The NYTimes had an interesting article on Sunday from David Carr writing about an author, Buzz Bissinger, who had a book promotion going on with Apple that Amazon matched and thus must somehow be evil.
…Apple, which had been looking to get into shorter works in a digital format, decided to include e-books in a promotion that it does with Starbucks. It selected Mr. Bissinger’s digital sequel as a Pick of the Week, giving customers a code they could redeem online for the book. (Mr. Bissinger said he still received a royalty of $1.50 for each copy sold.)
Amazon interpreted the promotion as a price drop and lowered its price for “After Friday Night Lights” to exactly zero. Byliner withdrew the book from Amazon’s shelves, saying it did so to “protect our authors’ interest.”
Mr. Bryant, who formerly edited a sports magazine for The New York Times, said that Amazon’s “price bot” had picked up the fact that the book was being given away as part of a weeklong promotion and responded by dropping its price to zero. (In an e-mail later, Mr. Bryant said that when the company told Amazon about the promotion, before it began, Byliner was warned the price might drop to zero. But, he said, “we hoped that wouldn’t happen.” It did.)
I love this article, for a very sick reason — I am really surprised that in all the reactions to the article, nobody at all seems to have noticed anywhere in the blogosphere the irony of the promotion.
With the pre-Agency debacle, Amazon was selling ebooks at a discount but giving royalties as if it had been the publisher-set price. This was apparently going to “destroy” publishing so Apple+5 did the collusion thing to “STOP AMAZON”, who was “obviously” the bad guy.
Here, Apple teams with Starbucks to do a “discount promotion”, yet still give Byliner same royalties. For those keeping track, that is the same as what Amazon was doing, without the Starbucks logo involved. Yet, somehow, again, AMAZON IS THE BAD GUY!
Let’s make sure we’re all up to date here — if Amazon does their discount model, they’re the bad guy. If someone else does it, Amazon is still the bad guy.
Because, you know, price-matching is obviously evil. Just as it was with Sears, Macy’s, The Bay, Walmart, K-mart, just about every large grocery store, fastfood stores, FutureShop, BestBuy.
But really, Amazon is to blame. After all, it’s not like they TOLD the publisher they would price-match. Oh wait, they did.
Jeremy Greenfield had an interesting post on Digital Book World about e-book pricing — but focused on the costs. The article tries to basically explain both why consumers think costs (and the price) should be a lot less, and publishers saying, “No, wait, costs are not that far off”.
Here are some excerpts from Greenfield’s post:
Publishers are making a killing on e-books because they cost nothing to produce, distribute and sell and are almost 100% pure profit. At least, that’s what many consumers think.
While consumers understand the basic costs involved in the bricks-and-mortar retail world, they don’t understand the costs involved in selling something that is, well, much, much smaller than a bread box.
“We still pay for the author advance, the editing, the copy-editing, the proofreading, the cover and interior design, the illustrations, the sales kit, the marketing efforts, the publicity, and the staff that needs to coordinate all of the details that make books possible,” said Bob Miller in February 2009 on the HarperStudio blog (which has been defunct since April 2010 when the publishing start-up folded) when he was president and publisher of that company; he is now president and publisher of Workman Publishing. “The costs are primarily in these previous stages; the difference between physical and electronic production is minimal.”
E-book production “costs 10% less” than print book production, said Molly Barton, Penguin’s global digital director. Hardly the vast savings that many consumers imagine. “But the largest expense is author payment and always has been.”
You can find the full post at Consumers Upset and Confused Over E-Book Pricing. [Edit: The original page has been removed]
Kris Rusch summed it up pretty well — she described it as all bullshit. But as I love to be a gadfly (not in the simple irritating sense, but rather the provocative sense for discussion), let me pull apart the original article. Because there is a hidden truth behind it, or rather, two versions of the truth.
Let’s start in reverse order, and begin with the publisher. They approach books in the modern world, at least from an accounting perspective, as “essentially” one entity. So all the costs that the publisher quoted above is charged to both items — it’s all overhead that has to be paid — regardless of the format of the final book. So they charge front-end editing costs, regardless of format out the back-end. They charge the combined formatting. They charge all marketing costs, etc. etc. etc. to the cost. All of these are considered a “book’s cost”, regardless of the final two sets of costs that diverge — when it is all ready at the end, you press “PRINT” in one business model or “UPLOAD” in the other. Except the publisher adds all those costs in both business models back into the original costs and amortizes it over both. Following that model, it wouldn’t matter whether you went Print or Ebook, the costs would come out the same. In fact, if you compare it to the old process where they only had print costs, the book costs are actually higher now — because they are doing an extra version that they charge to the total as well. It’s a completely wonky way to price what are essentially two separate products, but if your business model doesn’t like ebook transformation, it’s a good way to hide costs and embed them in your ebook world so that the transformation goes slow.
By contrast, let’s look at the consumer perspective. Editing? They know you already did that for the print book. Formatting? Already done. A cover? They don’t care, reuse the same one. Dozens of people to “manage the relationship”? Also don’t care. Nope, they know you already paid those costs which is why publishers are charging so high for print books (hard cover and paperback). Sooooo, ebooks aren’t incurring all those costs again — they are only incurring a small amount of “incidental” additional costs. In other words, once you have the “content”, ebooks only incur marginal costs. And like any good business model, you sell the ebook for the marginal cost of producing that extra format, plus a small profit.
In one vein, the publishers are saying, “Oh, you want an eformat TOO? That raises the overall price of everything” and consumers are responding, “No, unless you’re giving me both formats, I’m only willing to pay the incremental cost for doing an ebook”. And like all other industries where the internet is reducing production costs of virtual goods, publishers can continue to block innovation at their own peril.
