Home » Amazon, Big Publishing, Mike Shatzkin, PG's Thoughts (such as they are) » Walking back the assumptions that were the basis of the last post

Walking back the assumptions that were the basis of the last post

1 March 2016

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 As one observer sees it, it has bled 25% out of digital sales that have been replaced by physical, resulting in an increased share for Amazon of the print portion of publishers’ businesses.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?

And dropping.

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.

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Amazon, Big Publishing, Mike Shatzkin, PG's Thoughts (such as they are)

47 Comments to “Walking back the assumptions that were the basis of the last post”

  1. That’s one possibility. Personally, I rather hope that Mike Shatzkin is right in this case, if only because it would be a delicious irony for Amazon to turn the publishers’ own strategy back on them. Kind of like an aikido move. (Now where have I heard that metaphor before?)

    And as one of the commenters to my post noted, ensuring publishers kept their own e-book prices high would help Amazon sell a lot more lower-priced self-published titles.

  2. Smart Debut Author

    Mike might want to point his revisionist agent buddy toward the following statement on the subject by Hachette’s CEO Michael Pietsch:

    “The new agreement delivers considerable benefits. It gives us full responsibility for the consumer prices of our ebooks,” Mr. Pietsch explained in the note. “This approach, known as the Agency model, protects the value of our authors’ content, while allowing the publisher to change ebook prices dynamically to maximize sales. Importantly, the percent of revenue on which Hachette authors’ ebook royalties are based will not decrease under this agreement.”

    So now it turns out Agency is bad.

    But hey, its not the big publishers’ fault: Amazon made them do it!

    *rolls eyes*

    Yeah, right.

    • Exactly.
      Six months of public fighting by Hachette trying to force Amazon to do agency is suddenly forgotten?
      That agent has a very selective memory.

      What the public record of that far gone day of 2014 shows is tbat Amazon tried to discourage no-discount agency and told them that *if* they wanted them to forgo discounting they would have to pay them for the privilege.

      And they wanted agency so badly they agreed. Hence Amazon getting more than 30% on the higher-priced books.

      So no, it wasn’t surrender.
      It was a pyrrhic “victory”.

    • Dynamic pricing. Another task that legacy publishing is really good at doing. Much better than Amazon.

    • Yes, but Mr. Pietsch has been known to have issues with “telling it like it is”. http://jakonrath.blogspot.com/2014/08/william-ockham-fisking-michael-pietsch.html

      So, it wouldn’t be surprising if the statement you quote was less than the whole truth.

  3. Mike tends to swallow the b******* fed to him by his ‘important’ friends hook, line and sinker. (They’re important and in the REAL publishing industry, so they must be right) Yeah, yeah a very mixed metaphor but you get the idea.

    • Smart Debut Author

      It’s weird. Mike’s usually a smart and insightful guy. But for some reason, his critical thinking skills vaporize when “powerful agents” or “executives from big houses” tell him stuff, no matter how off-base or deliberately misleading that stuff is. Mike just swallows it and lets them lead him around by the nose.

      • Heh, maybe in the fine (four point font near a line going sideways) print on one of his pages somewhere it says:

        “This and everything on my pages are satire and should be taken with a grain of salt no less than a meter on a side.”

        Either that, or the ‘smart and insightful guy’ Mike got his account hacked a number of years ago and we’ve had the ‘Qig5 Mike Ver2’ spouting the party line ever since …

      • Smart Debut Author,

        Mike’s usually a smart and insightful guy.

        Objection! Assumes facts not in evidence.

        Everything I have read that Shatzkin has written has reinforced my opinion that he is a shill for the Big 5. Just days ago he finally woke up and wrote a piece that painted a picture of the trad-pub industry as something less than roses and unicorn farts, but today he is ‘walking back’ his last post? Why? Because two guys — count ’em, two — sent him emails to say, “‘Tain’t so.” Where is the courage of his convictions? Evidently, it’s in his wallet, and as an ‘industry expert’ he bloody well knows who’s paying for his next meal.

