Bye Bye $9.99 and Price Competition in eBooks

The mantra for many ebookers over the past year or so was “get rid of agency pricing and bring back lower ebook prices based on competition.” These ebookers are ecstatic over the approval of the settlement terms in the Department of Justice’s lawsuit against five of the Agency 6 publishers and Apple by Judge Denise Cote on September 6, 2012.

I think it is way too early to celebrate and I think ebook prices of bestsellers will rise, not become lower.

To set the mood to say goodbye to $9.99, here is a song from the past — Don McLean singing his Bye Bye Miss American Pie:

Now that you’ve been entertained, let’s discuss why I think we can say goodbye to the $9.99 bestseller and to real price competition among the big publishing houses which control the majority of popular publishing today.

The first problem lies within the settlement agreement itself. As Judge Cote wrote (p. 10 of the Opinion & Order filed September 6, 2012), the publishers, although they cannot use agency pricing, which presumably means a return to the wholesale pricing of the preagency days, can “enter into contracts that prevent the retailer from selling a Settling Defendant’s e-books at a cumulative loss over the course of one year.” This is a threefold problem for consumers.

First, it means that publishers will be able to require Amazon (and/or Barnes & Noble and/or Apple and/or all other ebooksellers) to disclose both sales numbers and pricing, something that Amazon has been loathe to disclose even to its shareholders. Under the current system of no such requirement, a publisher knows how many of a title have been sold by Amazon because Amazon has to pay for each title sold. But what has not been known, and what every analyst wants to know, is whether the sales are profitable, not just how many units are sold. Analysts want to know whether Amazon has sold 1 million ebooks and made or lost $5 million from the ebook sales alone. And knowing that information, analysts can determine whether or not Kindle hardware sales are profitable — all information that Amazon has steadfastly refused to isolate.

This is problematic because if Amazon has to verify that over the entire line of, say, Macmillan ebooks it is making a profit — and note that it is over the entire Macmillan line, not over the combined lines of Macmillan and Simon & Schuster — Amazon will have to be very cautious about pricing. One cannot easily take a loss on a million-selling ebook in hopes that over the course of the next months it will sell enough ebooks from that publisher to end the year in profit. How likely is it that Amazon will take that gamble and reinstitute $9.99 pricing?

The second reason this is problematic for consumers is because the order essentially orders a return to the wholesale pricing scheme but sets no boundaries on that scheme. There is nothing to prevent the publishers from altering the discount rate or even giving a different discount rate to different ebooksellers. As part of its order, the court did away with the most-favored-nation clause, which said whatever terms you give X you must give me.

I know the response to this is that the publishers need Amazon more than Amazon needs the publishers. I think, however, that Amazon’s caving in to Macmillan when Macmillan demanded agency pricing demonstrates that it is the publishers who are in the catbird’s seat, not Amazon. Amazon is the seller of product and thus needs product to survive. Each of the Big 6 publishers controls a significant portion of the necessary product that Amazon cannot afford to do without. Besides, I expect that each of the publishers will come, independently, to the position of squeezing Amazon similarly, so Amazon will have little recourse, just as it had little recourse in the Macmillan dispute.

The third problem for consumers is that the answer to the worries of the publishers that brought about agency pricing is simply raising the list price of newly published books. The way publishers do this is to take an expected blockbuster and raise its price to the new price point and watch sales. If expected sales (or close thereto) occur, then the next expected blockbuster is given the same price point, and this is repeated until there is confidence that consumers are now expecting to pay the price point.

And this is already beginning. J.K. Rowling’s new book, The Casual Vacancy, a Little, Brown, imprint, has a new price point for a novel: $35. If you check Amazon and Barnes & Noble, you will find that the ebook price at both is $17.99 — a far cry from the previous bestseller price point of $9.99 at Amazon. And the $17.99 is a 49% discount off the list price, which means that the ebook is likely to be generating a 1% gross profit for the retailers, just barely meeting the condition in the settlement order. I see this as an indication that the ebooksellers are concerned about profitability over the entire Little, Brown ebook line over the coming year.

Under the agency system, it would have been expected that Rowling’s new ebook would carry a price no higher than $14.99.

There is also the question of whether Amazon has gotten used to actually making money on ebooks and is using the profit to subsidize the Kindle hardware. Nate Hoffelder raised this question in Did the Agency Model Lead to Cheap eReaders? at his The Digital Reader blog. Having made money on ebooks over the past year, how likely is it that Amazon will want to subsidize both the hardware and the content, perhaps taking a loss on both? At some point, Amazon has to show a profit to prevent shareholder rebellion. And now it has the perfect excuse to do so: Judge Cote’s approval of the settlement agreement that allows publishers to require Amazon to earn a profit on ebooks.

