In Amazon/Hachette deal, ebook agency pricing is a winner

20 Comments

In the deal that Amazon and Hachette Book Group finally reached Thursday after months of bitter negotiations, we don’t really know which side “won,” if one side did. But one survivor — perhaps surprisingly — was agency pricing for ebooks, the practice through which the publisher sets an ebook’s price and the retailer takes a commission.

Hachette said in a letter to authors and agents Thursday:

The new agreement delivers considerable benefits. It gives us full responsibility for the consumer prices of our ebooks. This approach, known as the Agency model, protects the value of our authors’ content, while allowing the publisher to change ebook prices dynamically to maximize sales.

That wasn’t a foregone conclusion. In 2010, [company]Amazon[/company] was vehemently opposed to agency pricing, though it ultimately capitulated. Agency pricing was at the heart of the of the Department of Justice’s lawsuit against Apple and book publishers in 2012, in which the DOJ accused Apple and the publishers of colluding to set ebook prices.

The DOJ never actually said that agency pricing was illegal; rather, it alleged that Apple and the publishers illegally conspired to adopt the model at the launch of the iBookstore in 2010. At the time of the lawsuit, agency pricing had been in effect for about two years. The publishers’ view was that it ensured a more competitive marketplace because no one retailer could offer deep discounts on ebooks. I supported agency pricing and my colleague Mathew Ingram and I debated it here.

Though agency pricing wasn’t found illegal (and other kinds of digital content, like apps and music, are sold the same way), it was somewhat tainted by association with the lawsuit. ll five publishers named in the suit settled, and the settlements required them to give up strict agency pricing for two years. For those two-year terms, publishers could set their own ebook prices but retailers could discount them as much as they wanted, with a few minor limitations. After that, publishers and retailers could negotiate new contracts and restore “traditional” agency pricing if both sides agreed on it.

While we obviously don’t know all of the details that Amazon and Hachette agreed on, here are the things that Amazon publicly said about ebook pricing at various times during the negotiations:

  • “A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book.” [Kindle Forums post attributed to “The Amazon Books team,” July 29, 2014]
  • “This discussion is all about e-book pricing. The terms under which we trade will determine how good the prices are that we can offer consumers.” [Amazon exec Russ Grandinetti to the Wall Street Journal, July 1, 2014]
  • At an ebook price of $9.99, “we believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30% — we did have a big problem with the price increases.” [Kindle Forums post, July 29, 2014]
  • “While we believe 35% should go to the author and 35% to Hachette, the way this would actually work is that we would send 70% of the total revenue to Hachette, and they would decide how much to share with the author.” [Kindle Forums post, July 29, 2014]

Here is what we know about the deal announced Thursday:

  • “We are pleased with this new agreement as it includes specific financial incentives for Hachette to deliver lower prices.” [Amazon’s David Naggar, press release] (This is the same thing that Amazon said about the deal it reached with Simon & Schuster in October.
  • “Importantly, the percent of revenue on which Hachette authors’ ebook royalties are based will not decrease under this agreement.” [Hachette CEO Michael Pietsch, press release]

We don’t know the exact financial incentives Amazon is offering, but they presumably encourage Hachette to keep its ebook prices at or below $9.99 or perhaps some other negotiated price ceiling, like $12.99. This may be similar to what Amazon offers to self-published authors on its KDP platform: 70 percent of an ebook’s sale price if the book is priced between $2.99 and $9.99; otherwise, 35 percent. (Author Hugh Howey calls this “incentivized agency.” By the way, Amazon rolled out this system in January 2010 after the announcement of the iBookstore.)

Hachette said in its letter to authors that the percentage of revenue on which they take a cut won’t change. But since we know that Amazon is giving Hachette financial incentives to keep its ebook prices low, perhaps Hachette will be penalized with a smaller cut of the sale if it prices ebooks above that previously set ceiling, even if it passes on the same amount to authors that they would have gotten previously. Or perhaps Amazon takes a smaller cut when Hachette keeps ebook prices within a certain range.

Ultimately, both Amazon and Hachette may be telling the truth when they say they’re happy with the deal. But it seems clear that agency pricing, incentivized or not, on big publishers’ ebooks is here to stay, and now it will be up to Hachette to experiment with prices and see if its own findings jive with Amazon’s public statement that “when the price goes up, customers buy much less.