The most laughable part is the argument that the biggest expense is for the author. Considering an author gets less than 25% of overall price (and often much less), that’s a pretty good argument for consumers to say “Hey, big publisher? I don’t think you add enough value. I prefer to give more money to authors and so I’ll buy the self-published books they do. And you’ll get zip on the deal.”
After all, in the end, consumers vote with their wallets, and if it puts more money in the hands of the content creator, that starts to look a lot like another economic movement.
Anyone want to try labelling their self-pubbed books as “Fair Trade Reading”?
Marsha Lederman had an interesting article in the Globe and Mail on April 18th trying to put a Canadian spin on the charges in the U.S. of collusion and price-fixing by the Big Six publishers (Harper Collins, MacMillan, Penguin, Random House, Hachette, and Simon & Schuster) with Apple. Just to be clear, there are TWO lawsuits in the U.S. — a class-action civil suit launched by “consumers” against this group for trying to raise ebook prices above Amazon’s preferred ceiling of $9.99 (targeting all six plus Apple) and a completely separate Department of Justice civil suit that targets everyone in that list except Random House. I’m not including separate state plans in that list.
Here’s an excerpt from Lederman:
A proposed class-action lawsuit filed in B.C. Supreme Court by the Vancouver firm Camp Fiorante Matthews Mogerman alleges that Apple Inc. and a number of publishers engaged in a “conspiracy” to lessen competition and “fix, maintain, increase or control the prices of e-books.” It is the most recent of at least five such suits filed recently in courts in Ontario, Quebec and B.C.
It also alleges that the defendants or their representatives communicated secretly, in person and by phone, to discuss and fix e-book prices, in the lead-up to the introduction of Apple’s iPad, which can function as an eReader, in April of 2010.In addition it alleges that the growing Canadian eBook market is highly concentrated, making it more susceptible to collusion.
“The U.S. case isn’t going to cover Canadian consumers. So it’s the same underlying facts, it’s the same consumer protection agenda, but it is for different consumers in a different country,” said lawyer Reidar Mogerman, who filed the suit in B.C. Supreme Court last week on behalf of plaintiff Denise E. McCabe, a non-practising Kamloops lawyer who has purchased a “significant” number of e-books.
So, you’ve seen the U.S. case, this “seems” like a simple matching by Canadian lawyers, should have same outcome, right? Not so fast. There is an underlying premise in law that one act can’t result in two actions for damages — even if Canadian consumers are not included in a U.S. judgement, a Canadian judge is going to look to see if Canadian consumers were either explicitly targeted by U.S. actions (i.e. the American individuals involved in the decision were negotiating in ways that were inherently or explicitly including the Canadian market rather than simply a knock-on effect of American actions) and/or there were additional negotiations / decisions by Canadian actors that create an additional claim of action. In other words, where’s the “Canadian content”-equivalent component of the decision-making? If there isn’t any, and to date there has been no proof offered in any court-room or media story, then the Canadian lawsuits are going to have to fight a much bigger uphill battle. Particularly as there is no “Amazon.CA” ebook store — we all buy from the U.S. site. Which means publishers could get punished “twice” for sale adjustments in one store. I’m a bit skeptical of the outcome, partly as Canada doesn’t have the same class-action lawsuit mentality of our American cousins, including less of a “reward” culture when it comes to judgements, often limiting outcomes to “actual damages” (a couple of dollars if you can prove you bought a book at a price higher than $9.99).
I do, however, find the notation that the Canadian market is more prone to collusion since it is more highly concentrated of interest. It could mean that certain companies might take a larger hit than the others, and with completely different dynamics than in the U.S.
Personally, I think the lawyers missed the boat on the filing. They should have included a NAFTA element where they could show that Canadian consumers writ large were being squeezed by the Canadian publishers as a larger pattern of behaviour. I’ll confess upfront that I have a really strong aversion to HarperCollinsCanada. They don’t price match HarperCollins (U.S.) and invariably when I find a book that is priced way higher in Canada, the publisher is HarperCollins. I’ve even reduced myself to arguing with them on their Facebook page about their prices…I don’t know why I’m even still getting their feeds as it only raises my bloodpressure.
Awhile back, I got very excited about Lawrence Block’s ebooks being available, went to get one of the Scudder series and thought, “What the ????”. It was $13. For a book that had been out for 10 years. Since I’m on his FB feed, I mentioned it to him…to which he replied, “Huh? They’re $7,99 in ebook form”. Of course, if you’re in the U.S., Harper Collins (U.S) was selling it for $7.99. But the Canadian price was $13.99 or so on Amazon. I could find it for $12 something on Kobo and I think I could find it for slightly less than that on Nook (or vica versa). But bottom-line was that Canadians would have to pay more than $11 to get the ebook, a greater than 35% markup. Oh, and just to add insult to injury, the paperback version was available for less than the U.S. Kindle version.
While I normally see this with HCC, it isn’t unique to them. There’s something wonky in the state of publishing when (a) the ebook version is more expensive than the paperback (I don’t care how many times a publisher dances on the head of the pin arguing that ebook costs are not much lower than paper production, nowhere could you ever convince me it was MORE expensive!) and (b) the price you set to sell to a consumer virtually (across the internet, from the same store, with the same process, with the same technology, and the exact same E-version original!) depends on which country they are in and, ignoring currency exchanges particularly when dollars are trading almost equally, there’s a 35% markup!
If that isn’t a pattern of behaviour that gets you slapped by a Canadian court for price-gouging and collusion, it certainly does at least colour your evidence a bit more strongly in your favour in your court filing. Ah, it will be fun to be a spectator.
