From veteran publishing consultant Mike Shatzkin:
In the few days since the last post here about Big Five publishers and agency pricing, I have been challenged on two specific points by comments sent privately. Both of these comments are right and therefore lead to this corrective post.
One powerful literary agent, who is inevitably informed by publishers about negotiations that affect the selling prices of ebooks (which, in turn, affect the author royalty), tells me that I have the whole motivation thing on agency backwards. It may have started six years ago as a way for publishers to control the prices of ebooks across the supply chain, so something they were “imposing” on Amazon. But that turned around. It became a way for Amazon to guarantee that they would get a full margin on all agency publishers’ ebook sales (because publishers could lower the ebook price, but the stipulated agency percentage would not be affected). So, in the recent negotiations, the big publishers had no choice about sticking with agency. Amazon insisted that they stick with agency.
The grapevine, although not this agent, also says that the original 70-30 split of revenues that agency began with has been revised in the recent contracts so that Amazon gets a wee bit more than 30 percent. I can’t verify that although, in time, agents should be able to see that picture clearly.
I have had no conversations with any friends in big houses during the recent agency negotiations. The sensitivity around those negotiations, given that they started because of the DoJ’s involvement, was very high. But now I’m being told by people in a position to know that four of the five big publishers think agency has been a big mistake. As one observer sees it, it has bled 25% out of digital sales that have been replaced by physical, resulting in an increased share for Amazon of the print portion of publishers’ businesses.
As it was put to me by one observer, agency in 2010 was a strategy; by 2015 it was a surrender.
. . . .
It turns out that the real story of “agency pricing today” is that Amazon demonstrated dazzling marketplace power by keeping all the big publishers on agency terms. And all of the changes in the marketplace, including the degree by which the divison sales within Big Five houses between print and digital may have tilted in favor of print, probably work in Amazon’s favor.
Link to the rest at Mike Shatzkin and thanks to Jan for the tip.
PG has no doubt Mike was told the stories he describes, but PG says it would be contrary to the way Amazon does business with everyone else. Mike’s agent friend says, “It became a way for Amazon to guarantee that they would get a full margin on all agency publishers’ ebook sales.”
Since when has Amazon been obsessed with margin? For years, the big knock on Amazon was that it was too focused on revenue growth while sacrificing profits.
In what other vertical market does Amazon impose a pricing regimen that guarantees retail prices will be substantially higher than they were under the previous pricing system?
It’s impossible for anyone, including PG, to know whether Amazon pushes hard for best prices for all its multitudes of products, but for every product PG has ever priced, Amazon prices were almost always better than he found anywhere else online.
PG did a quick check of the prices of the ebook versions of several New York Times hardback bestsellers on Amazon, Kobo and Nook. The ebook prices were identical on each platform. There was no price advantage to buying these big-selling tradpub ebooks on Amazon.
So this is Amazon’s big book business power play: Negotiate pricing that guarantees Amazon will never offer lower ebook prices than readers can find anywhere else on the web? Give up the competitive advantage of low prices?
Perhaps you could concoct a conspiracy theory that Amazon is plotting to drive Big Publishing into bankruptcy by forcing high ebook prices which cause Big Publishing ebook sales to drop through the floor. Conspiracy theories are fun, but PG thinks Amazon has much better things to do with its time, talent and money than plotting the demise of anyone smaller than Walmart.
Books are just not that central to Amazon any more. The revenues Amazon generates from sales of Big Publishing titles becomes less and less important to Amazon every year. The latest estimate PG has seen (2014) says overall book sales represented 7% of Amazon’s revenue.
Given what Author Earnings has shown us, we know that indie ebook sales make up a large portion of that 7%. Small and medium-sized publishers account for a big chunk of the rest. So Big Publishing products (hard cover and ebooks) are 2-3% of Amazon’s total revenues?
Year over year growth in other parts of Amazon is much larger than year over year growth in the book market.
PG is not privy to Amazon’s inside analyses of the future of the book industry, but he would not be surprised if Amazon agreed with him: Trade publishers are toast over the next 3-7 years and Big Publishing is toast burned black. On both sides.
But PG could be wrong. It happens sometimes.