Dear Macmillan, You Don't Embrace The New By Trying To Protect The Old

from the that's-not-how-it-works dept

Lots of people have been sending over the blog post by the CEO of book publisher Macmillian, John Sargent, trying to explain the company's ebook plans, following all the hubbub over its fight with Amazon. I was going to write up a long blog post about how backwards-facing Sargent's viewpoint is, but frankly, Mathew Ingram, over at GigaOm, already wrote up the post I would have written (eerily, almost word for word). Go read that post.

In addition to Mathew's points, however, I'd add that Sargent seems to think that pricing is done by producers, rather than the market -- and historically when companies in competitive markets think that way, they end up being in line for a very rude awakening. Economic forces don't work the way they do because someone wants them to work one way -- they work because that's how markets function. And if you price something too high, the market lets you know. But Sargent doesn't seem to get that. Instead, he's trying to set up totally artificial and made up pricing -- which becomes really evident in his idea that "hardcover" ebooks will get one price, while "paperback" ebooks will get another. It's not difficult to understand Sargent's thinking here. He's still thinking in terms of protecting the traditional windows and the traditional profit margins, and that means high-priced hardcover books for a year or so, then lower cost paperbacks later, in an attempt to segment the market. But with ebooks, that's going to lead to frustration and confusion. As someone named CM Harrington noted in a comment on Sargent's own blog post:
So how much more expensive is hardcover e-ink over paperback e-ink?

Your model is doomed.
One of the reasons why economic forces work the way that they do, and the reason why infinite goods with zero marginal cost get pushed in price towards zero, is that buyers implicitly understand the difference between scarce goods and abundant goods. They implicitly recognize the marginal cost of making another good, and they mentally price products accordingly. Pretending that consumers don't do that is assuming that consumers are stupid. And that's an even bigger mistake than looking backwards instead of forward.


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  1.  
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    rachel, Mar 3rd, 2010 @ 9:47pm

    Oh come on now.

    Oh come on now.

    You can spend hundreds or thousands of dollars on a license for a software program, which has zero marginal cost. Nobody bats an eyelash, including, I imagine, readers of techdirt.

    Also, it's not "made up" pricing. Guys like Sargent have at their fingertips all kinds of marketing research, where they survey people and ask them (for example) how much are you willing to spend on an ebook?

    I haven't seen the data myself, but it's clear that you don't have any data at all.

    Also, maybe you ought to take a basic economics class.

     

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  2.  
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    Mike Masnick (profile), Mar 3rd, 2010 @ 9:59pm

    Re: Oh come on now.

    You can spend hundreds or thousands of dollars on a license for a software program, which has zero marginal cost. Nobody bats an eyelash, including, I imagine, readers of techdirt.

    Sure, if there's artificial scarcity that's what happens. But artificial scarcity is a temporary market feature that is unlikely to last. If you can get away with it, more power to you. But it's not sustainable.

    Also, it's not "made up" pricing. Guys like Sargent have at their fingertips all kinds of marketing research, where they survey people and ask them (for example) how much are you willing to spend on an ebook?

    Heh. It clearly is made up pricing, rather than market pricing. I used to do market research for a living. All the data in the world doesn't change the fact that you make a guess at the end. But what he's doing here is not just making up pricing, he's trying to have the producer set the pricing rather than the market. It's a recipe for failure.

    I haven't seen the data myself, but it's clear that you don't have any data at all.


    Actually, we've seen plenty of research -- some of which we've published here. Just saw another study that I'll be posting about later this week. They all show the same thing: price your ebooks at $0 -- increase your overall sales of physical books.

    So, yes, I do have the data. Thanks for assuming wrong, though. Very credible.

    Also, maybe you ought to take a basic economics class.


    Heh. Thanks. I did quite well in economics (well beyond basic level). Also taught it at the college level, but again, you want to make assumptions, go ahead.

    In your basic level econ, did they teach you what marginal costs mean? Did they teach you how to read a supply and demand curve? Or did they teach you just to look at demand? Because your statement above is only looking at the demand curve, which, again, is a recipe for failure.

     

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  3.  
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    jjmsan (profile), Mar 3rd, 2010 @ 10:05pm

    Re: Oh come on now.

    "Guys like Sargent have at their fingertips all kinds of marketing research..." Two words New Coke.

     

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  4.  
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    Ahab, Mar 3rd, 2010 @ 10:06pm

    no, YOU come on

    I hate to break it to you, but:
    # of people who use autocad

     

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  5.  
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    Ahab, Mar 3rd, 2010 @ 10:09pm

    no, YOU come on

    woops, html came on...even though plain text was selected. hrm.

    I hate to break it to you, but:
    # of people who use autocad is wayyyy less than # of people who read books
    My understanding is quite basic, but I do remember those supply and demand curves from econ.