It is the combination of forces that have been unleashed by the approved settlement agreement that will result in no agency pricing for at least 2 years but, instead, higher prices for consumers and the end of the $9.99 bestseller price. We may occasionally see a bestseller being offered at the $9.99 price, but it will be the occasional bestseller, not all bestsellers as in the past. And if we watch prices, I think we will see list prices climb; it will be the rare bestseller that will have a list price below $30. Rowling is leading the way and if her book is a bestseller at $35, it won’t take long for other top-tier writers to insist on equal list pricing. That is how it happened in the past and how it will happen this time.

I may be wrong, but I doubt it. History does tend to repeat itself and the DOJ and Judge Cote have let loose a rising tide. Do you agree?

Why Aren’t Kindles Free-Marketed?

In all the hullaballoo over agency ebook pricing and how terrible it is to not allow ebooksellers like Amazon to discount ebooks and sell them at whatever price they want, even if it is at a loss, ebookers haven’t questioned the lack of dynamic pricing of ereaders themselves, especially that of Amazon’s Kindles.

Consider this: Every store that sells an Amazon Kindle sells it for exactly the same price as Amazon and every other retailer. And when one retailer has it on sale for $20 off, so does every other retailer. (This is also true of the Sony, Kobo, and Nook devices.)

Why aren’t ebookers complaining about this price-fixing? No, I’m not suggesting there is collusion between the companies to prohibit discounting of the devices. Rather, I find it disingenuous that agency pricing, which is a form of price-fixing, is so disliked among some ebookers that they complain about it and want it banned, yet no one has complained about the lack of price competition when it comes to the device to read the ebooks. Why is it OK for Amazon to price fix but not Macmillan?

I’m sure the immediate response will be that there is no complaint because the prices on these devices have dropped to where they are now half or less of the original cost. If that is the key to salvation, then all Macmillan needs to do is drop the price of an ebook from $12.99 to $10.99 and ebookers should be satisfied — after all a drop in price is a drop in price — but I know that would not satisfy. Why? Because the argument would be made that the ebook price would be even lower if true free-market competition were allowed.

So why isn’t that the ebooker argument when it comes to the devices? I could see, for example, Staples offering a free Kindle with the purchase of a $150 paper shredder, or Target offering a 50% discount on a Kindle with the purchase of Stephen King’s newest novel. But we don’t see those sales because Amazon is not ready to sell at those prices itself and no one is allowed to undersell Amazon.

If the argument against agency pricing is legitimately one against price-fixing, why doesn’t the argument carry over to the devices? What makes it OK in one category of product but not in a related category of product? When agency pricing is attacked, it is usually on the basis that it has caused ebook prices to rise.

There has been no comprehensive pricing study done, that I am aware of, to determine whether the cost of ebooks has risen, fallen, or stayed the same since the introduction of agency pricing across the entire spectrum of ebooks published by agency-pricing publishers. I know, for example, that many of the ebooks I buy cost less under agency pricing and I also know that the prices of bestsellers that Amazon sold at $9.99 have risen under agency pricing. What I don’t know is whether across the spectrum of agency-pricing publishers’ ebooks, as opposed to niches, prices have risen, fallen, or stayed the same. I think this is important information to have so that we can intelligently determine whether agency pricing is consequential or inconsequential.

It seems fairly clear to me that opponents to agency pricing fall into a few groups. There is a small group of ebookers who are free-marketers and believe everything should be priced elastically, based on demand — the libertarians of the marketplace who oppose agency pricing because it is controlled pricing. A second group of opponents are those whose reading now costs more because they only read/buy books that fall into the niches where agency pricing has caused prices to rise, such as the Amazon bestseller niche. It isn’t so much that they are opposed to agency pricing as they are opposed to the increase in pricing and assume that Amazon would, if it could, charge a lot less for the books they want to read and buy in the absence of agency pricing. The third group assumes that because prices in one niche increased under agency pricing that all prices increased and thus are opposed to agency pricing because it caused a rising tide of prices.

These same arguments can be made when it comes to the devices: In the absence of Amazon price-fixing its Kindles, WalMart would sell the Kindles for less; there would be a Kindle price war between WalMart and Target; Staples would offer package deals; and so on. On this, I would think all of the anti-agency-pricing ebookers would unite to lambast the device price-fixing. But here silence reigns.

I’m sure someone will point out to me how different these products are; how one doesn’t have to buy a Kindle to read an ebook bought from Amazon; how, instead, one could download a free app and read the ebook on one’s computer or tablet. I’m sure the point will be made that you don’t need the Kindle but you need the ebook in order to read it. It’s all true, but doesn’t change the fundamental points:

1. There are no objective data to demonstrate whether agency pricing overall has raised, lowered, or done nothing to ebook prices except in niches.
2. There are no objective data to demonstrate that in the absence of Amazon’s device price-fixing that the Kindle would not be available for less, even free.
3. Whether price-fixing is OK or not OK should not be dependant on who is doing the fixing; that is, OK if Amazon is doing it, not OK if the big publishers are doing it.

