Last week, news came out that the Justice Department was readying a petition to sue five of the largest publishing houses in North America along with Apple for colluding together to maintain artificially high prices for digital books.
This was initially instituted in January 2010 after Macmillan pulled its entire digital catalog from Amazon unless Amazon concede to these new terms. Under the new terms, Macmillan would set the prices for digital books and Amazon and every other retailer would not be allowed to discount. This became known as Agency pricing, but the term “Agency pricing” is a misnomer. What the publishers are doing is engaging in retail price maintenance, not Agency pricing.
Amazon had been discounting popular front list digital titles heavily, marketing their nascent digital book program as having most of its digital content priced at $9.99 and under. Discounting is commonplace for paper books with large wholesalers like Costco and Sam’s Club pricing hardcovers at 40% or more off. Barnes & Noble also heavily discounts print bestsellers.
However, publishers worried that low digital prices would speed up the adoption of digital books, create large losses for print books, and wreak havoc with their current business model. Further, allowing Amazon to undercut prices would imperil others attempts to enter the market.
William Lynch is quoted as saying that agency pricing helped Barnes & Noble achieve its 25-27% of the market. I’ve argued as much here. Much discussion around Agency pricing involves the issue of competitiveness. It appears that the publishers (not Apple) are going to argue that without agency pricing, market competitiveness would decrease. They will point to the decline in print sales as an example. The goal of publishers will likely be to get a broad definition of the market such that it includes both paper books and digital books; trade fiction and non fiction; and academic works. This likely works both for and against them. First, Amazon only has market dominance in the trade fiction and non fiction categories in digital works. It does not have market dominance in the digital textbook market, the print textbook market or even the print trade market.
The publishers will point out that Amazon’s aggressive digital pricing is dooming independent bookstores and contributing to a decline of print book sales and a decline in businesses selling print books. The question that publishers will not be able to answer, however, is how Agency pricing helped to increase competitiveness at the increased price to customers. First, there has not been an attendant rise of independent brick and mortar bookstores since 2010 when the publishers impose retail price maintenance on print books. Second, there has not been an attendant rise of independent digital bookstores since 2010. In observing independent digital bookstores on the internet, the move toward RPM was dismay not jubilation. Kobo Books had to discontinue consumer oriented programs as did Fictionwise and All Romance eBooks.
Lori James of All Romance EBooks shared her thoughts on this matter.
1. We at All Romance appreciate the publisher’s desire to control pricing. We have direct relationships with hundreds of publishers and since the day we opened our contract has stipulated that we will not change the sale price of their work without permission.
2. Under the Agency model we can not offer incentives. We do offer incentives from time to time for Non-Agency, but that is our cost, not the publisher’s cost. In those cases, customers still pay full price for the Work. So, for example, we can spotlight a non-Agency publisher like Harlequin and offer customers a 30% rebate to purchase Harlequin titles for a two week period. Those purchases are for the full list price and Harlequin get’s paid based on the full list price. The cost of the promotion is completely ours and Harlequin enjoys increase sales and tons of brand advertising for free. As things stand we can’t offer that to Agency Publishers. It’s the same with our loyalty program and our bookclub. I understand they don’t want the offering of incentives to dilute pricing. But I don’t think a flat-out policy that they can’t happen is best either and it’s placing Agency titles at a disadvantage.
3. There was much talk originally about how Agency would level the playing field for the little guy who couldn’t hope to engage in the kind of loss leader pricing Amazon was doing. Instead, we could compete based on “service”. Yeah! We’re great at service. It sounded good. Then the content was pulled. It was many months before contracts were even available for initial review. Meanwhile – it’s back on Amazon and B&N. It’s on Apple. Getting Agency back was a priority but it took over a year to get those titles back due to numerous delays. And, this also required significant IT build-outs.
Meanwhile, fortunately, our customer base found many other titles they were interested in and continued to purchase. The loss of Agency didn’t end up really impacting our bottom line because we were in a unique position, having strong relationships with Indies who were supplying our customer base with a steady stream of delicious romance. Would we have done even better with Agency during that year? Yes. It’s hard to compete without content.
I have to wonder how many of the bookstores that were getting content prior to Agency are approved and still getting content today. And, it would be interesting to know how many new Indies have entered the arena. From where I sit, the numbers seem to be shrinking.
Agency pricing (aka Retail Price Maintenance) was designed to slow the adoption of ebooks, bolster print sales, and move marketshare away from Amazon. It was not designed to increase competitiveness in the market. I don’t think any one disagrees that one publisher and one retailer of books is a bad idea. No one, not even a card carrying Amazon Prime member like I am believes that. As Amazon becomes larger, it pushes for more concessions from its suppliers. Publishers are getting squeezed and it would not surprise me in the least if Amazon reduces the self publishing royalties using exclusivity as the modifier. But artificially maintaining a higher cost of a good isn’t increasing competition in the marketplace. No one will leave Amazon until something better comes along and in this case, with prices being equal, you can’t beat Amazon’s service. The question will be what will? My ideas include Loyalty and rewards programs. Better search and filter options. More targeted recommendation services. What are yours?
