Monday, April 2, 2012

The Business of Writing: The Pendulum Swings

A settlement is brewing over an investigation by the Department of Justice into a practice by Apple and five publishers to control and inflate the prices on ebooks. Essentially the deal they created was the publishers would set the prices on ebooks, and Apple would require them not to sell ebooks at other publishers for less. This meant if another sales outlet decided to sell a title for less than as sold at Apple, then the publisher would have to cease sales with that distributor.
The result of this pact formed between Apple and Simon & Schuster, Hachette, Penguin, Macmillan,  and HarperCollins was it allowed the publishers to set higher prices on ebooks and force Amazon to either accept the higher price or lose out on selling their books. This resulted in many ebooks selling for almost as much as the hardcover editions, easily more than the paperback versions. I’ve commented before that I felt there was no justification for an ebook costing more than a physical book—hardcover or paperback—as there were almost no production costs associated with an ebook once the file was completed and ready for readers to purchase.
Never mind that Amazon and Barnes & Noble also make similar demands for price matching. It’s probably a result of the above-mentioned agreement.
The agreement set two years ago between Apple and the publishers is what is called an agency model. This essentially allowed Apple to control the pricing agreements between publishers and Amazon, even though Apple had nothing to do with whatever contract was between the publishers and Amazon. This way the publishers had an excuse to force Amazon to charge higher prices for ebooks. This leveled the playing field for Apple’s then new iPad and iBookstore service, with the intent of breaking Amazon’s control over the market.
In simple terms, they created a corporate trust in order to fix prices. Good for big business and the 1% that benefit from sucking the money out of the economy unfairly; very bad for consumers and society in general.
So what is going on here? Are ebooks really all that big a deal?
In some ways, yes. An ebook is the perfect product. Once you’ve thrown a small pittance of money at that whiney and sniveling thing over there (the author), an ebook has almost no production costs! You could sell millions of copies with a 99.99% profit margin. That’s literally printing money, without the cost of paper, ink, or even running the presses.
But that isn’t it.
Apple made $100 billion in revenue last year. Only $50 million of that was in ebook sales. Ebooks accounted for .05% of Apple’s bottom line! A bump in their revenue stream roughly equal to a steamroller running over a marshmallow.
Clearly, there is something far more valuable that these companies are after. It is far more valuable than an ebook.
That something is control of the market.
It isn’t just Apple. It’s the publishers. It’s Amazon. It’s Microsoft, Nokia, Samsung, Toshiba, Philips, and NuvoMedia—just to name a few. NuvoMedia? That was the company that created the Rocket eBook Reader. One of the first ebook readers. NuvoMedia no longer exists. More about that later…
DVD, CD, RTF, TXT, DOC, PNG, MKV, JPEG, GIF, MP3, AAC, EPUB. These should all sound familiar to you,because they are all technology standards that we use. Movies, music, images, and text are all encoded into the above formats for our consumption. In order to use these, you need a device or program that can decode them. Some of these standards are open, so anyone and any company can use them. Some of these are proprietary, which means that any one that wants to make a product that can use proprietary standards must pay for that privilege.
If you create the standard, then the world must beat a path to your door. For every movie, song, book or picture that uses your standard, you get paid a small fee. Bill Gates became one of the wealthiest people in history by licensing his operating system. Every time someone bought a computer running a Microsoft product, a fee was paid to Microsoft. Any time a company wanted to create a program that used a format owned by Microsoft, a fee had to be paid for licensing for permission to use that format.
It’s called “Lock-in”. If you create the standard, everyone has to buy from you in order to use the product. If a competitor creates a product that uses your standard, they still have to pay you to use it. If your competitor creates a product that might be superior to yours, then you can play the “patent violation” card to force the competitor out of the market or at least delay their entry. Whatever happens, you will always get a piece of the action.
The best money-making condition any company or person can have in a monopoly. But, because monopolies usually result in abuse of consumers and corruption, monopolies are illegal. Still, businessmen tend to throw ethics aside and strive for monopolies.
Lock-in is essentially as close to a legal monopoly that the law will permit.
This is why we read so many news reports about one company suing another company. These lawsuits generally serve one of two purposes, either to force another company to pay up for licensing/patent violations, or to have the proprietary standard overruled so they can get into the market with impunity.
