them it exists and book recommendations).
  3. The reader who reads the book. 

That’s really all we need.

At the moment that’s exactly what’s happening with indie authors. There is currently nothing except the book platform between indie authors and readers.

How much should the platform get?

The current 30% is fine. Books are a $25 billion business just in the US. If we assume books are a $50 billion business worldwide that means -

  1. Once eBooks reach 50% penetration, companies that are the platform for eBooks will be earning $15 billion a year.
  2. The competition will be brutal and it’ll force companies to offer more and more services for less and less of a cut.
  3. We’ll hit a stage where the platform offers just 10%.
  4. 10% seems low until you realize that 10% is still $5 billion a year.

The promise of that $5 billion to $15 billion a year is why Apple, Google, and lots of other companies are jumping in.

Are Authors scared to accept they could be getting 90%?

Are there reasons Authors are scared to accept they could be getting 70% or 90% of book sales?

  1. Quite honestly, it seems a bit too good to be true. Going from 8-15% to 70% is literally getting your salary quadrupled. 
  2. It’s all very sudden.
  3. Most authors are familiar with a world where they had very little power and consequently very little share of revenue. It’s a drastic change that a company lets you publish without restrictions and also gives you 70% of revenue.
  4. Perhaps authors don’t want that much money – Perhaps there’s some artistic handicap that prevents them from thinking commercially and accepting they should be making money.

Not sure why it is but Authors seem really reluctant to ask for a larger share of profits.

What about Publishers – are Authors scared to lose Publishers?

Are there good reasons Authors would still want Publishers?

  1. The Prestige of getting Published. 
  2. All the help and hand-holding. 
  3. Letting Publishers focus on the non-writing parts of a Book.
  4. Having someone to blame if their book doesn’t succeed.
  5. Having a partial prize (getting the book published) if their book doesn’t become a bestseller.
  6. The advance and the financial stability that provides. 

Publishers take care of a lot of things authors don’t want to bother with or are wary of.

Perhaps there’s a 10% share for Publishers in addition to a 10% share for the platform.

Are Authors simply overwhelmed?

Eventually there will be brutal competition and earnings will come down. However, there will be a transition period where authors will be earning 3 or 4 times what they were earning in the past.

That’s one heck of concept to grasp. Imagine finding out tomorrow that your salary is 4 times.

That might help explain why authors are happily accepting 15% and 25% when they could be getting 70%.

70%, $9.99, eReaders, Apps – Irreversible Changes

Freedom is like an incurable, infectious disease. People get one whiff of it and they’re hooked for life.

70% share for indie authors, $9.99 price for ebooks, eReaders that let you change fonts and read books to you, Apps for eReaders – These are all being disregarded as transitory and merely strategic moves by eReader companies.

Publishers think they can get back control and then undo all these changes.

However, each of these initiatives is one more stake into the heart of the vampire squid Publishers (due apologies to Matt Taibbi). A step closer to freedom for readers and freedom for authors.

Authors, Readers will never give up their new Freedoms

Authors and Readers are not going to go back to the abyss Publishers had them trapped in.

  1. Publishers decided what to publish.
  2. Publishers set prices. 
  3. Authors got scraps i.e. 8% to 15%.
  4. Readers and Authors had no insight into actual costs of book publishing.  
  5. Publishers were the only ones with the finances to market a book.
  6. Publishers had the hooks in the distribution channels.  

All of this is dissolving. The concept of Publishers as gatekeepers is fading away.

There is no way to fool authors and readers now.

Could new middle-men arise?

Yes, of course.

However, these will increasingly be benevolent platforms like Kindle and iTunes that want only 30% and handle nearly all the work.

70% is for the author.

Even if another middle-man or another company takes over -

  1. Readers will not forget the days of $9.99 eBooks.
  2. Authors will not forget the days of 70% of revenue/profit.

How do you fool people who, after centuries, have been liberated? You don’t. These are the people most acutely aware of how precious freedom is.

The Role of eReaders and eBook Stores and App Stores

 It’s crucial to understand all the contributions these have made (and will make) -

eReaders 

  1. An eReader is a device that allows for more value than a book could provide i.e. changeable fonts, greater capacity, new features like text to speech, and more. 
  2. eReaders let us work with eBooks and negate the advantage Publishers had i.e. economies of scale.
  3. An eReader basically liberates reader and author from the tyranny of the physical book as a non-ideal distribution mechanism. Also a mechanism that middle-men could control and use to enslave both readers and authors.

eBook Stores

  1. An eBook Store allows for extremely easy discovery and distribution of eBooks.
  2. eBook Stores are ridiculously convenient. Find a book in 5 minutes, buy it with 1 click, get it in 60 seconds – at any time of the day.
  3. eBook Stores allow for free distribution in the sense of no one is deciding what you can access.
  4. eBook Stores allow for cheap distribution in the sense that very little is added to the cost of the book.

 App Stores

  1. App Stores allow absolutely anyone to help readers and/or authors.
  2. App Stores allow readers to choose what their book can do and cannot do.
  3. App Stores allow developers to change publishing and eBooks.

App Stores make the eco-system very vibrant and rich and free of monopolies.

70% and $9.99 are ridiculously important and firmly established

Consider where we are at the moment -

  1. We all know that Books could and should be $9.99 or less.
  2. We all know that Apple and Amazon are both willing to give authors 70% of that $9.99 (or whatever price authors pick).
  3. We know lots of sales are happening at $9.99.
  4. We know Amazon has managed to keep the $9.99 price intact for over 2 years.