        I got socks smarter than Mike Shatzkin. At least they do not spout crap that is demonstrably false.

        As we saw in Shatzkin’s last post, occasionally he stumbles across the truth. But when he does, he picks himself up, dusts himself off, and continues on his merry way as if nothing had happened.

        *Here endeth the reading from the Book of Rants.*
        *Thanks be to God.*

        (I gotta get me a new Shatzkin filter. This frelling crap is not good for my peace of mind.)

  4. Sorry Mike, you’ve been drinking from the qig5’s spiked kool-ade bowl again if you believed a word of what your ‘powerful literary agent’ told you.

    In fact, you should ask your ‘powerful literary agent’ how things are going — I mean with all those indie and self-publishing types not bothering with middlemen ‘agent’ types, he or she should now have extra time on their hands to tell us again just how wonderful the qig5 is and how evil Amazon is … like they just did.

  5. I always forget something …

    “But PG could be wrong. It happens sometimes.”

    In this case I think you are wrong my friend.

    You see, for the qig5, there is no burnt toast, in fact there’s no toast at all …

    Though the qig5 might end up with burnt fingers trying to get the no-toast out of the toaster …

  6. “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?”

    I don’t find it that hard to believe. Amazon has locked so many of us in to its platform as the easiest place to discover and to buy books, that I don’t think they NEED to offer lower prices to compete there. At least, not until somebody else starts to close the gap by offering an equivalent or better online experience.

    I realize that books are only one segment of Amazon’s business, but I don’t think that Amazon has that kind of market lock-in in many other retail segments.

    And if you think that Amazon would not gleefully allow the big publishers to shoot themselves in the foot, look no further than the amount of Amazon market lock-in induced by the Amazon-specific DRM on most e-books. Remember, publishers could opt out of that anytime they want, but there’s little sign of their doing so.

    • I wish TPV’s comment system allowed for +1s or Likes. I’d so be voting you up…

    • http://www.quotationspage.com/quote/26960.html

      “Never interrupt your enemy when he is making a mistake.”
      Napoleon Bonaparte

    • “Amazon-specific DRM”

      Ah, hate to tell ya, but it’s the writer/publisher’s option on if an ebook has any digital restriction management on it, it’s a check box as you’re adding an ebook.

      “I don’t find it that hard to believe.” You should …

      “Amazon has locked so many of us in to its platform” So there’s no place else? Wrong.

      “as the easiest place to discover and to buy books” That’s what ALL stores want to do …

      “that I don’t think they NEED to offer lower prices to compete there.” Thanks to the qig5 demanding agency (it was a big thing last year — look it up) they (the qig5) set the price. Anyone claiming different is misinformed or refuses to do even basic research on the matter. Go Google it, you’ll find plenty of things to love about the qig5 and their minions and the tall tales they claim.

  7. If Mike’s correction is actually true, how do we account for the info that came out during the negotiations? Remember when several reports said that the sticking point was that Amazon wanted to be able to discount ebooks but couldn’t persuade the publishers that they would make more money via discounts than they would via the agency model? I even recall seeing Amazon’s version of the math spelled out, and I don’t think it was Whale Math(TM).

    • On reflection, Amazon was arguing for lower prices, but not specifically for wholesale pricing. Amazon might have been pushing the publishers to take a much lower cut under agency anytime they priced above $9.99, just as they do for KDP.

      They were not arguing for the right to discount, but for the overall benefits of lower prices. And the math they used to justify their assertion that lower prices were better still showed Amazon receiving 30% on the lower priced ebooks which is consistent with agency pricing.

      • Felix J. Torres

        That was the end result: 30% at $9.99 and higher than 30% at higher price levels.

        And while most of Amazon’s public pronouncements were about the consumer price level, Hachette and company were ranting about discounting, which implies Amazon was talking wholesale as the baseline, which is what was in effect until the new contract was signed.

