Amazon made an announcement last week about the Kindle e-reader and changes to their royalty scheme for authors that may have caught your eye. I will do a quick recap:

Amazon announced it is providing authors and publishers with a “70% royalty option” for books sold on the Kindle. The new royalty regimen seems to be squarely aimed at keeping Amazon as the’ top of mind’ publisher for e-books, especially in light of the enormous number of new readers that were unveiled at the recent Consumer Electronics Show (CES) and the breathlessly awaited arrival of an Apple tablet device. The new percentage of 70%, from the current royalty of 35% per title, comes with a number of restrictions. These include:

• The actual price of the book must fall between $2.99 and $9.99 and be at least 20% below the lowest price of a physical edition of the same book.
• It has to sell for the same price, or less, as it does with competing booksellers.
• It has to be available everywhere the author or publisher has intellectual property rights.

According to Amazon’s announcement, “the 70 percent royalty option is for in-copyright works and is unavailable for works published before 1923 (a.k.a. public domain books). At launch, the 70 percent royalty option will only be available for books sold in the United States.” To see the entire announcement, go here.

My take: The royalties question is very important to authors, obviously, as that’s how they eat.  Amazon’s announcement has a sobering effect on competitors and publishing houses, as many authors may opt to move their works to direct publishing by Amazon, foregoing the services (and fees) associated with working with a publishing house.

There are a couple of other considerations to keep in mind. First, with this announcement, Amazon is giving authors the ammunition to go to publishing houses and ask the royalty question, “With Amazon willing to give 70% royalties on my work, what are you willing to do for me?” This will not be an easy discussion and will require publishers to explain in very clear and specific ways what the value proposition is of working with them instead of going direct to Amazon. I foresee a publishing industry shakeout over the next two years that is partially driven by this question.

There is also another piece of data to note. According to a New York Times article of January 22, 2010 entitled “With Kindle, the Best Sellers Don’t Need to Sell”, one of the hottest ways to boost your visibility as a struggling author is to give your work away (or, more specifically, some of it). Several authors and publishers, apparently having read and considered Chris Anderson’s “Free” polemic, have decided to test it out on up-and-coming authors. Apparently it works. According to the article, free versions of an authors work can show up somewhere in the top 5 of the Amazon Kindle’s top-seller list, and has shown to drive sale of the authors other works. In one example:

“In October, the most recent month for which she has statistics, Ms. Brashear (a publisher) said Samhain offered free digital versions of “Giving Chase,” a romance novel by Lauren Dane, leading to 26,897 downloads. But paid purchases of some of Ms. Dane’s other novels jumped exponentially. Her earlier novel “Chased,” which sold 97 copies in September, sold 2,666 digital units in October, and another of her previous books, “Taking Chase,” which sold 119 copies in September, sold 3,279 in the month in which a free download was available.” (New York Times, January 22, 2010: http://www.nytimes.com/2010/01/23/books/23kindle.html?pagewanted=2&sq=amazon kindle&st=cse&scp=2)

With Amazon offering great royalties to authors, plus growing data around the effectiveness of distributing and author’s works for free and for fee on the Amazon platform, how do the competitors respond? What will publishers do to provide the kind of valuable service they have available to authors to keep them from going direct? If Authors do stay with their publishers, how do they compete for visibility and attention in a burgeoning sea of authors for an audience willing to pay for their work?

I believe there is a sea change in the works, much like what newspaper journalism has experienced in the past few years. Authors and publishers are going to have to rework and rethink their relationships with each other and how to gain the kind of foothold that will allow them to remain in business….even if the business doesn’t quite look like what it did ten years ago.

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Because publishing has historically had very high fixed costs (printing presses and distribution warehouses), the industry is threatened by lower-cost digital distribution. Simon & Schuster as well as Lagardere SCA’s Hachette Book Group have announced that they will not publish a ebook until four months after the hardcover, positioning the ebook in-between the hardcover and paperback editions.

Even as the retail price of many new hardcover novels creeps above $27, Amazon and Barnes & Noble boast many new best sellers for only $9.99 in the e-book format.

Increasingly, publishers have come to fear that the bargain prices will lead consumers to conclude that books are worth only $10, or less, upsetting the pricing model that has survived for decades.

[...]

For customers, the e-book savings are striking. Barnes & Noble sells the hardcover edition of Stephen King’s new thriller, “Under the Dome,” for $22.75, but the e-book edition is only $9.99, a 71% discount off the $35 cover price.

Retailers generally pay publishers half the hardcover list price of each book, which means retailers lose money on current best sellers discounted to $9.99 or lower. Some publishers worry that retailers will eventually insist on paying less.

via online.wsj.com

This latest artificially-imposed scarcity is ironic, given that publishers have successfully stymied the growth of the ebook market by removing the property rights associated with owning a printed book: it’s not possible to resell the ebook, it’s not possible to “gift” the ebook after reading it, it’s not possible to share the ebook with family members (except by sharing the reader itself). Some people dub this draconian DRM.

Responding to a tweet, Ian Soboroff notes: “it makes more economic sense to hold back the hardcover edition and release the e-book early. Let e-book sales drive the print run.” I’m guessing that Cory Doctorow and Chris Anderson might say something similar, if they respond to this WSJ article.

The Simon & Schuster business model cannot survive. The firm, owned by CBS, publishes 2,000 titles a year and employs 1,500. This means that on average each book’s revenue has to support not only the author but also one S&S employee’s salary and benefits as well as printing, distribution, promotion, advertising, overhead. It’s a business model that requires “hits” to survive; in 2007, S&S had 140 titles on the NY Times bestseller list.

Publishers have market power over retailers even though that industry is dominated by a handful of firms. This article implies that rewards programs like Barnes and Noble and discounts offered by online retailers like Amazon come at the expense of the retailer’s bottom-line, that the publisher can count on revenue equal to 50 percent of the cover price.

According to Robyn Jackson, a “successful” fiction book sells 5,000 copies; nonfiction, 7,500 copies. Only 1-in-5 American families bought or read a book “last year” and about 3-out-of-4 books published do not earn back the advance given the author.

No wonder the cover price keeps inching upwards.

See a list of the top publishers in the world by 2008 sales (Simon & Schuster is number 26).

Posted via web from Kathy Gill’s posterous

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