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Summary:

A couple of years ago, with Amazon steadily pushing down the prices of e-books, the fortunes of the big book publishers were sinking fast. T…

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A couple of years ago, with Amazon steadily pushing down the prices of e-books, the fortunes of the big book publishers were sinking fast. Then Apple (NSDQ: AAPL) came along and helped enable publishers to set their own prices for their e-books across platforms. That model, known as agency pricing, has helped keep big publishers afloat in a time of major transition. But it’s also sparked controversy and legal battles, including threats this week of a lawsuit by the Department of Justice against Apple and its publishing partners. So who should be able to set e-book prices — the major publishing houses or retailers like Amazon? (NSDQ: AMZN)

Well, there’s been some debate on that question this week among our own ranks, with two of our writers taking opposite sides. So we decided to let them thrash it out on the site! Below, Mathew Ingram and Laura Owen debate the merits of the agency-pricing model.

Mathew Ingram [MI]: To me, the debate boils down to whether agency pricing is a justifiable and/or sensible approach by publishers to what is happening in their industry. In a nutshell, I would argue that while it might be understandable — in the sense that the Big Six are afraid of Amazon’s growing power in the book business, and want to protect their book margins as much as possible — it is neither justifiable nor (in the long term at least) sensible or advisable.

There’s no question that being a major player in a market that is in the process of being disrupted is not pleasant. Amazon is doing everything it can to not just drive down e-book prices but to disintermediate publishers in a number of other ways, including signing up authors to its own imprint. If you are a giant corporation that is used to controlling the marketplace to a large extent — both in terms of supply and in terms of pricing — then watching a new competitor wrest some of that control away from you is hard to do.

That said, I think agency pricing is unwise — and not just because it has attracted antitrust attention from the U.S. government and the European Union, among others, but because it isn’t in the long-term interests of either readers or (I would argue) of publishers themselves. There is a growing body of evidence that lower prices can boost sales of books by orders of magnitude — which suggests that publishers might actually be shooting themselves in the foot by trying to hang on to higher prices.

Laura Owen [LO]: I think agency pricing actually is in the interest of any reader who supports a vibrant book-buying marketplace that is not dominated by one company — i.e., Amazon.

You say that publishers are giant corporations, but Amazon is much, much larger than any single book publisher — or any other book retailer. Because of that, it can undercut chains like Barnes & Noble (NYSE: BKS) on price. It does so consistently on print books and on e-books that are not regulated by agency pricing. In fact, Barnes & Noble CEO William Lynch has said that Barnes & Noble has been able to remain competitive in the e-book game — the company currently has a 26 to 27 percent market share in the e-book market — because of agency pricing.

Some may say, “So what? I don’t feel any loyalty to Barnes & Noble.” With the closing of Borders, though, Barnes & Noble is the only remaining bookstore in many communities. Then there are the independent bookstores, which are definitely struggling as well. Through the American Booksellers Association’s partnership with the Google (NSDQ: GOOG) eBookstore, the indies can sell e-books through their websites. Because of agency pricing, they’re able to offer e-books from big-six publishers at the same price as Amazon. In this way, agency pricing can keep book spending within a community instead of sending it all to Amazon.

In addition, with the impending launch of sites like Bookish (which is quite delayed at the moment), book publishers are getting into selling direct to their customers — a move that will be incredibly good for the business. But efforts like that won’t go very far if Amazon is consistently undercutting them on price.

MI: That’s a great point, Laura. You are right that agency pricing does to some extent protect independent booksellers, or allow them to compete on more equal footing with Amazon, and I am as much in favor of a competitive bookselling marketplace as I think you are. I also recognize the fact that Amazon is a gigantic corporation — and perhaps even one that is using books as a loss leader for other products — and there are risks of having a lot of market power concentrated in the hands of single entity.

LO: Amazon is definitely using books as a loss leader. That’s why you’ll sometimes see print books priced lower than e-books: Agency pricing gives Amazon no control over e-book pricing, but it can still price print books at whatever it wants. People blame the publishers when they see hardcovers cost the same as or less than e-books, but that’s an image Amazon is able to manipulate behind the scenes because it’s willing to sell hardcovers below cost.

