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 (s amzn) 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 (s aapl) 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.
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