Author Alasdair White
In this blog, I will give an outline of how the Amazon Kindle publishing model works, especially its pricing model, and how it is designed to manipulate the authors who publish direct and how it seeks to dominate the suppliers who are their life blood. (Alasdair White October 2011)
In the US market, Amazon is thought to have around 54% of the ebook market (Barnes & Noble are thought to have 26% and the others, Kobo, Apple, Smashwords and so on, are thought to have 20% between them) while in the UK it has perhaps 75% and in Europe at the moment (a small but growing market) it is the dominant player confronted really only by Apple and Kobo. Amazon is, there can be no doubt, a dominant market operator, a highly effective and efficiency business, and rapidly becoming ubiquitous.
The Amazon Kindle ebook reader, a first-to-market product with all the advantages that that brings, is now aging. It uses a file type called a ‘mobi’ and is now the only major e-reader to use this file – all the newer e-readers use the industry standard format of ‘ePub’ and they can all download a small application called a MobiPocket Reader that allows them to read mobi files. The Kindle has, therefore had its competitive advantage eroded. As a response to new entrants, Amazon decided to release the Kindle outside the US (having previously refused to make it available anywhere else) but they premium priced it at a significantly higher price than it sold for in the USA. In this, they were merely doing what Apple does with its products – there is a premium price to pay if the product is bought outside the US. This is effectively, a tax on consumers for wanting to use a US product!
The problem for Amazon, if they were to stay ahead and were to attract buyers for their Kindle machines, was that they needed to have content. Given the high profit margins on the e-reader itself and the very low profit margins on books in any format, Amazon needed people to buy the e-reader and so the provision of content had to be done free or as near as possible to free. The rationale being that if the content was free or nearly free, then the huge premium on the e-reader would be amortised more quickly. But there is a problem: the average reader buys and reads perhaps eight books a year and since the e-reader is obsolete in around three years, that means the reader will have read perhaps 24 ebooks. That makes the cost of each ebook extortionate since the cost of replacement of the reader was around $200 dollars so each book read cost the equivalent of $8.33 plus the cost of buying the book – and since the very price sensitive and competitive paperback market had caused many mass-market paperbacks to be priced at well under $9.99, this meant that the ebooks would have to be priced at under $1.66 if the reader was to receive value for money. Amazon, therefore, aimed to set their ebook price at around $1 (actually $0.99) to attract buyers. This issue is still basically the same now.
Fortunately, the publishers (the main suppliers to Amazon) made them realise that prices would have to be higher and so Amazon embarked on a vertical integration strategy and started to turn itself into a publisher. The offer they made to desperate ‘wannabe’ authors is that Amazon would take their word processed document, publish it for them, and sell it for $0.99 for the Kindle. Amazon would not offer any editorial input, nor layout and design input, they would simply be a production unit. The result was a huge upsurge in sub-standard, poorly written and even more poorly edited fiction.
Then, as discussed in my previous blog, Amazon and the publishers colluded to engage in price fixing via the ‘agency model’. This caused a change of tack and Amazon trumpeted that this new deal meant that authors and publishers would receive 70% of the sales price on every sale … only that was not quite the case!
Let’s see what the Kindle Direct publisher’s platform actually offers. The 70% option works only for sales to a limited number of countries around the world and although the list is growing, it is basically, the US, UK, Canada, Germany, Austria, Switzerland, Luxembourg and Liechtenstein. If an ebook is sold to a country not on the list, then Amazon will only pay 35%. Further more, if the ebook is sold to a person in the European Union, then 15% is withheld as VAT and Amazon then returns either 70% or 35% of the VAT-exclusive price.
But that is not all Amazon deducts – on a normal-sized ebook they also deduct $0.15, £0.10, or €0.12 (depending on which Amazon site you order from) as … wait for it … a delivery charge! So, in the end, Amazon actually pays 70% (or 35%) of the list price – delivery charge – VAT. Whichever way one looks at it, to say they are paying 70% of the sale price is being very economical with the truth!