MI: True — but at the same time, the Big Six publishers are also owned by what in many cases are large international media conglomerates, and I don’t believe that their interests ultimately have anything to do with creating a more competitive bookselling marketplace, or a world that is ultimately better for book buyers and readers — or authors, for that matter. I think they saw agency pricing as a way of protecting their traditional profit margins, and they used Apple’s desperation to get into the book-selling business as a lever to get what they wanted.

Let’s talk about profit margins. Publishers’ desperate attempts to maintain their existing profit margins on print books could be preventing them from seeing the larger opportunity in e-books, just as a fear of Apple and digital music caused record companies to miss the boat when the MP3 revolution came along. I’d hate to see publishers make that same mistake — and I think agency pricing just encourages them to cling to the past instead of trying to adapt to the future.

LO: We’ll have to agree to disagree about the value of book publishers. I will have a soft spot for them as long as they are publishing the vast majority of the books and authors I want to read — the “no-substitute” books, as Seth Godin puts it.

MI: Yes, but do those profit margins they are trying to protect with agency pricing help authors and book buyers? In some ways, yes. Traditional publishers still serve a number of important purposes, including discovery and professional content curation (or editing, as we like to call it) — but I think they are also fighting a rear-guard action aimed at protecting their control over the distribution channels through which writers reach an audience, and it’s not clear to me that this is ultimately a good thing for anyone but the publishers themselves.

LO: It’s a good point that publishers have high profit margins with e-books. (That’s not to say that publishers have NO costs publishing and distributing e-books — they do.) It’s an issue that’s gotten more attention recently, as some book publishers report flat sales and increasing profits. I think the answer is higher digital royalties for authors.

Right now, most publishers are paying a royalty of 25 percent (net) on e-books. As you pointed out, Amazon pays self-published authors a 70 percent (gross) royalty on e-books priced at $2.99 and above. (On e-books below $2.99, Amazon pays just a 35 percent gross royalty.) I’d like to see traditional publishers pay a much higher royalty on e-books, with the industry standard at 50 percent. It’s a great way to engender goodwill, acknowledge that the costs of distributing books in digital formats are lower (though not zero) and reward authors for sticking around instead of going it alone (or with Amazon).

MI: And who has done the most to make it easy for new authors to reach an audience, traditional publishers or Amazon? I would argue that it is Amazon by a landslide, thanks to the Kindle platform and related features — many of which provide writers with a far greater share of the proceeds from their work than any traditional publisher has ever dreamed of paying.

If the profit margins that agency pricing provides are just used to shore up the walls that the Big Six maintain around the publishing process, how does that help authors or readers? I agree that a competitive book-selling marketplace is a positive thing, but there are other benefits that appear when a market is disrupted the way that the book industry is being disrupted.

LO: Does Amazon make it easier for new authors to reach an audience? Not if those authors want to reach print readers. Around 80 percent of book sales are still print; bricks-and-mortar bookstores are still a major source of discovery of new titles (the number-one source, in fact, for kids’ books.) In part because of its extremely poor relations with other booksellers, and in part because it’s not a priority, Amazon can’t do much to get its authors’ titles into those physical stores.

In a few cases, it’s working with Houghton Mifflin Harcourt to handle its print side, but many booksellers, including Barnes & Noble, have said they won’t stock those titles in their stores (at least as long as Amazon doesn’t offer them the e-books). Traditional book publishers do a much better job than Amazon does making titles available across a wide variety of platforms — not just online but also in stores and in libraries.

MI: What do you think of my argument that publishers are actually shooting themselves in the foot by fighting to keep prices high — and that their resistance to lower pricing is a lot like the resistance that the music industry mounted against lower CD prices and subsequently to low prices in the iTunes stores? I think the nature of book pricing has changed in an e-book world, and publishers need to step back and try to take advantage of those changes, instead of simply throwing up walls around their traditional business models.