The most famous battle over standards and formats was that of VHS vs. Betamax. VHS eventually won and Betamax disappeared. People who paid the higher price for Betamax got burned when VHS took over. There were other struggles between one technology vs. another, but the VHS vs. Betamax is one that most people are familiar with.
Vinyl records fell to the CD in the mid-80’s. VHS fell to the DVD in the 90’s. CDs were fatally wounded by the MP3 players. USB replaced the serial port. HDMI replaced RCA-jacks, but is now already being touted as going out of use just a few years after the public adopted it.
The “standard” format changes were coming too fast. People were starting to stand on the sidelines and waiting to see which would be the prevailing standard before they threw their hard-earned money into either camp.
Blu-Ray vs. HD-DVD suffered greatly from this. Rather than throw good money after bad, people waited until industry finally decided to go with one or the other. Despite this, Blu-Ray is still struggling to catch on. Media companies trying to force consumers to pay a premium for it isn’t helping.
This has everything to do with ebooks.
Ebooks came out over twenty years ago! The first commercially successful ebook reader was the NuvoMedia (later, Gemstar) Rocket Ebook Reader. I came across it for the first time and was really excited by it. But I noticed a fatal flaw in their approach, and it was one that also caused a number of other ebook reader companies to fail.
The flaw was a proprietary file format. All books had to be in the format used by the Rocket, and only NuvoMedia (Gemstar) was the supplier of these books. The books were also expensive, even compared to print books. I didn’t want to invest in one until I knew that they were going to be around for a long time. What would become of my expensive library should my reader be damaged?
The Rocket disappeared from the market. Anyone who had invested their hard-earned cash were screwed.
A few other companies tried to jump in, but they had the same approach of trying to lock in customers to a proprietary format and having only one source for their books. They all failed, too.
Enter Amazon.com, Inc. in 2007, when they brought to the world the Kindle ebook reader.
Amazon did stick with the idea of getting people locked in to their platform by going with a proprietary file format. But, they had a few advantages over previous wannabes in the ebook reader market. For one thing, they were already well established and well known. More importantly, instead of a limited offering of titles, Amazon hit the market running with a large selection of authors, titles, and genres. The battle was won when Amazon.com began offering the ebooks at reasonable prices.
People jumped on the ebook wagon in droves!
And the publishers panicked!
Amazon was already the 800-pound gorilla in the room when the Kindle hit the markets.
As I said above, proprietary standards lock people into a single platform and limit their choices of where they can make their purchases. But open standards give consumers the choice of where they want to purchase something and the flexibility to enjoy their purchases where and how they want.
The the publishers got together and created a free and open format for ebooks, based on HTML, the markup coding that makes the World Wide Web work.
This format is called ePub (for electronic publication).
An ePub file can be read on practically anything. It can be read by a web browser on a computer, by a program, on a smart phone, even on a regular cellphone! Of, course, also on any ebook reader that supports it.
Because it is an open standard, ePub files can be created by anyone without having to pay licensing. Consumers can buy their ePub ebooks from anyone and read those ebooks using any device that can render an ePub file. If worse comes to worse, you can rename your ebook from Story.epub to Story.zip, unzip the file and read the text from the HTML files embedded within.
ePub reintroduced competition into the ebook market. Amazon could no longer completely control the sales of ebooks. It also opened the door for other ebook reader manufacturers to enter the market, no longer needing to worry about paying Amazon.com for licensing of their file format in order to make devices that could read those files.
Barnes & Noble introduced their Nook and Apple introduced their iPad, both of which could load and read ePub files. Then the above named coalition got together to try and game the markets to artificially inflate ebook prices.
Amazon.com had been selling ebook titles at a loss, using low prices to lure readers into adopting ebook readers over paper books. It was working. Kindle sales took off.
Publishers were upset that Amazon.com was selling ebooks at such a discount, because they didn’t want consumers thinking ebooks were cheaper. (Keep in mind, ebooks represent 99% profit margin for publishers, so the word “gouging” comes to mind.) Then Apple came about with the agency model contract, and the coalition got on board.
Amazon was forced to go away from a wholesale model—where the retailer sets the final price—and accept the terms the publishers demanded. As a result, prices on ebooks went up a few dollars.
When the Department of Justice has settled things with this group caught with their hands in the cookie jar, Amazon.com will be able to return to selling the ebooks as wholesale. This means prices will drop, and consumers will get much better deals on books. To stay competitive, other distributors will have to drop their prices. Consumers win!
