Amazon Explains Its Theories of Ebook Pricing and Author Royalties

Posted on August 1, 2014

The - Hachette battle over ebook pricing shows no sign of ending any time soon. In fact, negotiations appear to be stalled out completely at this point. Perhaps to jump start the conversation, Amazon posted an explanation of its actions in a Kindle forum on its website. In the post, Amazon explains what it wants in its new contract from Hachette and argues that cheaper ebook prices benefit all authors who are being grossly underpaid on ebook royalties.

In the posting, Amazon says that it wants to discuss the company's objective. One of its key objectives is to lower ebook prices. The company says that most ebooks are prices at $14,99 and $19.99, which is believes is "unjustifiably high" for an ebook. Amazon explains, "With an e-book, there's no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market."

The Amazon Books team says that ebooks are very price-elastic. According to their own figures, for every book that sells at $14.99, 1.74 copies of the same book would be sold if the price were lowered to $9.99, a 16% increase in revenue. For books that sell quite a few copies, the numbers really add up.

Amazon says that the customer pays 33% less, the author gets a 16% larger royalty check and the author's readership is 74% higher, increasing the probability that he or she will make it on the bestseller lists over time. Amazon says that greater revenues also benefit the retailer and the book publisher, because the revenue pie is bigger.

Amazon says that Hachette doesn't pay its authors sufficient royalties on ebook sales, and thinks that authors should be paid 35%. Amazon said, "We believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise ebook prices. We had no problem with the 30% -- we did have a big problem with the price increases."

Roxana Robinson, the president of the Authors Guild, told The Huffington Post that Amazon is leaving out one key element when discussing the price of ebooks: the amount of time that an author puts in to create the work in the first place. That work is the same whether it's an ebook or a hardcover. She didn't say she opposes lower prices on ebooks, nor did she disagree with the proposition that authors should get bigger royalties. But she did question the source of Amazon's figures from its internal price study.

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