May 2015 Author Earnings Report
Welcome to the May 2015 Author Earnings Report. This is our sixth quarterly look at Amazon’s ebook sales, with data taken on over 200,000 bestselling ebooks. With each report over the past year and a half, we have come to see great consistency in our results, but there is always something new that surprises us. Often, it’s something we weren’t expecting, like the massive shadow industry of ISBN-less ebooks being sold, or the effect Kindle Unlimited has on title visibility. This time, we went into our report curious about one thing in particular. But we were still not prepared for what we found.
If you’ve been shopping for ebooks on Amazon lately, you may have seen this new addition to many ebook product pages:
This announcement can be found on ebooks from several of the largest publishers, and it appears to serve as both an apology from Amazon and also a shifting of the blame for high ebook prices. Amazon has stated in the past that they believe ebooks should not cost more than $9.99. Self-published authors are no doubt familiar with this price constraint, as their royalties are cut in half if they price higher than this amount. But after a contentious and drawn-out negotiation with Hachette Book Group last year, Amazon relinquished the ability to discount ebooks with several publishers. Prices with these publishers are now set firmly by them.
Soon after these agreements went into place, industry observers noted an upward move in average ebook prices. Freed from Amazon’s discounting, and with complete control over pricing, the publishers made a decision to push the price of many of their books above $9.99.
With six quarterly snapshots, each snapshot consisting of 50,000+ of the top-selling ebook titles, we plotted the average price by publisher type to see just how much prices have gone up. The blue bars show the price of self-published ebooks for each of our reports. The purple bars show the average price of Big 5 published ebooks.
Since we started pulling this data, the average price of an ebook from a Big 5 publisher has gone up 17%. Compare this to a difference of 5% for self-published titles, or the increase of 7.5% across Amazon imprints. The prices for Big 5 published ebooks have risen quite steadily, rather than a sudden surge since the return to agency.
What will the effect of these pricing decisions have on unit sales, revenues, and author earnings? We were eager to find out.
The May 2015 Author Earnings Report
We start with a simple counting of the number of titles on Amazon’s ebook bestseller lists. No math involved, just a detailed look at whose works are showing up as top-selling titles. For comparison, we included the same graph from our January 2015 report.
Number of Titles in Amazon’s Ebook Best Seller Lists
In the last three months, the Big 5 publishers have seen a 26% reduction in the number of titles on Amazon’s Best Seller lists. This means fewer titles are selling well enough to make these lists, and it also means fewer titles are receiving that added visibility.
Ebook Unit Sales
Over the same period, daily unit sales from the Big 5 have fallen 17%. This is a measure of the average rank of each ebook. Just as publishers study the New York Times bestseller lists to gauge the strength of their competition, we are looking at the same thing. But with a sample size of 200,000, rather than 20.
Ebook Gross $ Dollar Sales ($ Readers Spent)
Next up, we factor in the price of those ebooks to see how much money is being spent. Here, we see that daily consumer spending on books by Big Five publishers took less of a hit, with market share of daily revenue down 7.8%. Remember that prices on these titles have gone up. Publishers are trading lower volume sales for more dollars per title. But this might not be as clear a trade-off as it seems, as we’ll explain later.
Ebook Dollar Revenue To Authors
Most importantly for authors, we can see here a huge loss in daily earnings from Big 5 publishers of 20%. Their higher prices aren’t just hurting readers; they haven’t been good for their authors either. And authors seem to understand this, as many implored Amazon to continue discounting their works during negotiations with publishers last year. Now it is impossible for Amazon to discount these books, and publishers and their authors are losing revenue as a result.
Six Quarterly Reports
Let’s now turn to longer trends by graphing our last six Author Earnings reports over time. Here, we see the gradual downward trend for Big 5 ebooks and the upward trend for self-published works has become much more pronounced over the past quarter.1
Sometime in the last quarter, indie daily unit sales overtook Big 5 publishers, combined.
The above chart reveals the effect higher prices and lower market share have had on daily consumer spending, with self-published authors gradually chipping away at market share lost by major publishers.
Here is the chart that means the most to us as authors, and we see that self-published authors now command more daily income from digital royalties than all Big 5 published authors, combined. And in each of these graphs, we can see that long term trends have become much more pronounced.
