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Summary:

John Sargent, CEO of book publisher Macmillan, has written a blog post defending his company’s new “agency model” approach to e-book sales through retailers such as Amazon and Apple, but all the post really shows is how desperate Macmillan is to protect its existing business model.

If you want to see someone frantically struggling to defend an existing analog business model against the disruption that comes from digital, look no further than a blog post today from John Sargent, CEO of book publisher Macmillan. You might remember Macmillan as the company that had all of its books briefly yanked from Amazon’s electronic store a while back, as the two fought over the pricing of e-books. Amazon wanted to force Macmillan and others to sell books for $9.99, but the publisher wanted Amazon to adopt a new “agency model” that would provide more flexibility in pricing. Macmillan’s ace in the hole: Apple had already agreed to the agency model for the forthcoming iPad. Faced with this competitive threat, Amazon wound up conceding defeat.

In his blog post, Sargent describes (somewhat patronizingly) how the agency model works. In a nutshell, instead of allowing a retailer such as Amazon or Apple to set the price of e-books, the publisher sets the price and gives the retailer a larger cut of the proceeds in return (and lets them think of themselves as “agencies” instead of just humble old retailers). As I mentioned in a previous post about Macmillan and Amazon, this approach might seem a little odd if you’re used to the real world, where retailers typically set the price of the goods they carry on their shelves based on what they think the market wants, supply and demand, and all of those other quaint principles.

What becomes obvious after reading Sargent’s blog post is that Macmillan wants to retain flexible pricing for e-books for one simple reason: to protect its existing printed book business. You can see this reflected in the very first point the Macmillan CEO uses to justify why the agency model is a better approach than the traditional publisher-retailer relationship, when he talks about the end of the practice known in the industry as “windowing” (which is deeply flawed in its own right). As he describes it:

All the new adult trade books for which we have the rights to publish in e-book format will be available at the first release of the printed book. We will no longer delay the publication of e-books (read: no windowing). Readers were clearly frustrated at the lack of availability of new titles, and the change to the agency model will solve this problem.

Here’s the thing: This “problem,” as Sargent calls it, has been wholly created by publishers like Macmillan, who hold back the release of e-books in order to try and milk traditional hardcover and paperback sales for as long as they can. So now, in response to Amazon and others acceding to their demands on price, Macmillan is going to be good enough to stop doing that. This is the retailing equivalent of the serial killer who scrawls “Stop me before I kill again” on a mirror in lipstick. Could not the publishers themselves have stopped this practice at any time and avoided frustrating readers?

Then Macmillan’s CEO moves on to book pricing itself, and notes that e-book prices will effectively move in lockstep with the prices of printed hardcover and paperbacks books, although they will start out somewhat cheaper to begin with. For example, Sargent says that hardcover books typically sell for between $24 and $28, whereas the e-book versions of these books will be priced between $12.99 and $14.99.

He describes this as a “tremendous discount,” but that ignores a couple of important points. For one thing, it ignores the fact that the vast majority of books aren’t sold for the cover price. Why? Because retailers discount them when they aren’t moving. It also ignores the fact that e-books cost orders of magnitude less to produce than printed books, although debate continues as to how much.

More than one reader of Sargent’s blog post noticed that the publisher is effectively trying to replicate the existing price structure and business model of the printed book industry in electronic form (something that publishers have been trying to do for some time now, as John Siracusa noted in a piece at Ars Technica). One commenter said:

So how much more expensive is hardcover e-ink over paperback e-ink? Your model is doomed.

While another said:

This seems pretty well-considered. There’s only one point I’m confused about — can you please explain to me the difference between a “hardcover” and “paperback” e-book? Because that don’t make a lick of sense. Unless of course your definition of sense is “artificial price stratification of identical content.”