The Harvard Business Review has a great website, combining not only the articles from their magazine, but daily summaries of key articles, interesting statistics and a number of cool blogs ranging from “soft” HR issues to “hard” business articles. Frances Frei and Anne Morriss wrote a blog entry called, “Target and the Threat of Free Riders” that is pretty good. I know what you’re thinking — umm, doesn’t the heading for this blog entry say it’s about “publishing”? Yes, yes, it does. Because while Frei and Morriss are primarily talking about Target, the hidden subtext behind it is Amazon.
You might remember the big kerfuffle at Christmas time…Amazon released a new App that could scan bar codes, and they encouraged you while shopping in bricks and mortar stores to do some price comparisons. And then, *gasp*, buy from Amazon if the price was cheaper. They even had the audacity to offer initial discount coupons to those using the apps. The blogs exploded with stories of how Amazon was evil, how dare they do this, it was destroying the local infrastructure. They were essentially complaining that Amazon was being a “free rider” — the store chains have physical locations with large overhead costs they have to pay, and here Amazon was saying “go visit them, touch and feel your items in person, exploit their overhead, and then buy from us.” See what Frei and Morriss have lots to say about it from the perspective of Target, and guess what? They argue that OTHERS should be free-riding on Amazon’s investments:
Target is getting nervous, for the first time in a while. Some Target shoppers are browsing comfortably in the company’s high-design stores, then closing the deal online with lower-priced vendors. It’s enough of a phenomenon that CEO Gregg Steinhafel recently penned a letter to his suppliers with a competitive battle cry: “we aren’t willing…to let online-only retailers use our brick-and-mortar stores as a showroom.”
When there’s high utility of information pre-purchase and ease of substitution among products — as there is with big box retail — you run the risk that your well-educated customers will give their money to a competitor, sometimes without even leaving your store (not every customer huddled over a smartphone is playing Angry Birds). Customers won’t stick around out of gratitude.
Steinhafel’s letter hints at some of the ways that Target’s planning to fight back, including membership and subscription-based pricing models. The company might also look to one of its biggest free-riding threats — Amazon — for inspiration. Amazon should be facing an onslaught of customer free riding. Its products are often not the lowest-priced option, and they’re easy to substitute.
But the Amazon pre-purchase experience — a robust catalogue of customer and expert reviews for each product — gives you a reason to start the process there. Most important, Amazon then makes the pivot to purchase as seamless and lovely as possible, even from a cell phone. The retailer’s patented one-click technology makes it irresistibly easy, once you’ve found what you’re looking for, to point and click and be done with it. Amazon combats free-riding with ease of use.
My only quibble with the article is that it didn’t really pick up on the emotional backlash against free-riding that was generated with the Amazon app. People blogged, campaigned, boycotted, etc. Lots of people got really snippy, having no real idea what free-riding means but they could understand Amazon trying to steal sales from live stores.
Yet nowhere in all of the feeds did I see anyone, not even the timidest or bravest of souls, stick up their hand and say, “Umm, excuse me. How is this different from a store that price-matches?”. Because that too is complete free-ridership. So you go to the box store, find out everything you want to know, get whatever form of customer service you can get, get a quote on a price, and then go to another store that you would prefer to deal with, and ask them to match. Your drycleaners will do it. Your box stores like Zellers, Walmart, Sears, The Bay, Target, etc all have price-matching and “low price guarantees”. Mattress stores do it CONSTANTLY — they’ll price match anyone. Car sales. Pharmacies. Bookstores (gasp!).
In other words, another store goes to the trouble of deciding to have a sale, researching costs, deciding on a sale price, organizing their store with discount tags, new pricing, letting all their staff know about the promotion, etc. Then they advertise, generating big costs to do so. And their neighbour simply puts out a sign that says “bring us their ad, and we’ll match it.”
That’s basically what Amazon did, except they did it with an app and made it possible to not only price match a sale, but also to simply scan a barcode to see what the price is at Amazon (usually not as good for many items, as the article makes out). But the anti-Amazoners went berzerk anyway.
Never let the facts of a situation get in the way of a good rant against a big evil company like Amazon. After all, you wouldn’t want to take away sales from a local “good corporate citizen” like Walmart, now would you?
The Wall Street Journal has a pretty good article by Thomas Catan entitled Critics of E-Books Lawsuit Miss the Mark, Experts Say (link may expire). In it, Catan gives a pretty good overview of the Ebook “collusion” lawsuit and has some outstanding points about those who think the Department of Justice “got it wrong” (i.e. they went after the wrong company) and are really just puppets of Amazon:
U.S. antitrust law doesn’t seek to protect little companies against big ones, or even struggling ones against successful ones. Companies can grow as large as they want, as long as they do it through lower prices, better service or niftier innovations. Companies can even become monopolies, as long as they don’t get there illegally or try to extend their power by unlawfully stifling competition.
“Price fixing is kind of the first-degree murder of antitrust violations,” Prof. Hovenkamp says. “They don’t have discretion to just walk away from what appears to be a strong set of facts that, if true, are one of the most central of antitrust violations.”
The government might already have shown some leniency. For one, the Justice Department brought a civil, rather than a criminal, case, so no executives will go to prison. Also, the publishers that settled agreed that for two years they wouldn’t stop booksellers like Amazon from discounting. That is a relatively short period; restrictions in such consent decrees typically run as long as five or 10 years.
“The goal of antitrust policy is to protect consumer prices”, Prof. Hovenkamp says. “It’s not to protect inefficient firms from having to exit the market.”
I really like the article because it is one of the few that gets the law right, including the economic rationale. While every blog in the country it seems is decrying Amazon, the bloggers totally ignore that the publishers BROKE THE LAW whereas Amazon did nothing illegal. Amazon is guilty of being a strong competitor, maybe even coming close to predatory pricing on some items. But they aren’t breaking the law.
