Monday, August 11, 2014

William Ockham Fisking Michael Pietsch

William: In case you haven't heard, Hachette (US) CEO Michael Pietsch is sending out a response to the emails he's getting. DBW has it:

As you might imagine, I have a few comments:

Thank you for writing to me in response to Amazon’s email. I appreciate that you care enough about books to take the time to write. We usually don’t comment publicly while negotiating, but I’ve received a lot of requests for Hachette’s response to the issues raised by Amazon, and want to reply with a few facts.

• Hachette sets prices for our books entirely on our own, not in collusion with anyone.

William: Seriously? This is how you start? That's a bad strategic move because you lied about not colluding in the past and you never apologized for it. We all know you colluded. You know you colluded. You may think that this statement is true because you aren't currently colluding with anyone, but until you admit that you colluded in the past, it's just bullshit. And, by the way, you best be careful. Any evidence of coordination with your former co-conspirators will land you back in court. The evidentiary requirements for antitrust collusion is really low. Even coincidentally ending up with the same proposed terms as other Big 5 publishers could be trouble. Recycling the same old price list that you and your co-conspirators adopted in 2010 seems like an astoundingly bad idea.

• We set our ebook prices far below corresponding print book prices, reflecting savings in manufacturing and shipping.

William: I decided check. I picked James Patterson's "Invisible" because Patterson has been one of your most vocal supporters and is your top-earning author. The list price for Patterson's book in hard cover is $28.00 and the ebook list price is $14.99. That seems like a big difference, but you and I know that's not the whole story. The price you charge retailers for the hard cover is about $14 and you charge them about $10.50 for the enook. That will have a big impact on the actual price the customer (you know, people like me) would pay. But it's even worse. Your position (as articulated by your boss Arnaud Nourry) is that you want to compel retailers to charge the full $14.99 for the ebook version. The actual selling price of the hard cover version of "Invisible" is $16.80 at Amazon and B&N online. One of the "sanctions" that you complain about below is Amazon charging full price for the print edition of your titles. The next time you write a public letter, could you explain why it's terrible for Amazon to charge full price for a print edition and terrible for them to charge any less than full price for an ebook edition of the very same book?

• More than 80% of the ebooks we publish are priced at $9.99 or lower

William: I'm calling bullshit on this. Maybe 80% of the ebook titles published are priced below $9.99, but that's just irrelevant. Far less than 80% of your ebook unit sales are for titles priced at $9.99. Another thing you can add in your next email update: What percentage of your ebook unit sales occur at prices above $9.99?

• Those few priced higher—most at $11.99 and $12.99—are less than half the price of their print versions.

William: See my comments above. That's disingenuous to say the least.

• Those higher priced ebooks will have lower prices soon, when the paperback version is published.

William: WTF? What does the paperback version have to do with the price of the ebook version? That makes no sense at all. Does the ebook version get cheaper to produce and distribute when the paperback comes out?

• The invention of mass-market paperbacks was great for all because it was not intended to replace hardbacks but to create a new format available later, at a lower price.

William: Wow. If that's your position, you should be windowing ebooks like you do paperbacks.

As a publisher, we work to bring a variety of great books to readers, in a variety of formats and prices. We know by experience that there is not one appropriate price for all ebooks, and that all ebooks do not belong in the same $9.99 box. Unlike retailers, publishers invest heavily in individual books, often for years, before we see any revenue. We invest in advances against royalties, editing, design, production, marketing, warehousing, shipping, piracy protection, and more. We recoup these costs from sales of all the versions of the book that we publish—hardcover, paperback, large print, audio, and ebook. While ebooks do not have the $2-$3 costs of manufacturing, warehousing, and shipping that print books have, their selling price carries a share of all our investments in the book.

William: Blah, blah, blah. Don't you guys get tired of this line of argument? I'm sure tired of pointing out how completely bogus it is. But since you are the CEO of a big publishing company, I assume you know a little something about economics. Let's talk about the marginal cost of production. The short version of the definition is that it is the cost of producing one more unit of something. The marginal cost of producing one more print book is the cost of producing a single copy of a POD book. The marginal cost of producing one more ebook is $0. There are some transaction costs associated with selling that additional unit, but they are less than the transactional costs of selling the additional unit of a print book. And let's not forget that print books have resale value that ebooks don't. I've done some economic modeling of this and I find that the difference in price between a hard cover and an ebook version of the same title would tend towards about $5-$7. That's the price differential that would maximize revenue and sales across a broad range of titles. Interestingly enough, that's about the differential that Amazon is arguing for. That's not really surprising to me because they are a retailer with lots of data on book sales. Here's the crux of the matter. The market doesn't care about your costs or business model or expense allocations. They are irrelevant. Hachette has a very high cost structure for producing ebooks. In one sense, Amazon is doing you a favor, long term, if they force you to confront that reality now.

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. Both Hachette and Amazon are big businesses and neither should claim a monopoly on enlightenment, but we do believe in a book industry where talent is respected and choice continues to be offered to the reading public.

Once again, we call on Amazon to withdraw the sanctions against Hachette’s authors that they have unilaterally imposed, and restore their books to normal levels of availability. We are negotiating in good faith. These punitive actions are not necessary, nor what we would expect from a trusted business partner.

William: Good luck with that. These so-called sanctions are permitted by your contract with Amazon, right? I mean, they must be because you've never claimed that they can't do this, just that they shouldn't. If these things are so terrible, why didn't you negotiate with Amazon to prevent them from pulling these shenanigans? One more thing. If you are worried by Hachette's authors, why didn't you take Amazon up on their offer to compensate them? It's beginning to look like the harm to your authors is something that you aren't willing to address. Other than by whining.

Thank you again and best wishes,
Michael Pietsch

William: Just to be clear, the comment about recycling the price list is important. In the Apple agreement with Hachette in January 2010, the customer price for ebook versions of new releases with hardcovers costing $27.51 - $30 was $14.99. Patterson's book costs $28 and the ebook list is $14.99. What a coincidence.