Never discussed are what obligations the price fixers have, if any, to the consumer. Do publishers have an obligation to sell ebooks at price points that consumers want? Does Amazon have an obligation to free-market its Kindles?

Isn’t it interesting that without meeting ebooker demands as regards agency pricing the sales of agency-priced ebooks steadily grow? Isn’t it interesting that the freedom Amazon wants to price ebooks as it wishes Amazon isn’t willing to give to retailers of its Kindles? Isn’t it interesting that ebookers see no conflict in their demand for the end of agency pricing and their willingness to accept Amazon’s control of Kindle pricing?

We live in fascinating times!

The Value of eBooks: Is $2.99 The New Value

One excuse the big publishers used for going to the agency model of pricing was that Amazon’s $9.99 price for certain bestsellers was undervaluing the books and would establish expectations in ebookers regarding maximum pricing. So, if that is true, how do these very same publishers justify putting certain ebooks on sale for $2.99 or less?

This question popped to mind when Little, Brown, a subsidiary of Hachette, put City of Veils by Zoe Ferraris on sale for $2.99. This is the second mystery book by Ferraris featuring the same Saudi Arabian investigative team. (Although this is not a review of the book, it is worth mentioning that it is a 5-star book that offers both a fascinating insight into Saudi culture and a great mystery.) City of Veils is neither the first nor the last ebook by one of the Agency 6 to be put on sale for $2.99 or less; such a sale seems to be a regular happening. (The first book in the series, Finding Nouf, is listed as discounted to $11.16 from the list price of $13.95, with neither price being a price I would pay for a fiction ebook.)

Which makes me wonder about the “value of ebooks” and whether we are seeing the erosion of price to where, eventually, Agency 6 fiction ebooks will be regularly priced at $7.99 or less and frequently on sale for $2.99 or less.

There has to be something magical about this $2.99 price point. Why $2.99 and not $4.99? Or $3.99? Both prices would be substantial discounts off the list price and even off the standard 20% to 25% discount price. I suspect the answer lies in what experience is rapidly showing as the price point for maximizing volume of sales. I also suspect that publishers are finding that ebookers are unwilling to pay more than $2.99 for an introduction to a previously unknown author. Yet, I don’t see any evidence that after the introduction to a new author, ebookers are running to spend $11+ for other ebooks by the same author — I know I am not.

But regardless of the motivation, isn’t this $2.99 price point setting an expectation among ebookers as to what the correct price for an ebook should be? I find that it cements my belief that ebooks should be both DRM-free (which Tor, a Macmillan subsidiary, will be doing shortly) and list priced at no more than $5.99 and frequently discounted to $2.99 (or less). These Agency 6 discounts are also cementing my belief that I will only rarely pay more than $2.99 for any ebook.

The price point problem is exacerbated by other steps publishers are taking. I recently preordered Spycatcher with a bonus excerpt by Matthew Dunn, published by HarperCollins, one of the Agency 6, for 99¢. (The bonus excerpt is from Dunn’s forthcoming new novel Sentinel, which can be preordered for a whopping $12.99!) At the same time, Spycatcher without the bonus excerpt is available for $9.99. This type of discounting with bonus material included happens regularly. My question to publishers is this: Why would I ever consider buying Sentinel for $12.99 or Spycatcher for $9.99 — neither book nor the author being previously familiar to me — when I expect that at some future date I will be able to buy them for significantly less?  Doesn’t your offering one of the books for 99¢ create an expectation in me, the ebooker? And even if I can’t buy them in the future for $2.99 or less, why would I buy them at all — regardless of how good a read the introductory book is — at a price that has already demonstrated as far too high?

If there is any validity to the complaint of Amazon’s $9.99 price point setting consumer expectations at a price that is unsustainable by the publishing industry, how are publishers fighting that expectation by offering ebooks for $2.99 or less? Why is the publisher’s tactic sustainable but not Amazon’s?

Valuing of ebooks is difficult. Yes, there are costs that can be objectively measured but those per-unit costs diminish with volume sales. I grant that each ebook cannot be looked at in isolation as best-selling ebooks need to subsidize those that do not sell well so that overall there is an industry profit. Yet, where previously the argument was that no ebook should be sold below a price that sustained the industry, which price was somewhere north of $9.99, Agency 6 publishers belie that argument by demonstrating that at least some ebooks can be sold for significantly less without damaging the industry. That action reraises the issue of what is an ebook worth?