Yet, apparently, the publishers who have screwed the pooch over the last 10 years and avoided any uptake on e-books wherever possible, can now take the law into their own hands, change the basic rules of commerce, and stick it to the consumer who pays more under the Agency model than they did under the old system. And for all of this, they only get prosecuted civilly and might have to undergo supervision for two years. That’s the business equivalent of being released on your own recognizance after assaulting a police officer. A slap on the wrist in the long run.
And the blogger conspiracy see this as missing an opportunity to slap Amazon for being “too” competitive. But a great article by the WSJ in the midst of lots of naysayers who wouldn’t know an anti-trust statute if it reached out and bit their publisher. Oh, wait, it did…
I am an active follower of a lot of blogs, but very few discussion groups. For me, I often find that the discussion groups are too general with high volume (Dorothy-L), or too technical (some web-focused ones), or too narrowly focused (single app approaches, for example). I do however follow the “Murder Must Advertise” discussion group regularly as it seems the right mix of volume, topics, and valuable content. This past week, one of the hot topics has been Amazon allowing readers to return e-books for refund, and it got me looking at it a bit more broadly.
Not surprisingly, the people who are in favour of allowing returns are mainly readers, those against are mainly writers. Those in favour argue that of course returns should be allowed, since sometimes you buy the book with high hopes and confidence and it turns out that the thing is a steaming pile of armadillo dung. This happens despite reading previews, other reader’s reviews, etc. Those against allowing returns tend to follow one of four threads of thought:
E-books don’t cost a lot of money, and for those less than $2.99 on Amazon, we’re talking extremely small profit margins. So authors aren’t getting rich here. As a result, they argue that it is too burdensome on the bottom-line for authors to have returns taking away their meagre profits.
On a related note, some would also argue that it is offensive or embarrassing for someone to return something that costs so little.
Some argue that writers are creating content, not the book — and you can’t return content. It is both priceless and worthless, so returns are not appropriate for that type of product.
The final argument is usually that there is a danger of people doing the literary equivalent of a “dine and dash” — returning it after they already have read it.
I understand those arguments, even if I don’t agree with them. First of all, the size of the profit margin doesn’t determine whether a customer (i.e. the reader) feels they should have the right to return something. Equally, for the second argument about the cost, a $2 purchase might be a significant luxury for one person, while the other considers it pocket change. It’s a slippery slope to offending customers to say its too small an amount to worry about, if the customer is telling you they are worried about it enough to want to return the book. Some people are even returning FREE books, just because they want to signal that the book was so badly written or formatted that it shouldn’t even be given away! Price isn’t a determining factor. For the last two threads, neither are particularly compelling — one is semantics that matter to a writer, but not a reader, and the other is just a straw man. People return the books for legitimate reasons (in their mind at least), not because they are trying to rip off the writer. In fact, the reasons for returns of any product, outside of food, are long and varied — ranging from the three inter-related biggies (simple buyer’s remorse, product defect, or price cheaper elsewhere) to a laundry list of unrelated areas (error, gift return, poor pre-purchase research, aesthetics, or the ever popular strawman mentioned above).
I leave it to others to argue about the merits of the above, or other reasons for and against. Instead, I want to share four other perspectives on e-returns.
Friction — The goal of any sales environment is to have “frictionless purchases”, to use the business vernacular. This is what Amazon has been trying to patent with their “one-click” purchase methodology. Don’t make people re-enter their info or even confirm — one click, and they’re done. Same with the fact the Kindle books appear directly on your ereader device. Frictionless. It’s also the same rationale, by the way, for people offering pricing at $0 or $.99 — it reduces the buyer’s friction in trying you out. If you remove returns, you have shifted all potential “sales” risk from the seller to the buyer. In other words, people will pause before clicking “BUY”. And not just the people likely to do returns. The evidence from other environments is quite high — regardless of price, a no return policy can reduce sales by as much as 30-50% on clothing (much higher if you don’t have change rooms), and if I recall the numbers, 80-90% on electronics. Not surprisingly Nook’s lacklustre market penetration is compounded by poor website design, no-returns, and higher prices (three big frictions). One way to overcome “no return” friction is name-brand recognition, but unless you’re Stephen King or James Patterson, the buyer perceives new authors as risks. Previews help, but are far from perfect, as mentioned above. And don’t get me started on a recent read, where the competence demonstrated by the first 7 chapters of the book disappeared in Chapter 8 with no warning.
Success — To paraphrase a high-ranking and extremely successful Japanese businessman I had the pleasure of meeting back in 1997, there are only five areas where a no return policy is appropriate:
food (obvious, although people return spoiled food quite regularly);
penny stocks and ponzi schemes (since you’re probably scamming in both worlds);
garage / tag sales / used stores (I didn’t even know they had tag sales in Japan?);
going-out-of-business sales; and,
any business run by amateurs who don’t know what they’re doing.
In fact, for those who read the lovely historical approaches to “sales” (like aggressive sales tactics like “don’t take no for an answer”, etc.), one of the marks of knowing when you have reached the right degree of sales and marketing is when you are generating returns. It means you’ve sold to all the people who were “right” for your product, and you are now getting returns from the people who were “near-right” for your product. Returns at that point are not signs of personal failure, or even market failure, but a sign of success.