LO: I agree with you that publishers need to experiment much more with e-book pricing, taking into consideration factors like whether a book is new or old, whether its author is well-known or unknown, etc. In fact, I think agency pricing has made publishers much more willing and able to experiment with lower e-book prices — across retailers.

With agency pricing gone, Amazon would be running those pricing promotions itself, and competitors like Barnes & Noble, Kobo and Google will have to decide whether they want to spend resources matching those prices instead of building up their platforms in other ways.

MI: And I agree that having too much power concentrated in too few hands is not good for the industry or for readers and authors. But I think Amazon is on balance a force for good, in that it is pushing publishers to become more flexible and adapt to the changes that are happening in the book world — and that could wind up being a benefit for everyone.

LO: OK, and my last point: agency pricing is abolished and Amazon gradually becomes the only player in the game, there’s no guarantee that it will keep e-book prices low…or that it will keep paying self-published authors generous royalties. Why should it, if it doesn’t have any competition?

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  1. Laura is misleading when she says publishers pay a 25% royalty on ebooks, while Amazon pays 70% on titles priced between 2.99 and 9.99 and 35% on titles less than 2.99.

    Publishers pay a 25% royalty on net. Amazon pays its royalty percentages on gross. In other words, publishers are actually paying authors 17.5%.

    1. Clarified. Thanks. Depends on how publishers calculate net though, so it is not accurate to say that a 25% net royalty automatically translates to an author payment of 17.5%. Regardless, my point here is that publishers should be paying authors a higher royalty on e-books.

      1. One other thing to note is publishers are paying an advance, KDP is not.

  2. Michael E. Kelly Saturday, March 10, 2012

    For me, the whole argument boils down to Laura’s last point. What happens when Amazon is literally the only game in town? Does anyone believe they’ll be better for readers and writers at the cost of their profit margins? A single player in the market means there is no market, it would be Amazon’s way or the highway. Good luck with that. The government is actually taking steps towards creating a monopoly here, and that’s ridiculous.

    1. This is said quite often. The “What happens when…” question.

      The problem is, in this technology age, Amazon achieving and sustaining absolute control of the market has no basis in reality. Remember Microsoft? Now look at Apple. Remember Yahoo!? Now look at Google. Remember Myspace? Now look at Facebook.

      If you want to look at the past and try to predict the future, the reasonable conclusion is that someone will do it better if the market demands it. That has actually happened.

  3. From a reader’s perspective I realize that both publishers and writers need to make a living. That said, when I see ebook prices that exceed the paperback and hardback pricing it is aggravating. Say what you will but ebooks offer only convenience to me.

    We have no control over an ebook. I can’t give it away, donate it to my local library or sell it. Given the pricing I simply choose not to buy and instead look for cheaper alternatives and ebook lending at the local library.

    If the pricing policy gave an appearance of fairness I would be buying more. 

    1. Jim I agree. I, for one, don’t believe in paying the same price for an e-book as a hardcover. You are not printing on paper or using more ink. You can make millions of copies. I love the convience of being able to download a book and read it. I have no room to store books anymore. I enjoy being able to “borrow” books from an E-book lending site as I am not one of those who “re-reads” books over and over. There should be a way to make pricing fair for author, publisher and consumer alike.

  4. With digitization, book publishers ought to be able to  “disintermediate” middlemen like Apple and Amazon with ease.

    Why bother with agency model, wholesale model etc. when all that is needed is a platform to host the content, manage DRM, process payment and advertise/promote etc.. the kind of stuff which fits Google’s biz model of an advertising portal and also dovetails with Facebook’s monetization efforts. The publishers and authors could also establish their own collaborative eBook portal and simply pay commissions to sales coming from affiliate’s referral links. To that end, the publishing industry should get behind an open format like ePub and encourage the availability of generic, commodity e-reader devices and not collaborate with someone like Amazon attempting to build a moat with its proprietary Kindle format.

    As regards Authors, Publishers as middlemen might not be a dispensable “disintermediatable” entity for most, as they need their experience and expertise to turn their ideas to a polished, finished product, besides matters of financing (via advances) and marketing. Exceptions would be prolific franchise authors like Stephen King, JK Rowling (who has already embraced this approach with Harry Potter ebooks exclusively from her own site!).  