[Via Dear Author]
Interesting and thoughtful arguments.
I agree that the model ARE describes is the desirable model–publishers set a retail price, collect wholesale revenues based on this price (e.g., 50 or 70% of retail) and let distributors discount to their hearts content. With the exceptions of ARE and Smashwords, however, this model has not been the model adopted by most retailers. Unfortunately, only the big six publishers have the market heft to push back on retailers and they chose what, for me, seems the wrong avenue of pushback.
That said, I think that the issue of market power in distribution of trade fiction is one that should be of concern for everyone in the business. Amazon is a great company and I’m very happy they went into business and have aggressively pushed eBooks. I’m also hoping that five years from now they won’t be the ONLY company offering an outlet for midlist and small publisher trade fiction.
Rob Preece, Publisher
There are two (at least) separate issues here. One is price fixing (aka retail price maintenance). The other is collusion.
The other thing to keep in mind for everyone interested in this topic will be the amount of politicking that influences the decisions of the DOJ. The publishing/media industries are heavy lobbyists, and have a lot of influence at the top of government. Look at their success in changing copyright out of all proportion to the original intention of those who established it in the first place, and their astonishing success in implementing disproportionate laws against web users accused of piracy.
The publishers are already getting their political oars in, with irrelevant arguments about their unfortunate plight and how fixing prices had to be done to bolster their businesses.
We can only hope that the law is applied as it is written and not as the publishers want to twist it. The government must let it be known that it is not their responsibility to help businesses maintain their business model in the face of a changing technology and commercial culture.
I doubt that collusion will be proven. I even doubt if specific price collusion took place, unless it is sufficient to show that they colluded to keep prices ‘high’, which is doubtful.
In my own personal view, coming from outside the publishing business, I would like to see someone, the gov or the industry, abolish the whole pricing structure that publishing is based on. I would like them to move to a fixed wholesale price and a variable retail price structure like any other product.
If a retailer sells for a higher price then good look to them. If they sell for a lower price, then so be it … the publisher/writer should not gain or lose on that basis, getting a fixed royalty/margin for every copy.
The agency model has absolutely resulted in more competition- look at the hardware prices!
I don’t know about you guys, but I’d much rather pay $0 dollars for a nook touch or $70 for a Kindle touch than pay $400 for a 1st generation Kindle. Sure, the price would have come down a bit due to technological advances – but not nearly as much as it has due to COMPETITION.
The profit margin on the original Kindle was rumored to be 100%. If that was the case today, then the most basic, ad-supported Kindle’s would still cost $160.
This is assuming that Amazon even bothered to make a wi-fi only reader without copying from Barnes and Noble, and gave a price cut on the ad supported version even without much competitive pressure to do so.
The tradeoff for the extra $80 (minimum- if you bought a Fire the agency model saved you $200, if you bought a Fire AND another Kindle the agency model probably saved you north of $300) is that full price ebooks (ie agency model, new release bestsellers) went up in price $5-$6.
Again- assuming Amazon continued subsidizing ebooks even without competitive pressure to do so.
That means that unless you purchase 14-16 FULL PRICE (again, only agency model, new release bestsellers count- older ebooks and independent ebooks are arguably cheaper due to the agency model) ebooks a year, you are still coming out ahead. The average American who reads, reads 15 books a year. Since it is likely that more than 1 of those books falls outside of the full price agency model spectrum, or would have been purchased on paper for some reason anyways, or was pirated or borrowed rather than purchased, I think the average consumer is better off because of the agency model. This can be demonstrated with the math above.
Amazon was playing a cup-and-ball game to make a less competitive market look more competitive. But the end effect was that consumers were paying more and the ebook market wasn’t taking off because of it.
I guess I am not the average American who “reads 15 books a year.” More like 125-150 per year for me. And no, the older e-books are often not cheaper. Prices are frequently held at a price between 9.99 and 12.99 for backlist titles. I have dozens of those sitting on ereaderiq waiting in vain for price drops. They don’t come through very often.
Peter, your post made no sense at all. Absolutely zero. You seriously believe that eReader hardware prices have dropped because the big publishers have colluded to keep the prices of ebooks high? Or are you paid to shill online for the publishers?
EReader hardware prices have come down because of competition in the eReader hardware market and also because prices always drop on maturing hardware technology. When the first Kindle came out it was the only device of it’s kind. Honest and open competition then brought us the Sony EReaders, the Kobo, the Nook and others. This competition is what drives down prices.
As far as the so-called Agency Pricing model is concerned, it’s nothing less that illegal collusion and restraint of trade. I sincerely hope the Dept. Of Justice drives a few big nails into the coffins that the big Publishers have already started building for themselves with their short-sighted attempts to preserve an out-dated and unsustainable business model.