        It was Hachette and co that were publicly pushing for no-discount Agency.

  8. PG, I think you put your finger on the logical argument that supports the notion that Shatkin had been played by the agent:

    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.

    Who set the ebook prices on the other platforms?

    1. If it was tradpub on their own, then they have no right to complain about what they agreed to do with Amazon.

    2. If it was Kobo and Nook setting the price, like Amazon supposedly did, then there should be massive complaints coming out about them, too.

    3. If Amazon ordered tradpub to set their prices the same on the other platforms, then I think there would universal agreement that this is not just a Bad Thing, but a Very Very Bad Unlawful Thing along the lines of Restraint of Trade and Monopolistic Practices and result in Attention Being Paid by the feddies.

    Since I really doubt #3, since that goes against everything Amazon has said and done since the company was founded I have to assume that someone fed Slatkin taffy.

    • Ashe Elton Parker

      And it wasn’t very good taffy, but he’s so brainwashed he ate it as eagerly as if they’d given him Godiva Chocolates.

  9. This is the most interesting thing I have read about the Big Publishing Houses (BPHs) since Lee Child’s comments here. I will definitely have more to say about this later, but as I have little time left on my lunch hour, I will leave some questions for you all to ponder:

    Why did the BPHs tell this story to a big-time agent?
    Which BPH is the odd one out (in this story)? The answer to that question is hugely important. Can you guess why?

    Much of this story could be true, from a certain perspective, but the core insinuation is so laughably false that the story must be connected to a larger effort. Why would the ‘in crowd’ buy this story?

    • Because this is the new big lie zombie meme?
      “eBook agency pricing is killing us but it wasn’t our choice. Amazon forced it upon us.”

      • Too bad Amazon isn’t ‘evil’ enough to ‘play’ games right back at the qig5.

        Three steps would shut up/shut down all the qig5 lies.

        1) Big bold (as big as the title) that this is the price that the publisher demands the ebook be sold at.

        2) Remove any ebooks Amazon considers ‘overpriced’ from the ‘suggested’ lists. Maybe have it in an ‘overpriced junk you might like’ list.

        3) As the qig5 know pricing better than Amazon does, Amazon should use those prices for the paper/hard backed books too.

        (I’d give it 30 seconds after they hear about it for the qig5 to sh** themselves, 30 minutes to have them using their mouthpieces like Mike to cry foul and 30 hours for AG/AU/ABA to FedEx the DoJ a 30 page whine that Amazon is pricing things just where the qig5 wanted them to …)

    • Well I imagine Penguin/Random House is the odd one out. In part because Random House half of PRH wasn’t under the same court ordered negotiations and in part because of their size.

      The only reason I can think for why the tale of woe to the big-shot agent is to rationalize the now even lower advances, but I could imagine that they are still trying to argue that Amazon is now truly the monopoly because it is insisting on agency with all the publishers (but that is silly).

      • I thought it’d be Hachette trying to save face — and calm agents and authors — after they so publicly “won” by losing (thereby leading others toward agency-model failure).

    • Well, as Shatzkin said, the agent has to be informed of these things in order to keep abreast of the royalty payments his or her authors should be receiving.

      Really, I can understand the instinctive skepticism with which you’d approach anything Shatzkin (or anyone else in traditional publishing’s corner) says, but if you think about it, it kind of does make sense Amazon would insist on agency pricing.

      The market had changed; Amazon had already won the battle for e-reader market share and didn’t need to keep slashing its margin on e-books anymore. But if Amazon just up and stopped doing that on its own, it would be the bad guy.

      But lo! Here come the publishers, willing to take the fall for raising prices themselves! Amazon could play the part of the aggrieved consumer advocate and buy a little more time to keep prices low (though you’ll note, even after Cote put the kibosh on agency pricing, Amazon didn’t return to $9.99 pricing with the same level of gusto it had before—many prices for new-release titles were a buck or two higher) while laying the groundwork for a return to agency pricing once the publishers were able to renegotiate.

