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.

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