Is Big Five Publishing Positioning Itself for Large eBook Profits?

big five publishing vault of money pixabay safe-913452_640As an Indie author, I’ve always sided with Amazon because Amazon made my career as a writer possible. Nevertheless, I was a little confused recently by the retail giant’s apparent about-face with regard to the agency model.

Essentially, the agency model does two things:

  1. It allows traditional publishers to set the price of their own eBooks, and
  2. It prevents Amazon from discounting those prices.

In practical terms, this means that many traditionally published eBooks are more expensive than their paper counterparts. Not surprisingly, this has led to an overall drop in profits for publishers.

A less obvious effect has been to make some readers angry with Amazon because they think the retail giant is to blame for the high prices. So why has Amazon allowed this to happen? And why are traditional publishers willing to take such a big hit to their profits?

Few people know why Amazon does anything, however many industry pundits have theorized about the Big Five. Some believe the Big Five are dinosaurs, too hide-bound to change. Others believe they are over-pricing eBooks in an attempt to kill them off. Yet others believe the Big Five are simply out of touch and greedy.

Overall, the public face of traditional publishing is not pretty. We see the Big Five as dinosaurs that are killing the goose that laid the golden egg through sheer greed. But what if that picture is wrong?

Ask yourself this – if the Big Five are being woefully mismanaged, why are their parent companies not doing something about it?

We talk about the Big Five, but they are really just mid-sized corporations in comparison to their parent companies. For example, Hachette is merely a subsidiary of the Lagardère Group. As of September 4, 2015, Lagardère had a stock price of €24.53 and included the Airbus Group as one of its subsidiaries.

Given its size, I think it’s safe to say that Lagardère is not a dinosaur. So why is such a huge, successful group allowing one of its subsidiaries to price itself out of the market?

I am a science fiction writer, not an economist, but I am going to predict that all of this strange behaviour by the Big Five is actually them, positioning themselves for the future, a future in which digital+mobile is the norm, and print is just a niche, artisan enterprise.

Yes, yes, I know, laughable, but before you give yourselves a hernia, answer me this – how can any publisher make a profit out of eBooks that cost just $2.99? Clearly, they can’t, which means that if they are to survive, and continue making a profit into the future, they have to condition readers to accept higher priced eBooks now.

Radical? Yes. Impossible? No. We are all creatures of habit after all, and besides, there is precedent; the paperbacks we accept as the norm now originally began as the cheap pulp fiction of the 1930’s and ‘40s.

“By under-paying writers and publishing on in-expensive media, pulp publishers were able to charge 10 cents for an issue … Low prices drew in many working-class young adults and teenagers, who could not otherwise afford some of the more pricier magazines of the day.”
The Vintage Library

Traditional publishers were slow to embrace pulp as well, but by the 1980’s they had become the dominant players in the market and the price of paperbacks went up and up.

Will history repeat itself? I hope not, but it is never wise to underestimate the other side in any conflict. Amazon clearly does not, and neither should Indies. This fight is not over yet.

28 thoughts on “Is Big Five Publishing Positioning Itself for Large eBook Profits?”

  1. Yesterday, I noticed that on an Amazon link, you sometimes see “This price was set by the publisher.”
    Here’s an example: J.A. Jance’s newest mystery is $12.99 for a Kindle copy.
    http://www.amazon.com/Dance-Bones-Beaumont-Brandon-Mysteries-ebook/dp/B00OP0JHS2/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1442938162&sr=1-1&keywords=ja+jance

    Perhaps that is a way of Amazon informing the reader that Amazon is not responsible for the price.
    Just a thought.

      1. Yes, Amazon is distancing itself from the high prices, but it also chose to ‘allow’ them in the first place – i.e. via those contracts it signed with some of the big players.

  2. AC, I’m not sure your theory disagrees with the others. Pricing high protects the paper market, for the moment. That’s where the Big 5 have an advantage due to their superior ability to create and distribute paper books. You’re also right, they can’t maintain their profits pricing ebooks at $2.99 if nothing else changes. The difference in what it costs them to produce and deliver an ebook is lower than for a paper books, but not that much lower. I’ve seen costs quoted in the $2-3 range on the high side for a hardback to print and distribute. the cost differences for a paperback are only slightly lower. So maybe that is what they’re aiming/hoping for.

    Another theory I’ve heard is that the parent companies realize the high ebook prices won’t hold up forever. As long as the paper market remains large, keeping the price of ebooks high delays the move to digital. Once it hits a tipping point where paper isn’t selling, the publishers can exit the new book market, no longer signing new authors and publishing new books. That would cut their costs immensely. But they’d have a ton if IP tied up that they could sell as ebooks a high (but lower than now) prices and milk those assets forever (or at least for life+70 years).