In effect, Macmillan is trying to do exactly the same thing that many other media companies are desperate to do — from newspapers to music labels to movie companies — which is to replicate the pricing model of an analog, real-world business in digital form. In other words, it is trying to artificially reproduce the kind of scarcity (and thus pricing power) it used to have in one medium in a medium that doesn’t even know what scarcity is. Sooner or later, that attempt will fail (among other things, iTunes appears to show that flexible pricing actually leads to lower sales). For now, Macmillan and other publishers have managed to convince Amazon and Apple to accept the new agency model, but those sandbags aren’t going to last for long.

Related content from GigaOm Pro (sub req’d):

The Price of e-Book Progress

Post and thumbnail photos courtesy of Flickr users Cindy47452 and radioher.

  1. [...] For now, Macmillan and other publishers have managed to convince Amazon and Apple to accept the new agency model, but those sandbags aren’t going to last for long. via gigaom.com [...]

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  2. Truly a a great post. It was a pleasure to read and a great summary of the continuing ignorance of publishers trying to hold on to old models. My favorite part of course was the serial killer with the lipstick. Brilliant. Thanks.

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    1. Thanks, Charles — glad you enjoyed it. And thanks for taking the time to comment.

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  3. Good summary. Content owners still want to take the easy way out by replicating traditional business models onto the Internet, and hope technology companies play nice along….That’s going to be an uphill task, what with multiple classes of devices coming into play….
    I have a slightly diff perspective on the issue, that this is more a tussle around who controls the platform. If you’d excuse the plug, more at http://bit.ly/d7PEGK

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  4. No doubt, there will be plenty of pain as creative destruction continues on its merry way, and the evolving business model of content publishers of all types will create serious dislocation in the affected companies, but some of the arguments are just infantile.

    “wholly created by publishers like Macmillan, who hold back the release of e-books in order to try and milk traditional hardcover and paperback sales for as long as they can.”

    Hmmm.

    A capitalist enterprise attempting to maximize return in an uncertain environment. downright criminal.

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  5. I don’t see a problem with charging a higher price for people who want to buy the book close to its release date. It’s the same with any convenience. Time has a value in this case that the publishers should feel free to try to capture.

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  6. Brian/TMC,

    You guys seem to be suggesting that this is good old capitalism at work, but it isn’t. This is extortion. Businesses that base their prices on value provided will do well in the long run, but businesses that try and create artificial value will be crushed.

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  7. [...] Macmillan Stacking Sandbags Against e-Book Flood – GigaOM [...]

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  8. I think Macmillan’s strategy is a flawed strategy. No industry has been able to control things as they did when there was not such thing as the internet. Instead of embracing this technological reality, in my mind like your post says they are indeed building a wall around themselves. Have they not learnt anything form the music indutry and record labels when their only strategy was to go after and sue website which allowed free downloads, there was no innovation in their part and I don’t see any innovative and unique thinking on the part of the book publishing industry.
    Greta post, enjoyed the read. They will be forced to chaneg when the push comes from the ground up ie. the consumers

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  9. [...] Macmillan Stacking Sandbags Against e-Book Flood – GigaOM [...]

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  10. On the whole I agree with you here, but there’s one exception:

    “As I mentioned in a previous post about Macmillan and Amazon, this approach might seem a little odd if you’re used to the real world, where retailers typically set the price of the goods they carry on their shelves based on what they think the market wants, supply and demand, and all of those other quaint principles.”

    In fact, without endorsing all the other weird things Macmillan is trying to do, I believe that an agency model of some kind is the only approach to ebooks that works. The retailer model for printed books developed because printed books are physical objects which retailers are able to “buy” and “resell.” If I’m running a bookstore, I buy X number of copies of a given title from a publisher. There’s a (discounted) price to me per title, and however many I buy, that’s how many the publisher sends me. But if I’m running an e-platform, when I buy a title from a publisher I am in effect acquiring an infinite number of copies. There are no physical objects to buy, so it’s really a question of who gets what percentage of the sale price when someone buys it. I don’t necessarily pay the publisher a penny until after a sale actually happens.