20 Comments

hhd

No publisher nor any manufacturer should be allowed to set prices that a retailer may charge. I believe Amazon should have just have shut Hatchette out and not allowed their books to be sold by Amazon except on Amazon’s terms. If a publisher wishes to act as a retaiiler they may charge whatever they wish; if they sell to a retailer it is the retailer’s decission to set their price point wherever they choose. I trust no publisher to help authors nor consumers, but only protect their own selfish corporate bodies.

rickchapman53

I’m sorry, but you don’t know what you’re talking about. Nothing in the law requires a supplier to sell a product and/or services to a reseller. Nothing in the law requires a reseller to purchase products from a supplier. This is settled law.

The interaction between the two parties is managed by contractual negotiations.

Apple sells iPhones to its resellers on an “agency” basis. No one attempts to dictate to Apple on what terms iPhones are sold to Amazon and an attempt to say they must sell at wholesale to a reseller would be laughed out of court.

Rick Chapman
http://www.softletter.com
http://www.saasuniversity.com
Author “SaaS Entrepreneur: The Definitive Guide to Success in Your Cloud Application Business”
Author “Rule-Set: A Novel of a Quantum Future.”

rickchapman53

+++ At an ebook price of $9.99, “we believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. +++

Wow, I bet the suffering was immense. Do you realize how wonderful 30% margins are on E-inventory? Golden. That 30% is close to 30% NET because E-books are zero real inventory items.

Theresa M. Moore

No matter what price point a publisher sets, Amazon will find a way to talk it down, or unilaterally act to reduce the sale price anyway. And its payout scenario means that the publisher will receive 35% anyway, from contract markets outside the US. In my case, as an independent publisher I was forced to accept its contract terms, which give Amazon every advantage and myself none. It can and does discount the price anytime it wants to. Amazon just did not like the idea of having to negotiate terms which denies it that unilateral freedom. I never sold as many ebooks on Amazon as I did all the other venues I worked with, so now my titles are not there anymore. Amazon screwed the pooch. That’s not MY fault. I work with any retailer which presents a fair and evenhanded deal. Amazon failed to do that. So now that the major publishers (who were framed by Amazon) are “forced” to work with Amazon, they will find that there is no advantage after all. It’s only a matter of time.

Will Buckley

Without the support of authors and Authors United, Hachette would not have been able to have continued their stand off with Amazon and ultimately publishers and the authors they represent would have lost control of pricing for their work.

A situation that has brought the music business to its’ knees.

Mick Rooney

The support of Authors United had nothing to do with Hachette finalising a deal with Amazon. What shifted things recently was Simon & Schuster’s deal with Amazon. Hachette’s stand off looks increasingly now more like an unwillingness to be the first big 5 publisher to throw down a marker in the sand.

rickchapman53

+++ The support of Authors United had nothing to do with Hachette finalising a deal with Amazon. +++

It had everything to do with it.

Read the below:

http://www.rule-set.com/ricks-blog/amazon-vs-hachette-its-over-and-what-really-happened-and-aaag-owes-indies-and-authors-an-apology

Rick Chapman
http://www.softletter.com
http://www.saasuniversity.com
Author “SaaS Entrepreneur: The Definitive Guide to Success in Your Cloud Application Business”
Author “Rule-Set: A Novel of a Quantum Future.”

Muddy-Mudskipper

“The publishers’ view was that it [agency pricing] ensured a more competitive marketplace because no one retailer could offer deep discounts on ebooks. ”

If that isn’t the ultimate in doublespeak bulls*t I don’t know what is. Based on that single sentence I’m now on Amazon’s side.

Jack C

While agency pricing may technically be in effect, without knowing more about the deal, your conclusion that it is a winner strikes me as very premature. In fact, given all of the comments, I’d think the opposite is true; that agency pricing was the loser here.

Control over pricing, without a (relatively) fixed % of the gross, is “control” in name only. Whether Hachette keeps the old % share of revenue at prices that Amazon considers too high (unlikely), or not, the agreement seems to indicate a loss of pricing control.

Time will tell. We’ll see if Amazon’s incentives push Hachette prices down.

