Shocking WSJ Discovery: Higher Prices=Lower Volume!

Barry Eisler here. Joe, thanks as always for the guest slot. I was going to mock this Wall Street Journal article somewhere, and there’s no better place than A Newbie’s Guide for that…

So okay, today the Wall Street Journal ran a piece headlined, “E-Book Sales Fall After New Amazon Contracts: Prices Rise, but Revenue Takes a Hit.” The article is behind a paywall, but you can access it by cutting and pasting the headline into your browser and clicking on the result of the search.

I just want to make sure I’m the first to congratulate the Wall Street Journal on its shocking discovery of a correlation between higher prices and lower demand. And, while I’m no economist, I’d like to humbly propose that the WSJ call its discovery something like, “The Demand Curve.” If this doesn’t win the newspaper a Pulitzer, I have one more suggestion: an even more radically new article on how a round object fastened to an axle can work as something called… a wheel.

Apologies for the snark, but where else but in publishing could a notion like “higher prices lead to lower revenues” even be controversial, let alone newsworthy? But the publishing industry is notoriously special, and Joe has been beating this drum for years. Five years ago, he wrote:

Naturally, people would rather pay less for something than more. And in a digital world, like we’re rapidly becoming, consumers have shown consistently in other forms of media that they place less value on downloads than on physical products.

When companies price digital content too high, consumers respond by pirating that content. That’s the ultimate in “devaluing.”

So what is truly the value of ebooks? Is it free? Or is it the publisher’s price, which seems inflated, and which in the agency model gives them 52.5% of the list price of an ebook for doing nothing more than providing a cover, editing, and putting it up on Amazon?

If an ebook is free, the author gets screwed.

If an ebook is priced high, it won’t sell a lot of copies, and the author gets screwed.

If an ebook sells for a small amount of money, the author makes 17.5% of the list price. That also seems like the author is getting screwed.

Publishers are currently talking about going 50/50 with authors [BE note: hah, this was five years ago, the talk never ends does it?], so an author will make 35% of the list price. But it’s still the price the publisher sets, which is inflated, which will lead to piracy.

By setting the price, the publisher is pricing ebooks so they won’t sell well, and then taking 35% of what little money will come in.

Joe has also pointed out many times that authors will be the ones who kill legacy publishing, because they’ll go elsewhere as they figure out the New York Big Five’s pricing strategy is costing them money. Though whether this is Big-Five-Death-By-Authors or Big-Five-Death-By-Suicide is an interesting philosophical question.

Anyway, back to the Wall Street Journal’s big discovery. The headline itself—again, E-Book Sales Fall After New Amazon Contracts: Prices Rise, but Revenue Takes a Hit—is interesting. The way it’s written, you might think it was Amazon that caused the high prices that produced that shocking revenue hit. In fact, Amazon has consistently tried to price ebook prices lower, even publicly explaining last year why everyone—authors, publishers, and retailers—makes more money from lower ebook prices. Higher so-called “agency” prices have been forced on Amazon by the Big Five, and were at the heart of the price-fixing conspiracy New York and Apple engaged in to keep ebook prices high.

And that subtitle is amusing, too. Prices rise, BUT revenue takes a hit? How about AND takes a hit? Or THEREFORE takes a hit?

I can’t help it. It’s too much. The Wall Street Journal—one of the world’s leading business newspapers—doesn’t seem to understand, or even know the existence of, an Econ 101 concept as basic as this:

In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price.

What is it about publishing that makes otherwise intelligent, educated people lose sight of even the most axiomatic things? One day, someone’s going to write a dissertation on that topic.

Publishing industry analyst Mike Shatzkin provides this helpful quote: “Unfortunately, it may be that consumers aren’t happy with the higher prices.” Okay, I admit that my first thought was, “Those pesky consumers, always insisting on decent value for their money! If we could just figure out a way to keep ‘em happy about coughing up $25 a book, we’d all be in clover!”

And then I thought, “Unfortunate for whom?” Because there’s demonstrably more money for everyone in lower priced ebooks. But wait, here’s a clue:

“Publishers said the current pricing model involves some sacrifice but they felt it was worth it to keep Amazon in check.”