How do you un-teach the lessons of 70% and $9.99?

  • You just can’t. 
  • What possible rationale could Publishers come up with to convince readers that they ought to pay $15 or $20 for an eBook?
  • What story could they spin to authors to get them to accept 15% royalties?

What Happens Next? The 10% Platform is inevitable

Sooner or later a company is going to figure out how to create a 10% platform.

Yes, a platform that gives authors 90% of revenue.

How could you possibly survive on just 10%?

Well,

  1. 10% of $25 billion a year (just in the US) is a pretty huge number.  
  2. You’ll have billions of dollars a year in eReader revenue.

It’s possible and likely that a company will dominate both eReaders and platforms (via a 10% Platform).

In 2 years we’ve jumped from 8-15% royalties to 70% royalties – Does a jump from 70% to 90% really seem that improbable?

What Happens Next? Attacks on the Platforms

Amazon and Apple are doing two things that will get a lot of people upset -

  1. Breaking down barriers in Publishing – Publishers and retailers and distributors get upset because they lose out.  
  2. Creating Cash Cows – Rival companies get upset because Apple and Amazon get healthy revenue streams from both devices and eBooks.

We will see all sorts of ‘openness’ initiatives, eBook delays, threats, advertising based strategies, and a lot of dirty tricks.

The Platforms enable a lot of things – cheap books, advances in technology, new features. However, they are evil because they are not open.

Thanks to Amazon and Apple we have 70% profits for Authors (Apple) and $9.99 prices (Amazon) – and yet they are evil because they don’t let Publishers and new middle-men undo all the progress and put authors and readers back into shackles.

Kindle, iSlate and 70% Royalties

70% Royalties are the new status quo - Authors and Publishers can thank the upcoming Kindle, iSlate race for an absolutely amazing new world for Publishing.

Amazon offers a 70% Royalty Rate – with conditions readers will love

 Amazon’s new royalty rate option comes with some user-friendly (and Amazon friendly) conditions -

  1. Book list price must be between $2.99 and $9.99.  
  2. List Price must be at least 20% below the lowest physical list price for the same book in paper. 
  3. Book must be made available for sale in all regions for which the publisher has rights. 
  4. The Kindle features that Amazon offers for books such as Text To Speech must be enabled. 
  5. Books must be offered in the Kindle Store at or below their price in other stores, including physical book prices.

In terms of the 70% royalties -

  1. 70% royalties will be on the sales price.  
  2. Download costs will be  deducted before calculating 70% royalties. Costs are 15 cents per MB.
  3. Public domain works (those before 1923) will not qualify for the 70% royalties.
  4. The existing royalty rate will still be an option.
  5. The new royalty rate starts June 1st, 2010.
  6. Initially the royalty rate will only be available for books sold in the US.

Amazon’s reaction to Apple iSlate content deals

Larry Dignan at ZDNet thinks its related to the Apple iSlate’s imminent release and he’s right.

With Apple offering Publishers 70% and more control over prices we would have Publishers try many things -

  1. Get Apple a strong position in ebooks and then play them off against Amazon.
  2. Release only for the Apple iSlate.
  3. Release premium versions on the iSlate before releasing general versions on other eReaders.  
  4. Disable features that are Kindle advantages i.e. no text to speech, etc.  

With this new 70% option Amazon does two things -

  1. Gives Publishers the option to make 70% (which is hard to turn down) from book sales to the Kindle’s huge customer base. 
  2. Gives authors the option to entirely bypass Publishers. Getting 35% royalties was tempting – A 70% royalty rate is irresistable.

It strengthens Amazon’s appeal to Publishers and weakens their hold over Publishing at the same time.

Let’s take a look at Apple’s efforts with the iSlate – after all its thanks to competition that we get the Kindle 70% royalty option.

Apple lures Publishers with 70%, the iSlate, and secret meetings

The Bookseller has the scoop on secret Publisher-Apple negotiations -

Publishers Marketplace reports that Apple representatives are in New York for meetings this week -

with “nearly all (and most likely all) of the six largest trade publishers”

The main aims of Publishers seem to be -

  1. Fight the $10 price the Kindle has promoted and which Publishers consider unsustainable.  
  2. Keep control of pricing and supply.
  3. Fight the big discounts on bestsellers that retail stores push.
  4. (Allegedly) Accelerate ebook adoption.  

Apple might negate Kindle’s lead by cozying up with Publishers

While tech blogs are salivating over color and apps and new user machine interaction paradigms from the iSlate, Apple might be approaching eBooks with a very practical and non-glamorous approach -

  1. Offer better terms than Amazon to Publishers – the 70% rate. 
  2. Let Publishers have control over pricing.  
  3. Give Publishers some other types of control - for example, ebook supply.
  4. Lock up the content providers and lock out Amazon.

In the end content (the ebooks themselves) is the single most important variable and Publishers still control most of the quality content.

What really matters is that we are at 70% Royalties

Apple and Amazon are both going to be around for a long time.

The really important change the iSlate’s entry heralds is the shift to 70% royalties.

Take the Kindle Store or the App Store -

  1. All you have to do is create content and sign up. 
  2. Of course, it helps to do a ton of marketing.
  3. The store is set up for you. 
  4. Distribution, buying, and all the important facets are covered. 
  5. You can sell all around the world.
  6. You get a payment in your bank account at the end of the month.

Authors just have to focus on content creation and marketing – the rest is taken care of for them and all they have to give up is 30%.

Who would have thought we’d see 70% royalties – Publishing has changed more in the last 2 years than in the century before.

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