    And, as a second point, there is no physical software out there that has more actual worth, but costs the same. I mean, I can start painting instead of using photoshop, but what happens when I want to change something thats already digital?

    Words are only worth the words, words+paper are worth the price of the words + the price of the paper. In the Ebook model, I've already spent $200 on state of the art paper, so I shouldnt have to pay for the paper twice.

    If they did poll people and do market research, as you claim, I think they polled the wrong people. Maybe they did the poll a year ago, and they only polled people with ebook readers. The people who will spend lots of money on a brand new electronic device are people who have money to spare, and probably have a higher price limit than the rest of us.

    Or perhaps the people who were polled just weren't thinking. Maybe they hadn't bought a book in a while and thought, oh, well, that price sounds okay.

    Or perhaps some of the people were not technically inclined, and really dont think about the cost of the physical object.

    Or perhaps they were (or were asked to) name a price relative to a brand new hardback. If the alternative is spending $40 on the new stephen king book, $25 sure *sounds* reasonable.

    Those are just off the top of my head.

     

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  6.  
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    Yeebok (profile), Mar 3rd, 2010 @ 10:25pm

    "hardcover_book.txt" 5300bytes, last modified 1/1/2010. $20
    "paperback_book.txt" 5300bytes, last modified 1/1/2010. $50.

    err .. yeah I'll buy the more expensive one. right.
    Like a hard-cover book vs paperback, the only real difference is the weight and volume of the book. Digitally, there's no equivalent - unless you include the book jacket in the book or something.

    I don't use ebooks, so I am somewhat curious. What is the difference between a hardcover ebook and a softcover ? If the only difference is waiting, I reckon I can wait a year to save whatever the difference is.

     

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  7.  
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    Any Mouse, Mar 3rd, 2010 @ 10:55pm

    Re: Re: Oh come on now.

    New Coke? Does it come precut for you?

     

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  8.  
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    og, Mar 3rd, 2010 @ 11:39pm

    Re: Oh come on now.

    "You can spend hundreds or thousands of dollars on a license for a software program"

    Correct, however that cost will also include support, access to a comunity and other benefits that are not at zero marginal cost.

    This model does not apply to novels.

     

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  9.  
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    Chris Meadows (profile), Mar 3rd, 2010 @ 11:51pm

    A Premium on Impatience

    There's more going on here than scarcity vs. abundance, though. There's also the time factor involved.

    I go into more detail about this in a TeleRead post scheduled to go up at 8:15 a.m. Central Time (in which I link this post, too), but bear in mind the difference between the cost of printing a paperback and printing a hardcover is only a buck or two—but hardcovers cost three times paperback price.

    It's a premium on impatience. People who absolutely have to have the book right now will be willing to pay that extra cash. People who aren't, won't.

    It's the same way with Baen's E-ARCs. Nobody seems to feel that they're somehow trying to pull a fast one by selling these less-proofed electronic advance reader copies for $15 three months before the final e-book comes out for $6. If people are impatient enough to want to pay that much for a draft version, they can. If not, nobody's forcing them to.

    I don't see Macmillan's variable pricing plan as being substantially different in principle than that. Just on a longer time scale.

     

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  10.  
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    Blatant Coward (profile), Mar 4th, 2010 @ 2:52am

    One second now...

    If I pay for a book for the hardback price, and I report the crappy "written by a seven year old or M. Night Shalyimadingdong" ending as a story crashing bug, will they then repair it? If so, I may be able to get behind this. If not, I will look at my folder with hundreds of Baen E-published titles and scoff.

     

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  11.  
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    Derek, Mar 4th, 2010 @ 4:15am

    Another media company strangles itself with its own necktie. The gasping and kicking is annoying but it will end soon.

    The more these industries fight the inevitable, instead of meeting the future with adaptive, forward-looking strategies, the sooner they fall by the wayside.

    I hope printed books never die, but I'm not hopeful that the publishing industry won't kill physical books in an effort to coddle their outdated business model. So far this year I've bought eight books: four PDFs direct from authors, four second-hand paperbacks.

    It's not a pretty sight, but these visionless companies are the slower, weaker animals that are inexorably taken down by predators. It's how nature works and it's how markets work too.

    There's a certain beauty to it, really. The laughable part comes when the ignorant cry for protection, often in the name of "capitalism," when healthy competition is exactly what they're afraid of.

    So go ahead Macmillan, knock yourself out. Overprice your product, spend your money on lobbyists and hand-wringing. You can delay things a bit, maybe let a couple more execs bail out comfortably. But you're limping. The lions are watching.

     

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  12.  
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    Richard (profile), Mar 4th, 2010 @ 5:01am

    Re: Oh come on now.

    You can spend hundreds or thousands of dollars on a license for a software program, which has zero marginal cost. Nobody bats an eyelash, including, I imagine, readers of techdirt.

    and for that money you expect support when things go wrong.