      And then it’s a win-win for Amazon. It gets to bump its margin, while getting to look like it only did so over protest and the publishers are the real bad guy. And so Amazon neatly manages to bypass any static it might have caught if it had decided to end the deep discounts on its own—as it inevitably would have had to do sooner or later as the market changed. It seems like just the kind of clever idea Jeff Bezos would have come up with—turning the publishers’ own strategy against them. Well done, that man.

      Given the negotiations were secret, it’s hard to say who was on what side and who really argued for agency pricing. But it seems reasonable that Amazon could have been more open to the idea of agency pricing than we thought.

  10. I’d like to gently point out that the e-book terms have never been a rigid 70/30 split on the selling price; Amazon has always included an allowance, off the top before the split is calculated, for data-transmission “fees.” This is not normally much of an issue for fiction — except if the publisher embeds fonts and/or significant/large illustrations, a work of fiction will seldom exceed 1mb (even a doorstop-sized novel). But nonfiction is another story indeed… and cookbooks, oh my. I do not think it entirely coincidental that Amazon’s format for e-book files is significantly less efficient for the same book than is an epub, and sometimes even than a PDF with fonts embedded!

    If this rings bells concerning accounting for mainframe time on a 1970s-era batch-card-input system, it should: It’s the same bad accounting principle that assumes that there’s no such thing as a fully-paid-for sunk cost.

  11. “It became a way for Amazon to guarantee that they would get a full margin on all agency publishers’ ebook sales”

    But all Amazon had to do under the old contracts was price ebooks higher and they’d get the same result…

  12. Patricia Sierra

    This is from a Streitfeld NYT article written back when Amazon and Hachette settled:

    James L. McQuivey, a Forrester analyst, said that if Hachette won in the short term, it would be a different story in the long run.

    “Hachette got Amazon to allow them to control pricing while also cutting the amount of money Amazon takes if the publisher does engage in discounts, which appears like a victory,” the analyst said. “But in the end this all cements Amazon’s ultimate long-term role in this business, which will only put Hachette right back in this situation every time they are up for renegotiation.”

    Neither side gave many details of the deal, but both pronounced themselves satisfied.

    An Amazon executive, David Naggar, said Amazon was “pleased with this new agreement as it includes specific financial incentives for Hachette to deliver lower prices.”

    Amazon feels publishers get too much of the revenue from e-books, so that was another major area of contention. In a letter Thursday to authors and agents, Michael Pietsch, Hachette’s chief executive, said the percentage of revenue on which Hachette authors’ e-book royalties are based “will not decrease under this agreement.”
    ______________

    Mike says: So, in the recent negotiations, the big publishers had no choice about sticking with agency. Amazon insisted that they stick with agency.
    ______________

    My question, then, is this: Has there been a whole new round of negotiations that didn’t get coverage in the media and Amazon is, in fact, insisting publishers use the agency model?

  13. It’s Tuesday. You should all go check out the Amazon Top 100 bestseller list so you can see the BPH debut titles at the top.

    This is just a reminder that the sincerely held beliefs of publishing insiders might not always reflect reality.

    • I had to go down to #21 to find a price above $7.99 and most of the first 20 were $0.99. I doubt any of them were big 5 debut novels 🙂

  14. Financial results coming soon and BPH execs need to reshape the narrative?

    • Qig5 about to drop their ebook prices and the writers will then get less per sale — which the qig5 wish to blame on Amazon rather than admitting they did it to themselves …

  15. I’m sorry, but I just love the photo of the burned toast. So eloquent! 😉

  16. I followed the Amazon-Hachette negotiations pretty closely, back in the summer of 2014. I even wrote a post or two, Joe Konrath was kind enough to publish on his blog. In one* of those posts, I wrote up a timeline of the negotiations. In the intro to the post, I said this:

    We should be continually re-evaluating our understanding of this situation based on new information.