Always interesting when someone casually reveals his true motives. Though this one might have been stated more clearly as, “Publishers said sodomizing readers was worth it to keep Amazon in check. A Big Five spokesman added, ‘Sorry, readers, we know it hurts but it’s for the greater good. And by ‘greater good,’ I mean the good of the Big Five, who are above all else intent on preserving the problem for which we are the solution.’”

And here’s another clue: “What’s more, they have noticed a bump in sales of physical books that is possibly related to the higher price of digital books.”

I’ve been saying for years: the prime imperative of the Big Five is to preserve the position of paper and retard the growth of digital. They’re willing to lose money to accomplish this. They even just described it as good news.

I also love how the cripplingly high prices the Big Five has fought for are now described as “the Amazon deals” and “the Amazon pacts” (“pact” is such a great word. The west has a North Atlantic Treaty Organization. Only Communists have things like a Warsaw Pact. We have factions, they have tribes; we have detention centers, they have gulags; we might build a security fence but never a Berlin Wall...wait, sorry, I know I’m digressing but propagandistic language is endlessly fascinating to me. Remember, It’s Just a Leak!).

Why is the Wall Street Journal trying to hang around Amazon’s neck a money-losing price structure dictated by the Big Five? Because it’s bad. And if it’s bad, and it’s happening in publishing, it must be Amazon’s fault. Quod erat demonstrandum.

A paragraph later: “Publishers succeeded in preventing Amazon from lowballing prices…”

Lowballing: “a per unit price that maximizes overall revenue.” I guess it’s time to update the dictionary.

“Hachette cited fewer hot titles and the implementation of its Amazon deal as reasons that e-books fell to 24% of its U.S. net trade sales in the first half of 2015, from 29% a year earlier.”

I think this would read a little more clearly as “Hachette cited fewer hot titles and the implementation of THE PRICING STRUCTURE THE BIG FIVE INSISTED ON as reasons that e-books fell to 24% of its U.S. net trade sales in the first half of 2015, from 29% a year earlier.”

Nah, that’s crazy talk. If there’s a problem, it must be The Amazon Deal Pact that caused it.

And this: “Pricing e-books is a Goldilocks problem for the book giants: For years they worried that consumer prices were too low, and now they are seeing the disadvantages of bumped-up prices.”

Shit, if only someone could have predicted this!

“To figure out how to set prices, a team of data specialists at Macmillan’s Manhattan offices in the Flat Iron building sifts through a database of 74 million transactions looking for trends.”

Oooh, sounds impressive. But it occurs to me the crack Macmillan Team of Data Specialists could have saved themselves some time, and Macmillan some badly needed revenue lost due to high ebook prices, if they had just read Amazon’s announcement about this a year or so ago, or Joe’s post from five years ago, or if they had at any point just used the Google to search for something called the Demand Curve…

“Amazon was willing to buy a title for $14.99 and sell it for $9.99, taking a loss to grab market share and encourage adoption of its Kindle e-reader.”

It’s amazing that someone could write this article and describe the strategy as “grab” market share, rather than as, I don’t know, “grow” market share. Is Jeff Trachtenberg psychic? Was he in the meeting rooms where Amazon devised its “grab” strategy? Serious question, Jeff: on what are you basing this assertion? And why do you not at least consider the entirely logical—and substantially better supported by common sense and data—possibility that lower prices don’t necessarily cannibalize a market for the benefit of one, but might instead grow that market to the benefit of all?

“Publishers worried that such discounting kept Apple Inc. and Google Inc. from emerging as competitors, as those companies might not want to lose money on e-books.”

This would read better as “The Big Five didn’t think everyone would agree to subsidize the Big Five’s high-price, low-volume, paper-first strategy.”

“Apple, which denies wrongdoing, was found liable in a civil case and subsequently lost an appeal in June.”

