Amazon vs. Macmillan vs. You

Last week, Amazon and Macmillan (one of the “big six” book publishers) locked horns over the selling price of Macmillan’s eBooks on Amazon’s site. Amazon thinks that the eBook ceiling should be $9.99, while Macmillan wants to sell their books for $12.99-$14.99 (the same price as their physical counterparts). Things have escalated to the point where Amazon has (temporarily, they say) pulled all Macmillan books from their online store. Macmillan CEO John Sargent countered by taking out full page ads in multiple periodicals explaining their position. In a New York Times full-age advertisement for one of Macmillan’s new books, the bottom of the ad states that the book is “Available at booksellers everywhere except Amazon.”

To understand how and why things turned so nasty so quickly, we only have to go back a few years to the birth of mp3s.

I have talked about this before, but in the music business, the average royalty rate hovers around 10 cents per song, for up to 10 songs per album. That means that for each CD Joe Superstar (the guy that actually performed the music) sells, he makes $1. Everything above and beyond that dollar is essentially split between the vendor and the music label. For every $15 CD you buy at Walmart, $7 goes to Walmart, $7 goes to the Record Label, and $1 goes to Joe Superstar.

And, as you probably know, when Joe Superstar got his record deal, the record company fronted him a lot of money to record that album — money that they get back through Joe’s royalties. Let’s just say that Joe’s album and first small tour cost the company $200,000. For Joe Superstar’s first 200,000 sales, $7 goes to Walmart (or whoever), $7 goes to the Record Label, and that last dollar? It does to the Record Label too. According to MusicCareers.net, the average major label album sells about 3,000 copies. That means, odds are, Joe Superstar will never see a dime.

Of course, who does see dimes (and lots of them) are the music industry. While Joe is travelling around the country side in a ratty old van, record labels are working overtime just to count all those dimes rolling in. Unfortunately in the mid-90s, something threw a wrench in the recording industry machine — mp3s.

Initially, mp3s weren’t seen as a threat to the music industry. They were low quality, took too long to transmit, and were only being traded by technical computer people. My, how things have changed. For many people now, mp3s are the primary way they listen to music.

Enter Apple, whose iTunes has become the major pipeline of legal mp3s. What Walmart was (and still is) for physical CDs, iTunes is the digital equivalent. iTunes is now responsible for 25% of all music sales, and about 70% of all digital music sales. To put it in perspective, Amazon came in second place with 8%.

For iTunes, Apple gives a 70/30 split. For each 99 cent song you download from iTunes, Apple keeps 30 cents and gives 70 cents to the performer. Actually, that’s not true; they give 70 cents to the copyright holder — which, if you’re signed to a major label, is your record company. Many signed artists are making … well, let’s just say that a dime per song was looking pretty good. Depending on the deal, the artist, the label and the deal, artists are typically making anywhere from a dime down to a penny per digital download.

Let’s switch gears to Amazon for a moment.

What Walmart is to CDs and Apple/iTunes is to mp3s, Amazon is to books. They’ve been one of the largest retailers for physical books for years, and now in part thanks to the Kindle, they’ve become one of the largest — if not the largest — retailers of eBooks as well.

There’s one major difference between Amazon and iTunes, however. Remember when I said iTunes keeps 30% and gives 70% to the copyright holders? Well, Amazon keeps 90%.

Let me run some numbers by you, as I am wont to do. For a while, I tried selling my book Commodork through Amazon for a price of $10. For each sale, Amazon kept 90% and offered to pay me my profits (a lousy buck) via PayPal. And while this is not directly Amazon’s problem, PayPal takes .35 cents per transaction, plus 3.5%, which left me with about 62 cents per copy.

These kinds of profit margins are, quite frankly, only possible when you’re the only seller in town. And for the most part, Amazon is — or, was. Recently, Apple introduced the iPad. And guess what’s coming with the iPad? Yup, the iBookstore. And guess who gives content creators 70% of the selling price? Right again — Apple, not Amazon.

The problem that’s been facing mp3s for a decade now is how to get the genie (free music) back in the bottle. The industry has tried a few different methods. They’ve lowered the price of digital songs to a dollar each, Apple has made it incredibly simple to find/buy/deliver music to your iPod, and when all else fails, the RIAA will sue you for hundreds of thousands of dollars, which only seems to be stopping the people who get sued.

Amazon is determined not to let this happen to the eBook industry, and they think the solution is DRM and price-limiting. Amazon thinks that if they can keep the price of eBooks lower than the cost of physical books, and if they can keep people from sharing them amongst one another, they may have a chance. That’s why they don’t want Macmillan or anybody else selling eBooks for more than $9.99.

What Amazon didn’t take into consideration was the arrival of the iBookstore — which is essentially the same as running the largest clothing store in town and noticing that a Walmart Super Center is being erected across the street. When done the right way, competition is good for us as retailers, although I’m not looking forward to the inevitable separation of media. I foresee only being able to get some books through Amazon and others through the iBookstore in the very near future.

As an author though, it’s an exciting time.