    So, kudos to Shatzkin for doing that and for providing me with new information. I am re-evaluating my understanding of that whole episode. A few pieces of the puzzle suddenly fell into place. A scenario I considered at the time, but rejected as totally implausible seems very likely.

    * http://jakonrath.blogspot.com/2014/07/amazon-hachette-sounds-of-silence-guest.html

  17. In addition to forcing agency on the Big 5:

    Amazon forced HarperCollins to pretend that “Go Set a Watchman” was a new book, rather than an early draft.

    It was Amazon who told Simon & Schuster editor Robert Gottlieb to reject Confederacy of Dunces. He had really wanted to publish it until Bezos told him “no.”

    It was Amazon that kept telling J. K. Rowlings that Harry Potter was too long for a children’s book.

    And it was Amazon that said that Kevin Costner was the perfect director for “The Postman.”

    Glad we cleared all that up.

    • Smart Debut Author

      Don’t forget that Amazon also forced Lee Child, who was asked who should play the blond, six foot four titular character in a movie adaption of his Jack Reacher series and replied “Not Tom Cruise”, to stand by helplessly and watch those same books get made into movies starring… you guessed it… Tom Cruise.

      No end to Amazon’s evil, I tell you… No end at all. What’s an honest author to do?

      Just ask Authors United’s new expert witness Dr. Soladoni… he sets the record straight right here:

      http://www.soladoni.com/ebooks-amazon-sell-day/

      • Oh, man! I can’t believe I missed the Lee Child shot. And just as I was feeling smug. You topped me on that.

        Not to mention the super creepy link. Well played, sir.

        • Smart Debut Author

          I did not know Robert Gottlieb was the guy who rejected Confederacy of Dunces — guess the title hit too close to home. 😉

          Thanks for sharing that piece of industry history. 🙂

          Good thing he’s a literary agent with Trident Media now, instead of an editor — being able to pick out manuscripts with potential was clearly not Robert’s thing. 😀

  18. [I work at Amazon. I do not in any way speak for Amazon, nor do I work in any capacity in the book or ebook part of the company. My comments are based purely on Amazon culture.]

    I think PG is correct… Amazon has this thing called the “virtuous cycle” that goes all the way back to JB’s original business plan. It’s basically a causal cycle: lower prices leads to more consumers, more consumers leads to more vendors, more vendors leads to more competition and thus lower prices, rinse/repeat. We evaluate ideas based on these notions, and we drive relentlessly to keep building Amazon’s brand and loyalty with consumers by continuing to focus on these concepts. Nowhere in there is a break in the cycle to *not* lower prices if there’s some sort of opportunity to hurt a competitor. JB is very explicit: we don’t worry about competitors (and we rarely talk about them), we worry about our customers. The notion that Amazon would purposefully put ourselves in a position where we can’t lower prices is absurd. JB and Amazon have literally spent billions, even tens of billions, to build brand loyalty. Like every other person with ADS who thinks “Amazon is just waiting until they have a monopoly and then ho boy are they going to jack up prices!” they are completely missing the math: you don’t spend 10s of billions building brand loyalty so that you can spend 90 days getting some extra profits on a small part of your business (“our margin is their opportunity” – Jeff Bezos) by “jacking up your prices” and then lose all of that brand loyalty. Amazon’s endgame isn’t “monopoly and then jack up prices”, it’s “huge, huge market share because no one can beat Amazon on price, convenience and selection.”

    • Well, that’s the long version of what I say when someone asks me what Amazon’s motive is:

      Sell more stuff.

      Literally everything they do comes down to just “sell more stuff”. That cycle he’s talking about is an implementation detail, but an important one because it has worked over and over and over.

      • Felix J. Torres

        …and after 20 years it is baked into the corporate culture. Those kinds of mantras are very hard to displace; they aren’t abandoned for short-term tactical “gains”.

        When the time comes that Amazon is disrupted it will likely be because they are pathologically unable to abandon that Mo.

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