Libya, eBooks and Big Ben

Dear Reader,

In retrospect, the market was a bit slow in reaction to the troubles in the Middle East. As the Egyptian protests were becoming widespread, gold began to climb, but carefully. Similarly, oil had a momentary spike, but nothing like now.

Of course, the violence in Libya is worse than in Egypt. However, in a way, the violence might calm tensions in other parts of the Middle East. Perhaps the biggest warning sign from Egypt was the ease of overthrowing Mubarak. The markets could have foreseen more turmoil ahead.  Naturally, the Egyptian revolt encouraged others. “If they can do it, so can we” probably ran through the minds of many.

But with the violence in Libya, I would now think twice before attending the local protest in Yemen or Bahrain. My hypothesis runs somewhat counter to the conventional wisdom: the relatively peaceful protests in Egypt were a sign of trouble for other countries. The violent civil war breaking out in Libya is actually a sign of tranquility for the rest of the Middle East. 

I’m not ready to put this down into stone. After all, I’m not an expert on the geopolitical situation of every single Middle Eastern country. Some fires may burn deep enough to be unquenched by the violence. But certainly Libya will make the less passionate think twice about rising up.

Today, I’m finalizing some research for The Casey Report. We should have an excellent issue this month. If you’re not already signed up, try it risk-free for 3 months today.  So in the meantime, I’ll leave you with two long articles by Doug Hornig and Alex Daley. First Doug will share his thoughts on Ben Bernanke’s testimony yesterday. Then Alex Daley will report on a new author circumventing traditional publishers thanks to technologies such as the Kindle.


Big Ben Tolls

By Doug Hornig

Is it just me, or do other people wonder what it takes to get a Ph.D.? Do they give them out to just anyone?

Me, I only have a B.A. In Anthropology, no less, which is one of the fields kids of my era gravitated to when they didn’t want to get shipped to Southeast Asia to kill rice farmers. Of course, I got mine back when a B.A. was actually worth something. Or at least that’s what I tell myself.

Ben Bernanke, on the other hand, has a Ph.D. from MIT. Which is a pretty decent school, I hear tell. Although I don’t know about their economics department. It must be tucked away in a semi-private corner, what with the space required by all those prizewinning physicists and engineers running about the place. Maybe it’s weak. Because there do appear to be times when I know as much about the subject as their most prominent Ph.D. And I never even took Econ 101. All I know is from studying trade patterns amongst the Trobriand Islanders.

But Ben, along with his MIT Ph.D. and a beard that is, I admit, nicer than mine, also carries the distinction of being the second most powerful man in Washington. (Or first most, by some reckonings.) What he says matters.

He doesn’t say it all that often. Usually only in print, through the release of minutes of the meetings of the Federal Open Market Committee, which he chairs. Hmmm… Federal? Nope. Open? Anything but. Market – well, they do deal with markets, but hardly open ones. Committee. Check. At least they got one right.

Twice a year, though, Big Ben comes out of his hidey hole, as he did this Tuesday, and drives his Ford Focus to Capitol Hill to share with Congress his economic insights. Strike that. Not the insights part, but I’m sure he gets a chauffeured limo ride to the Hill. Although, so they say, a modest Focus is indeed the Bernanke family car.

Ben then plunks himself down in front of a panel of congresspersons who try (except for Ron Paul) to pretend they aren’t as obsequious as they appear. He makes pronouncements as to the state of the American economy, takes questions and avoids the answers to them. There is this fog that slowly settles in. Perceptions get distorted. Hearing becomes impaired. By the end of his appearance, it’s often difficult to find someone who remembers what he actually said.

Don’t believe me? Take the reportage on Tuesday’s testimony to the Senate Banking Committee, as reflected in these two headlines I plucked from the Internet. (I could go off here on the present condition of the journalistic profession, but you’ll forgive me if I save that for another time.) Please feel free to draw a conclusion:

From FOXBusiness.comBernanke Sees Little Effect on U.S. from Pricey Oil

From the Associated PressBernanke: Rising Oil Prices Pose Threat to Economy

You see the problem.

Let’s take the first one first. Even I, in my lowly anthropologic ignorance, know that rising oil prices have a ripple effect, and a big one, across the entirety of the American economy. The stuff is used not only to get our Focuses from Point A to Point B, but it goes into fertilizer, plastics, medicines, you name it. We are the oily civilization, and the cost of this über-resource has an impact on, well, pretty much everything.

Yet the chairman contends that, “The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation.”
Perhaps Ben has been sharing some blue Kool-Aid with his pal, the secretary of the Treasury. Last week, commenting on the possibility of an oil shock because of turmoil in the Middle East, Tim Geithner (who only has an econ M.A., but got an important job anyway) said that the world economy is strong enough to "handle" the oil shock, and insisted that central banks “have a lot of experience in managing these things.” How well they managed them was not addressed.