    Software differs from books in that it does something.
    Proponents of proprietary s/w will constantly remind you that it is support that you are paying for.

     

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  13.  
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    Michael, Mar 4th, 2010 @ 5:33am

    Re:

    Isn't the difference obvious?

    $50
    -$20
    ----
    $30

     

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  14.  
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    Hephaestus (profile), Mar 4th, 2010 @ 6:43am

    Re: Re: Oh come on now.

    And also that healthy mcDonalds buger that tasted like silly putty .... that one gives me heart burn just thinking about it.

     

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  15.  
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    Jeff, Mar 4th, 2010 @ 6:49am

    Re: Oh come on now.

    You can spend hundreds or thousands on software, the same way you can spend hundreds on an ebook. But you don't have to on either.

    There are people out there pirating software just like music and not paying for it. Batting an eyelash, yeah piracy of software shows me someone is. and I hear people bitch an moan about Adobe and other high dollar software all the time. There are free versions out there of most software programs, take Gimp instead of Photoshop. Yeah you don't get quite the robust functionality, but hell it does almost the same thing for free.

    The market spoke and someone answered it.

    And you also have to realize those $1000 programs have 100's of programmers working on it, not like the one author that wrote the book. They want to be payed for their work too, but there are more ways to split up that check!

    As you said you haven't seen the data yourself, that is so evident.

     

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  16.  
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    John Fenderson (profile), Mar 4th, 2010 @ 6:50am

    Re: Oh come on now.

    "You can spend hundreds or thousands of dollars on a license for a software program, which has zero marginal cost. Nobody bats an eyelash, including, I imagine, readers of techdirt."

    In the old days, your statement was true. Nowadays, it would be an exceptional circumstance that would cause me to spend anywhere near that much for a software license. And I would certainly bat an eyelash (and have a bit of a fit.)

    Thank you, FOSS, you make my business more productive on many, many levels.

     

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  17.  
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    Hephaestus (profile), Mar 4th, 2010 @ 6:51am

    This is my favorite comment ....

    Record Cartel Suit #1: "Revenues are down since we raised prices."
    Record Cartel Suit #2: "Raise prices again to cover the difference."

    Really funny because its true ....

     

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  18.  
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    ComputerAddict (profile), Mar 4th, 2010 @ 6:55am

    Re: A Premium on Impatience

    I agree, I think Macmillian used the wrong word choice when calling them hardcover ebooks and paperback ebooks. Its more of initial money grab (remember when the iPhone was $600?) and the long term price. While many people will just wait for the long term price (as they do now buying the paperback edition) many people will still want it as soon as they can get it.

     

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  19.  
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    Jeff, Mar 4th, 2010 @ 6:55am

    Let them die

    These old dinosaurs just can't adapt and if they don't they are going to die out. If they want to price themselves out of business, I say let them.

    The only scary thing is when politicians give us the old "too big to fail" speech on the publishers in trouble and bail them out as well.

    The auto industry is facing this problem right now. They went out there keeping prices high and not paying attention, while these new guys came in from overseas and underpriced them and almost wiped them out.

     

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  20.  
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    chris (profile), Mar 4th, 2010 @ 7:29am

    Re: Oh come on now.

    You can spend hundreds or thousands of dollars on a license for a software program, which has zero marginal cost. Nobody bats an eyelash, including, I imagine, readers of techdirt.

    ha ha she's right techdirt, you all whine about the price of music and then spend all your money on software. that's ironclad evidence that you're all anti-intellectual hypocrites who hate books.

    open source? what's on earth is that?

    Also, it's not "made up" pricing. Guys like Sargent have at their fingertips all kinds of marketing research, where they survey people and ask them (for example) how much are you willing to spend on an ebook?

    I haven't seen the data myself, but it's clear that you don't have any data at all.


    ooh, another zinger. the logic is bullet-proof: sargent is a CEO, so clearly he knows everything. none of you techdirties are CEOs, so clearly you know nothing.

    that's it techdirt: you just lost the game. close your browsers and go buy some CD's.

    Also, maybe you ought to take a basic economics class.

    ZING! we all know economics is about making money, not aggregate outputs, or the efficient allocation of scarce resources. no one here wants anyone to make money so clearly you don't know anything about economics.

     

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  21.  
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    chris (profile), Mar 4th, 2010 @ 7:35am

    Re: Re:

    Isn't the difference obvious?

    $30 + 12-18 months.

     

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  22.  
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    Anonymous Coward, Mar 4th, 2010 @ 7:56am

    n addition to Mathew's points, however, I'd add that Sargent seems to think that pricing is done by producers, rather than the market -- and historically when companies in competitive markets think that way, they end up being in line for a very rude awakening. Economic forces don't work the way they do because someone wants them to work one way -- they work because that's how markets function. And if you price something too high, the market lets you know.