    1. -grin- when it comes to human motivation there’s always room for more interpretation, although I hope you’re wrong about the long-term viability of traditional publishing. I have no love for the industry, but neither do I wish to see the pool of writers diminish; not all writers are capable of making it in the indie world.

    2. That’s a scary, but plausible theory. I heard yesterday from a friend who writes for the Christian market that the big publishers in that field have pretty much closed their doors on new authors, and I know from another friend that they’ve been making it difficult for their midlisters to stay on board. So they’re now relying on the top tier of authors while the rest are more or less forced to go indie. A good short-term strategy for the publishers, but what happens in 10 or 20 years as their bestsellers stop writing or lose market share? By that point the top writers in the niche will have been happily self-published for years, and I doubt they’ll accept any inducement to return to the trad fold. Every good writer who makes the decision (voluntarily or through inability to get a trad contract) to self-publish is a potential huge loss to the trad business. Do you think the trads believe they can always woo them into a contract? Do they think that refuseniks like Hugh Howey are the exception? Has nobody in the industry pointed out that ceding ground to your competitors is a bad long-term strategy and that indies are, increasingly, their competitors?

        1. “Do you think the trads believe they can always woo them into a contract?”

          Possibly. Four or five years ago, they thought this and were right. (Think Amanda Hocking, DB Hinson, and others I’m not thinking of.) However, if you start looking at the last couple years, say since Hugh signed (and he’s a big outlier/exception) you don’t see the big names signing other than some with Amazon. They may be trying to sign mid-listers they think have big potential, but all the bigger names where you hear of contract offers seem to be turning them down. What trad pub can offer someone who has made it is so much worse what they can do on their own and they know it. Mid-listers might consider it although I know of some of them turning down offers too.

          In the past, if your (obligatory) agent didn’t manage to build some hype to start a bidding war, you pretty much had to take what was offered if you wanted to be published, right? Having the indie option changes everything.

          1. And given that the latest Author Earnings report suggests that the long-term prospects for indies are better than for trad, they’re likely to keep having trouble signing the savviest authors (those are the smart ones they SHOULD be signing). Of course AE is indie-biased, but those are interesting numbers.

            Just from looking to what’s happening with authors I know, I can’t help wondering if the much-anticipated tipping point is way closer than we realize.

  3. I’m not quite as convinced the suggested strategy has much chance of succeeding. Books are only one form of entertainment/information and consumers are both price and time sensitive.

    Why spend $25 for a single book when for $8 a month you can have unlimited access to movies on Netflix? The current prices of books have created a vicious cycle for traditional publishers, as revenue falls they raise prices more which in turn decreases revenue more.

    Assured access to bookstores is the biggest advantage traditional publishing has. An advantage that continues to shrink as this business model seems to be following the trajectory of Block Buster.

    A real threat would be a dramatic reduction in book prices. This could be achieved using existing technology. For instance instead of printing off 10,000 copies of which 65% will be turned into pulp, why not print more books on demand at the bookstore itself? Or better yet at libraries as it would help these vital institutions budgets.

    Readers are not going to pay more for books. Either they will borrow from libraries, buy used copies, or turn to other cheaper forms of entertainment/information that deliver more value. Higher prices will only further accelerate the decline.

    1. You make some good points, but the fact remains that the reading public are buying ebooks at those ridiculous prices because of the convenience, if nothing else. They grumble and complain, but if one of their favourite authors brings out a new book, they will buy it.
      Of course, as more and more mid-list authors turn Indie, the price differential between Indie and traditionally published books will blur.

  4. My thoughts:
    1) Making Amazon less competitive boosts print sales and makes bookstores happy. Higher eBook prices may also be seen as positioning publishers against the inevitable day authors win a better share of ebook profits, or perhaps even trying to prevent it (if those sales are minor, why fuss?)
    2) I find it hard to believe a publisher couldn’t make pretty good money off a $4.99 or $5.99 ebook, given the practically nonexistent unit cost, assuming it sells anything at all — but for traditional publishers, discoverability still arrives in the bookstore, not online. Therefore, see above.
    3) Amazon is going to make out well either way because of its own growing publishing operations and the failure of its competitors (Oyster just bit the dust, for example, and Nook appears to be failing).
    4) I’m perfectly happy with agency pricing, since it makes indie books a lot more competitive. I’m kind of horrified to see the prices on traditionally published author friends’ books.
    5) Discoverability is the nut we all have to crack — successful innovations in THAT could change the landscape of publishing for both groups very quickly.

    1. I agree completely on the issue of discoverability – it is the problem we all face. I’m not sure about the cost to produce ebooks though. If a traditional publisher is simply converting a book from print to digital then the cost is minimal. However at some point in the future, publishing will have to go to ‘digital first’ and at that point, publishers will need to factor all the overheads of advances, royalties,editors, covers, production etc., into the price of the ebook. And that will not be cheap. Hence what I see as their positioning now.

