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Amazon, ebooks and advertising

Amazon's adoption of ad-supported ebooks is shifting from possible to likely.

This post originally appeared on Joe Wikert’s Publishing 2020 Blog (“Why Advertising Could Become Amazon’s Knockout Punch“). This version has been lightly edited.

Your Ad Here by KarenLizzie, on FlickrIt all started harmlessly enough with Amazon’s Kindle with Special Offers. That’s the cheaper Kindle that displays ads when the device is in sleep mode or at the bottom of the screen when paging through the owner’s catalog of books. It is very unobtrusive and, since it lowered the price of the device, has made that Kindle an extremely popular device.

Now there are rumors that Amazon is selling ad space on the Kindle Fire’s welcome screen. That sounds pretty reasonable, too, as it’s a simple way for Amazon to drive a bit of additional income that’s pure profit for them.

Given that Amazon’s goal is to offer customers the lowest prices on everything, what’s the next logical step? How about even lower prices on ebooks where Amazon starts making money on in-book ads? Think Google AdWords, built right into the book. Of course, Amazon won’t want to use Google’s platform. They’ll use their own so they keep 100% of the revenue.

The changes the DOJ is requiring for the agency model means a retailer can’t sell ebooks at a loss, but they can still sell them for no profit, or break even. In other words, the 30% the retailer would keep on an agency ebook sale can be passed along to the customer as a 30% discount on the list price, but that’s as deep a discount as that retailer can offer.

The rules are different with the wholesale model. Amazon already loses money on sales of many wholesale-model ebooks. Let’s talk about a hypothetical wholesale model title with a digital list price of $25. Amazon is required to pay the publisher roughly half that price, or about $12.50 for every copy sold, but that ebook might be one of the many that are listed at $9.99 for the Kindle. So every time Amazon sells a copy, they lose $2.51 ($12.50 minus $9.99). Amazon has deep enough pockets to continue doing this, though, so they’re quite comfortable losing money and building market share.

So, what’s preventing Amazon from taking an even bigger loss and selling that ebook for $4.99 or $0.99 instead? In the wholesale model world, the answer to that question is: “nothing is preventing them from doing that.” And if selling ebooks at a loss for $9.99 makes sense, especially when it comes to building market share, why doesn’t it also make sense to sell them at $4.99, $0.99 or even free for some period of time? It probably depends on how much pain Amazon wants to inflict on other retailers and how much attention they’re willing to call to themselves for predatory pricing.

Make no mistake about the fact that Amazon would love to see ebook pricing approach zero. That’s right. Zero. That might seem outlandish, but isn’t that exactly what they’re doing with their Kindle Owner’s Lending Library program? Now you can read ebooks for free as part of your Prime membership. The cost of Prime didn’t go up, so they’ve essentially made the consumer price of those ebooks zero.

Why wouldn’t they take the same approach with in-book advertising?

At some point in the not-too-distant future, I believe we’ll see ebooks on Amazon at fire-sale prices. I’m not just talking about self-published titles or books nobody wants. I’ll bet this happens with some bestsellers and midlist titles. Amazon will make a big deal out of it and note how these cheaper prices are only available through Amazon’s in-book advertising program. Maybe they’ll still offer the ad-free editions at the higher prices, but you can bet they’ll make the ad-subsidized editions irresistible.

Remember that they can only do this for books in the wholesale model. But quite a few publishers use the wholesale model, so the list opportunities are enormous. And as Amazon builds momentum with this, they’ll also build a very strong advertising platform. One that could conceivably compete with Google AdWords outside of ebooks, too.

Publishers and authors won’t suffer as long as Amazon still has to pay the full wholesale discount price. Other ebook retailers will, though. Imagine B&N trying to compete if a large portion of Amazon’s ebook list drops from $9.99 to $4.99 or less. Even with Microsoft’s cash injection, B&N simply doesn’t have deep enough pockets to compete on losses like this, at least not for very long.