January 2014 to January 2015 Drop in Publishing Revenue
This sharp downturn should not be a surprise. As was recently reported by the American Association of Publishers, the Big 5 publishing group and roughly 1200 other reporting traditional publishers collectively saw an 8% drop in ebook dollar sales revenue in late January 2015 compared to early February 2014. This is actually a little steeper than shown by the data we’ve collected for our Author Earnings reports. Looking at our own data from early February 2014 and late January 2015, we measure a 4.7% drop in Big 5 publisher dollar revenue from ebooks at Amazon, not 8%. But the AAP data — while the bulk of it is the Big Five — also includes data from other traditional publishers as well as from other ebook retailers. Undoubtedly, the near-halving of Barnes & Noble Nook ebook sales during that same period is also a factor in the AAP’s larger reported drop in Big 5 sales.2
What we see from the graphs above is that all the reporting lately on the plateauing or decline in ebook adoption is certainly true for major publishers, whose numbers are being used as if they represent the broader market, but their daily unit sales are less than a third of the total market. Ebooks may be on the downward slope for them, but not for everyone else.
The Bigger News is What Happened Since January
What the AAP hasn’t reported yet, because the data has yet to be collected on their side, is the impact of the market shifts since late January, which we see below. Late January unit sales are on the left. Our latest report on early-May daily unit sales is on the right.
In just the last three months, Big Five publisher ebook unit sales have fallen another 18%. Higher prices and a return to agency pricing seems to be seriously impacting sales. And self-published authors are moving into that lost market share, with an increase in daily revenue of 12.4% since January 2015.
The Effects of Agency Pricing
We noted above that daily revenue for the Big 5 publishers has gone down significantly, but not nearly as steeply as their plummeting share of daily unit sales. The fact that revenue has not fallen quite as severely as market share is explained by the higher prices of the titles being sold. But there is more at play with the return to agency pricing, and it isn’t good news for those publishers or their authors.
In the past, publishers set high prices on their ebooks knowing that Amazon would discount those titles, which would increase sales by not driving away price-conscious consumers. In fact, one of the complaints from publishers in their negotiations with Amazon is that Amazon was no longer discounting as per usual. Those discounts had been assumed and were factored into publishers’ pricing strategies. Widely misunderstood under this scenario is the fact that the discount came out of Amazon’s pocket, not the publishers’ nor the authors’.
When Amazon discounts a non-agency ebook, the publisher still gets their share of the original digital list price, which is set by the publisher. The author also still gets their usual 25% of that share — or 17.5% of the original digital list price — regardless of any Amazon discounting. The only party that loses out in profits with the discounting is Amazon — something they were apparently willing to do in order to help grow the ebook market, encourage adoption, and to win market share from competitors who could less afford to discount so steeply. (In fact, the degree to which Amazon was discounting those Big Five titles surprised us when we ran a 120,000-book comparison in late January against the publisher’s original digital list prices for those books. Prior to agency, Amazon was giving up almost the entirety of their margin on Big Five ebooks, and selling them on average at cost.)
The move to agency pricing changes this relationship. Amazon now gets a fixed 30% of every sale, which means publisher profit is no longer the entirety of daily sales revenue. In fact, let’s look at the difference by graphing publishing revenue prior to the return to agency pricing for most of the Big Five. This is how the world looked just 3 months ago, at the end of January 2015:
The green block is Amazon’s take. As you can see, there is no take from the Big 5 publishers. Amazon’s deep discounts came at their own expense, so major publishers were getting 100% of what consumers spent on their books. The blue portion is what goes to their authors.
And this is what the world looks like when publishers operate under agency pricing:
Notice the brand new block of green atop the Big Five bar? Agency publishers are now giving up 30% of the revenue from their higher-price ebooks, and they are selling fewer numbers at those prices. Also: Their authors are earning less, as royalties are calculated as a percentage of net revenue.
Publishers fought hard to take back control of ebook pricing from Amazon. This was a stated intent by Hachette to its investors in 2014, and it was touted as the end result of their lengthy negotiations. What has that control brought?
By our data, which matches industry reports, this control has brought higher prices to consumers, lower sales for publishers, and less earnings for their authors. It has also brought greater market share for self-published authors, which is why many were pulling for publishers to get their way during negotiations with Amazon.
If it seems unlikely that publishers would have fought so hard for such disastrous results, it might help to be reminded that it isn’t the first time. In the lawsuit against publishers for conspiring to raise ebook prices in 2009, it was shown that the agreement they fought to win with Apple resulted in a reduction of profits per ebook sold (pg 53). Lawyers were also successful in showing at trial that a move to agency pricing resulted in a sudden and drastic shift upward in ebook prices, harming consumers, but also harming publishers (pg 94).
