First, a progress report: With a Little Help is going great guns behind the scenes. The typographer has some very nice samples for me, and the book should be in my hands—or on my hard drive—shortly. The sound editor's nearly done with the audiobook, which has a lovely handcrafted quality, thanks to all the various environments in which it was recorded. And I'm dutifully uploading gigabytes of scanned paper to Flickr as part of the special edition.
Meanwhile, the mysteries of price and profit are on everyone's minds these days thanks to the Macmillan-Amazon spat, with commentators on both sides of the debate drawing parallels to the train wreck of a decade the recording industry just went through. Those rooting for Macmillan point to the way listeners allegedly abandoned their willingness to pay for music—even as a single retailer, Apple, gained near-total control over pricing and distribution. Those who take Amazon's side point to the recording industry's unwillingness to partner with innovative technology firms like Napster, which offered the RIAA a blank check in exchange for a license to continue operating. They also point to Apple's simplified, 99 cent/track pricing as the breakthrough that listeners needed to start paying.
I think they're both right. On one hand, Macmillan should be worried about losing control of its destiny, as Amazon, a single distributor, seeks to lock readers into its devices and services. But on the other hand, Amazon's optimistic (or, some would say, cutthroat) pricing on the cream of the publishing industry's profits—frontlist hardcovers—isn't necessarily a loser for publishers, and it's possible that the world's largest online bookstore just might have some insight into purchasing patterns that publishers need to hear.
What's Your Theory?
Amazon's $9.99 Kindle price, in part, represents a wager that there are enough new readers for frontlist hardcover books that Amazon (and the publishers whose wares it sells) will make up the lost profits from lower prices with greater sales volume. Macmillan's concern is due, in part, to the indisputable fact that the people who shell out good money for an e-book reader are often precisely the kind of price-insensitive consumers upon whom publishing relies to buy books at full price. It all comes down to which profit-maximizing strategy you favor: price discrimination or demand elasticity.
In my last column, I discussed price discrimination: the idea that you make more money by segmenting your customers based on how much they're willing to spend. At the extreme end of price discrimination, you have the airlines, whose opaque pricing is the bane of travelers who can't figure out why a ticket that departs a day earlier costs twice as much. In publishing, price discrimination is accomplished through “windowing.” Traditionally, the hardcover comes out first, at the highest price, so price-insensitive customers, whose thrift is outstripped by their impatience, are enticed to shell out. Once that market is exhausted, the paperback comes along, and price-sensitive customers put their money in the pot. Some customers, of course, would buy the hardcover regardless of whether there was a cheaper option available, but publishers (rightly) believe that if paperbacks and hardcovers went on sale on the same day a sizable fraction of the hardcover market would buy the cheaper paperback. Thus, if low-cost e-books are released simultaneous with the hardcover, there's reason to worry that Kindle and iPad owners (big spenders who might otherwise buy the premium item) will prefer to download cheap, convenient e-books.
Demand elasticity is the straightforward idea that new customers will come into your shop if you lower prices. The publishing industry already practices some demand elasticity: new hardcovers, for example, are priced at $27, not $75, because the higher margin at $75 would not make up for the lost sales from readers unwilling to pay the higher price. Many Internet companies made their fortunes on demand elasticity. Google, for example, bet that charging less for ads (and using clever automation to make money even on extremely cheap ads) would attract so many new advertisers that they would realize a substantial profit.
Everyone with a product to sell practices both price discrimination and demand elasticity in varying degrees. But when the product you're selling is digital, the correct ratio of one to the other becomes a lot harder to calculate. If you're selling hard goods, whether books, shovels, or coffee beans, the math is easy: you can't make money if you drop your price below the marginal cost of production. But digital goods, like e-books, have almost no marginal costs. Things like credit card processing fees, electricity and bandwidth, and a few other considerations keep the cost from truly falling to $0, but the low marginal cost of selling digital copies opens up some very exciting possibilities for publishers. Could the pool of people willing to buy books—the total number of regular readers—be increased by dropping the price? And could that increase in new customers be large enough to offset losses from smaller margins? Amazon clearly thinks so.