Pies — Many of the proponents of the “no return” policy are also offended by low prices on ebooks or disbelieving of the successful anecdotes offered by people regarding Kindle Select. For those looking for more “data” / “evidence”, check out Sourcebooks Casablanca website — they had a Q from a reader asking why they, as a publisher, would give away books. Not a small indie, not a self-published author. Their response was limited to focusing on 7 adult fiction titles (in romance and in general fiction) for free within the past 6 months and they found “On average, full-price sales for the 4 weeks after the promotion were 46 times greater than the 4 weeks before the promotion.” In other words, they sold four year’s worth of books in the month after the promotion. Now that varied — some were as “little” as 7-12 times increase…but the average was a 46-fold sales increase. Not conclusive, but a nice validation of others experiences. For those who claim that it must just hurt future sales, giveaways for promotion are the same logic as going from selling locally (small market) to selling national (large market) — you gave it away, sure, but you are now known to a MUCH LARGER market than before. If you had time to go door-to-door, sure, you might have reached those people through other means. But unless you’re repeating John Locke’s previous car tour approach (which sounds almost like door-to-door sales! ), this is a pretty efficient means (at least at present) to reaching greater awareness…building sales by enlarging the pie. And returns are just a small piece of that pie.
Negative but hidden feedback — Another concern a lot of people have out there are negative reviews. If you take away the option for returns, the number of negative reviews will greatly increase — the vast majority of those who do returns are then satisfied, they have their money back. They move on. But if they can’t return the product, they vent another way — in message boards, and reviews. Right now, an author sees returns and is therefore getting feedback of a sort, but it is hidden. Take away returns, and any negativity will start to show up in the reviews pretty fast. And in some cases, magnified because the reader feels like they got “taken”.
Just some alternate ways to look at returns as perhaps helping your sales, rather than hurting them…
I confess that I’m a bit of a Blog ‘Ho — I’ll read just about any blogger that has something interesting to say that resonates with me. Click here, press add there, and I’ll follow their RSS feed pretty fast. If over time they start to fade, I can click and drop just as easily. Both for work purposes and my personal interest in writing, or an interest combining the two (writing about HR), I really enjoy the Harvard Business Review’s site various feeds. One of them is their feed on Technology (which often co-links itself to talking about innovation).
Today’s feed includes an article by Nilofer Merchant (Rules for the Social Era — note link may expire). An excerpt from her post appears below…she talks mainly in her article about lots of big companies are not adjusting to the new social era of supply-chain production that is more about being lean, rather than big and talking to your customers in a way that is integrated in product design, delivery, etc. rather than just market research. But, on the writing and publishing front, the best “shift” for me is the third one:
Sharing, not telling. When companies think of social media, they hope to get consumers to “like” them or “fan” them, as if that increased connection is meaningful. Again, that captures the marketing aspect but misses the strategic point.
Writers I encounter virtually on the web are desperate to understand social media marketing. They think, “Oh, I posted on a bunch of newsgroups, therefore I’m marketing.” Or they’re tweeting and re-tweeting anything and everything. Their Facebook status updates look like a teleprompter, with repeated posts every day.
Yet, while they know deep within their writing souls that authors must “show, don’t tell”, the idea that they should “share, don’t tell” is foreign to most of them. Most do the equivalent of SPAM “telling” rather than trying to build a base of fans that like their ideas and products. I’ve tried to explain this concept to some new “marketers” when they ask for feedback on their web design or facebook updates…usually based on fact they are NOT getting the response or fanbase they were hoping for when they started “TELLING” their online story.
One of the blogs I follow is Passive Guy (at his site called the Passive Voice), partly because he has a really good site for the latest news on the ebook front with several excerpts / re-tweets a day. And one of his posts today caught my eye given the whole Megaupload thing in the past week — the post was entitled “Piracy Does Depress Sales“. The post is an excerpt from another site by an attorney named Terry Hart, linking to a study by Stan Liebowitz at the University of Texas entitled “The Metric is the Message: How Much of the Decline in Sound Recording Sales is Due to File-Sharing?”. The claim from Liebowitz? That *all* of the decline in record sales could be attributed to file-sharing.
Now many of my readers know that I did a MA in public policy. Which means I also did graduate-level stats and economics courses. So, when I see an academic making such bold claims, two things happen — first, my interest is piqued … maybe they have some ground-breaking analysis and research to support this argument, after all it’s “published” and their careers depend on on it, and if not, maybe at least an innovative approach; second, my BS detector goes haywire.
Without going into the long, down and dirty statistical parts in too great of detail, Leibowitz’s argument rests on two premises:
Levels of Record Sales (RS) is based on three variables: a + bFS + cZ, where a, b, c are coefficients, FS is level of filesharing, and Z is other various factors that influence Record Sales; and,
Two of those variables can be ignored (a and cZ) if the other one (bFS) is large enough to explain on its own the level of change in Record Sales.
Unfortunately, both of these assumptions / premises are completely false and are fatal flaws to the rest of the econometric argument based on other people’s studies (note he did no research of his own, just summarized other literature which had their own flaws and failures, but I digress).
