What’s Fair is Fair

Much is being written about the Hachette/Amazon standoff.  Hundreds of articles, full-page ads taken out in the New York Times from best-selling authors, the formation of Author’s United followed by Readers United, not to mention that two organizations that are usually extremely closed-lipped are actively making public statements.  Two of those public statements are what I’m going to talk about today.

While we still do not know EXACTLY what the terms in contention are, the smart money is on two major issues:

  • Whether Agency or the Wholesale model is used for ebooks
  • What is the share that the retailer gets for selling the ebook

Let’s start with sales model. Generally speaking, books have historically been sold under a wholesale model.  The producer determines a list price for an item and negotiates with the retailer for what the margin should be (The amount the retailer gets off of list price). Usually the more product you move, the bigger your discount.  So someone like Amazon could get 50% – 60% discounts while a small bookstore might get 40%.  Under this model, the retailer can set their price to anything they wish.  So let’s say a book has a list price of $10.  A big retailer like Amazon could buy it for $5 – $6, put it on sale for $8. And keep the $2 – $3 as profit.

Okay, all fine and good.  But when Apple came along they introduced the Agency Model for ebooks.  In this case, the publisher sets the price. The retailer can’t adjust it and they kept 30% for themselves.  The Agency Model got a lot of spotlight in recent years because of a Department of Justice lawsuit. Because of it, some have the wrong impression that agency pricing is illegal, which it’s not.  In that case, the issue was that the big publishers “colluded” to force Amazon to use the agency model, and it was their “acting in concert” which was illegal. As a fall out of that lawsuit, Agency Model went away (for a period of two years), and newer contracts can be written using either model.

So for the past few years we’ve been under the Agency Model and as all the big-five pay the same royalty rate for ebooks (25% of net) the breakdown between the parties has been:

  • 30% to Amazon
  • 52.5% to the Publisher
  • 17.5% to the author

Given that retailers generally get 40% – 65% margins under wholesale pricing, I suspected Amazon was looking at that 52.5% piece the publisher gets as something pretty juicy.  I was fully expecting that what Amazon “felt as “fair” was 50%, and they wanted a wholesale model.  Then Amazon made a public statement where they made a case for lower priced ebooks AND listed what they think is a “fair division.”

  • 30% to Amazon
  • 35% to the Publisher
  • 35% to the author

I must say that seems like a very fair proposal and one I fully support! For hybrids like myself, it is the 75% / 25% split on ebooks that makes us most upset with traditional publishers and a 50% / 50% split would bring more titles back into the fold.

Of course, that means that the publisher will lose 17.5% of their margin on ebooks, and I’m sure they’ll claim their margins are already “razor thin” and can’t support such a cut.  But I think they are smart and savvy and can find ways to remain profitable.  Will it mean cutting down on huge advances to celebrities and those running for office? Probably. Will it mean fewer mid-list titles that the P&L shows as questionable? Probably. And I’m okay with both of those things.  Heck, I’m even okay with them moving their office from high-rent New York to somewhere else to reduce their costs and raise their profits. I’m all for publishers being profitable.

In Hachette’s public response they stated:

“This dispute started because Amazon is seeking a lot more profit and even more market share, at the expense of authors, bricks and mortar bookstores, and ourselves.”

The emphasis in the above statement is my own. I just don’t get how Hachette can make this claim when Amazon is proposing a sharing arrangement that keeps their amount EXACTLY what it was. An amount, by the way, that Hachette and the other publishers forced Amazon to take in the first place. They need to explain the “expense of the authors” part when Amazon is publicly asking to double author’s income. Now granted, it is possible that Amazon wants both wholesale pricing AND 30%…and to that I say GREAT!  After all if they want to discount, the publisher/author still makes their same income.  Any money passed onto the consumer is taken from their portion. If they want to drive market share by deep discounting, the publishers and authors make out like bandits. So I say discount away!  My readers will love it, and I’ll sell more books, wins all around.

Now what I can buy in their statement above is their fear about Amazon wanting “even more market share.” Will they discount to attract B&N customers to their site?  I suspect so.  Will it make them even stronger than the past?  Odds are good that will be the case. But I’m not as afraid as everyone seems to be that Amazon will crush us all into dust once it gets its dominance. From where I’m sitting they already HAVE this dominance, and yet what they are proposing seems very FAIR to me.

I’m sure all three parties have a different idea of what “fair is.”  I’m sure many authors would prefer:

  • 80% author
  • 10% Amazon
  • 10% publisher

But given we have the weakest bargaining position, I don’t see that happening.  But what about Amazon’s proposal?  Yeah, I’m all down for that, and if the publishers were smart they would jump on it. Currently, a 50/50 split is what is deemed “fair” for subsidiary rights such as audio, foreign language, and media.  If the ebook division was also 50/50 I can guarantee that a lot of the hybrid authors would move their projects more toward traditional than self. The real question is: will the publishers embrace this?

I’m not holding my breath, but I guy can dream, can’t he?

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