Behind the Curtain - Writing Advice
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I've seen some blogs and posts lately where indie writers are worried that Amazon is going to become the only game in town, so they are just exchanging their traditional publishing 'overlords' for 'Amazon as an overlord' instead.
Now these are generally very intelligent people, but I'd like to provide a quick explanation why I’m not worried about Amazon becoming the only game in town for indie writers.
Fundamentally they are worried about a monopoly situation, but when you look at what it takes to create a monopoly, you'll see pretty quickly that there aren't the right ingredients in place for Amazon to corner the market on ebook distribution.
The most common monopoly is a physical monopoly-think Ma Bell a few decades ago. The cost of putting in the physical infrastructure to provide phone lines to all of those houses was so prohibitive, and the incremental cost of providing service to one additional customer was so low, that once you had the infrastructure in place in a geographical area, you could pretty much keep anyone else from coming in and putting in their own infrastructure. If someone tried, you could drive you prices down so low that it would be impossible for them to compete on the basis of price and still recoup their infrastructure costs.
The slightly less common type of monopoly is a government issued monopoly (think copyrights and patents). This is a situation where the government agrees to stop others from competing directly with you as an incentive to get you to create whatever product it is you create.
The last major monopoly is what I call an investment monopoly. This is somewhat related to the physical/geographic monopoly in that you've already made the investment required to distribute or create your product, but there's nothing physically stopping anyone from entering your market. Instead, the sheer cost of entering your market, and your ability to drop your prices stops others from making that investment. They know that as soon as they make that investment, you'll drop to cutthroat pricing, thereby eliminating their ability to repay the fixed costs of getting into the market.
The example I always think of with regards to this kind of monopoly was Intel. The creation of a chip fabrication plant runs in the billions of dollars, and my impression is that for many years that was the primary thing driving their domination of the chip manufacturing market. Sure there was Motorola which provided at one point something like 20% of the chips to the market, but that just meant that Intel provided chips to the other 80%. If you wanted a personal computer you had to go with one of those two options. Eventually though, the profit margins in the CPU industry go so high (the ingredients (silicon) for a processor are the next best thing to free) that it justified AMD stepping into the industry. From an economic standpoint, it's pretty astonishing to me that there was enough margin in the market for AMD to survive even after Intel started slashing prices, but that's exactly what's happened so far.
The interesting thing about the current publishing environment is just how much the landscape has changed from what it was a couple of decades ago. It used to be that incremental costs of producing and distributing one more book to the end consumer drove the bulk of the price of the finished product. Printing, shipping, storing (either in the publisher's warehouse, or at the book store), returns (estimated at about 50% of the total print run), they all add up.
Now, the incremental cost to produce one book is essentially zero, and the costs to distribute is mere pennies, and likely to become even cheaper as additional fiber is laid to even more locations, and the existing fiber is more and more heavily utilized.
What that really means is that at traditional prices for paper books, there is room on e-books for a huge profit margin for everyone from the publisher to the author and the distributor. Even more incredibly, you can drop the price point of an e-book to less than half of the current costs of a paper back, ($2.99 for purposes of illustration) and there is still room for many times the profit the publisher and author would normally make.
I know it feels like I've wandered a bit away from the earlier discussion of monopolies and Amazon taking over the world, but hopefully this has laid the foundation for an understanding of what I'm about to say next.
I can't see any situation right now in which independent authors are going to take less of a cut on a per-book basis than they are right now, at least not for very long.
When you look at my three generic pricing models, you'll see that there's nothing geographically stopping people from competing with Amazon, Barnes & Noble, Kobe, Smashwords or any other electronic book distributor. Likewise, the very fact that we've got so many different e-distributors tells me that there isn't anything currently in place that is going to lead to some kind of government-supported monopoly.
That means that the only way for a distributor of books to create a true monopoly is for the costs to replicate their business model to run so high that nobody else can enter into the market, and that's also something I just can't see ever happening.
Don't get me wrong, there has been some fantastic human capital invested into the websites of these mega e-distributors, but ultimately, one or two sharp developers could create a storefront to sell e-books in fairly short order and go head to head with the existing distributors.
There is a fairly constant rule in business that says when a particular industry is making higher than average profits, it will drive further entrants into that particular industry until price competition drives the pricing down to a point where the industry is once again making average returns.
Intel and AMD was a good example of that rule in action, and ultimately that is the guarantee to indie authors that they'll continue to see the same kind of returns on a per book basis.
If the current distributors ever try and grow their profit margins by reducing royalty percentages to the authors, it's going to take their already generous profit on e-books and send it even higher. That's great for the distributor in the short turn, but in the long term they'll find themselves with so much competition that they'll be forced to drop pricing or increase percentages to authors/publishers if they want to have any hope of maintaining their market share.
The really amazing part of all this? From the outside looking in, there doesn't seem to be any logical reason for Amazon to have increased its royalties to authors from 35% to 70% unless you assume that Amazon understands the principles we're talking about here very well.
My bet? Amazon knows exactly what kind of goldmine distributing e-books is going to become over the long term. In fact, they are probably subsiding the cost of the kindle somewhat with estimated profit off of the book sales (for another good example of this read up on Iomega and how they arrived at pricing on their zip drives back in the day).
Faced with this kind of goldmine, I think Amazon has very carefully decided to try and limit the amount of competition they'll face by taking some of the profit out of the picture and passing it along to the authors and publishers. A very shrewd move which is helping guarantee that they'll continue to have a huge selection of high-margin, low-price product for their kindle customers to purchase for years to come.