The industry has put itself into a straitjacket of its own making. Originally publishers planned to window ebooks. Windowing of ebooks allegedly would let publishers subsequently publish the ebook version of a pbook at much reduced price, more in line with ebooker expectations. But after much protesting from ebookers, publishers ultimately went to simultaneous release. Unfortunately, with simultaneous release, publishers decided they could not price the ebook much lower than the pbook for fear of cannibalizing pbook sales, losing money, and devaluing the book.

Then to shore up the value of ebooks, agency pricing was instituted. It was touted as necessary for the health of the publishing industry — from author to publisher. Now, within the past year, these same publishers are regularly pricing some ebooks at $2.99 or less, shattering the justification for the higher agency pricing.

In the end, I think publishers will find that $2.99 is the magic price point for ebooks. The combination of the self-publishing phenomenon that ebooks have produced, the use of the $2.99-or-less price point by self-publishers, and the apparent willingness of at least some of the Big 6 publishers to discount ebooks — even if for just a limited time — to that price point, will create an expectation in ebookers that publishers will be unable to combat. We may be a few years away from seeing that magic price point, but I suspect it is coming on fast.

The Department of Justice vs. eBooks II

As I noted in the first part of this article (see The Department of Justice vs. eBooks I), the settlement proposed by the DOJ raises a lot of issues but doesn’t attack the central premise that agency pricing is okay.

I mentioned in part I that publishers could raise the list/wholesale prices of not-yet-published ebooks. But there is another option that could prove to be even more effective: Publishers are not obligated to give ebooksellers a 50% or higher discount as the wholesale price. Publishers could limit the wholesale discount to 30%, which would reflect the current 70-30 split that comes from agency pricing.

And there is nothing preventing publishers from limiting the format that an ebook can be sold in.

The point is, publishers do not have to think of themselves as helpless. I expect publishers will look at the situation as if they are helpless. They aren’t, but they need to be creative, something they are not known for. As the current debacle demonstrates, publishers are being led, they are not leading.

Let us not forget that the settlement proposed by the DOJ effectively separates book sales into two distinct markets: pbooks and ebooks. This could be important because one of the reasons the publishers gave for agency pricing is that they want to keep the brick and mortar stores alive. (It is worth noting that recent data show that even with the growth of ebooks, pbooks sales still account for 80% of all book sales.)

Well, the b&m stores rely on pbook sales, not ebook sales. Even Barnes & Noble relies on pbook sales. The only major bookseller of pbooks that doesn’t have b&m storefronts is Amazon. If publishers want to help ensure that the b&m stores continue to be competitors to Amazon, the simple way to do so is to not only insist that every bookseller get the same wholesale discount (there is no law that requires volume discounting) but then to supplement the b&m stores with higher co-op payments for displays, which would enable them to have additional funds for discounting to compete pricewise with Amazon.

The law requires that similar parties be treated similarly. So if Amazon wanted co-op money, it would have to open b&m stores. In other words, publishers could help level the playing field without straying from the requirements of the DOJ settlement.

It has been stated on numerous blogs and forums that the key to fighting Amazon is to do away with DRM. Without DRM, people would navigate to the ebookseller with the best pricing and service. I do not think that is true in the absence of devices that can handle different formats. Most Kindle owners will continue to shop at Amazon because Kindles can’t handle ePub in the absence of conversion and side loading. Similarly, Nooks can’t handle Amazon’s proprietary format without conversion and side loading. The question isn’t whether converting and side loading are hard to do — they aren’t — but whether most ebookers would do so to save a dollar or two. I think not.

What Kindlers and Nookers always cite in defense of buying from Amazon or B&N, respectively, is the ease of buying and then seeing their purchase appear on their device effortlessly. Right now they could buy a lot of the indie books that they buy at Smashwords in the DRM-free format of their choice. But they don’t because then they would have to side load the ebooks; they aren’t automatically loaded onto their device. Why would habits change?

Ultimately, the real keys to ensuring competition remains are a single, uniform format that is device agnostic (and if DRM must be, then the DRM also be uniform) and agency pricing.

I can hear the uproar as I write about agency pricing, but consider that many of the electronic items we buy are either agency priced or have the same effect through resale price maintenance agreements. Every ad I see for an Apple iPad gives the same price. Every ad I see for a Kindle Touch lists the same price. Yet no one complains that there is no price competition for these items (where is the DOJ’s proconsumer department in these cases?); the complaints are all directed at ebooks.

Of course, the answer is that Kindles don’t compete with Kindles, they compete with Nooks and each vendor independently decided to set the prices. But it is the blind person who fails to see that there is really no difference in effect for the consumer and the purpose of the antitrust laws, ultimately, is to protect competition for the benefit of consumers. Whereas the DOJ recognizes that the Kindle and the Nook are not the same, it insists that the Stephen King and the Dean Koontz novels are the same, at least in book form.