On the first premise, I’ll deal with the four sub-components in turn:
“RS” — this represents overall record sales…note that RIAA and others like to list this in terms of dollar sales / value, just as the movie industry does. However, $$ are impossible to compare in this scenario because file transfers have $0 value, and the only REAL indicator is # of units sold. However, even with that, you would have to do a lot of regression to show what the “real” # of units sold vs. nominal increases vs. sales of legacy songs that have been out for a long time (i.e. the long tail) vs. new releases as the metrics for measuring sales have changed dramatically in recent years (just check out the Billboard Magazine’s change in methodology in recent years to no longer count albums that were given away or sold too cheaply towards their charting results) not to mention that people have gone from buying whole albums to breaking it into individual tracks now through sites like iTunes. Plus, you’d have to cross-correlate that with big producer sales vs. indie band sales…the market is no longer homogenous, with much fewer barriers to entry/exit for entrepreneurs who can sell. The piracy world would not treat all the music the same, i.e. big bands are always going to be more sought after than garage bands, and so RS are not all able to be grouped together either…with market segmentation comes the need to segment your formulas too. This isn’t “completely fatal” to the approach, more like a statistical caveat that the RS figures are unstable and hence unreliable over time;
“a” — this is a non-zero stand alone parameter, arguing that there is some natural, presumably static rate of sales as it is a stand-alone coefficient (i.e. not a factor of economy, etc.). In other words, if the other two elements ended up being zero for some reason, there would still be some level of record sales. I don’t disagree that there could be legacy sales, etc., but it would never be static and is highly dependent on the economy itself…if the economy is doing well, and people have money, they spend it on non-essentials like music, but it isn’t entirely 1:1 either since the research shows that some people substitute away from other entertainment expenses like movies during economic downturns…so it is not some stable “alpha” coefficient, there is another factor that goes with it or maybe it just rolls into the “cZ” variable. I’m definitely not buying the argument that there is some “natural” rate of Record Sales...again, this isn’t fatal to his end argument as he ignores this element, dealt with later;
“b x FS” — the argument here is that there are two components as a result of filesharing — first, there is the rate of displacement (b) by which the number of sales that are displaced by a single transfer…or put in different terms, if the rate was 10%, it would be 10 transfers would equal one lost sale, etc. And then you multiply it by the total number of files shared. Seems like straightforward math, but it isn’t. First of all, you have to decide what that coefficient is (b). And there’s really no way to know, considering that the piracy market is segmented by the type of pirate. For example, there are the fetish pirates — these are basically hoarders. They pirate to just collect songs, most of them with more songs than they could ever listen to in their lifetime. It’s a collection compulsion. Not unlike your grandmother who might have hoarded old twist ties or butter containers, they save them / copy them / keep them. But like the grandmothers compulsion to “save” them and collect them, they wouldn’t go out and buy them. If they had to pay for the song, even a penny, they wouldn’t. They’re only taking them cuz they’re free. So how many lost sales are there here? NONE. They wouldn’t pay for the song, they just collected it for no reason other than they liked having the most songs, blah blah blah. Many of them collect songs and artists in genres they DON’T EVEN LIKE. Just because it is there. For them, the coefficient is 0 … if they want a new song, they probably buy it on day of release to have it and then upload it, but their own receipt of songs displaces very little sales. After that are your casual pirates…these are people who don’t hoard everything, but hear a song on the radio and pick it up for free off the pirate sites. These people too wouldn’t buy many of their songs, but they might. Probably about a 10% rate, but not as a direct function of FileSharing because they wouldn’t buy all the songs…for example, it might seem like a 1:10 ratio, but that might be true for the first 10 songs, and then their pocketbook forces them to make choices so it starts to rise to 1:50, 1:100, etc. Definitely a variable rate diminishing over time with previous sales (i.e. their purchases would not be independent events). After that are your sampler pirates…these are people who actually go the opposite way. They might “sample” 100 songs to find 2 they actually like, and then they go the person’s whole album. So their coefficient is actually HELPING sales, all they’re really doing is saving themselves from going to old-fashioned record stores to listen to everything first. Finally, you have what I consider to be the true pirates. These are people who actively go out and download what they would otherwise buy…and THEIR coefficient is 100%. 1 download = 1 lost sale. The RIAA and others argue that this is EVERYONE who pirates, when in fact the %age is REALLY hard to calculate. In part because there are hybrid pirates — part sampler, part hoarder, part true pirate, etc. And lord knows what THEIR coefficient is. However, regardless, you have to take their individual coefficients by group and multiply that by the total filesharing number. Why can’t you just average them, as Liebowitz’s methodological review does? Because the hoarders filesharing behaviour is way higher in volume than the casual or samplers, and the true pirates are somewhere in between. At the very least you would need to weight it to figure out the percentages. And now for the extra kicker: no one has a reliable measure of filesharing. Say what? That’s right…they know how much global bandwidth was used, and they have lots of ways of proxying the number of files transferred, etc. But guess what? It doesn’t distinguish in many cases between movies (large size), software/warez (medium size), MP3s (small size) and ebooks/texts (microsize). And it also doesn’t differentiate very well between three key areas — porn, other file transfers including streaming, and legitimate file transfers. It just does a multipart estimate, piling error on estimate on wild ass guess as it goes. Why does this matter? Because if you can’t figure out the right coefficient to use and multiply it by the right file and size to get true MP3/music filesharing, you can’t figure out the relative change in this parameter over time.
“c x Z” — this is the catch all to suggest that there is some coefficient (hopefully positive) that multiples by a bunch of grouped variables (Z) that contribute to sales…things like previous sales, new releases, promotion, touring, economic growth, etc…while ignoring things like streaming narrow niche radio stations that are substitutes for purchases too, a technology that didn’t exist 20 years ago. Overall, this element is not problematic until you try to negate it out below.
So what does Leibowitz do with this argument? He basically comes to the hypothesis that perhaps the change in RS could be accounted for just through the second variable alone. In other words, given the size of files being shared being large enough to impact sales, and assuming “b” to be negative (i.e. pirating has SOME displacement effect on sales), could the percentage change in the second variable be enough on its own to account for changes in RS? Liebowitz takes a bunch of studies, drops the “a” and “cZ” variables, in effect averages out the “displacement variable” (i.e. “b”), multiplies it by the filesharing rate of change over time, and ends up with a figure equal or greater than the change in sales. Ergo, he concludes that the second variable CAN account for all the change and therefore DOES account for all the change.