Ah, the little professional courtesies oligarchs extend each other. After all, it’s always relevant to note that the convicted defendant continues to deny wrongdoing. Plus it was just a “civil” case (I’m not even sure this terminology is accurate. Does the government bring civil cases prosecuted under US criminal laws?), which doesn’t sound all that bad.

In other Wall Street Journal news, “Chester Frot, who denies wrongdoing, was found guilty of burglary and arson and subsequently lost an appeal in June. You can reach him by mail for the next twenty years at San Quentin Correctional Facility.”

“Publisher e-book sales have been stagnating since 2013, when they fell 2.5%…”

It’s journalistically negligent, or willfully propagandistic, to say this without clarifying that you’re talking specifically about legacy publishers. And without pointing out that in the same timeframe self-published ebook sales have been exploding. If you don’t understand this point, you can’t understand what’s really going on in publishing. Which means either that Trachtenberg himself—the guy who writes these articles—doesn’t understand what’s going on in publishing, or that he doesn’t want his readers to.

“One high-level publishing executive disputed that the Amazon pacts are behind the e-book sales decline. ‘This is a title-driven business,’ he added. ‘If you have a good book, price isn’t an issue.’”

Did Trachtenberg grant this publishing exec pernicious anonymity because the executive didn’t want to be ridiculed for saying something so stupid? Did Trachtenberg ask for anything like, I don’t know, supporting data before agreeing to publish an anonymous quote that violates the laws of Econ 101, all available data, and even common sense?

If a book is “good,” whatever that means, price isn’t an issue? Okay, anonymous publishing executive, why aren’t you charging a hundred dollars for your “good” books? You’d be making bank! Could it be that books are a little more fungible than all that? That consumers find books fungible not just with each other, but with other forms of entertainment, as well, meaning that you can very easily suppress sales of a book with a non-issue high price? In fact, it seems you can even suppress sales of an entire market. Bravo!

And then, almost as an aside, in the second-to-last paragraph: “Amazon says e-book sales in its Kindle store—which encompasses a host of titles that aren’t published by the five major houses—are up in 2015 in both units and revenue.”

A tiny note of insight and relevance! But no analysis of why that is and what it means. Wait a minute, are you saying lower priced book sales are growing in both volume and revenue, while higher priced ones are shrinking by both measures? Is something going on here? What might it mean for the industry?

Nah, why discuss any of that? We know legacy publishes are having a hard time because of the Amazon reason. Anything else goes in the second-to-last paragraph and merits no discussion at all.

I’m not sure why Amazon declined to comment on the article. They could have just said, “Um, we told you so.”

As a commenter over at The Passive Voice puts it:

The Big Five really painted themselves and their authors into a corner with agency. They’ve screwed their authors royally for at least the next two years, just like they’ve screwed themselves.

1) If they keep their ebook prices high:

– Their ebook revenues (and market share) continue to shrink fast.

– Unable to discount Big Five ebooks, Amazon discounts Big Five print books even more steeply (as they are now), hastening the demise of chain brick-and-mortar bookstores that can’t compete at those prices. The Big Five ends up more reliant on Amazon for the Big Five’s (less-profitable) paper sales, while the far more profitable ebook market passes them by.

2) But if they lower ebook prices back to where they were in 2014, during the pre-agency days:

– Maybe the erosion of their ebook sales slows. But NOW, under agency, those discounts come out of their own pockets (and those of their authors), instead of Amazon’s. The average discount Amazon was underwriting on Big Five books was 20-25% pre-agency—that’s a hell of a subsidy, and it’s gone now. So under agency, the same discounted 2014 ebook consumer prices and sales will mean 20-25% less revenue for the Big Five than it did in 2015.

– And those lowered consumer ebook prices will once again accelerate the nationwide reader migration from print to ebooks, hastening the demise of chain brick-and-mortar bookstores.

What did Schopenhauer say? “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

Although if the Big Five continues to adhere to a high-priced ebook strategy, and continues to rely on insights as fresh and useful as those in this Wall Street Journal article, the more relevant rubric might be Elisabeth Kübler-Ross’s anger, denial, bargaining, depression, acceptance.