There are other catches as well. To get a book accepted for the 70% band the price has to be set at between $2.99 and $9.99 if offered on Amazon.com, £1.49 and £6.99 inclusive of 15% VAT if offered in the UK and €2.60 and €8.69 inclusive of 15% VAT if offered on the German site. So, if you offer the book at €0.99, then your payment from Amazon will be in the 35% bracket. In addition, the price set must be NO HIGHER than the list price at non-Kindle ebook stores and no higher than 80% of the printed book price.
Finally, if world rights are offered, then the correct 70% bracket price has to be set for each site to ensure that Amazon doesn’t arbitrarily modify the price inline with whatever FX value they have chosen – something they are entitled to do without informing you. If this fate does befall you, they won’t even discuss it and will pay only in the 35% bracket.
And if you think the problems end there, then think again! No matter what price is actually set, this can appear radically different depending on where the buyer is in the world. For example, let’s take an ebook that is priced at $3.95 on the Amazon US site – this will appear as $3.95 to a US-based buyer, as $6.42 to a UK buyer, $6.84 to a European buyer and $5.95 to a Hong Kong buyer. On the other hand, the same book offered on the UK site at £3.98 and the German site at €4.99 appears at that price no matter where the buyer is based. And if a UK or European buyer has the temerity to try to buy from the US site they will be advised to return to the UK or German site while a US-based buyer trying to buy from the UK or German site will be actively blocked from doing so. And just in case you are wondering, the publisher/author will only receive 70% (or 35%) of the $3.95 even if the buyer ended up paying $5.95 or higher.
In the mean time, they are about to release the Kindle Fire, an ePub reader and tablet computer, using the same pricing approach as they used before in the hope that they can develop a significant market position in the computer market. Whichever way you look at it, Amazon is positioning itself as a vertically integrated electronic content provider and it is abandoning its current positioning as an online book retailer.
In reality, the Amazon operating and pricing model puts all the control in their hands, is generally disadvantageous to is suppliers (publishers and authors) but is generally supported by is customers – who have very little option since Amazon dominates the online book and ebook market. It would not surprise me to find Amazon’s position challenged by new entrants and for Amazon itself to be the subject of an anti-trust or competition investigation in the near future.
In this series of blogs on Amazon I have looked at the fact it is not really a bookstore, that it is operating an ‘agency model’ pricing model in a way that reflects its corporate and national culture but does nothing for its suppliers, and that its Kindle Direct publishing system is being presented inaccurately and operated arbitrarily. Indeed, Amazon may not be in the best interests of the book trade at all – now there’s a thought!
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Hmmm, I’ve been wondering why I received 11 cents for sale of one kindle, and too focused on the next book to look into it.
Excellent insights on the Amazon-Kindle e-books pricing. Since most of our books are sold in the U.S., I’m not especially bothered by 35%, less VAT. Like you say, Amazon is the biggest game in town, and that’s just the cost of doing business with them. What I really appreciated were the insights into Amazon’s mindset around creating content for Kindle. Good stuff; thanks for sharing.
I understand that they also withhold a 30% tax on the royalties for those not based in the USA.
I am so glad someone else feels that Amazon is arbitrary and capricious in its pricing. Two of my three books available through the Kindle Store do not attract the “free” ($2) Whispernet delivery charge to Japan, one does. When I asked why this was, I was told that this subject could not be discussed.
And let’s not forget that for non-US bank account holders, Amazon pays by cheque (check). In the 21st century? Agree completely with you – the Amazon e-book structure is not set up to help its suppliers – however cosy the Kindle author “community” may seem to be. It is, in the immortal words of Ian McDonald in “Out on Blue Six”, “pointing at the sun, while pissing on your shoes”.
This would be a pretty good argument, except that B&N is also in the self-published ebook game, and they still haven’t even come close to overtaking Amazon, as is Smashwords which distributes to all readers with the same pay scale. That coupled with the fact that anyone who’s ever been published traditionally knows that even if you price your ebook at 2.99 and get 70%, you’re still making more per sale than you will from a publisher. Most publishers give you 15% at most, and very few give advances anymore. So you can put out your own work and make decent money (if it’s good enough) or you can go with a publisher and hope to make just a little. Also, if readers are worried about the quality of a practically free book, they can simply read the reviews to see if it’s worth the money. Most of the books have a “look inside” so that you can get a taste of the quality. Amazon is an online retailer, not an online bookstore, and if they want to produce an ereader which I can purchase for less than any other reader, and have a larger selection of books at lower prices to choose from, I’m hardly going to complain. They want to offer a tablet for less than others cost? Again, no complaint. It’s not exactly a surprise that Amazon is trying to make money. I believe they are a company that is not based on philanthropy but rather on profit.
