Amazon's Incomplete Arguments

Amazon’s case against Hachette is well-considered but its economic arguments are incomplete. (I’m not going to touch its bizarre misreading of Orwell.)

I love saving money, but I can’t jump on board the “lower prices are better for everyone” argument without thinking about a number of points.

Comparison effects. Lower priced goods will tend to sell more when they are next to more expensive goods. A $10 book may sell 1.75 as many copies as a $15 book when they are both in the same storefront, but what would the sales be if all books were $10? Or if all books were $15? It may be a good strategy to price an individual book at $10 but it does not follow that Hachette would be better off it it priced all its books at $10.

Think of it this way: a reader is looking to buy two books, and more often than not chooses the cheaper ones. So cheaper books will tend to outsell the more expensive books, and bring in more revenue. But it doesn’t necessarily follow that the reader is buying more books in total. It just shows that people take account of price. Lowering the price of all books may not therefore not increase sales, and could lower overall revenue.

Amazon’s price elasticity argument only works if the total sales of all books (or at least, all Hachette books) increase when they are all uniformly priced lower. It doesn’t work if the reason cheaper books sell more is because readers are buying the cheaper books instead of more expensive ones. Amazon may have history on its side–total sales of all books increased with the introduction of the paperback–but I’d need to see actual data.

(Also, dropping a price from $15 to $10 would increase sales because people like bargains, but increased sales after a price drop are not permanent.)

What’s the actual profit-maximizing price? Price elasticity is a real phenomenon but it’s not that case that you can just keep lowering prices to increase sales and revenue. You don’t sell an infinite number of books at a price point of zero. $10 might be a better price point than $15, but how does it compare to $8? To $12? If anything, Hachette ought to be able to experiment with a wide variety of different price points.

Effect on print sales. Amazon argues that its preferred pricing model leads to higher revenue for publishers and authors, but it does not take into account the possible effect on print sales (information which Amazon does have). If higher ebook sales reduce print sales, Amazon’s argument from the self-intrest of publishers and authors might be false.

It might be short-sighted to worry about cannibalizing print sales with ebook sales. This opens up a publisher to competition from those who do not have that worry. Already, many digital-only authors have been successful with very low prices. But it would also be a mistake to analogize print to CDs or DVDs. Print will be with us for a long time, and most data show that ebook sales have leveled off. They are not replacing print sales. So protecting print is not as short-sighted as, say, the music industry was when initially failing to embrace digital distribution.

Amazon doesn’t need to make money on books, but Hachette does. Amazon is still thought of foremost as a bookseller but most of its revenue is from non-media sales. Amazon can afford to lose money or break even on media sales if doing so increases its sales of other goods or keeps customers tied to the Amazon/Kindle/Fire ecosystem. Publishers would not benefit if their sole product becomes somebody else’s loss-leader. (This, incidentally, is what I think that publishers and authors and not Amazon ought to be in charge of setting the price for their works. For digital goods, the agency model is superior in nearly every respect to the wholesale/retail model. It is bizarre to me that so many people think otherwise–do they really think it would be better for software developers if Apple and Google set the price of the apps on their app stores?)

DRM. The best thing for readers and publishers would be to get rid of DRM, since it benefits platform owners, not creators, and tends to create distribution and platform monopolies. Readers should be able to buy ebooks from a wide variety of sources and read them on any device. Hachette should be able to sell ebooks directly from its own website that readers can access on a Kindle, iPad, or Nook. Amazon’s DRM gives it a lock in its readers which in turn increases its leverage against the publishers. If Hachette doesn’t like Amazon’s policies it should be able to walk away and take its readers with it.

Incidentally, it would not violate the DMCA for Hachette to remove Amazon’s DRM from its own books or to authorize readers to do so, since anti-circumvention only applies to acts taken without the authoirty of the copyright owner. Amazon is not the copyright owner of Hachette’s books and DRM-protected works don’t get a new copyright. However, there may be some complications about the distribution of tools to allow this, and it’s probably just simpler for Hatchette to give readers who want to flee Amazon’s lock-in new DRM-free copies of their Hachette ebooks.