What Hugh Howey Won't Talk About (but Should). And Amazon is Not a Publisher! (Part I of Several Parts)
I swung by Hugh Howey's site the other day, and he's just posted up an article on his blog entitled:
Could it be any Clearer?
I strongly urge you to click on the link and read it. Well worth it, whatever your take on the Hachette vs. Amazon issue.
Now, Hugh's a big Amazon fan, as anyone who's read his blog postings know. But I think he's losing perspective on the issue. I also think there's an element of an odd sort of class warfare that has crept into the entire debate that I find very strange. It's a sort of "Stephen King Must Make Less So I Can Make More" vibe that's strumming along some of the blogs. One of these days, I expect to see posters of Holston from Wool dressed up like Che brandishing an AK-47 if things go on like this.
Before going any further, I need to make it clear I'm neutral on the dispute between Hachette and Amazon. These are both large companies with vested interests and money to make and protect. I expect neither to put the interests of authors first. That's not what large companies do. I do expect both to blubber hugely when talking about the travails and problems of authors, then, when the cameras are off and the interviewers are gone, look after their respective piggy banks and not worry a whit about whether or not you, the author, are making a living writing books or whatever. This is as it should be.
Further, anyone, from an objective standpoint, should understand the tremendous benefits that the electronic shelf as provided authors. It has:
Activated the long tail in books. The concept of a book going out of print is obsolete in electronic publishing.
Allowed anyone to self publish. You can now avoid the gatekeepers of publishing and attempt to engage directly with the market and sell your book. Yes, you could do this before the electronic shelf (and I have), but it's a lot easier in theory (though Amazon has decided to make it practically impossible for many classes of books, as we'll see shortly).
Reopened new publishing models such as serialization, which had vanished for the most part since the 19th century. Howey is one of serializations revivers.
Opened up the possibilities of new innovations in publishing. I know something about this because in 2001 I created what I believe was the first E-book to incorporate community and messaging directly within a book. Today's technology offers the possibility of doing that, as well as much more. We really haven't seen much of this, but I'm sure someday we will. I think.
Introduced real competition into the market. See bullet point two. Yes, a lot of people are going to write and publish drek. (But one man's drek is another's golden bundle of soft porn. See Fifty Shades of Grey for a reference point.) And many people will write wonderful books that otherwise would have never been discovered. The market can function to help make this so.
Provided a much needed wakeup call to the publishing establishment (I worked in publishing, briefly. Scholastic and a couple of other smaller players. Didn't care for it). They don't like the ringtone, but, c'mon guys. Don't you all have iPods (or at least did) and smartphones? No one ever heard of MP3? Napster? The torrents? Didn't you realize the jig was up when you saw the Kindle? Did you really think print was going to be the analog empire to survive the Mongols of digital? Sheesh.
Now, Amazon has received much of the credit for the above, though it all would have occurred whether it was WalMart, B&N, or you who had built the platform. The discussed capabilities are inherent in the technology. But it was Jeff Bezos and Amazon who realized the opportunity and built an effective channel for E-books. It was a brilliant move and I'm overflowing with admiraton. And in E-books, Amazon is reaping rich rewards. And it deserves them.
That said, I'm an author and an ungrateful bastard. Also, I need to eat and I'm going to want to avoid handing over any more of the proceeds from my book to the greatest extent possible. After all, if didn't write the book, no one has anything to sell.
So let's first level set everything. The first thing that you must learn is that Amazon does not pay you royalties! Yes, I know that's what they call their retailer markup, but that is completely misleading. Amazon is NOT a publisher. They provide NO publishing services. Amazon is a channel. It does not make a market for your book. It does not promote it. It will not generate reviews. It doesn't edit or copyedit it. Does not design it. Doesn't provide graphics or graphics guidance.
If you doubt this, here is a test you can take to prove this to yourself:
Write a book. When you have finished it, upload to Amazon.
Do nothing. Wait for Amazon to market your book.
