As the dispute between Amazon and Hachette ramped up earlier this year, Amazon tried to exercise some leverage by delaying the sale of Hachette titles as well as increasing print book prices and changing Amazon’s algorithms to Hachette’s disadvantage. Hachette authors took to social media, and Amazon customers, accustomed to finding what they want at prices they like, were similarly annoyed. In an attempt to counter the barrage of bad publicity, on 29 July Amazon posted their version of events on the Kindle Forum.

The delivery of the message on the forum instead of on Amazon’s usual media pages was no accident: Amazon know they can count on certain blindly pro-Amazon self-publishing gurus to run with Amazon’s position without doing any homework. I, however, have done my homework, and I can help you unpack Amazon’s propaganda.

In the announcement, Amazon suggest they are happy with their 30% cut but are committed to the $9.99 price point except for “a small number of specialized titles.” Amazon then offer unsubstantiated evidence that ebooks priced at $9.99 sell 1.74 copies to every ebook priced at $14.99, and suggest to authors that if they would agree to that price they would be earning 16% more from an audience 74% larger:

So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000. The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved.

And in a direct allusion to the lower ebook royalties paid by the Big Six to their authors (the true addressees of Amazon’s post), Amazon declare their support for a 50-50 royalty split:

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 e-book prices … We believe Hachette is sharing too small a portion with the author today, but ultimately that is not our call.

Having read the entire 160-page Opinion and Order of United States v. Apple Inc, et al, I can report that the 30% commission was never the publisher’s idea or ideal — it was imposed upon them by Apple — and that a $9.99 price point would have meant a 46% decrease in publisher revenues compared to the old distributor discount (wholesale) model.

Under that model, publishers were releasing the ebook and hardcover at the same time and charging the same price; the average was $26.00. The ebooks were sold to Amazon at 50% off list, or $13.00; Amazon would then discount the list price to whatever they wanted, as they do with print books. But Amazon, in an attempt to drum up business for its Kindles, began selling these new releases at $9.99, taking a 23% loss. This is what started the fight.

In Madame Justice Cote’s missive you can read the whole story of how Apple skillfully manipulated the publishers’ twin Achilles’ heels of fear and arrogance; the machinations between Apple, the Big Six, and Amazon are a surprisingly riveting read, with a theme of mutually assured destruction not witnessed since the Bay of Pigs.

(The whole of my summary of the agency price war will be found in the upcoming third edition of The Global Indie Author, slated for a September release.)

In any case, to make a long story short, Amazon accepted agency pricing because they saw the advantage to them by the new model. By demanding the inclusion of the same most-favoured-nation (MFN) clause* that Apple had ingeniously added, AND adding a model-parity clause,** Amazon ensured that they, despite being unhappy with the higher price point dictated by the agency contract ($12.99 for ebooks with a $26.00 hardcover counterpart), would now earn 30% of all sales and, in fact, would never risk a loss again on any ebook.

Secondly, Amazon is notorious for manipulating figures, and in their forum post they do so again.

Just how many authors sell 100,000 copies of a single ebook? Very, very few, estimated at about .0001% of books published per annum in the United States; this, for me, confirms my inference that the true addressees of the post are not us indie authors of the Kindle forum but the bestselling Hachette authors who have been publicly shaming Amazon. Nevertheless, let us accept Amazon’s proposal that at $14.99 an ebook would sell 100,000 copies but 174,000 copies at $9.99. Under the 2009 distributor discount model, when Hachette was selling the ebook to Amazon for $13.00, the author was earning 50% of that, or $6.50 per ebook. At 100,000 books, that equalled $650,000. Amazon could have discounted the $26.00 list price by a consumer-pleasing 42.35%, sold the ebook for $14.99, and earned a $199,000 profit instead of a $301,000 loss. That they chose to sell at $9.99 is indicative of a corporate strategy that has led to Amazon’s record $126M loss this most recent quarter. You can see why investors are not impressed.

Under the agency model, a Hachette author earns 25% of 70%; for an ebook priced at $14.99, the author earns approximately $2.62, or $262,325 for 100,000 copes, which is $387,675 less than before.

Amazon, meanwhile, earn $449,700, up from the previous potential of $199,000. You can see now why Amazon “had no problem with the 30%.” They were, however, apoplectic with being forced off the $9.99 price point: it was Amazon who filed the anti-trust complaint with the Department of Justice.

Using Amazon’s latest proposal, the author would sell 174,000 ebooks and be paid 35% of revenue, earning $608,300. That amounts to $41,700 less than selling 100,000 ebooks at $13.00 per unit wholesale.

Just to break even with their pre-agency revenue, then, an author has to sell 85.7% more ebooks than before, not 74%. And you must remember the 74% is an average increase in sales, which means not everyone will achieve this. Amazon, however, are guaranteed revenues of $521,478 on 174,000 ebooks priced at $9.99.

So no, Amazon, it is not “good for all the parties involved”; it is good for you.
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* The MFN clause is the same one found in the Kindle Direct Publishing contract; it stipulates that we have a legal obligation to Amazon that we will not sell our ebooks for less anywhere else.

** The model-parity clause enabled Amazon to force agency pricing across all publisher contracts, thereby ensuring Amazon would not be disadvantaged by a distributor-discount retailer.