      1. Unit cost is figured on the manufacturing and distribution cost of the book. All those other things are overhead that get figured into the P&L during the acquisition decision, but they are one-time costs, not ongoing costs. Once an eBook is set up, it costs nothing but a little labor to distribute. The one ongoing cost that trade publishers are probably not used to budgeting to any significant ongoing degree is advertising and promotion. In some ways a full digital future may require a return to the kind of budgeting we used in direct mail publishing, where advertising was a good half of all our ongoing expense for a book. (On the other hand, paper and bookstores will have their fans for a long time, I think. And they will find ways of adapting, too. For example, some of them have started vanity publishing operations with POD presses of their own.)

        1. Your point about the direct mail promotion and advertising is a damned good one. I remember I used to buy most of my books and LPs off catalogues. If this is what you mean then it did work. Delayed gratification wouldn’t work these days but still…promotion is the one part of being an Indie I’d happily give up. 🙂 And yes, I’ve even read of a library [in Canada I think] that PODs books for local authors.

  5. My only question here is this: If BIG PUBLISHERS are mismanaged dinosaurs, how do we account for the fact that they get most the press (Major Sites), most of the buzz, just about all of the big awards, most of the listings on the various end-of-year best books of the year lists, most of the advances of any size, and have their books in bookstores that seldom carry self-published/indie press books. When people talk about the books they want to read, those books come from BIG PUBLISHING.

    How do we account for this if they’re doing such a lousy job

    1. I think they’re still doing an okay job with the old paradigm – i.e. print – but their own profit and loss figures point to the fact that they are /not/ maximising their profits when it comes to ebooks. And they seem to be doing it deliberately.

      1. They could do better with the e-books. When a bestseller comes out, at time I see that the hardback and e-book aren’t much different in price. Unless I’m in a big hurry to start reading, I’ll get the hardback every time under those circumstances.

        Malcolm

        1. I’m too much of a scrooge to buy hardbacks, but like you, if the price is much the same then at least a hardback is something physical you can enjoy, lend out or sell. Ebooks are more like books that you rent, hopefully for life. That alone should be reason enough to keep the price low.

  6. This all circles back to one persistent myth: that writing is easy and writers don’t mind being starving artists. Okay, maybe that’s two myths in one. But it’s the sentiment from many in the general public (as well as from some in the publishing and entertainment industries) that we scribes can’t get real jobs or are too psychotic to do anything else besides create stories. In some ways, I’m just not surprised the publishing industry is wrestling with this traditional-book-vs.-e-book issue; which is akin to videotape-vs.-DVD (or, if you really want to get nasty, East-Coast-rapper-vs.-West-Coast-rapper.)

    I’m not naïve. I’m fully aware that publishing houses want to see a significant return on their investments, and that includes analyzing overhead costs. But, if writers pull a 1988-style screenwriters strike, the outside world might actually show us some respect. That includes the publishing executives ensconced in their ivory towers…maybe. What is a book worth in hard currency terms? I don’t know. Then again, is a professional athlete worth a seven-figure annual salary for working only half the year?

    1. “But, if writers pull a 1988-style screenwriters strike, the outside world might actually show us some respect.”
      Yes! Although I believe the desertion of the mid-list is quietly forcing the issue as well.

    2. I don’t think writers could pull off a successful strike. Publishing companies probably have 6 months, maybe a year or more, of books in their pipelines. It would be impossible to know which authors were feeding new material into the pipeline during the strike. Even if the strike lasted longer than the pipelines, authors could use pen names, or the publishers could turn to an inexhaustible supply of new authors waiting for a chance.

  7. Interesting post. I’ve not really read much about this. But I have seen the ridiculously high prices of traditionally published ebooks. I recently bought one to read while traveling since I didn’t want to get the hardcover. I needed to read it for my book club and thought the plane ride would be the perfect time. But I was NOT happy to pay $13.99 for it.

    1. I know, the pricing is ridiculous, yet if we want the ebook badly enough, we do pay it. I buy maybe one traditionally published book a year because of the price. The last one I bought was the latest Robin Hobb. I just couldn’t wait. 🙂

  8. “This fight is not over yet.” You said it, AC, and I’d be willing to bet that there are a number of conflicting agendas in operation in this business that we hate to love, or is it love to hate? One thing’s for sure and that is that the big hitters in the business are not giving up without a fight. The industry has changed so drastically in the last 20 years, I’d like to be around for the next 20 years just to see the outcome.

    Thought provoking article, AC, excellent post.

    1. Thanks, TD, and yes, I’d like to be around to see the outcome as well. We’re living through a time that will end up becoming a part of history. Always exciting. 😀

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