Barclays Capital takes a more sober view, noting that the civil war raging in Libya means 1 million barrels of that country’s daily output is “shut in,” with the other 600,000 barrels at risk. If the strife spreads to Algeria, another 1.3 million b/d could be taken off the market. While it’s assumed that Saudi Arabia can step in and raise output, at best this takes time, and its oil is an imperfect substitute for Libya's sweet crude. Moreover, many experts question whether the Saudis actually have the spare capacity they claim.

This is a dicey situation, as you already know if you’ve filled your gas tank in the past month and bitched about the 3.75% price increase. Maybe Bernanke doesn’t notice because of the good mileage his Focus gets. And maybe he also didn’t notice when food prices in January rose at the fastest clip in three years, on top of the already-monster hikes of  ’10.

But back to our headlines. Perhaps FOX just got it wrong. After all, the AP said something much different. Didn’t Big Ben actually toll the alarm? Yes, if this is an alarm: As the AP reported, he admitted “that a prolonged rise in oil prices would pose a danger to the economy.” No duh.

I decided, not for the first time, that the press was useless. I wasn’t going to be able to see through the fog if I didn’t go right to the source.

The takeaway, if you read his statement, is that he truly seems to believe (unless he’s just lying through his teeth) that inflation is tame. “Over the 12 months ending in January,” he says, “prices for all of the goods and services consumed by households (as measured by the price index for personal consumption expenditures (PCE)) increased by only 1.2 percent, down from 2.5 percent in the year-earlier period.”

Anyone out there spend just 1.2% more in 2010 than 2009? Didn’t think so. Problem is, the government loves to look at flat-screen TVs, computers, cell phones and other electronic gizmos, all of which have become steadily cheaper as the tech improves. It ignores food, fuel, healthcare, insurance, tuition and anything else that might dampen its stats. Soaring stock market and commodities prices are also not counted.

As for the future, here’s the “modest increase” he projected earlier because of pricey oil: “FOMC participants see inflation remaining low; most project that overall inflation will be about 1-1/4 to 1-3/4 percent this year and in the range of 1 to 2 percent next year and in 2013.” Wow. That is modest. Three solid years of ultra-low inflation. I can hardly wait.

Big Ben went into some detail concerning a monetary policy that has been “unusually accommodative” and employed some “less conventional means.” Referring to the Fed’s “large-scale purchases of longer-term securities.” But he neglected to mention that those purchases were made with dollars newly created from thin air. And that such monetary inflation has throughout history always led to serious price inflation.

Luckily, though, “We have all the tools we need to achieve a smooth and effective exit at the appropriate time … our ability to pay interest on reserve balances will allow us to put upward pressure on short-term market interest rates and thus to tighten monetary policy when required.”

Whew. Who knew it was that simple? But I guess that’s where the Ph.D. comes in. I’ll apply to Phoenix University in the morning.


The Economics of eBooks for Authors

By Alex Daley, Casey’s Extraordinary Technology

Remember this face. It won’t be long before you see more of it. A lot more. She’s already appeared on numerous online shows and in the pages of national newspapers. But with her recent rise into the spotlight, don’t be surprised to find her slated for a spot on The Today Show or even CNBC in the near future.

 

Her name is Amanda Hocking. She is a 26-year-old Minnesota native with a predilection for vampires and an incredible talent for writing. Her series of books, originally available only on the Amazon Kindle, have become a relatively large hit and rank her among the bestselling independent authors of the moment.

And it’s her independence that has been the subject of much media speculation of late. Numerous blogs are now reporting that her sales surpassed the 100,000-eBooks-per-month threshold in December, making her arguably the most successful self-published fiction author today. And, with royalties for Kindle books at 70% in some cases, and no publisher involved to take a slice of the pie, these bloggers are quickly jumping to the conclusion that this self-made author is raking in the dough, espousing headlines like “This 26-Year-Old Is Making Millions Cutting Out Traditional Publishers With Amazon Kindle.”

Unfortunately for Hocking’s bank account, and the readers of all those blogs now decrying her the first eBook millionaire, the math is a little misleading.

The Business Insider article referenced above includes some (admittedly) back-of-the-envelope math to come to the conclusion that she’s a potential millionaire. 100,000 books per month, times 12 months, times $1+ average royalties per book, equals more than $1M per year in income. Impressive. Though the million-dollar conclusion is a little premature. Here’s why.

To begin with, it’s worth explaining where they arrive at that $1+ per book in royalties. At the beginning of last year, Amazon.com made a change to the royalties they offered authors of eBooks, in an attempt to encourage more, cheaper eBooks and larger numbers of independent authors. Under the original royalty agreement, authors received 30% of the price of their eBooks and were free to set whatever price they wished for them. That’s comparable to the 30% offered on average by traditional pulp-centric publishers.