    As for who controls the price of books, the only reason one is tempted to say it ought to be the platform is because the publishers are being stupid and/or doing things for ulterior motives. If a platform like Amazon allows publishers to set the price, that’s no different from the arrangement the company has with self-published authors, who set their own prices and Amazon takes a percentage of every sale. Why should Macmillan be subjected to more control by the platform than a self-published author? (Other than the fact that, as noted, Macmillan is being stupid. There’s no law against that, unfortunately.)

    I do agree that Sargent’s arguments are specious and probably disingenuous as well, and I agree as to what his motivations are. However, if big publishers like Macmillan are determined to price themselves out of the ebook market, there are plenty of smaller publishers circling their market share like sharks, ready to take advantage of this folly. So be it, say I.

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  11. [...] Macmillan Stacking Sandbags Against e-Book Flood – GigaOM [...]

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  12. [...] Matthew Ingram on GigaOm stating: In effect, Macmillan is trying to do exactly the same thing that many other media [...]

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  13. Of what value are publishers like Macmillan in the digital age? Clearly only a matter of time before authors work with Amazon and Apple directly.

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  14. Found you via link from Techdirt. Nice explantion of the flawed assumption that analog business models don’t translate directly to the digital world.

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  15. [...] Macmillan document.write(unescape('%53%74%61%63%6b%69%6e%67')); Sandbags document.write(unescape(… [...]

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  16. I agree with your overall argument, but, as someone who works in book publishing, it irks me when I continue to see a phrase like “e-books cost orders of magnitude less to produce than printed books.” Admittedly, you do point out that debate continues as to how much, but it’s still assumed that ebooks will be significantly cheaper to produce. I work for a small publisher who generally runs small print runs, but the actual printing and binding of a book is still a fraction of the total unit cost. Depending on the book and the run, it comes to between one and three dollars per title. Now there are also distribution and warehousing costs, but the publisher doesn’t assume all of these costs (they’re sometimes shared with the booksellers) and, when selling direct, these costs are offset by shipping and handling. The majority of the costs associated with a title are actually tied to preproduction and author royalties. And considering that readers will probably begin to expect more from electronic publications (interactive design, video, etc.), I can only assume that preproduction costs will rise. Naturally, authors will continue to want to be paid.

    All of this ignores the fact that publishers rarely receive cover price from booksellers (it’s generally between 40% and 60%, depending on the retailer) and that the hardcover price is in many ways a smokescreen for actual revenues. (Which means that charging a little less than half–around $9.99–is perfectly reasonable for an ebook.) It also ignores that fact that ebooks don’t have the pesky return problems that can hit publishers when booksellers ship back a load of books, and that ebooks eliminate the need for a large sales force (sorry, guys). Still, it doesn’t mean that just because a physical product isn’t produced that an ebook is orders of magnitude cheaper to produce.

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    1. No one is saying producing a book is without costs. But the simple fact remains that the second physical copy costs the exact amount of the first.

      With digital, the first copy costs money to create, but infinite copies can then be made with zero cost.

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  17. [...] Macmillan Stacking Sandbags Against e-Book Flood – GigaOM [...]

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  18. I think it’s pretty easy to discern the difference between a hardcover e-book and a softcover e-book. The former is more expensive and the latter less so. A bit waggish, but accurate.

    I own a Kindle DX and a SONY reader. I like books and I buy a lot of them in all formats. I’ve also gone to the trouble of making ebooks for my own use.

    My book buying behavior it works like this: If am I a poor, i borrow books at the library. Else if I’m prosperous, and I also really, really want the book, then I buy the book when first available, despite the fact that it’s got this big heavy cover that’s hard. Else if I’m not so excited or not so prosperous, then I’ll buy the book when it’s cheap enough either in soft-cover or at a thrift-store.

    Excitement for an eagerly awaited title will make me shell out more money because I want it NOW. Less anticipation, less I’m willing to pay. It looks like Macmillan understands this.