At the same time, Amazon will likely tell publishers the only way they can compete is by significantly lowering their ebook list prices. They’ll have the data to show how sales went up dramatically when consumer prices dropped to $4.99 or less. I wouldn’t be surprised if Amazon would give preferential treatment to publishers who agree to lower their list prices (e.g., more promotions, better visibility, etc.).

By the time all that happens, Amazon will probably have more than 90% of the ebook market and a nice chunk of their ebook list that no longer has to be sold at a loss. And oh, let’s not forget about the wonderful in-book advertising platform they’ll have built buy then. That’s an advertising revenue stream that Amazon would not have to share with publishers or authors. That might be the most important point of all.

What do you think? Why wouldn’t Amazon follow this strategy, especially since it helps eliminate competitors, leads to market dominance and fixes the loss-leader problem they currently have with many ebook sales?

Photo: Your Ad Here by KarenLizzie, on Flickr

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  • Arnold Gill

    Good ideas, but there is one flaw in this reasoning – and that is the list price model being used by the publishers. I have recently looked at a few books from Simon & Shuster on Amazon, and the Amazon price is, for example, $7.99 for the paperback, $10.23 for the Kindle ebook, and $18.99 for the hardcover. Now, considering the printing costs involved, the delivery and handling costs, and the costs associated with a physical store, there is absolutely no reason that the ebook price should be more than the paperback. They need to produce a single digital copy, nicely formatted (which is already done for the print versions), and convert to 3-4 ebook formats. There are NO OTHER COSTS! The _real_ price of ebooks should be in the $4.99 or lower range, while anything above that is the publisher purely trying to protect their print divisions from the new paradigm. Consumers are getting screwed, pure and simple. Using myself as an example, I might by 1 or 2 books at $10.23, but I will buy a dozen at $4.99. The publishers have got to think “app store” if they wish to survive.

  • mark

    To reinforce what Arnold Gill says – there are costs for the original formatting (and remember, the authors have ALREADY typed it in), and that presumably done by scripts, and zero printing, binding, or distribution costs, why *should* ebooks cost more than a buck or two?

    And then there’s the one person completely left out of this discussion: why should the publisher get more than a minimal amount? Why not 20-80 for the publisher.. and the AUTHOR? The publisher didn’t write it, or transcribe it. Why shouldn’t the author get more than pennies on the copy sold?

    But that’s the same question that the RIAA issue begs – you know, authors and musicians would just waste the money, we shouldn’t give much to them….

    mark

  • http://www.linkedin.com/in/pfnikolai Pete Nikolai

    Most books sell fewer than 1,000 copies. To compensate an author of a low-selling book for the hundreds if not thousands of hours they put into writing the book, the retail price would need to be substantially higher than $4.99, regardless of whether a publisher is involved or not.

    With the flexible pricing ebooks should enable, books that sell more copies could come down in price to appeal to even more people–if the author or publisher or retailer decides to do so.

    But perhaps the real issue is not so much fair compensation. Low ebook prices seem to have become an entitlement that some readers feel they can demand.

  • Juan Pablo

    If so, forget about diversity. The “only” eBooks that will come to life will be those that attract people, cause thats what advertisers are looking for.
    Additionally, Arnold, why would you buy a dozen eBooks if you dont have enough time to read them? Time is the limit for eBook market. A good book is obviously more valuable than a lousy one,so, puting this in economic terms, why would the Author/Publisher leave these “benefits” to the consumer instead of having their own share?

  • Cay Hasselmann

    Joe, your arguments make sense, however I disagree with the monopoly notion as whenever they would start to higher the prices some new outfit will raise up. That is at least what happens in all these scenarios, additional they will be restrictited more and more by anti competion measures, just see what happened to MS with the Open Source movement. At least one thing is clear that publishers are the big losers here who in the past had the power. Once Amazon starts acting stupid or burocratic the market will move more to open source, but as long as Amazon keeps prices low and access easy they will suceed. But sorry it will be bad news for all publishers.

  • Cay Hasselmann

    Juan, in previous time you would buy an O┬┤Reeilly book as reference and to show you co-workers in what ares you are working, even if you never read the book.