George Orwell

Pietsch’s quote–“Importantly, the PERCENT of revenue on which Hachette authors’ ebook royalties are based will not DECREASE under this agreement.”–would suggest that while the author might still get their 25% of 70% of the publisher-set retail price, the deal between AMZN and Hachette might give Hachette, say, 65% of that price under a ‘high-price’ scenario or, say, 75% under a ‘low-price’ option. In which case Hachette would net/net $6.17 on a $12.99 e-book and $5.74 on a $9.99 price point. The author royalty–at 25% of 70% regardless of the ‘incentive’ to Hachette/AMZN (depending on how you view it)–would be $2.27 and $1.75 respectively.
Whatever the actual incentives/penalties, it becomes apparent that from AMZN’s perspective the pressure they’ll mount on price points–accompanied by continuing to seed and fuel discord between publishers and agents/authors–is the necessary next move on the chess board to set up for checkmate 3-5 years out.
Bezos’ darwinian pursuit of crushingly dominant market share–knowing he can nab it at the lowest cost-per-percentage-point that it will ever be–is the requisite continuing assault that assures the further, deeper, monopolization of the book market. After they rename it Standard Book and people awake from their slumber and recognize the destruction of a keystone of our culture they may then wish that the government had pursued an antitrust action. But I guess a gaggle of K-street lobbyists is like nothing compared to owning The Washington Post.

Jack C

What “keystone of our culture” is Amazon is going to destroy exactly?

Will Buckley

Interesting that we end up with the same pricing model that Apple was sued for price fixing. A suit initiated by a white paper study underwritten by…….Amazon.

As they say in the movies: “It’s complicated.”

Len Sherman

Laura, your article says: “But one survivor — perhaps surprisingly — was agency pricing for ebooks.”

Authors who self publish with Amazon on the KDP set their own selling price within a wide range, ceding 30% to Amazon as an agency fee. Isn’t that essentially what they appear to have negotiated with Hachette? Did this negotiation really have to drag out so long?

Laura Hazard Owen

We’re probably never going to know why the negotiations dragged out so long. Hachette had an agency pricing agreement with Amazon as of 2010, a new contract in 2012 post-DOJ and now had to negotiate this new one in 2014. It seems as if one issue was the percentage of each sale that Amazon would take.

Len Sherman

Finding a “deep throat” in Amazon or Hachette would make for a great scoop for your next column!

rickchapman53

+++ Authors who self publish with Amazon on the KDP set their own selling price within a wide range, ceding 30% to Amazon as an agency fee. Isn’t that essentially what they appear to have negotiated with Hachette? Did this negotiation really have to drag out so long? +++

This untrue. Amazon sticks indies into a $7 dollar pricing box and punishes them with a predatory 65% margin grab if they price a book over $9.99 and under $2.99. It has announced there are “legitimate” reasons for pricing over $9.99 but has not told anyone what they are and how their prospective pricing codex will be structured and administered.

More info here:

http://www.rule-set.com/ricks-blog/october-06th-2014

Rick Chapman
http://www.softletter.com
http://www.saasuniversity.com
Author “SaaS Entrepreneur: The Definitive Guide to Success in Your Cloud Application Business”
Author “Rule-Set: A Novel of a Quantum Future.”

John

So after all the hand wringing, they’ve gone back to the same agency model that the DOJ used to sue Apple?

Mike

Wasn’t the issue there not so much the agency model per se, but the fact that publishers and Apple colluded to fix prices? A cartel, in other words, whatever the starting point.

rickchapman53

No, it was not. The issue was and always was about Amazon’s desire to strip the publishers of agency pricing. That was also at the core of the battle between Amazon and Macmillan.

Agency pricing tends to put the supplier in control of the pricing model since this model is applied to a suppliers top products and brands.

Wholesale pricing puts the channel in charge.

Explained here:

http://www.rule-set.com/ricks-blog/what-hugh-howey-wont-talk-about-but-should-the-book-channel-part-v-of-several-parts-the-resellers-and-agency-vs-wholesale-pricing-and-mdf-oh-my

Rick Chapman
http://www.softletter.com
http://www.saasuniversity.com
Author “SaaS Entrepreneur: The Definitive Guide to Success in Your Cloud Application Business”
Author “Rule-Set: A Novel of a Quantum Future.”

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