    This might be true for most goods, but for university textbooks the market is seriously broken in that the people choosing the books are not the people paying for them.

    Professors get free copies of the books and often barely look at the price when picking a text. Publishers even send out sales reps to sell professors on the educational advantages of their textbooks.

     

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  23.  
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    Storysmith, Mar 4th, 2010 @ 8:16am

    Perhaps they should talk to Toni Weisskopf and get some hints about a successful business model. At Baen publishing, http://www.baen.com ebooks at $6.00 peacefully coexist with hardbacks, paperbacks, advanced reader’s copies, and profitable authors who make national bestseller lists…. and a very loyal customer base. CD’s with multiple digital books (with 'share-share-share' licensing) are included with some hardbacks… and NO DRM on any product.

    Perhaps in a few years, they’ll be answering to their Board of Directors why they didn’t at least investigate a profitable effective business model for ebooks?

     

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  24.  
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    sehlat (profile), Mar 4th, 2010 @ 8:47am

    Re: Baen

    "Perhaps in a few years,..." Nah. They'll blame "piracy" for their mistakes and keep plugging the old model until the building collapses around them. I cite the movie and record industries as evidence.

     

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  25.  
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    Valkor, Mar 4th, 2010 @ 9:23am

    Re: This is my favorite comment ....

    Sounds like government accounting. The demand isn't nearly as inelastic as they think it is.

     

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  26.  
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    mertz, Mar 4th, 2010 @ 10:36am

    http://www.nytimes.com/2010/03/01/business/media/01ebooks.html?pagewanted=2

    i just finished reading the macmillan blog and some of the commenters mentioned reading this nyt piece to get a more appropriate view on the entire book selling industry. suffice it to say i didn't learn anything new because i work at a bookstore. everything at the store is very fluid. if your things don't sell we ask the customers why and we hear out their advice and criticism. if we need to lower the price of the books we do that, by relaying customers comments to the publishers. if the publishers say no then we just return the books to them and incur the loss. sometimes we lowered the price of the books ourselves to get them off the shelves and in the hands of paying customers, and if they authors came in the store and happened to get mad at us, we would explain the problems to them and often they get on board or they insult us and the publisher gets involved. in a bookstore our main concern is selling products to customers. the rest we don't really care about. if your product is over priced or if you don't have a realistic view of what people are willing to pay for your products then you probably shouldn't be at that cushy job as a publisher seperated from the actual customers who help pay your salary. we're all in the business of making money. if customers think something is valued to low we raise the price and the customers pay that price happily. if we didn't listen to the customers who walk in our doors and the people we do business with, then our bookstore which is one of the best in a big city, would not exist. sometimes we also have to take risks and build and burn bridges with the publishers, other retailers, sellers who are sending us products to sell. if we can't move your products we don't want them, but if we're incurring a loss on our end then it's a guarantee the publishers are as well. we need big ideas and forward thinkers in the publishing industry.

     

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  27.  
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    Deherty Meherty, Mar 4th, 2010 @ 10:38am

    That really suks

    Like I said.. that really sucks fish tea. Fools fear what they don't understand.. How droll of him. I think he will wake up real soon. Just give him a minute.

     

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  28.  
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    Chris Meadows (profile), Mar 4th, 2010 @ 11:23am

    Re: (Storysmith's post)

    A successful business model like starting out charging $15 for an e-book, then reducing the price a few months later?

    Gosh, maybe Macmillan should try that!

     

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  29.  
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    Chris Meadows (profile), Mar 4th, 2010 @ 11:29am

    Re: Re: A Premium on Impatience

    Eh. I think that hardcover and paperback are convenient shorthands. People know that hardcovers cost more than paperbacks and come out first; they don't publish both editions at the same time. People getting hung up on "hardcover vs. paperback e-ink" are just looking for a fight to pick.

     

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  30.  
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    TheStupidOne, Mar 4th, 2010 @ 12:29pm

    Re: Re: Oh come on now.

    Some software packages (Matlab for instance) are incredibly expensive and are regularly paid for by corporations. If a good computer program will prevent one wasteful $50k prototype or one useless $100k test then it has more than paid for itself for many companies. (Yes I pulled those numbers out of my @$$ but not at all unreasonable for the company I work for.)

     

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  31.  
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    John Fenderson (profile), Mar 4th, 2010 @ 12:41pm

    Re: Re: Re: Oh come on now.

    Yes, but the original comment was implying that such purchases are common amongst the readership here. In fact, such expensive tools are only needed and purchased by a tiny percentage of people. That's often a big part of why they're insanely expensive -- their target markets are tiny and development costs are being shared by a small number of customers.

     

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  32.  
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    Mathew Ingram (profile), Mar 4th, 2010 @ 2:48pm

    Nice to know that our great minds are still thinking alike, Mike :-)

     

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