And if the DOJ were really focusing on the effect on the consumer, it would take a look at the various formats and DRM schemes that lock most consumers into a particular eco system. How much more anticompetitive can one be than to capture an audience and make it difficult for them to stray elsewhere?

Here is another question: Where are the authors in this dogfight? The Author’s Guild has come out against the DOJ settlement, but where are the indie authors? Based on comments I read elsewhere, most indie authors are pleased by the settlement because it will make Amazon even stronger and the majority of their sales are at Amazon.

In the short-term view, the stronger Amazon is, the better it is for the indie author. But is that true for the long-term? I can only speculate, but based on Amazon’s attempting to squeeze publishers for more money, I think it is fair to expect that eventually it will turn to squeezing indie authors. The more dependant an indie author is on Amazon, the less the indie author can refuse whatever terms Amazon wishes to impose. And it must be remembered that Amazon owes its obligations to itself and its shareholders, not to its suppliers. Amazon is the Walmart of ebooks.

There is also one other potential negative effect to the settlement. If Amazon succeeds in establishing the $9.99 price point, indie authors who have not yet found a large audience for their books will be squeezed into even lower pricing than currently. More of their ebooks will be priced at 99¢ and free because the reading public will not see them as being worth more when one can by the well-established and well-known author for $9.99 or less.

How this will all turn out is of great interest to me. I am pleased that Macmillan and Penguin have the moxie to fight the DOJ settlement, as I do not think the settlement is in anyone’s best interest over the long-term. It may be of benefit over the short-term, but somewhere along the continuum, in the not-so-distant future, publishers, authors, and consumers will face a different reality.

What do you think?

The Department of Justice vs. eBooks I

As most of you already know, the U.S. Department of Justice (DOJ) has filed a lawsuit against Apple and 5 of the Big 6 publishers alleging collusion in the establishment of agency pricy pricing (see “Justice Dept. Sues Apple and Publishers Over E-Book Pricing; 3 Publishers Settle”). In several of the forums I participate in, ebookers are celebrating the expected lower ebook prices.

Yet, there are several things worth thinking about and noting. First, Random House, one of the Big 6 publishers, and Smashwords, the leading indie author distributor, both of which have agency pricing, are not named defendants in the DOJ lawsuit. That signals to me that the problem is not with agency pricing, but with the collusion aspects.

Second, the 3 publishers that settled with the DOJ, which settlement, it is worth noting, is not effective until approved by a court, are restricted from instituting agency pricing for 2 years, after which they can reassert agency pricing as long as they don’t agree over dinner to do so. This, too, indicates to me that agency pricing is not contrary to the law or necessarily thought to be anticonsumer by the DOJ.

The third notable matter is that the publisher with the greatest moxie, the one that first stood up to Amazon, Macmillan, is not settling with the DOJ and intends to fight, as do Penguin and Apple. That means that the DOJ case is not so strong that it cannot fail once tested. And should it fail, so will the settlement agreements with the 3 settlers fail. It appears that in Macmillan’s case, CEO John Sargent is alleged to have attended only 1 meeting with his fellow CEOs, which means that the DOJ will have to demonstrate that it was at that meeting that the collusion occurred, not an easy task unless the settlers will testify that that is when the collusion came to fruition and that Sargent was present when the decision was made. Hachette, one of the settlers, claims there was no collusion, so it makes me wonder how the DOJ will sustain its burden of proof. Allegations are one thing, proof is another. Simply that there was an opportunity to collude doesn’t prove there was collusion.

There are other problems with the lawsuit. It has been too many years since I last practiced antitrust law (last time was nearly 30 years ago), so I’m not current on the state of the law and I admit that I’m not sure exactly what the DOJ must prove to prevail, but it is clear to me that the Republican-dominated U.S. Supreme Court doesn’t look favorably on these lawsuits. It was a Republican court that upheld resale price maintenance agreements, which has the same effect — setting a floor price below which goods cannot be sold — as the agency pricing system.

An interesting legal question, which may or may not be relevant to the DOJ lawsuit, is this: What constitutes the market? If all ebooks constitute the market, then ebooks are interchangeable commodities, an idea that is resisted by publishers and authors and even by many consumers. If the market is an individual title because you cannot substitute Dean Koontz for Stephen King, then wouldn’t the DOJ have to prove collusion among publishers to set the price for Stephen King, not collusion to set the mechanism for pricing of all ebooks? Of course, there are numerous variables to the market scenario, but they make for a fascinating legal chess game.

