From The Washington Post:
The book world is once again in a state of high dudgeon over the “thuggish” behavior of Amazon, which has begun slow-walking customer orders for books published by Hachette (James Patterson, Malcolm Gladwell, a.k.a. J.K. Rowling) in an effort to win more favorable terms in its next contract with the publisher.
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In business terms, what is about to play out is the next round in a long-running battle between a manufacturing cartel (the publishers) and a monopoly retailer (Amazon) for control of the value chain that links book writers and their readers. In most respects, it is similar to the battles in other parts of the news and entertainment sector where digital technology has also upset the old order but a new order has yet to emerge.
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I recently gained some new perspective on these issues while trying to sell my first book. While I came away from the process with a greater appreciation for what publishers, editors and agents do, I also came away thinking that the industry’s pricing practices are a bit screwy.
Let’s start with the author’s advance — or more precisely, the non-refundable cash advance against the author’s royalty payments for every book sold. In theory, the advance is supposed to reflect the publisher’s best estimate of how many books will be sold. In practice, 80 percent of books don’t sell enough copies to “earn out” the advance.
This is a curious way for an industry to set pay for talent. If publishers are so bad at predicting book sales and can’t stop themselves from overpaying on advances, then why not change to a system that doesn’t require them to take virtually all of the upfront risk? As it happens, authors from time to time have offered to take a smaller advance in exchange for a royalty rate higher than the 15 percent industry standard. Such offers, however, are routinely and universally rejected.
This is the kind of business practice that is common in cartel-like industries, like real estate agents and their 6 percent commissions. In this case, it’s a way for publishers to stop themselves from getting into self-destructive bidding wars for best-selling authors and celebrity writers. And as long as all the publishers tacitly agree to play by the same rules, it allows them to under-pay these winners, to the benefit of both their shareholders and authors who never earn back their advances.
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Another oddity of the publishing world is that those royalties are set differently for printed books and e-books. The accompanying chart, drawn from a recent presentation made by HarperCollins to industry analysts, tells the story. Authors makes about $1.60 less from a typical e-book sale than a hardcover sale, while the publishing house is left with $2.20 more in gross profit.
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The irony here is that despite the best efforts of the publishers to slow the migration from $28 hardbacks to $10 e-books, the shift has provided a significant boost to their profits and profitability. Cannibalizing their old business turns out to have been very good for the publishers’ bottom line. So you can perhaps understand why Amazon — which for all its market power makes very little profit on its e-book sales — is now demanding a bigger slice of the pie.
Link to the rest at The Washington Post and thanks to Meryl for the tip.