If publishers cannot control e-book retail prices, how should they set their own?

On the Columbia Journalism Review, Ryan Chittum has a rebuttal to a number of recent posts about e-book production costs and price, including the post by Mathew Ingram that I covered here. Though the article is replete with quotes and counter-arguments, but the central thrust seems to be that publishers ought to be able to charge what they want to—but they really should be wanting to charge less.

At base, copyright holders have the right to ask what they want to get for their work (which is why they were so concerned about Amazon selling ebooks at a loss). If they set the price too high, nobody will buy the book and they will lose money. If they set the price too low, lots of people might buy it, but they will still lose money.

Though I may be oversimplifying his argument, the problem with this is that it really isn’t how the market works. Copyright holders have the right to ask what they want to be paid wholesale for each copy of the book. What happens to the book after it’s bought and paid for by the distributor shouldn’t be any of their concern. Amazon could sell each e-book for a thousand dollars or pay people $10 to read it. (Or at least that was the case until the Justice Department noted as part of its settlement that they need to be making a profit on a given publisher’s works as a whole.)

On a related note, the ever-interesting Mike Shatzkin’s latest column also has to do with e-book pricing. Shatzkin mentions that, in pre-Amazon days, a lot of publishers would sell copies of their books at full retail price via mail-order to people who wanted them and couldn’t find them anywhere else.

He brings this up to note why the idea that publishers should stop printing cover price on books so bookstores could be free to charge more, brought up by American Booksellers Association president Bernie Rath in the ‘90s wouldn’t have worked—if publishers kept selling books at their own retail price, consumers would soon have found out what stores were “ripping them off” by charging more. (This hasn’t stopped others, such as Ed Handyside of UK publisher Myrmidon Books, from proposing a similar idea more recently, however.)

The point is to note how tricky the question of publishers selling direct to retailers is now. Certainly, they can do it. They can do it even better than they ever could before Amazon, thanks to the Internet, especially if what they’re selling are electronic books. The problem is that the question of pricing backs them into a corner. In an agency-less market, if the publishers sell at full retail price, Amazon can undersell them.

But if the publisher discounts, they face another problem. Amazon (and every other retailer) would say, with ample justification, “the retail price my discount and margin should be based on is the price you sell it for.” If “publisher’s retail price” means anything, it must mean that! Just like when publishers didn’t sell direct in the all-print world before online happened, the price the publisher says is the retail price is what intermediaries would expect to see them sell the book for.

The only way a publisher could get away with discounting their own e-book prices in such a situation, Shatzkin posits, is when, like Baen or for that matter Pottermore, they don’t have to sell through any other stores but their own.

6 Comments on If publishers cannot control e-book retail prices, how should they set their own?

  1. Marcello Vena // May 19, 2012 at 5:37 am //

    Two comments on my side:

    – Actually Shatzkin, in the mentioned column, is advocating for an agency market whereby both Publishers and Retailers sell at the same price. In an agency world, Amazon would not be allowed to undercut publishers…

    – The statememts the publishers should not be concerned with the final price Customer pay to Amazon is a old fashioned capitalistic concept based on downstream competition. Fair enough, until there is a significant competition in the retailer business. But if Publishers anticipate this might not longer be the case in the long run , with one dominant retailer that might want to change terms and also to grow upstream and become a competitor, they have all rights to be concerned.

    Publishers don’t want to become the Xmas turkeys being fed like princes during the Fall just to be killed and eaten up by the very same farmers who feed them…

    Best wishes,

    Marcello Vena
    @marcellovena

  2. Chittum, like so many like him, is all over the place in his arguments. At one point he is looking at Final Cut Pro X, something that cost millions to produce, and trying to extrapolate to the production of a book, which cost an author maybe 6 months to produce. It is an unconvincing and poor argument.
    He says “At base, copyright holders have the right to ask what they want to get for their work (which is why they were so concerned about Amazon selling ebooks at a loss)” Well for goodness sakes it was the Publishing industry that introduced the insanely idiotic pricing structure in the first place !

    The rest of humanity operates a fixed wholesale and retail price system. That way everyone knows what is going on. That’s why the capitalist system works so well. But Publishing has been operating this inane system for so long it appears to me that almost no one in the industry seems to have any real grasp of economics and how the market works.

    The publishers, and everyone who writes in and around the topic of pricing, can talk about this issue till the cows come home. They had one chance to make the Agency system work and they blew it. Had they used it the way self publishers and indies use it, and had they priced different titles individually and at sensible prices that didn’t incense the public and the market, they would probably have gotten away with it. But they succumbed to laziness and greed. Their stupid attempt to milk the market and the public failed and they got what they deserved.

    In my view they won’t achieve anything, now that that is over, until they bite the bullet and change to a fixed wholesale price.

    Not that it maters much, for society as a whole. These big publishers and their out of date business models are in their death throes anyway.