To nail down an actual percentage that any one ebook retailer has on a global scale would be mathematics that I would not put on the shoulders of even my worst enemy. With the advent of ereaders and the jump in technology since we have no real way to garner who has what part of the market (as readers use a variety of devices to get their book fix). So any argument that tries to blame Amazon is useless to start with figures such as these. A model you can try and argue with but a percentage of buyers will only show that the retailer is doing something right.
Now moving on to your pricing arguments. VAT is a fee (A value added tax or value-added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the “value added” to a product, material or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.) Therefore it is paid regardless of what you buy. This tax is added onto the purchase price and does not effect the royalty or in the case of a seller utilizing a website like Amazon (profits). Amazon still pays the agreed upon amount to the owner of the product regardless of the VAT, which they add to the back end of the purchase and only the consumer pays, and then Amazon remits to the government charging the VAT.
Royalties are even easier. For books that you upload to any site you can choose the price. Lets say you are a new author and want you book to gain exposure, so you set the price to $0.99 and wish away. At this price you are looking to get 30% royalty and this is what you get. Amazon takes the total price $0.99 and multiplies it buy 30% and gives you 29.7 cents (yay you). Or you decide to make a little more and set it at $2.99. So now you get 70% of $2.99 or $2.093 and away you go. You make this royalty rate on the price you set no matter what price Amazon actually sells it for. Even if they discount it as a sale item (yay you).
Now this article goes on to bash Amazon for its dealings with its pricing and devices. First you always create a device that you can sell to people with they thought in mind of what else you can sell to them along side said device. So if I create a reader, I of course want to add value to it by adding content and therefore I open my dB to the public to help me create content. It is not my fault if said content is rubbish any more than it is Google’s or any other website/search engines fault for delivering rubbish when you are looking for something online. There are lots of people out there with something to say and no idea on how to present it and plenty more with nothing to say but the ability to present it. So to lump all authors in a pile or even (as in this article) to imply this is a dis service to Self Publishing (Indies). I read more books than people want to know and I can honestly say that the majority of “Indie Authors” are good but not really given a chance since Traditional is focused on old hat ideology and survival. There are bad seeds within any group and to bash a whole for the few is unfair and in my opinion “stupid”. We as readers can avoid books poorly written and edited and let the next potential consumer know by leaving a comment or review. But on the other hand when we find one that is good we should be just as quick with the review and/or comment.
Is Amazon a massive 900lb gorilla in the room. Bet your last dollar but where is it fair for us to blame it for pricing. Taxes are due to the government imposing them not the retailer collecting them. Amazon does not set the price the Author does. Of course you can not live in the US and buy from a DE or FR or UK site (they have a US site).
Stop your whining and join the adults, we just found another good indie book to read.
Great article!
Every time i think about putting my ebooks on Amazon, I just read their ultra-confusing contract and realize that they are just trying to take advantage of publishers and authors.
PLEASE read the contracts people… And boycott companies that misinform and exploit like this!
[...] 99¢ and $2.99 prices, are (again according to Alasdair White) vanity traps for authors, and an attempt to boost the number of sales of the Kindle hardware. [...]
I’m glad to say that Amazon stopped charging a premium price for the Kindle in the UK in or before 2010.
That’s when I paid $139 for my Kindle in the USA, then the equivalent of £92. The UK price was £109 including 17.5% VAT, or £92.76 before tax. Comparisons are more difficult now, because the WiFi keyboard version is no longer sold direct in the UK, and the no-keyboard version is sold in the USA only with adverts.
Alasdair’s points about publishing remain valid, but until there’s real competition for content, many of us will tolerate Amazon’s practices faux de mieux.