Will Amazon.com start selling ePub-file ebooks? Probably not. Amazon.com’s goal is to get consumers to buy products through them, not go elsewhere for those products. The more people buy from Amazon.com, the more leverage Amazon.com has in negotiating the wholesale price from suppliers on items that they sell.
That’s what concerns me.
To be a professional writer, I need to make enough money to survive. I need to be able to pay my bills, put food on the table, buy clothing I need, etc. To do that, I need to be able to sell enough copies of a book so I make enough money to make a living. I have a tough fight in front of me, trying to get enough people interested in buying my book so I sell enough copies.
My goal is to sell 10,000 copies of my first book.
Go ahead and do the math. If you are feeling lazy, here is the reality:
Each copy of my book sells at $4.99, meaning I will have $49,900 in gross sales.
The distributors take 70%, leaving me with $34,940 that goes into my pocket. That is a pretty nice number for an annual income!
But wait! There’s more!
That $35K doesn’t actually land in my pocket. I have to pay both federal and state taxes, 35% and 5.25% respectively. That whittles down my useable income to a little over $20,000.
Twenty grand ain’t all that much for an annual income. However, it is something! At least I’ll be able to keep the lights on and reduce my debt load. There will be enough left over to keep paying the monthly bills while I hunker down and work on book number two, Dragontalker. It does mean my lifestyle [of having no life] will have to continue status quo.
With distributors losing their little money-making game, they are going to look elsewhere for where they can keep their profit margin. Let’s face it, how often do we hear of CEOs laying off thousands of workers and then getting paid a bonus that would have kept three times as many of those workers on the job? You know they are going to look for the easiest place to cut their costs.
And the easiest place is to cut the royalty they pay the author. That 70% could be cut to 40%. That would be pretty devastating on my bottom line. Or, they could simply state they won’t sell my ebook at the suggested retail price I set and choose a much lower number. Or, they could raise the price on my ebook, which would cause readers to forgo reading taking a chance on a new author which could cost me sales and keep me from reaching my sales limit.
I’m not sure what action the distributors are going to take after the DoJ makes its judgement. I recognize that I need to be ready with my contingency plan: sell my book on my web site directly and forget going with the big distributors. Same thing that J.K. Rowling just did last week.
On the plus-side, all the money I make through gross sales on my web site is mine to keep. Plus, the costs incurred with doing direct sales are deductible as business costs. The downside being I have to deal with the nitty-gritty of managing a retail operation.
One problem with selling via my own website is people not trusting my intentions with their credit cards. That could cost me sales. People trust Amazon.com, Apple and Barnes & Noble with their purchases.
There is the loss of free promotion. Not going through those three will mean that my title doesn’t appear in the monthly “What’s New?” emails they send out. If a new title has strong sales numbers, the retailers begin promoting it aggressively. More sales means more money in their pocket. A hot seller actually becomes more popular when people perceive that other people think it is good. Promotion from the retailer is a good message to a buyer that this is a good product. Rergardless of whether that is a fact or not.
I will also miss out in another area: perception of legitimacy. Selling through Amazon.com, Apple, or Barnes & Noble lends a certain illusion of legitimacy to my book and to me as an author. It tells people that an intermediary agent thought my book was worthy enough to sell. People too easily overlook that those businesses are merely retail organizations, distributors. They are not publishers. Distributors and retailers don't vet the ebooks they sell. Anyone looking through the volumes of 99¢ crap being sold will realize that the distributors don’t really care about how legitimate one author is from the next. Don’t get me wrong! There are some real gems among the 99¢ ebooks. Some are so good that I think the authors were selling themselves way too short by setting such a low price on their books. There are many others that were such awful drivel that I couldn’t get past the first page or two. Thank God you can download samples before buying ebooks!
Will people be willing to purchase my book through my web site, rather than through a retailer? It does mean I have to step up and be more aggressive in promoting my books. I need to encourage people who know me to share links about my book on social networks, as well as people who become fans of my writing.
The pendulum is swinging. But in whose favor will it swing? Consumers are certainly going to benefit from lower prices. But how will the new and independent authors fare in this change to the market? If distributors decide to put the squeeze on the authors/publishers in order to avoid eroding their profit margin, will authors/publishers turn to self-retailing? That could cause greater long-term damage to the distributors than having to adjust retail prices to the consumer in the short term.
Hope for the best, prepare for the worst. Whatever fallout comes from this, I’ll just have to make sure I look at my options and prepare.