Check back in 60 days to see what has happened.
Always remember that channels do not make markets. You will make the market. That 30 points (30% retail markup, not royalties) Amazon is charging you is channel margin. Because of its size, Amazon can pretty much lock its 30 point margin in and regardless of whether you have a publisher or not, you will pay that fee to use its downloading service because right now, there isn't much in the way of competition to force it to lower its retail markup. One of the principle points of argument between Hachette and Amazon is wants to raise its margins with Hachette up to 30 points. Hachette is paying less than you. What the amount is has not been disclosed. Probably between 20 to 25 points.
Now, let's look a little more closely at that 30 points. Howey has stated that bookstores typically markup their books by 40% to 50%. This is true. This is their gross margin, because now they have to support an extensive physical infrastructure. Once this accounted for, a paper bookseller's net margins range between 6% to 15%. For the physical stuff Amazon buy and resells, margins are similar.
But the 30% retail markup Amazon is charging you is for it to stock its electronic shelf with an E-book. And this is far less expensive than managing physical inventory. Once you have built an electronic shelf, the cost of adding new items to the shelf drops steadily as the initial cost is amortized over time. And remember, the physical cost of maintaining its electronic infrastructure tends to drop as well. Server space gets cheaper, CPUs faster, memory cheaper, etc. Even programming and support costs can be sharply cut via outsourcing. (One area that's much trickier to manage is the cost of power.)
So, what is the cost to Amazon of adding your book to its shelf? Pennies, maybe. Let's stretch a bit and say, $0.50. Heck, let's make it $1.00.
Oh, and you can't factor in Amazon's transmission costs when they sell a book. That's applied against your retail markup. I'll put up a table at a later date to factor that in.
So, Amazon's net markup on your book is $29 dollars. 29 points.
In channels, 29 points net margin is a license to print money.
But, wait! That's just for books under $9.99. For books over that figure, Amazon's retail markup is 65%. 65 points. Take away that buck.
In channels, 64 points net margin is not a license to print money. It is a license to print gold bars.
I've raised this point several time on Howey's blog, but no one seems to want to talk about this.
I'll be digging into that number in the next part of this series.
Now, Hugh's a big Amazon fan, as anyone who's read his blog postings know. But I think he's losing perspective on the issue. I also think there's an element of an odd sort of class warfare that has crept into the entire debate that I find very strange. It's a sort of "Stephen King Must Make Less So I Can Make More" vibe that's strumming along some of the blogs. One of these days, I expect to see posters of Holston from Wool dressed up like Che brandishing an AK-47 if things go on like this.
Before going any further, I need to make it clear I'm neutral on the dispute between Hachette and Amazon. These are both large companies with vested interests and money to make and protect. I expect neither to put the interests of authors first. That's not what large companies do. I do expect both to blubber hugely when talking about the travails and problems of authors, then, when the cameras are off and the interviewers are gone, look after their respective piggy banks and not worry a whit about whether or not you, the author, are making a living writing books or whatever. This is as it should be.
Further, anyone, from an objective standpoint, should understand the tremendous benefits that the electronic shelf as provided authors. It has:
Activated the long tail in books. The concept of a book going out of print is obsolete in electronic publishing.
Allowed anyone to self publish. You can now avoid the gatekeepers of publishing and attempt to engage directly with the market and sell your book. Yes, you could do this before the electronic shelf (and I have), but it's a lot easier in theory (though Amazon has decided to make it practically impossible for many classes of books, as we'll see shortly).
Reopened new publishing models such as serialization, which had vanished for the most part since the 19th century. Howey is one of serializations revivers.
Opened up the possibilities of new innovations in publishing. I know something about this because in 2001 I created what I believe was the first E-book to incorporate community and messaging directly within a book. Today's technology offers the possibility of doing that, as well as much more. We really haven't seen much of this, but I'm sure someday we will. I think.