But all of this aside, the bottom line is that agency pricing is not illegal even in the eyes of the DOJ. Which leaves a lot of questions. For example, will Random House abandon agency pricing or continue with it? What about Smashwords? (Smashwords has already announced it will retain agency pricing and oppose the settlement agreement during the comment period.)

A more important question is this: Several of the Big 6 have — so far — refused to sign renewal contracts with Amazon because of demands made by Amazon. In the absence of agency pricing, will some or all of the Big 6 refuse to renew agreements with Amazon? Would such a refusal affect both pbooks and ebooks or just ebooks? If they do not renew the agreement, what can Amazon do about it?

The settlement agreement says that publishers cannot prevent a retailer from discounting the publishers ebooks except that it can require the retailer to make a profit across the publisher’s line. I find that an interesting proviso. Consider how secretive Amazon has been about how many ebooks it really has been selling. Amazon has only been forthcoming with broad numbers and in a few cases announcing that an author has joined the millions club. Will Amazon, who is not a party to the proceedings, voluntarily share sales information? I doubt it.

Yet the sharing of that information is necessary to make the exception meaningful. If the wholesale price, that is, the price the ebooksellers have to pay the publisher, of the new James Patterson ebook novel is $13 and Amazon sells it for $10 and sells 1 million ebook copies for a $3 million loss, somehow Amazon must sell enough other books in that publisher’s line to overcome the loss. How is that going to work?

Will Amazon offer the first 10,000 units of Patterson’s ebook for $10, the next 10,000 units for $16, the next 10,000 units for $13, and so on? Customers will be thrilled. Especially if they can buy the same ebook someplace else for $13 when Amazon wants $16.

Another problem with the settlement is that it does not — and cannot — establish a wholesale price for not-yet-published books. The DOJ could say that current agency-priced ebo0ks’ wholesale price is 70% of the current agency price, because that is what the publisher has been willing to accept. But what about future ebooks? The DOJ is not in a position to dictate individual pricing, so there is no reason why publishers cannot raise list prices to $30 and set wholesale prices at $15. The settlement speaks to discounting, not to setting of wholesale price.

There is more to say, but it needs to be said in another installment of this article, so this will be continued in my next post.

eBooks: Is Agency Pricing Good or Bad?

Recently, there has been a lot of focus on the “conspiracy” between 5 major publishers and Apple regarding agency pricing and whether these 6 entities have violated antitrust law. The focus is not on whether agency pricing is good or bad, but whether the parties colluded. That question I’ll leave for the US Department of Justice.

I’m more interested in whether agency pricing has been good for me as a consumer. Various forums have been discussing this and Mark Coker, president of Smashwords, has written an excellent piece defending agency pricing (see Does Agency Pricing Lead to Higher Book Prices?) Mark Coker makes several salient points, but they are points from the author and distributor perspective, not the consumer perspective.

(Mark Coker does make, however, one interesting observation: Before agency pricing, there was the wholesale pricing model. A publisher would set a book’s list price at say $30 and wholesale to booksellers for $15. The booksellers were free to sell the book for any price they wanted, be it $5 or $10 or $25 or $30. The reality was, however, that no bookseller could sell all books at less than cost and survive, not even Amazon. At some point, a bookseller has to turn a profit or at least cover costs. Consequently, the wholesale price was, in effect, an agency price; that is, a minimum price at which a book could be sold without putting the bookseller out of business. In other words, there really isn’t much difference in effect between the wholesale scheme and the agency scheme as far as consumers are concerned. For retailers, the agency scheme ensures that the retailer makes a profit on every ebook sold.)

But what about from the consumer perspective, and even from the indie author perspective?

In the days before ebooks (i.e., my participation in the ebook marketplace), I spent, on average, $5,000 a year on pbooks, mainly hardcover. I am now into my fifth year of ebooking and each of those years has seen a steady decline in the amount of money I am spending on books overall. Combined, my pbook and ebook spending doesn’t exceed $2,000 in a year, and is often quite a bit less.

One reason, if not the major reason, for this is agency pricing. The traditional publishers, namely the Big 6 (Random House, Hachette, Simon & Schuster, Penguin, Macmillan, and HarperCollins), are overpricing their ebooks via the agency pricing. Consequently, I am simply not buying agency ebooks published by the Big 6. The newest James Patterson novel simply isn’t worth $12.99 or higher to me. They are good reads, but let’s face it — classic literature that I would read again and again and savor each phrase they aren’t. They are formulaistic books that provide entertainment but do not evoke a lasting passion.

Consequently, I consider agency pricing to be a positive for the consumer. It helps dissuade ebookers from spending excessive amounts of money on books that in an open marketplace, and without publishers setting a retail price that bears no correlation to the true value of the book, would not command such high pricing in perpetuity. It might command it for weeks or months, but not years.