    EBook distribution might evolve into a “Marketplace” model where publishers and authors sell their eBooks on an eCommerce portals like Amazon. But Amazon’s efforts to also be a publisher as well might give them pause and a preferred marketplace platform might be a neutral, non-competing one like Google.

    1. “publishing industry should get behind an open format like ePub and encourage the availability of generic, commodity e-reader devices and not collaborate with someone like Amazon attempting to build a moat with its proprietary Kindle format.”
      In fact, EPUB may sadly reinforce Amazon’s proprietary format in the mid-future… 
      Today, EPUB is a standard per se, it is no standard in real life. As a result, it is a mess. Some book designers, indie publishers and conversion houses are warning we would struggle soon for a while but the IDPF has nothing to say on this particular subject. 
      Allow me to explain. 

      EPUB is a standard, hence fully documented. Problem is vendors just don’t care about specs. B&N doesn’t even respect a staple-basic rule which says “authors’ CSS > vendors’ or readers’ CSS”. 
      In Europe, Kobo (partner of FNAC) altered EPUB files provided by publishers and turned them into KePUB in which Kobo’s own CSS files and JavaScript were forced. Then someone discovered this and the vendor went backwards. 
      Then Apple announced ibooks textbooks and (sort of) forked EPUB into ibooks (it’s not fully EPUB3 nor fully EPUB2 nor fully HTML5… but it’s the same basis). 
      In Europe, publishers and conversion houses discovered EPUB’s code interoperability is a nightmare. Some may say it is not a standard at all since even simple styles are not rendered the same way ! They used to code for iBooks (there was no real opponent at the time) and today, they must participate in a “race to the bottom” to make sure their EPUB file displays properly on the highest number of devices possible. Remember the good ol’ internet ruled by IE6 ? That’s what EPUB is achieving today. It seems we have not learnt from the past. Period. This is just insane. And the IDPF is actually working on minor specs instead of cleaning up the EPUB mess. Alas, such specs will be used to design good-looking EPUB files while basic specs, if they were respected 100%, should do that. So you will spend a lot of money to make good-looking EPUB Files because those minor specs are “expensive” (development costs).

      In other words, EPUB is becoming a problem because of vendors who are taking an open and standard format and turning it into something of their own. And no one knows where the IDPF is going. As a matter of consequence, we have huge tables with EPUB Specs, CSS properties, HTML tags, readers (and rendering engines), “supported Yes / No” and comments (how they are supported). 
      Ironically, Amazon’s support of EPUB specs (through Kindle Previewer 2.3) is a lot better than the vast majority of “EPUB vendors” —and that statement involves full respect of EPUB specs too. 
      Needless to say nobody cares in the EPUB ecosystem : vendors don’t answer your questions,  they won’t publish their roadmap, etc. This is annoying, if not irritating. On the other side, I would (unfortunately) describe Amazon’s as better. You just know where you are going, you know what’s bound to happen. 
      In the end, it’s a lot easier to deal with Amazon than EPUB vendors when it comes to file formats. 

      And I’m not even covering DRM, policies, etc. 
      Seriously, this is slowly morphing into a nightmare. I know the vast majority of people won’t bother about this but it’s a shame since files and code are ruling the world today. To sum things up, if you don’t understand what they are doing with EPUB, the open standard, then you don’t know they are trying to put customers in their golden cage. In other words, digitization of books allow “the greedies” to make the book something it’s never been : pbooks are universal and can be read anywhere, anytime and anyhow ; ebooks are files strongly linked to an ecosystem, an ecosystem led by hypocrites who are doing their utmost to imprison readers technically (DRM + EPUB alterations) while screaming “Hey, we’re using an open standard !”. That’s not quite better than Amazon which says its Kindle format is proprietary, hence being crystal clear on this subject, as opposed to the hypocrites who are making EPUB a mess… 

      As an actor in this e-industry, I’m just feeling worse day after day after day. In fact, this situation is going out of control. This is going so far that I’m wondering if I should not stop and do something else. If nothing happens concerning EPUB and respect of its specs in the next months, I’ll probably quit. At least I will be able to tell myself I did not take part in this swindle… 

  5. The word “control” in the headline is not the same as the word “set” in the lead graf. And I haven’t heard of Amazon trying to control anyone’s prices but its own.  We have a whole body of law regarding anticompetitive behavior; and though enforcement has varied with politics, Holder is reminding our biggest players of that body of law.

