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Ebook prices aren’t dropping faster because they weren’t too high before

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In April, the Department of Justice sued Apple (s AAPL) and five book publishers for allegedly colluding to fix ebook prices. Eight months later, the DOJ has settled with four of the five publishers. The settlement allows retailers to discount settling publishers’ ebooks with just a couple of restrictions, so many people expected it would lead to much lower ebook prices.

But, as David Streitfeld notes in the New York Times (s NYT), that hasn’t happened so far. “Prices have selectively fallen but not as broadly or drastically as anticipated,” Streitfeld writes. “The $10 floor that publishers fought so hard to maintain for popular new novels is largely intact.” Streitfeld attributes this to two factors: The growth rate of ebooks isn’t as rapid as it once was, and e-readers are getting so cheap that Amazon (s AMZN) can’t afford to lose money on content as well as devices.

I’d offer some totally different explanations.

Ebook prices aren’t dropping faster because they weren’t too high before

A fact that often gets lost in the ebook pricing debate is that most ebooks never cost $9.99 in the first place. Between 2007 and January 2010, when Amazon charged that price for New York Times bestsellers, very few people owned e-readers and Amazon had no competition from other ebook retailers. I’ve written about this more here, but the point is that publishers’ adoption of agency pricing happened as the ebook market was taking off, and was in response to those market changes.

Under agency pricing, publishers sold most frontlist ebooks at $12.99 to $14.99, but priced plenty of older ebooks a lot lower. The pricing strategy developed as the ebook market itself changed. And those prices are still working for the market as it is now. We’ve seen that readers are happy — or at least willing — to pay for hot new ebooks.

Publishers still have power over ebook prices

The settling publishers have not switched back to a wholesale model for ebooks, in which they set a suggested price and the retailer buys the ebooks at a discount (usually 50 percent) and then sells them for whatever price it wants. Rather, publishers are using a modified form of agency: They set an ebook’s list price and pay the retailer a commission (Before the settlement went through, that commission was 30 percent; we don’t know what the new retailer contracts dictate, but the commission is likely still around 30 percent.) In addition, publishers are now free from Apple’s price bands, which tied ebook price directly to print book list price, so if a publisher wants to raise an ebook’s list price — from, say, $12.99 to $16.99 —  it can. A retailer who wants to discount that book to $9.99 will then lose even more money.

This dynamic may keep both ebook prices stable. Publishers can increase their ebook prices, but if they raise them beyond a certain point, they risk losing sales if the retailer doesn’t discount. At the same time, retailers who discount ebooks too heavily may see the publisher respond by raising the ebooks’ list price, causing the retailer to lose even more money by continuing the discount.

Kindle has a lot more competition now

Back when Amazon priced all New York Times bestsellers at $9.99, it was the only player in the game. Streitfeld writes as if Amazon is the only retailer out there, but it now has competition from Barnes & Noble’s Nook (s BKS), Apple’s iBookstore, Kobo and Google (s GOOG). These retailers have all shown themselves willing to match Amazon’s price drops on ebooks. The prices aren’t always exactly the same across stores, but they are at least close enough that there is little incentive to switch retailers if you’re already using a platform you like.

Streitfeld does note that “it is possible that Amazon, which controls about 60 percent of the e-book market, is merely holding back with price cuts for the right moment.” The same is for any of the other retailers selling ebooks. A retailer simply may not see much incentive to drop ebook prices by a dollar or two if a) people are already buying those ebooks through them at the higher price; b) other retailers are likely to match the discount and c) the slightly lower price won’t convert many new buyers.

10 Responses to “Ebook prices aren’t dropping faster because they weren’t too high before”

  1. As tablets take over from readers, the price of ebook titles will fall to a buck. Here’s why: Buyers sincerely believe that all digital media should be free but they will tolerate paying about a buck a title.

    And buyers are right. If we can’t resell a purchased item, we never owned it. Its inherent value is diminished. Ebooks prices today are tied to print titles but that bond is exactly what’s about to break.

    This will be Apple’s moment: Amazon sells a cheap tablet (razor) so it can many books (blades) at 10 bucks. Apple sells an premium tablet, so it doesn’t care what the book price is. Tunes are a buck, apps are a buck, shows will soon be a buck, and on tablets, book titles will be a buck too … also. Apple will finally underprice Amazon, which has been underpricing publishers and resellers for a decade. Turn about is fair play.