But pricing and profit-maximizing strategies aren't the whole story. Consumer electronics buyer demographics tilt heavily to the coveted 18—34-year-old who'll buy anything slim with an eggshell finish. Turning those big spenders into readers is an exciting prospect for anyone who cares about bringing in new business—and Macmillan executives are keenly aware of the opportunity e-books represent for turning nonreaders into new customers. Tom Doherty, publisher of Macmillan's Tor imprint (Tor publishes my novels), is positively luminous on the importance of inducting nonreaders into the practice of regular reading. And there's no bookseller on earth with more nonreader customers than Amazon, which, in addition to books sells everything from server space to freeze-dried steaks, sex toys, and uranium ore.
Yes, the publishing industry needs to attract new readers. But as the recent skirmish over price suggests, the question is: at what cost? At the heart of the Macmillan-Amazon spat is the realization that allowing Amazon to dominate the e-book market will only make it harder for publishers to balance their interests with Amazon's. That's because the Kindle is a “roach motel” device: its license terms and DRM ensure that books can check in, but they can't check out. Readers are contractually prohibited from moving their books to competing devices; DRM makes that technically challenging; and competitors are legally enjoined from offering tools that would allow readers to break Kindle's DRM and move their books to other devices. Price conflict aside, this is the real challenge for publishers, because it means that e-book customers can't break with Amazon without jettisoning their digital libraries.
Amazon refused to allow any changes to its terms for my last book, both in the Audible edition and the Kindle edition, refusing to allow me to offer the book with some introductory text affirming readers' rights to move the books to devices that Amazon hasn't approved.
Don't hope for a better shake from Apple, either. Apple's longstanding love-affair with proprietary formats and lock-ins will very likely make the iPad every inch the roach motel that the Kindle is. Apple pitches this as a design decision, but it's also a powerful anticompetitive strategy that raises the cost of switching to a competitor's device.
There are other forms of market dominance, too. Amazon has the Internet's best affiliate program. Bloggers, or anyone with a Web page, really, can get an affiliate ID from Amazon and use it in their links to Amazon's products. Amazon pays a commission for everything that a customer you send its way buys. For example, a customer who follows a link to a book and goes on to buy a television earns you a tidy sum that Amazon pays out once a month. I regularly review books and products on Boing Boing and use my personal affiliate ID to link to Amazon. In 2009, I sold more than 25,000 books that way, at a commission to me of 4% to 8.5%. It's not the 40% discount I'd get if I was buying books wholesale from Macmillan and selling them in a bricks-and-mortar store, but I don't have any overhead, bookkeeping, cash register, employees, or other expenses.
There's a reason that the Web is festooned with links to Amazon: it pays to make those links, and it's easy. Other retailers, including Indienet, Powell's, Borders, Barnes & Noble, and the amazing Book Depository have their own affiliate programs, and I'd happily link to those, too, if there was an easy way of doing so without having to laboriously hand-code six links on every review. This is every bit as important as DRM, Kindle pricing, and restrictive license terms. Price may the hot issue now, but publishers should be thinking about the whole picture. An automated system for offering readers more choice in their book buying would also help correct the current imbalance in the e-book market, while improving the lives of book buyers and those who make links on the Web. WordPress's Booklinker plug-in is a good start on this—you can install it on your server and it turns all your book links into a pop-up with various retailers that readers can choose from, and your affiliate ID is automatically added to each URL. Publishers who want to get a jump on Amazon could choose to expand Booklinker by turning it into a Java-Script library that bloggers can include on their Web pages without having to install server software and can use with systems other than Wordpress. For extra points, they could figure out how to tie the service into the ISBN resolving services used by libraries to automatically find other editions of a book as well.
Amazon has done an incredible job of figuring out how to cross-sell, upsell, and just plain sell books. They have revolutionized bookselling over the course of a decade. As a reader and a writer, and as a publisher and a bookseller, I am constantly amazed at how good they are at this. But I don't believe in benevolent dictators. I wouldn't endorse a lock-in program run by a cartel of Santa Claus, the Tooth Fairy, and Mohandas Gandhi. As good as Amazon is at what it does, it doesn't deserve to lock in the reading public. No one does.