  6. Brilliant Pebbles Sunday, March 11, 2012

    Why would anyone assume that because Amazon gains more control that said control will be impregnable and unalterable?  The reason they are getting control is because they have selection and price.  If someone else provides better price and equal selection, well, acquiring a given book is a commodity… Walmart’s copy of Dragon Tattoo is the same as Amazon’s is the same as B&N’s is the same as The Next Company That Will Come Along If Amazon Overexerts Its Influence.

  7. Hi everyone. What are your thoughts on self-publishing/ print-on-demand tools such as Peecho or Blurb? Do you think more and more authors, and eventually publishers, will start to shift in this direction?  I think these tools have great potential to put some more power back into the author’s hands and disurpt the whole publishing market. I am curious to hear your thoughts.

  8. Rick Maynard Monday, March 12, 2012

    One particularly frustrating night last year, I was purchasing “Devil’s Knot” by Mara Leveritt. When I found the dead tree edition at the nearest B&N, the cover price was $16.99. The e-book edition, which was the same everywhere because of agency pricing, was $16.99.

    I just looked it up so I could write this message. Price drops have taken place since then, making it even more absurd. The dead tree edition is $10.88, and the e-book is $12.99. I understand that Amazon is reducing the price of the dead tree edition as a loss leader. I also know that, while it is a fine book, there is nothing in it that justifies a $13 e-book price.

    Speaking as a consumer, I am asking for some common sense. The e-book I ultimately bought did not require paper, nor ink. It did not need to be shipped cross country to a distribution center, purchased by a retailer, or shelved. There was no risk it was going to end up on a remainder shelf to be sold at less than cost.

    I am asking for nothing free. I understand that there are still costs involved in e-book publishing.

    But I also think that my purchasing a product where the risk and manufacturing cost are so vastly reduced should result in a lower priced product.

    I understand that it’s tougher for some businesses to compete without the agency model. But I also feel that publishers have abused their position.

  9. Thomas Hogan Monday, March 12, 2012

    Unfortunately, as in most discussions about the future of book publishing, people don’t differentiate between consumer books and professional books. While it may be just fine for us to sell our “Boardwalk Empire” book in e-book format for $9.99, it is definitely not fine for us to sell our “Knowledge Management in Practice” for $9.99. “Boardwalk Empire” has an audience in the tens of thousands, and we can therefore spread our editorial and production costs over a large number of units sold. On the other hand, “Knowledge Management in Practice” is lucky to sell 3,000 copies, so we need to charge a much higher price. If Toyota could only sell 3,000 cars a year, they would have to get a couple hundred grand for each one.

    What most people don’t understand is that if we price an e-book on Kindle for $9.99 or less, we get 70% of the selling price from Amazon. If we charge any more than that, Amazon only gives us 35% of the revenue. Amazon is trying to fit the entire book world into their vision that all e-books should cost $9.99 or less. However, what Amazon has done to small and medium size publishers like us, with their two-tiered model, is to make it very difficult for us to offer e-books for professional niche markets at a reasonable price.

    Another thing that people don’t understand is that the cost of printing a book is a small fraction of the cost of creating and marketing good books. Roughly speaking, a 300-page book costs under $3.00 to print, assuming a reasonable print quantity. I’d be happy to sell our Plexus and Information Today e-books for $3.00 less than our print books. 

  10. How a lobbyist org. decided agency pricing costs consumers $200 million — paidContent Tuesday, April 10, 2012

    [...] pricing advocates — including me — have argued that the model allows for a more competitive e-book marketplace because the [...]

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