Introduced real competition into the market. See bullet point two. Yes, a lot of people are going to write and publish drek. (But one man's drek is another's golden bundle of soft porn. See Fifty Shades of Grey for a reference point.) And many people will write wonderful books that otherwise would have never been discovered. The market can function to help make this so.
Provided a much needed wakeup call to the publishing establishment (I worked in publishing, briefly. Scholastic and a couple of other smaller players. Didn't care for it). They don't like the ringtone, but, c'mon guys. Don't you all have iPods (or at least did) and smartphones? No one ever heard of MP3? Napster? The torrents? Didn't you realize the jig was up when you saw the Kindle? Did you really think print was going to be the analog empire to survive the Mongols of digital? Sheesh.
Now, Amazon has received much of the credit for the above, though it all would have occurred whether it was WalMart, B&N, or you who had built the platform. The discussed capabilities are inherent in the technology. But it was Jeff Bezos and Amazon who realized the opportunity and built an effective channel for E-books. It was a brilliant move and I'm overflowing with admiraton. And in E-books, Amazon is reaping rich rewards. And it deserves them.
That said, I'm an author and an ungrateful bastard. Also, I need to eat and I'm going to want to avoid handing over any more of the proceeds from my book to the greatest extent possible. After all, if didn't write the book, no one has anything to sell.
So let's first level set everything. The first thing that you must learn is that Amazon does not pay you royalties! Yes, I know that's what they call their retailer markup, but that is completely misleading. Amazon is NOT a publisher. They provide NO publishing services. Amazon is a channel. It does not make a market for your book. It does not promote it. It will not generate reviews. It doesn't edit or copyedit it. Does not design it. Doesn't provide graphics or graphics guidance.
If you doubt this, here is a test you can take to prove this to yourself:
Write a book. When you have finished it, upload to Amazon.
Do nothing. Wait for Amazon to market your book.
Check back in 60 days to see what has happened.
Always remember that channels do not make markets. You will make the market. That 30 points (30% retail markup, not royalties) Amazon is charging you is channel margin. Because of its size, Amazon can pretty much lock its 30 point margin in and regardless of whether you have a publisher or not, you will pay that fee to use its downloading service because right now, there isn't much in the way of competition to force it to lower its retail markup. One of the principle points of argument between Hachette and Amazon is wants to raise its margins with Hachette up to 30 points. Hachette is paying less than you. What the amount is has not been disclosed. Probably between 20 to 25 points.
Now, let's look a little more closely at that 30 points. Howey has stated that bookstores typically markup their books by 40% to 50%. This is true. This is their gross margin, because now they have to support an extensive physical infrastructure. Once this accounted for, a paper bookseller's net margins range between 6% to 15%. For the physical stuff Amazon buy and resells, margins are similar.
But the 30% retail markup Amazon is charging you is for it to stock its electronic shelf with an E-book. And this is far less expensive than managing physical inventory. Once you have built an electronic shelf, the cost of adding new items to the shelf drops steadily as the initial cost is amortized over time. And remember, the physical cost of maintaining its electronic infrastructure tends to drop as well. Server space gets cheaper, CPUs faster, memory cheaper, etc. Even programming and support costs can be sharply cut via outsourcing. (One area that's much trickier to manage is the cost of power.)
So, what is the cost to Amazon of adding your book to its shelf? Pennies, maybe. Let's stretch a bit and say, $0.50. Heck, let's make it $1.00.
Oh, and you can't factor in Amazon's transmission costs when they sell a book. That's applied against your retail markup. I'll put up a table at a later date to factor that in.
So, Amazon's net markup on your book is $29 dollars. 29 points.
In channels, 29 points net margin is a license to print money.
But, wait! That's just for books under $9.99. For books over that figure, Amazon's retail markup is 65%. 65 points. Take away that buck.
In channels, 64 points net margin is not a license to print money. It is a license to print gold bars.
I've raised this point several time on Howey's blog, but no one seems to want to talk about this.
I'll be digging into that number in the next part of this series.
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