Amazon's Latest eBook Deal Is A Watershed, Will Increase Pressure On Publishers

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Amazon signed an exclusive deal for the eBook rights to two bestsellers by Stephen R. Covey.  This is a watershed deal.  The economics are not unusual for Amazon, but–for once–they are good for the author.  By giving writers a way to make more money by dealing directly with Amazon, the deal could begin to put pressure on other publishers to change the way they view eBooks.

Specifically, the deal could shift difficult discussions currently being held between Amazon and book publishers in Amazon’s favour since it:

  • Sets a precedent for authors owning the digital rights for back titles, which could lead to writers cutting out the middleman and distributing direct to Amazon.
  • Pays 50% royalties to the author, setting the stage for a very public case in which an author could make more money selling e-books currently than print books. 

WHOLESALE PRICE TO AMAZON IS SIMILAR TO OTHER E-BOOK DEALS

We spoke with someone close to the deal who said that it closely resembles a typical e-book deal, except for the larger royalty to the author. 

Specifically, the wholesale price paid by Amazon to Rosetta Stone books (the publisher) is likely close to those paid for other comparable older e-book titles.  On older books, we estimate that Amazon nets between $0 to $1 in profit per Kindle copy sold. (Amazon loses money on new books). 

Rosetta, meanwhile, is giving half of the overall revenue to the author, but it should make a profit since there are minimal production and marketing costs involved.

LEGAL PRECEDENT GIVES SOME AUTHORS ABILITY TO DEAL DIRECTLY WITH AMAZON

There is an important legal precedent here, one that could give Amazon a huge advantage in dealing with authors and publishers who published books more than a decade ago.  (In those days, print publishers did not explicitly buy rights to electronic books, whereas they now do.)

Rosetta Stone went through a lengthy legal battle with Random House back in 2001 in which it won the rights to sell e-books on its titles.  This precedent will make it difficult for publishers to successfully sue authors and digital publishing shops for the digital rights to back titles. 

The precedent should give authors the ability to “go direct” and cut better deals with Amazon.  This, in turn, may allow Amazon to acquire the rights to books for less than they would if a traditional publisher were involved.

Publishers who do sue for electronic rights risk losing leverage in discussions because they will likely be seen as “the bad guy” suing authors in order to squeeze more money out of them.  A better alternative may be to simply try to negotiate the best deal possible with authors, assuming many of them don’t cut direct deals with e-book distributors.

In addition, there is a competitive issue at play as well.  If a large battle for e-book rights ensues in which publishers team up in court to agressively go after digital rights, the case will likely be led by a single publishing house with the others playing lesser roles in the legal process.  This makes the lead plaintiff look potentially worse to authors than its competitors which could make it easier for its competitors to sign new authors.  So, publishers could have a difficult time coming together to team up on an issue like this in court.

AMAZON HAS NOW DEMONSTRATED IT CAN GO IT ALONE

Amazon is the largest e-commerce site in the world and already has a large installed base of readers buying the print and audio editions of the e-books it sells.  If Amazon is able to succesfully use its massive reach to drive a material amount of book sales off of these exclusive Covey releases it will have demonstrated to authors that it can sell e-books directly with Amazon.  This will provide more motivation for authors to cut out the middleman and go direct to Amazon.

BOTTOM LINE:

None of this will make any difference to the near-term Kindle reality: Amazon loses money on most books it sells.  In order for the Kindle to become the big money-maker that most analysts expect, traditional publishers will have to cut the wholesale prices at which they are selling eBooks to Amazon.  We have seen no evidence yet that this is happening.

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