Agency pricing has had another benefit for the consumer. It has made the rise of the indie ebook distributor, like Smashwords, possible along with the rise of the indie ebook author. It is not that these entities didn’t exist before; they did in the form of vanity presses for the pbook crowd. Rather, they have become legitimized, something the vanity presses never were able to accomplish.

Because the Big 6 agency pricing is so high, readers like me began to explore alternatives. And now I buy primarily indie authored ebooks at places like Smashwords. The competition among indie authors to get noticed and read has been such that ebooks are often priced at $2.99 and less, all the way down to free. Even here, however, agency pricing is beneficial because I can buy those books at Smashwords or Barnes & Noble or Books on Board or any number of outlets and not worry about price — it will be the same at every store.

I’ll grant that if my only interest in reading is today’s popular books by big name authors, what we used to call the New York Times Bestsellers but which name is no longer appropriate, agency pricing is a problem. After all, Amazon demonstrated that it was willing to sell those ebooks at a loss in order to gain market share. (Which raises another interesting observation: When Amazon was able to sell the bestsellers as $9.99 or less ebooks, it cornered nearly 90% of the ebook market. With the advent of a more level playing field, introduced by agency pricing, its market share has dropped to about 60%.) Amazon had the fortune to be able to sell at a loss because other product lines were making a profit and could support the ebook losses; most ebook sellers did not have that option if they wanted to remain in business.

Agency pricing doesn’t ensure the lowest price; the Big 6 demonstrate that daily. But from my perspective as a consumer, the advent of agency pricing has made ebook selling more competitive. Not because the ebooksellers are being price competitive but because the indie authors are being price competitive. Agency pricing has also ensured that there won’t be one supplier of ebooks, which is also important to me as a consumer.

In balancing the scale of good or bad, I think agency pricing is good for me as a consumer. It has saved me scads of money by limiting the number of expensive ebooks that I buy to a handful. It saves me money because I no longer spend as much on pbooks; I have too many ebooks to read in my to-be-read pile, so I buy fewer pbooks. It has broadened my reading. Before agency pricing I did as many readers and bought reasonably priced ebooks by name authors. Since agency pricing, I browse the indie author ebook offerings and buy indie ebooks at very reasonable prices.

One last observation: Even if the Department of Justice pursues the collusion matter, there appears to be nothing inherently wrong with agency pricing. I expect that at worst the 6 parties being investigated will pay large fines but I think agency pricing is here to stay.

What do you think? Is agency pricing good or bad for the consumer?

eBooks: Has Amazon Turned eBooks into Commodities?

For a long time, publishers and readers have argued that each book is unique and thus one cannot substitute, say, a book by Dean Koontz for one by Stephen King. For years I accepted that — until ebooks and agency pricing and Amazon exclusivity. Now, in the case of fiction at least, I think the tides have turned and ebooks demonstrate books and authors are substitutable, that is, (fiction) books are commodities.

Until inflated agency pricing of bestsellers and Amazon’s concerted effort to dominate the ebook market, I would not have considered substituting one author for another author — at least not consciously. Yet the more I think about book buying and reading habits, the more convinced I am that between the criteria genre and author, it is genre that dominates.

Before the advent of ebooks on a wide scale, most readers bought (or borrowed) physical books to read. Physical books, except in the secondary market, were (and are) highly priced. A popular hardcover today, averages $25 and climbing. As a consequence, a reader carefully chose the book to buy and placed the emphasis on author and genre. For $25, the reader wants Tom Clancy, not Jack Unknown.

Amazon began to whittle away at that reader preference with its heavy discounts. Selling bestsellers at $9.99 rather than $25 meant that a reader who had already read Clancy’s latest novel could look for something else within the genre and take a chance on Jack Unknown. The investment was not overwhelming.

Today, Amazon has gone further with ebooks. Tom Clancy’s newest release may cost $14.99 in ebook form (and less in hardcover), but readers are increasingly finding ebooks at $2.99 and less in the same genre by unknown authors worth a try as they wait for the Tom Clancy novel to come down in price — or simply move beyond Clancy altogether.

Amazon, by aggressively courting the indie author and by aggressively pricing indie titles, has expanded what readers will search to find a good book to read. And Amazon has gone the further step with its Prime Lending program and Kindle Direct Publishing programs. Amazon has given its stamp of approval to indie books and authors. Although I think Amazon is not a bookseller to patronize because of its desire to monopolize the integrated book market, it deserves a great deal of credit for changing books into commodities.

I know that many of you will clamor to say that I am wrong, but I ask you to consider this: Once you have bought and read the latest release from your favorite author, do you stop buying and reading books until that author’s next release in 2 or 3 years or do you continue to buy and read books within that genre? And if you do continue to buy and read books, do you continue to be entertained by them or are you only entertained by books written by your favorite author? Finally, do you rush out to buy your favorite author’s newest release or do you wait for a less expensive edition to appear?