But the coefficient is done wrong and the filesharing numbers are wrong. Plus, to correctly argue that you can ignore “a” and “cZ”, those numbers have to be positive (i.e. assuming they wouldn’t have reduced sales themselves, they would have only helped sales). In fact, he goes further at the end to suggest since those numbers were LIKELY positive, pirate sales probably depressed sales even more than 100% i.e. compounded reductions from what natural growth would have been. However, those other numbers are NOT necessarily positive. In fact, lots of literature has argued either way on those elements too…stagnating industry, economic collapse, streaming substitutes, musical tastes and purchasing power of aging demographics who already bought their favorite bands and aren’t buying pop stuff. Not to mention it is all digital now — so people aren’t WEARING out their CDs or MP3s at the rate of cassettes, 8-tracks, or vinyl. Which means they’re not buying replacement copies. If you want to see this playing out in the ebook world, look at the Big 6 refusing to sell ebooks to libraries or limiting number of loans because they want to ensure future replacement sales as they do now with paper versions that wear out.
Overall, I’m REALLY disappointed with the article. I’m not an expert, just someone well-versed in economics, performance measurement and statistics, and I can see that the Liebowitz article basically plays fast and loose with techniques to argue something he decided from the beginning — if every pirated song represented a lost sale, then piracy accounts for all the losses. Not surprisingly, if you start with that as a hidden premise to your argument, you find that the results match.
Now waaaaay back in the title, I mentioned a link to ebooks. And here’s the rub. Piracy or lending libraries have the same effect on sales — they’re partly substitute goods and partly complementary. What does that mean in layman terms? It means some pirates / borrowers will be true pirates — if they can pirate, they will pirate books they would have otherwise bought. Not 1:1, but a decent sized coefficient perhaps. Highly dependent on the price of the book, actually (even filesharing of MP3s took a hit when iTunes started selling singles for $1) so the $25 new release book might get pirated a lot faster than your $3 backlist, varying by both pirate and author’s name. But as those participating in the lending library and Kindle Select are finding, those other free sales / pirated copies can also ADD to other sales when the reader reads book 1 in a series and comes back later to buy book 2 or 3. They may have got their “taste” for free, but they still bought the other books. Note that Amazon pointed this out for their Prime lending experience … people BORROWED book 1 of the Hunger Games, but then came back and bought Book 2 and 3.
The REAL difference at the moment though is that ebook pirating is not quite as easy as MP3 pirating…For example, I can’t go into Walmart and pick up a disk with 10 ebooks on it, rip it at home and upload everywhere. Plus the software to burn / copy onto ereaders hasn’t reached the user-friendliness yet of iTunes or WinAmp or RealPlayer that manages your library completely for you, regardless of purchase source and moves it to your device seamlessly. It is still far easier for ereader users to just get their books from Kindle store, or Kobo, or Apple, etc. Which isn’t to say it’s “hard” to do the other, just that it isn’t seamless yet. And not everyone is using the same ubiquitous format (ePub and Mobi will win, but they’re not at “MP3” level acceptance yet). Which mean the displacement coefficient is probably less for ebooks than it is for MP3s, simply as the technology is a barrier to the casual, sampler, true, and hybrid pirates.
Only time will tell what the long-term coefficients will be for the ebook industry. But I’m pretty sure the # will not be 100% of ebook sales, even if ebook sales will eventually represent 100% of the decline in paper copies.
Every well trained manager knows about the “four P’s” of marketing. To make a sale, a company must offer the right product to meet customers’ needs, and at the right price. It has to be offered in a place they find convenient and, in order for them to know about it and how it can help them, it has to be promoted well. New research by my colleagues and me, however, suggests that another “P” is growing in importance. Customers also care who the parent of the product is.
For those who are interested, the article goes on to discuss basically how people are looking for who the parent company is, their corporate brand so to speak, and whether its someone with whom they want to do business. In fact, I would go one step further — not only do people want to know who your “parent” is (if your company has one) but also who your partners are, what they’re like, and if they reflect positively on your brand. I think the research behind the article is flawed, as the numbers are gross exaggerations of reality, but all of the pieces are incredibly relevant to one specific group of people — readers of ebooks. And this has implications for the would-be author hoping to sell to them.
Going back to the top of the article, the four traditional Ps plus the new one all impact on the ebook reader’s purchase:
Product is, has been, and always will be the determining factor — a good story well told will always do better than a crappy story poorly told. If you want to waste your time putting up poor quality work, expect poor quality results;
Price is huge for ebook purchasers, with 99 cents being the “impulse” price point vs. the egoists who say “you should never sell your book for less than $4.99” (or $3.99 or $2.99 or $9.99). I call them the egoists because they feel like they are personally devalued if their book is too “cheaply” priced…of which I can’t help but think, “Okay, your ego is bruised at 99 cents but it’s intact at $2.99?”. It reminds me of the classic joke about the man who asks a woman if she’ll sleep with him for $1 million, to which she responds after some thought, “Yes, I probably would.” He then asks if she’d do it for $10 and she is offended, “What kind of woman do you think I am?”. To which he responds, “We’ve already established what kind of woman you are, now we’re negotiating price.” If you are selling your writing, we’ve already established what kind of writer you are — a professional one. As such, to me, there are only three differences between 99 cents and $2.99 — first, of course Amazon gives you better royalty percentages at $2.99 than 99 cents (70% rather than 35%); second, the obvious “price” to the consumer; and finally “volume”, how many copies you’re going to sell at 99 cents vs. $2.99. Basically if you sell 6x or more copies at 99 cents, you would make more money overall by pricing at 99 cents; if you sell less than 6x more at 99 cents, then you would make more money by pricing at $2.99. But people ARE competing on price, and it’s working quite well for their bank account;
Place takes on a whole new meaning in the digital world. Where indie authors used to find themselves shut out of the major markets i.e. bricks and mortar bookstores, the new world order plays to their strengths — digital stores, with virtual storefronts, where your book competes on an almost even footing for webpage space with anybody else’s book. And while Amazon’s Kindle sales are dwarfing everybody else in North America, the real question for the author is not where are you going to sell but rather when are you going be able to sell everywhere? The Kindle Select Program is burning up the internet wires with lots of tales of woe or joy, and it requires exclusivity at the start, but after that, even those authors will upload to Smashwords, Apple, B&N for the Nook, Kobo, etc. Everywhere you’re apt to find a reader, that’s where you want to be to make their purchase as easy as possible.
