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Andrew Zack

Andrew Zack

Posted: February 4, 2010 10:50 AM

If you aren't actually in the publishing business, don't own an eBook reader, and haven't tried to buy a book published by Macmillan from Amazon this week, you likely weren't aware that war had broken out.

Other writers have done a good job of describing the details, so let me sum up here: Macmillan wants to change the way it sells eBooks via Amazon and other eTailers (You get it? Retailers online=eTailers). Amazon didn't like the plan, so it pulled the "buy" button from all Macmillan titles on its website. Imagine this in a grocery store and either Coke or Frito Lay ran into the same situation. Shelves and shelves full of bottles or chips and people aren't allowed to buy them. Get it? Okay.

Even Amazon admits it must "capitulate" to big, bad Macmillan. Not that they call Macmillan "big" or "bad," but that's the underlying message. But the irony is that Amazon will make more money under the new structure, because it has been selling eBooks as loss leaders to promote sales of the Kindle. But with the iPad out from Apple, there's only one thing to say, "Be scared Jeff [as in Bezos]. Be very scared."

Honestly, now, why would anyone want to buy a Kindle instead of an iPad? Price points are close enough and the iPad does so much more. And this has always been the problem with dedicated eReaders. The cost of a dedicated eReader is so high, that if you already own a computer or you are in the market for a new one, you have to debate the fiscal wisdom of a dedicated eReader over that of a new laptop. Along comes the iPad and your decision is nearly made for you.

With Apple already agreeing to higher price points in its iBookstore than Amazon has, publishers are thrilled finally to have some leverage to push Amazon away from its $9.99 loss leader price point. And they should be, both thrilled and pushing.

But what Macmillan has started could come back and bite it you know where. Macmillan wants an "agency model." In this model, Amazon, BN.com, and Apple will be "agents" of the publisher. They will sell books and receive commissions on such sales. The rate published is thirty percent. So, in selling a $14.99 eBook, Amazon would earn $4.50 and the publisher would earn $10.49. Of course, this begs the question, What about the author?

As an agent who earns a living off commissions from the sales of his clients' works, I'm very motivated to make sure my clients earn as high a royalty as possible. Publishers tend to have one of two royalty structures for eBooks: fifteen percent of retail price or twenty-five percent of net received. Under the first rate, an author would receive $2.25 on that sale. Under the second, $2.62. This may be the first time earning a "net" royalty is better than a retail royalty.

So have we stumbled upon a model that actually works better than the current model? Could this model work for printed books also? And could it be the long-sought route to a net royalty structure that works for both publishers and authors? Imagine if publishers turned brick-and-mortar bookstores into "agents" who got a thirty-percent commission? Certainly this would be better for publishers, who routinely grant fifty-percent discounts off list. Could it be done? Perhaps, but it would change the market for consumers, who have gotten very used to going online to Amazon or into a Barnes & Noble Bookstore and seeing books discounted thirty or forty percent or more. But books could be cheaper.

I have long argued that deep-discounting by bookstores has forced up the retail price of books, as publishers have had to increase the retail price upon which their discounts to bookstores are based. Perhaps by going with an agency model, there is a way for publishers to push back and increase margin and lower prices for readers. All while still giving bookstores a healthy thirty-percent take. It could be a win/win.

But can we take this one step further? Could publishers just become "agents" of authors, where the author gets a bigger piece of net? Why can't bookstores get thirty percent and authors thirty percent and publishers get forty percent, because publishers have to pay the costs to manufacture books? Right now, publishers discount books by fifty percent on average to bookstores. From the remaining fifty percent, publishers pay for manufacturing and royalties to the author. On hardcovers, those royalties are usually ten percent to fifteen percent, based on list. So on a $25 book, the publisher receives $12.50, from which it pays the author a royalty ranging from $2.50 to $3.75. Production is about another $2.50, leaving publishers with about $7.50 to pay editors, publicists, etc. Given the low wages in publishing, that $7.50 goes pretty far.

But let's take that $25 and split it three ways: $8.33 for the bookstore, $8.33 for the publisher, and $8.33 for the author. The publisher makes nearly the same money. The bookstore makes more money, and the author makes a lot more money. But we know publishers won't agree to take less money, especially given production costs. So why not thirty percent to bookstores, thirty percent to authors, and forty percent to publisher? If bookstores sell at full retail price, they will make more money than buying at fifty percent discount and selling at thirty percent off list. Publishers will make about the same money than selling at a fifty percent discount and paying a royalty based on list, and authors will make a lot more money.

So who loses? Well, consumers, because there will be less room for bookstores to discount books and make a profit. It's hard to discount books by thirty percent when all you make is thirty percent. But they could still sacrifice some of their thirty percent to, say, offer a discount on best-sellers. Competition on price will be less of a factor in differentiating between Amazon or BN.com or brick-and-mortar stores. But with respect for the retail price returned to the marketplace, it's also possible that publishers may feel comfortable ratcheting down the retail price of books a bit. Perhaps some of that twenty percent it will save by going from an average discount of fifty percent to an agency commission of thirty percent could be passed back to consumers in the form of cuts to the retail price.

Also, keep in mind that no one believes that the days of paper books aren't numbered. It will take a couple of generations for kids to be fully separated from paper books and adults ready to read everything on a tablet of some kind, but I wouldn't recommend anyone more than a decade from retirement invest in starting a bookstore. We are experiencing the beginning of the end of paper books right now. The brick-and-mortar store and the paper book will disappear faster than you might imagine.

At that point, eBooks will be the primary format and the trend for pricing eBooks lower than paper books is already established. That $25 hardcover is a $14.99 eBook, a pricing difference that more than takes into account the savings in paper, printing, and binding and clearly also takes into account differences in warehousing costs and the lack of shipping costs related to stocking bookstores. Frankly, I think publishers and eTailers have gone too far and I expect eBook prices to rise over time. They will still be cheaper than paper books, but not by as much.

So, could Macmillan's face-off with Amazon benefit us all? Perhaps. But it could also come back to bite Macmillan in a tender place. Because if it makes sense for Macmillan to change the way books are sold and priced, why shouldn't authors try to change the way they are selling books to publishers?