    • @Winstuff, stop telling us how much tablets and ereaders cost. Authors don’t get a share of the profits of those expensive devises at all, so why start explaining cost to everyone. And no, you won’t get books for a dollar either. I don’t know what kinds of books you are talking about. you can go to Project Guttenburg and see what they have but as far as new, full-price quality, convenient ebooks, you will not get those for a buck so stop dreaming, please. When that day comes, authors will simply find other things to do with their time, saying as how they can’t even LEGALLY get the FONT to write the book without paying that artist $20. Yes, writing fonts cost a minimum of $20 when you purchase. and book cover artists expect royalties. these costs don’t vanish because the book is an ebook, so please, please stop.

  2. Actually, the long view on publishing is that the industry is a mess right now. Prices on ebooks are way up because publishers got greedy and still wanted to use the same business model as for print, which with a lower overhead brings much larger profits. Ebooks are almost pure profit items despite the whining and moaning about costs. At the same time it’s harder for authors to get a foothold and royalties are down. Add to that increased retail competition online and a tech industry that regards any content merely a way to sell tablets that become obsolete every few months. Youthful writers, enthralled with this new digital format (which actually took around 30 years to develop) are making excuses for bad business models and buying into the promises of unlimited delivery channels by the tech folks. Time to sit back and get real or the whole thing will go bust just like videotext in the ’80’s.

  3. Reading the tea leaves now to try to understand what’s really going on in the paper/ebook marketplace misses the far larger point of the disruptive changes in play that will radically transform the publishing industry.

    Many industry pundits agree that popular trade books will be 80% e in the foreseeable future — within 5, 8 or maybe 12 years. At that point, paper book prices will rise considerably relative to today — a luxury for those that still enjoy paper — while ebook frontlist prices will fall relative today, maybe to $9.99, maybe lower. In between today and the e-dominated world, the cost structure of current publishers will break down, leaving the Big 6 or 4 or 2 in an altered form or no form at all.

    The big winners in this transformation will be consumers, authors and the platform(s) that connect the two. Whether publishers continue to play a major role in this world is up to them, depending on their answer to the question: how will we continue to create value in a post-digital book world? Those that think “consumers will still buy frontlist ebook prices when we raise prices” seem to believe that publishers live in a world where downward sloping demand curves don’t exist. However, consumers live in the real world.

    Needless to say, it is WAAAAYYYY too early to read too much into the disruption of the book industry by looking at today’s prices on Amazon.

  4. William Ockham

    This article has a number of factual inaccuracies and misleading statements. First, although Penguin has announced that it will be settling, its ebooks are not yet covered by the settlement terms. It’s is misleading to say that four out of the publishers have settled with the DoJ . Moreover, the settlements certainly haven’t been in place for eight months as the article seems to suggest. It is really very early to measure the full impact of the settlement agreements. When both Random House and Penguin are covered by the settlement terms, there will be a more noticeable drop in ebooks prices.

    The most egregious falsehood in this article is the claim that “ebook prices aren’t dropping faster because they weren’t too high before”. Yes, they were too high before. The average ebook was overpriced by at least an amount between 25 cents and $1.32, based on the terms of the settlement. Interestingly, the decrease in the prices of bestselling ebooks covered by the settlement is generally in that range. To ignore these facts is to go beyond ignorance and venture into the realm of the apologist and propagandist.

    Only the foolish or the misinformed expected a huge ebook price war. I don’t know if John Sargent believes the nonsense he’s spewing, but anyone else who does is naïve in the extreme.

    When the article discusses the current state of pricing under the settlement terms, it really goes off the rails. Saying that “publishers are now free from Apple’s price bands” is a little like saying that the Emancipation Proclamation freed slave owners from their responsibility to care for their slaves. It is an insult to your readers to pretend that the price bands were a limit on publishers when the reality is that they served to limit retail price discounting.

    Owens also wants us to believe that each publisher has been able to negotiate the same deal individually as they did through the illegal collusion. I find that quite unlikely.

    The final insult is the implication that ebook prices are higher because Amazon has more competition in the ebook space. Really? We’re supposed to believe that more competition results in higher prices? On what planet? Of course, everyone knows that the real competition is between traditional print books and ebooks. The metric that matters is the spread between the retail price of the print bestseller and the retail price of the same ebook title. The smaller the spread, the better for the Big 6/5/4. The bigger the spread, the better for consumers and the industry as a whole because the quicker the transition to digital, the better for everyone besides the current market leading incumbents.

  5. Nate the great

    You could be right about the competition. Amazon might be avoiding the deep sales because they know someone would match them, thus reducing Amazon’s benefit.

    But I’m not sure how that would square with Amazon’s willingness to match everyone else’s sale prices, That’s a situation where Amazon gains very little and yet they still do it. Admittedly that is at the expense of the smaller publisher and authors, but Amazon is still competing on price.

    I still think that the earlier growth were due to lower prices supported by the expensive hardware and the deeper discount Amazon secured from publishers. Of course, I said as much in the quote