Promotions are an interesting area. Most people think in terms of traditional promotions for authors — book signings, conferences, bookmarks, talks, advance reader copies, etc. — yet people are experimenting with gift cards, sales, flyers, garage sales, craft fairs, hobby shows, Twitter, Facebook, Blogger, WordPress, more more more more more! Some are truly innovative, some are, umm, misguided. But they try a lot to give themselves “discoverability” that now goes way beyond the old world where you hoped a magazine would give you a starred review or you made a bestseller list some month. Things are both more chaotic as well as dynamically targeted now. And there are lots and lots of people coming up with ways to say “Hey Readers! Here’s a new book you might like!”
Parent or Partners is a “new area” but it isn’t that new for authors. For years, authors were gauged by which publisher or imprint carried their work. Or dropped them. Now, in the wild west frontier that is e-publishing, readers are more likely to notice other elements. Like if you had a good cover artist, based not on their name, but whether you had an eye-popping cover. Or the proof-reader and formatter you partnered with (if you didn’t do it yourself), because readers notice if your ebook is full of typos and formatting problems. Some readers will even eviscerate you in online reviews for badly set books. However, both of those are really not about your partners so much as the product itself — it goes to the quality of their “experience” they receive while reading your book. Instead, “partners” are far more likely to show up in one of two ways: the publisher/e-publisher you used or the vendor you’re using to sell your books. Under the first, this might seem a lot like the old world — who’s your imprint? It strikes me as being a bit different now though — as the author of the original article stated, it is more about corporate reputation. People aren’t looking at your publisher to see if they are a good guarantee of “quality” so much as avoiding partners who are scum-sucking scammers screwing every author or reader whenever they can. Avoiding evil publishers, so to speak. I myself have a very strong bias against Harper Collins Canada — it seems like every time I go to look at a book on Amazon where the pricing is wonky (i.e. ebook seems much higher than average, often higher than hardcover or paperback even), it is published by Harper Collins Canada. I’ve even beaten them up for it on their Facebook feed, to which they tell me it is Amazon controlling the pricing. A complete crock, but that’s their mantra, and I look forward to their eventual bankruptcy as the digital world leaves them behind. Equally, though, some readers care not about the publisher so much as your vendor. And more and more I am seeing otherwise reasonable people state that Amazon is evil and they’ll never buy from them. Some base it on Kindle Select exclusivity, some don’t like the lending library, some don’t like their impact on bookstores, some don’t like their comparison apps, etc etc etc. But if you are a seller of books, there is good news — while those readers are passionate about not buying from Amazon, they don’t yet seem to care if you still sell it there, they just care if you ONLY sell it there (because they won’t be able to buy it). In other words, if you go with the multi-vender / place model, they’re okay. As long as they can buy it from someone they don’t hate. Sigh. Oh, life was so grand in the old days where people just bought their stuff and didn’t argue with the company! 🙂
Interestingly, each of those five Ps? They also give you competitive advantages over some of your competitors — produce a better quality PRODUCT, sell it at a better PRICE, sell it in more PLACES, do more innovative PROMOTIONS than they do, and choose your PARTNERS wisely. Ones that add value to your product probably in one of the other four areas. At least, that’s my two-cents worth today…
Jeffrey A. Trachtenberg has an interesting article in today’s WSJ that deals with ebook pricing models, and the 99 cent “impulse” price point (E-Book Prices Get Slashed — note link may expire). An excerpt from his post appears below:
The book world is discovering the 99-cent special. Nearly two years after book publishers forced a sharp increase in the price of newly released e-books, a new low-price trend is emerging. A growing number of publishers are experimenting with 99-cent temporary prices on e-books, in hopes of persuading readers to sample a wider range of authors.
The latest example is George Pelecanos’s new crime novel “What It Was,” which goes on sale Monday. The digital edition costs 99 cents for the first month, and then $4.99 afterward. While Mr. Pelecanos is known for his work on HBO’s gritty Baltimore series “The Wire,” he has also authored 18 books. But he has never been a big seller.
I’ll eventually get around to posting my own take on e-book pricing from an “economics” perspective i.e. what is an “optimal” price if the economists were tackling the question, but I like the idea that the “big” names are suddenly realizing they’re getting their butts kicked by the mid-listers or the newbies. Why? Because competing on price is a really good strategy. It’s worked for hundreds of electronics firms, car companies, musicians, etc., to shift some of an industry’s revenue from corporate-backed big names to the little guy. So much so that a name like Pelacanos (profiled in the story) is willing to “experiment” with a price point that isn’t much of an experiment — everyone KNOWS it will sell at that price since everyone else is having success at that level. Best quote ever from Pelacanos though:
“It’s a gamble, but I want to be read.”
Welcome to the new digital world…it’s only unfortunate that his cut, roughly half what he would get if he had self-published the novel, might be deemed “unprofitable” to him and therefore a failure — given that his last hardcover had only 25K sales, not clear why he would think 100K digital sales could be a “failure” though.