  3. I just read Shatzkin’s column referenced above and yet again it makes you want to pick these people up and shake them until they raise a white flag.
    Shatzkin tries to fight a rearguard argument on paper book cover prices. Yet he himself demonstrates that at it’s core it was a tool to manipulate the customer in a really cynical way. His argument is comical if it weren’t coming from someone held up as being enlightened within the publishing industry.
    Shatzkin then waffles on about the importance for publishers to gather email addresses …. am I suffering some kind of time warp ? I didn’t know whether to laugh or cry at this. What on earth is he talking about ? online marketing has moved on a thousand miles beyond this kind of nonsense.

    The real problems publishers have are, imho, a) that they have refused completely to make any attempt to market their own product while moaning about how well Amazon manages to do it. b) they have failed wilfully to grasp basic economics and marketing principles and have tried to hammer the square bloc of their antiquated pricing system into the round hole of the modern market. c) they are faced with being consigned to the scrap heap of irrelevance because of their continued and arrogant ineptness. Oh, and d) no one actually cares except the paper fetishists !!

  4. Hi, Chris,
    Thanks for the discussion.
    I disagree, naturally, on this: “What happens to the book after it’s bought and paid for by the distributor shouldn’t be any of their concern.”
    If a retailer has 90% of your market and they’re reselling your products at a loss to prevent other retailers from getting a toehold in the fast-growing market, you’d be nuts not to be concerned about it. That was Amazon’s position in ebooks when the publishers moved to the agency model with Apple. The publishers, understandably, didn’t want one company to grab monopsony power in their market.
    And under Leegin, manufacturers can set minimum resale prices on their products unless it unreasonably restrains trade.

  5. Ryan: Then they can and should stop selling to that one retailer. Legally, they have the power to do that. They don’t have the power to get together and collectively set their own prices for that retailer. They can’t have their cake and eat it too.

    Also, the Leegin ruling may not apply the way publishers and their advocates would like to think it does. Judge Denise Cote cited it as a precedent to oppose one of the publishers’ arguments in her ruling on their motion to dismiss the other day. From pg. 35-36 of the ruling:

    Apple and the Publisher Defendants’ agreement in restraint of trade is unlawful per se because it is, at root, a horizontal price restraint. “A horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful.” Leegin 551 U.S. at 893. The CAC claims that the Agency Agreements emerged from a horizontal agreement among the Publisher Defendants and reduced competition among retailers in order to raise prices. It is therefore unnecessary to subject this trade restraint to a rule of reason analysis.

    The agreement among Apple and the Publisher Defendants is a horizontal restraint because, as with the toy manufacturers in Toys “R” Us, the “only condition on which” a publisher would agree to Apple’s terms “was if it could be sure its competitors were doing the same thing.” Toys “R” Us, 221 F.3d at 936. Unlike those vertical restraints that are subject to the rule of reason, this agreement “has nothing to do with enhancing efficiencies of distribution from the manufacturer’s point of view.” Id. Rather, it has everything to do with coordinating a horizontal agreement among publishers to raise prices, and eliminating horizontal price competition among Apple’s competitors at the retail level. “That is a horizontal agreement.” Id.

    So, basically, yes, vertical pricing restraints are okay if they’re one supplier to its retailers. But the part that gets the Agency Five into trouble is that they all implemented that vertical pricing restraint at the same time—and the judge doubts that they would have done so individually if they couldn’t have known the others would do so too.

  6. Marcello Vena // May 21, 2012 at 4:06 am //

    Hi Chris,

    your last comment is very correct. The point being discussed is that is suspicious that fact they all implemented that vertical pricing restraint at the same time—and the judge doubts that they would have done so individually if they couldn’t have known the others would do so too.

    Agency pricing however doesn’t seem under fire. As a matter of fact, Random House that signed a similar contract with Apple and Amazon a year later is NOT being sued.

    Agency as is NOT unlawful, the question being discussed is the way the 5 out of 6 Big Publisher found this agreement with Apple.

    Is Apple and the Big Publishers were found guilty, they would have to change to a different business model. Random House could on the contrary keep the agency model.

    One last remark, vertical pricing restraints can apply in this case, since for any given book there is ONLY one Publisher, who has got exclusive right from the author.

    Books are not commodities like crude oil. A book from Stephen King is not a replaceable with a book from J.K.K. Rowling. So basically we are talking of millions of vertical markets (one for each book) whereby the Publisher is only one.
    (excluding the classics and orphan books, which by the way are mostly free and do negligibly affect the overall market.)
    And the same goes for pricing. Any Publisher is free to set whatever price it wants under the agency. So hard to say there is a collusion on fixing the prices of the single ebooks, since this is clearly not the case.
    It’s rather the last point you made: it’s sort of “meta-collussion” on having all 5 Publishers agreeing to such legal model at the same time and perhaps coordinating the efforts…

    Best Regards,

    Marcello Vena

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