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

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.