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Is Amazon Evil?

Amazon's cheap books are easy on our wallets, but publishers have been deeply undercut by the rise of large retailers and predatory pricing schemes.

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Amazon’s handling of e-book pricing—and publishers’ response—will have perhaps the most far-reaching effects on the industry. The situation thus far is not encouraging. To create a new market and generate demand for the Kindle, Amazon set the e-book’s price at $9.99. Publishers were not consulted.

If Amazon had asked publishers what they thought about locking in e-book prices at $9.99, it would have been subjected to a chorus of outrage. That’s because the math behind publishing is seldom in a publishers’ favor. The sale of a twenty-dollar hardcover nets a large publisher about ten dollars. Royalties run the publisher about three dollars, and the costs of printing, binding, and paper are a further two dollars (more for low-volume titles). Take $1.20 for distribution, two dollars for marketing, and that leaves a publisher with roughly $1.80 to cover rent, editing, and any other costs. A smaller publisher might keep closer to a dollar per book.

E-books reduce the cost of printing, binding, and paper, but royalties tend to run higher, and all other costs are largely unchanged. Publishers account for these costs when they slap a price tag on a book, so Amazon’s decision to set the price irrespective of them set off a wave of anxiety.

Amazon, hardly oblivious to these economics, chose to absorb the loss, paying publishers for the price of the equivalent printed book in order to make the deal more appealing. But Amazon has successfully established customer expectations at an impossibly low rate, and publishers worry that at some point the retailer will no longer take on losses to sustain it.

“There’s no way they can continue to sell . . . at a loss,” says Johanna Vondeling, vice president of business and development at Berrett-Koehler. “Eventually, they’re going to change their minds on this, and I think all publishers should be worried about what happens when they do. They’re going to keep that e-book price where it is. They’re going to turn around and say to the publishers, ‘Tough. All we’re going to pay you on is the split of $9.99.’”

While the $9.99 price has evolved, it is still the most popular e-book rate on Amazon. And even with elastic pricing, Amazon remains in control, using its algorithms to set the price of e-books.

This past January John Sargent, CEO of the publisher Macmillan, met with Amazon executives in hopes that he might regain control over the pricing of Macmillan’s books. If anyone could sway Amazon, it was Macmillan, a huge bookmaker with imprints such as Farrar, Straus, and Giroux; Henry Holt; Picador; and Times Books. Sargent flew to Seattle and laid out his terms. By the time he stepped off the plane in New York, Amazon had removed the buy button from every Macmillan book on the Web site.

Negotiations between retailers and publishers have historically been behind closed doors, so it was that much more dramatic when an irate Sargent wrote a blog on the Macmillan Web site chronicling the messy details. Before long, Amazon announced that it had no choice but to cede pricing control to Macmillan because the publisher “has a monopoly over their own titles.”

Macmillan’s success is a heartening development. It and a handful of other large publishers have taken over pricing of their own e-books. But smaller houses have not been so lucky. Johnny Temple, founder of the independent press Akashic Books, is not sure whether he will eventually be able to negotiate the same terms that the big publishers have with Amazon. “If we had a room full of lawyers, maybe we would be working with them and thinking about the future terms,” Temple says. “But we’re just busy trying to stay in business.” As is the case with most large retailers, those publishers with a lower sales volume are simply treated differently.

 
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