Wednesday, May 20, 2009

Who makes money on Kindle books?

Sandra Parshall

The Amazon Kindle has broadened the market for books, and Kindle rights are making the same amount of money for publishers, and in many cases the authors, as the print editions. So why are publishers worried as they watch Amazon conquer the e-book market?

I’ve read a lot on this subject lately, but an article by Rachel Deahl in the May 11 Publishers Weekly did the best job of explaining the conundrum publishers face.

Amazon’s goal is to sell the hardware, the Kindle itself. To make it more attractive than the Kindle’s chief competition, the Sony Reader, Amazon has more than 265,000 titles available for download and is charging less for most of them than Sony’s e-books cost. In many cases, Amazon is taking a loss on the books themselves.

To understand what’s going on, you have to realize that few books are sold at the cover price, and booksellers buy books from publishers at a discount. Deahl reports in PW that Amazon pays publishers the same discounted amount, around 50% of cover price, for Kindle rights that it pays for printed books. Amazon sells printed books at just enough to make a profit on each copy. But they’re charging less for many e-book downloads than they pay for the rights.

For example, the cover price on Jim Butcher’s current bestseller, Turn Coat, is $25.95. If Amazon purchases each copy from the publisher at a 50% discount, they’re paying $12.97 for it. Amazon sells the print version for $17.13 – $4.16 more than they paid the publisher. But the Kindle download costs only $9.99 – $2.98 less than Amazon paid for it.

Right now, Amazon’s willingness to take a loss, or merely break even, on downloads in order to push Kindle sales and build its share of the e-book market is not affecting publisher profits. According to the Authors Guild, writers are also being paid – depending on how their contracts are structured, they receive either 15% of the book’s original list price or 25% of net receipts from e-book sales. According to PW, though, some agents are unhappy because publishers don’t have to spend any of their profits from e-books on manufacturing and shipping and are making a disproportionate profit on each sale, while the writer’s income remains the same.

It’s a vision of the future that’s giving publishers nightmares. What will happen when Amazon has driven its competition out of business or into a tiny and almost meaningless corner of the market? Publishers, Deahl reports, are afraid Amazon will exercise its power to demand much lower prices for digital rights that it pays for printed books. That effortless profit will vanish for publishers, unless they lower the author’s royalty on e-books. We all know how writers and agents would feel about that approach. As noted above, some grumbling is already being heard about a split of e-book profits that is perceived as favoring publishers and penalizing writers.

Amazon, with its worldwide marketing network that is visited by millions of users every day, is ideally positioned to push a product like the Kindle. According to Jeff Bezos, CEO of Amazon.com, 35% of all Amazon sales of titles available in print and digital formats are Kindle editions. Just a few months ago, that figure was 10%.

Amazon has just introduced the Kindle DX, a larger version of the reader designed to display newspapers and college textbooks. Amazon will soon launch a pilot program at six universities, but this effort faces significant obstacles in the education market. The DX is big, it’s clunky, it’s black and white only, and it costs $489. Students who already have access to full-color digital references through their schools, and are accustomed to using laptops and miniature netbooks to retrieve information, may not be enamored of Amazon’s latest version of the Kindle.

One thing seems certain, though: the original Kindle for popular books is here to stay. What it means for publishers and writers is an open question. Stay tuned, and if you’re a writer, you might want to have a talk with your agent about it.

6 comments:

RhondaL said...

I just saw this in Newsweek, too. This reminds me of the big box electronics stores selling $9 & $11 music CDs as loss leaders, just to get buyers into the store and to create a sales funnel to their more expensive electronics. Yes, that did kill a lot of record stores.

On a related note, a lot of writers of non-fiction, especially in the self-help genre, are moving away from the traditional publishing model into self-publishing their ebooks as downloadable PDFs. Some expand their ebooks into downloadable multimedia presentations.

The quality of some of these ebooks can be quite good. And these authors -- like Havi Brooks, Naomi Dunford and Chris Guillebeau -- do quite well.

Now, I'm not sure how that model would work for fiction because the end-user (reader) buying process for fiction is different.

Readers like having the social proof/stamp of approval that a publisher gives. Writers like it because traditional publishing takes care of some distribution issues with traditional outlets. And then there's the security issue - what prevents someone from duplicating the ebook for family and friends?

If those problems can be solved, though, even Amazon could feel the pinch if authors can manage to turn into "one-man-bands."

Sandra Parshall said...

Has anyone checked out a site called Scribd? Writers upload their material, choose the restrictions theywant to place on it (downloadable or not, for example, readable on the Kindle or not) and set their own prices. The site is attracting millions of readers/buyers -- and, interestingly, the majority are men. That contrasts with brick-and-mortar bookstores, where women buy the majority of books.

Sandy Cody said...

Interesting post. Last weekend I had a signing at the small, independent book store in our town and had a similiar discussion with the store owner. They can't get Kindle, which makes it even more difficult to compete with the big guys. I understand that the first law of life is change and appreciate that Kindle offers many advantages (imagine a college student having all their testbooks on one handy gadget), but worry about the little guys. In my experience, independent book stores are the best friends of the lesser known writer.

Terri P aka WindDancer said...

Sooner or later they will have to raise their prices, and I imagine most kindle addicts will pay it.

A woman was sitting next to me on the train earlier this week - reading on her Kindle. The glare on the screen was awful (okay I was being nosy and checking it out). I wasn't impressed but it is definitely popular. But I feel for the authors...

Chester Campbell said...

I don't know how publishers work, but for individuals who own their digital rights and put their books in the Kindle Store, Amazon pays 35% of the list price. I price my books at $8.94, Amazon sells them for $7.15, and I receive $3.13. Which could be a lot better but isn't bad.

Tony Burton said...

I'm a publisher, and the books I place on Amazon produce the 35% margin that Chester talks about. I'd love it if I could get more (that 50% amount) but it's not the way it works for me.

I dare say Amazon won't lose money, one way or the other.

Tony Burton
http://www.wolfmont.com/