    (Frankly, Dr. Marx, I don’t care that it costs almost zero to produce one more ebook.)

    I anticipate that demand peaks at first release of most books, then fades with time. I’m willing to pay the hardcover price for an ebook when first available, if I am excited enough about it. But if the book is available in paperback, I won’t buy the ebook until it’s comparably priced.

    I get really cheesed off when a book I want is unavailable at any price in electronic format. Damned Luddites.

    My advice to publishers: Charge an inflated price for ebooks before the official hardcover release date. When you do the hardcover release, charge a penny less than whatever you’re charging for hardcover until the sales of hardcovers softens, then put out a paperback release timed to coincide with a drop in the ebook price. If the book goes out of print, drop its price to epsilon.

    Oh, and if Amazon or Barnes & Noble want you to help plump sales of their readers, let them pay you for it.

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    1. Steve,

      That seems like the normal book buying pattern. But doesn’t it annoy you? I hate hard cover books because they are unwieldy. I think I’d pay more for a softcover given the option. I know I’m not alone in that feeling.

      If a business just tries to squeeze money of it’s customers without regard to what they want, the deserve an early death.

      The whole idea of platform “windows” is absurd in a world of real time information. Give it to me when it’s available in the format I want it in. Charge whatever the market will bear and that’s it.

      Gaming the market to eek out an extra buck at the expense of your customer’s satisfaction is bad business. Make them happy all the time by giving them what they want, how they want it at a price they are willing to pay.

      If publishers don’t realize this they will be replaced by the people that do. And I’m eagerly awaiting that moment in time.

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  19. Macmillan’s variable pricing scheme is not about scarcity.

    Even the hardcover vs. paperback pricing scheme is not about scarcity. Hardcovers only cost a couple of bucks more per unit to manufacture than paperbacks, but they sell for three to four times as much.

    I think you’re getting caught in the opposite trap that you accuse Macmillan of: focusing so much on the issues of scarcity and marginal cost that you forget to consider the time factor involved in pricing.

    The reason hardcovers cost so much is that they’re charging readers a premium to satisfy their impatience. People do a value calculation to figure out how much having that book now is worth to them, and if it’s worth more to them than the price difference between the hardcover and the paperback they know will come out in a few months, they buy it.

    It’s the same with Baen’s E-ARCs. They charge $15 for a less-proofed e-book three months before the $6 fully-proofed e-book comes out. Are they trying to “artificially produce scarcity”? No, they’re providing a sneak peek to the fans who are crazy enough about an author to want to get an early version of his book ahead of time. Do people think they’re trying to cheat their audience? No, the fans love them for it.

    Granted, Macmillan isn’t offering an ahead-of-publication-time sneak peek, and their books have DRM and other annoying things, but the principle is the same. You want it now, you pay more. If you’re willing to wait (or go to the library), you pay less later.

    If you’re going to complain about e-books costing inordinately more than their marginal cost to produce as opposed to hardcovers, you should make the same complaints for hardcovers as opposed to paperbacks.

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  20. [...] Macmillan Stacking Sandbags Against e-Book Flood – GigaOM [...]

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  21. [...] to Amazon. The iPad has helped open up fresh wounds between Seattle-based e-tail giant and some of its publisher partners. In short, if you read the headlines, then you might be tempted to write off Amazon and its Kindle [...]

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  22. [...] When books become digital, the marginal cost of reproduction is essentially zero. And there are no hardcover and softcover e-books. Publishers are terrified by what Napster did to the record industry, worried that consumers [...]

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  23. [...] market isn’t really about hardware, anyway; it’s about the sale of content — and Amazon is still expected to earn a billion dollars on digital books, even if its Kindle [...]

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  24. [...] market isn’t really about hardware, anyway; it’s about the sale of content — and Amazon is still expected to earn a billion dollars on digital books, even if its Kindle [...]

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