Under the new arrangement, if an author agrees to a host of conditions, including making the eBook cheaper than paper copies and keeping the price between USD$2.99 and $9.99, they can keep 70% of the title’s price instead. That’s a lot of incentive to an independent author considering whether to go it alone or keep looking for that book deal. 

Ms. Hocking’s books, however, fall partially out of that price range. She is most famous for her “My Blood Approves” vampire series, the first and most popular of which retails for just $0.99 in eBook format. At that level, she would only receive about $0.30 per copy sold. If readers buy the follow-ups, each published for a still bargain bin-level $2.99, she makes a much more substantial $2.09 per copy.

Her newer trilogy also has the same structure as the prior series, with the first book at a “why not” level of $0.99 and the follow-on books priced at $2.99 as well. But to figure out how much money she may have made from her books thus far, we need to know not just how many she sold in December, but altogether.

Thankfully, two weeks prior to her sudden blog fame, this article appeared in USA Today, which highlighted Ms. Hocking as having sold a total of 146,000 books in all of 2010. Her December sales numbers are the result of a very fast-growing ramp that has accelerated from only a few hundred books a month in early 2010. If you assume the majority of her sales were for the best seller on her list and distribute the rest of the sales in a typical 30% fall-off model, 145,000 sales might be distributed amongst the 9 books she had published before the end of the year as such:

If so, then her probable take-home pay would have been in the range of $189,000 for the year (if the sales are more heavily skewed to the two $0.99 books, which is very likely, then it could be considerably less). Not a millionaire yet, but certainly a lot more than your average 26-year-old makes each year, and definitely at the high side for an author of any kind, let alone one without a publisher.

While it may have been a bit premature to anoint this young literary up-and-comer as the first millionaire of the eBook world based on her December sales, there are two really important numbers buried in her sales data that should interest readers and scare publishers. 

First, all of the books she has published are available in paperback as well as in digital form. These paperback books are made possible not by her signing a contract with a traditional publisher, but through a “print on demand” service that makes a copy of the book for each order on a website like Amazon.com or the online extension of Barnes & Noble. They are priced at par with traditional store-bought paperbacks, with most of her books priced at $8.99 or $9.99 each. 

The eBook versions account for 99% of all unit sales. That’s an astounding disparity. Sure, her books were originally available only in the eBook format, are targeted to a young demographic that is largely digital to begin with, and promoted almost exclusive via the web. All of that skews the number a bit. But, while her experience is extreme, it is not unique. 

In a very public analysis of sales of the massive bestseller The Room a few weeks ago, two things became abundantly clear. 1) Amazon is the 800 lb gorilla of the book industry, as between Kindle and print sales, the company accounted for 50% of all sales of the bestselling book. 2) Amazon’s customers prefer digital to paper, as Kindle sales accounted for 80% of Amazon’s total, or about 40% of all sales across all channels. And price was not the sole driver of the preference, as the hardcover on Amazon was only $14.41, or 20% more than the digital version. 

In January, USA Today announced that 19 of the 50 bestselling books in the nation each had more than half of their sales from eBooks. By February, that number had risen to 23 of 50. 

Which brings us back to the second most interesting tidbit from Ms. Hocking’s sales data – what has happened to her sales since the end of 2010. According to USA Today, her sales in January alone approached 450,000 units! It’s amazing what a little mainstream attention and an expanded base of potential consumers can do.

With an estimated 3 to 5 million new eReaders activated this holiday season, the market for eBooks just got a whole lot bigger. Add in all the people reading Kindle books on PCs, smartphones, iPads and the like, and the audience is growing at a rapid pace.

While Ms. Hocking may not yet be a self-published millionaire, she is certainly on her way there quickly. Plus, you know what they say about fiction writing: the real money is in the movie rights.

In the meantime, her success should serve as an inspiration for authors. And as a warning for traditional publishers: Let the music industry be your warning. Technology is changing the world beneath your feet. You can’t fight it. Start adapting now.

[Of all the technology sectors to invest in, biotech is one of the most promising for the near future. But Alex and his team don’t fall for the hype that attracts many investors to tech startups like flies. Instead they’re doing meticulous due diligence on every one of their picks – as a result handing subscribers of Casey’s Extraordinary Technology annualized gains of 84% in 2010. Read more here.]

Vedran here again. At the moment, gold is up to $1,438.80. It’s hard to believe that only weeks ago, I received a couple frantic emails from subscribers deeply concerned about a 6% percent drop in the price. That’s it for today. Thanks for reading and subscribing to Casey’s Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

Mar 02, 2011