One does not need to theorize on why publishers would make these decisions. One CEO of a Big 5 publisher wrote in a note to herself that higher prices would slow ebook adoption and casual purchasers, protecting retailers (pg 47). So speculation is not required. This was the same conclusion reached by the judge in the collusion case, whose reading of Big 5 CEO emails showed a willingness to erode Amazon’s market share at any cost, even to themselves. The court decision in United States vs. Apple et. al. is not only gripping reading, it provides our clearest window into the intentions of major publishers, as it includes their private thoughts and emails.
Studying the market and all available data is critical for writers today. It is equally critical to understand the decisions being made by retailers such as Amazon and Apple, and publishers such as the Big 5. Without this understanding, authors may place their trust in partnerships that do not have their best interests in mind. Not all publishers are alike, of course. Some have not yet returned to agency pricing. This may be worth considering when entertaining offers from various publishers. It may be useful to know that some price their ebooks much higher than others, which hinders sales. It might also be a good time for agents to begin including price ceilings in their negotiations with publishers. Their revenue goes down as author earnings go down. Literary agents are in a position to protect consumers, assist authors, and prevent publishers from driving up prices any further. Their careers are in the balance as well.
One final point that bears mentioning: Protecting the paper book trade will not help publishers. We know from their own accounting that ebooks are far more profitable. Any report showing a decline in ebooks and an increase in print means a net loss for the Big 5 and their authors. Every dollar of consumer ebook spending that is replaced with a dollar of consumer paperback or hardcover spending means:
- Reduced publisher profits (only 20 cents of profit on each dollar versus 52.5 cents on ebooks).
- Reduced author earnings (only 8-15 cents of each dollar goes to the author versus 17.5 cents on ebooks).
- Fewer of an author’s books get sold and read.
- Less discoverability (in the last quarter, the number of titles on bestseller lists plummeted 26%).
- Fewer new fans eagerly awaiting the author’s next book.
Authors need to understand that ebook dollars and even the celebrated hardcover dollars aren’t equivalent. In addition to the lower royalty share authors get, a big chunk of those dollars are lost on printing, shipping, and returns.
Through all of this, we can see that control over pricing is enormously powerful. The largest retailers and the largest publishers are willing to do great harm to one another in a fight for this power. For authors who want control over their pricing, so they can avoid becoming casualties in wars between retailers and publishers, the choice of publication method is clear. And it’s becoming more clear every quarter, as self-published authors continue to win market share, and continue to take control of their careers.
1) For consistency across the six reports, we revised the payment to Big 5 publishers up across the board in the previous five reports. In the past, we had calculated payments to publishers at being 80%. This was to account for the 70% they were owed, and to then factor in any discounting Amazon was eating on their end. Following our January 2015 report, we ran a comprehensive comparison of Amazon sales prices for the entire 120,000-title dataset against the publisher-set digital list prices on B&N.com, and determined that Amazon was on average discounting Big-5 and other traditionally-published books far more steeply than our 80% modeled, and that Amazon’s profit was very close to 0%, rather than 20%. In other words, publishers were getting on average very close to 100% of the actual sale price for every ebook sold. To look at trend lines, we applied this consistently to each report, for an apples-to-apples comparison of payouts for the last year and a half. But for the May 2015 report itself, we computed all publisher shares (and author royalties) for non-agency Big-5 and other traditionally-published books using the digital list price our spider software found that same day on B&N.com.
2) Barnes & Noble’s Nook store’s well-covered collapse appears to be accelerating. It is now possible to hit the overall Top 50 Best Seller list on Nook.com with fewer than 100 sales per day from a standing start. It takes around 1,500 sales per day to hit the same benchmark on Amazon.com. We currently calculate B&N’s ebook market to be in the single digits, perhaps even the low single digits. No author should be happy with this development, as the more healthy markets that exist for our works, the better.
For more on the history of the fight for and return to agency pricing, an excellent and fascinating read is the decision in United States vs. Apple et. al.. Information on windowing can be found on page 34. On page 35, you can see the price advocated by one major publisher for ebooks to be in the $18 – $20 range. Throughout, you can hear about each publishers’ anger over the $9.99 price ceiling encouraged by Amazon, a desire for much higher ebook prices, and a desire to win back control of pricing and to drive those prices as high as possible. This Author Earnings report provides the clearest look at the disastrous consequences of this pricing philosophy.