If you answer yes to the latter parts of each question (at least the first two questions), then books are commodities and substitutable. And this is the revolution that Amazon has wrought aided by the Agency 6 — the change in how readers view books, especially ebooks. What the Agency 6 claimed they wanted to prevent by instituting agency pricing, they have instead brought about by encouraging, through their actions, Amazon to legitimize the indie marketplace.

Prior to this legitimization, indie books and vanity books were synonymous. That is no longer true. Amazon has made it possible for known and respected authors to go indie and not be negatively viewed by readers. What vanity presses sought for decades, the Agency 6 gave them in months.

The commoditization of books is both good and bad. It is good because a wider range of authors are discovered. The Shayne Parkinsons, Vicki Tyleys, L.J. Sellers, and Richard Tuttles of the indie world — authors who write very well and excellent stories but who were unable (or unwilling) to break into the traditional publishing world — now have a chance to be discovered and claim the large and broad readership their writings deserve. I admit that prior to the commoditization of books, I would not have tried any of these authors. But once indie books were legitimized and books commoditized, I began to explore the indie world and found numerous gems, with some authors and books being better than what I could find in the traditional book world.

Commoditization is, however, also bad — bad for publishing, for authors, and readers — because in coming years the writers who currently make grand incomes from writing — the Stephen Kings and Tom Clancys of publishing — may well find themselves unable to attract an audience for their higher priced efforts. Granted that this is just the marketplace at work, but the pendulum can swing too far in either direction. As the market settles on a low price ceiling, that ceiling will become crowded and with the ease of entry into ebook publishing, it will become increasingly difficult to find the King and Clancy of the 2020s.

A balance is needed, but I have no idea how to bring it about or what that balance should be. Amazon deserves praise and scorn for commoditizing books, but more praise than scorn. In this, Amazon has done well.

How Do You Do It? Amazon vs. Publishers (I)

I have been following the story regarding Amazon’s foray into publishing. It reminded me of an old (early 1960s) hit by Gerry and the Pacemakers called How Do You Do It? So let’s set the question with Gerry and the Pacemakers.

As the song asks and says, “If I only knew, I’d do it to you.” And that is the crux of the matter in the latest nose thumbing by Amazon.

If publishers cannot figure out what is happening, cannot see the upheaval that is coming, then perhaps they should fold their tents and slither away in the night.

The truth is that the publishers do have an ultimate weapon, a “nuclear bomb” so to speak, at their disposal if they are willing to stand up and use it now, before it is too late.

It is clear that the future lies in ebooks. eBook sales are growing, paperback sales are declining, and hardcover sales seem to be remaining steady. Although I think publishers should begin to pull the rug out from under paperbacks, perhaps it is too soon. But the one thing that it isn’t too soon for is to put an end to the ebook format war.

By format war, I mean both the underlying format and the DRM wrapper. It is time for publishers to go the route of DVD producers and enact a single standard that all ebooks adhere to and that all retailers must abide by. Doing that now is the only way to tame the Amazon tiger.

In no other field has a retailer been able to set its own standard. If you notice, the DVDs that Amazon sells, just like the TVs it sells, adhere to the same format and copy protection scheme as those sold by Best Buy, Barnes & Noble, Walmart, and any retailer you can name — but not ebooks. In ebooks, we have two different formats — ePub for everyone except Amazon; mobi or a derivative for Amazon — and multiple copy protection schemes — a base Adobe DRM for everyone except Amazon; a proprietary scheme for Amazon.

Now that Amazon has decided to challenge publishers at their own game and has begun signing authors to Amazon exclusives, the publishers need to strike back while they can. For now, as Amazon’s dispute with Macmillan over agency demonstrated, Amazon needs the publishers more than the publishers need Amazon. Yes, Amazon has the largest market share, but that can be changed. Publishers need only to find some backbone.

Once Amazon starts signing frontlist authors to exclusive contracts, publishers will be in trouble. The way to head that off is to make it mandatory that every bookseller sell ebooks only in ePub and only with a standard DRM scheme. Doesn’t matter what the DRM wrapper is as long as everyone uses it, just like it doesn’t matter what the copy protection scheme is for DVDs because everyone is using it.

Amazon is at its most vulnerable now. That status vulnerability will change, eventually disappearing, as Amazon expands its publishing base. Amazon will become a vertically integrated company that handles ebooks from beginning to end. When that occurs, there will be no need for the traditional publisher and other bookstores will be at Amazon’s mercy.

Yet it is now that publishers can act to preserve themselves and bookstores by simply leveling the playing field. Just as publishers were able to force feed Amazon the agency system, they can modify that agency system to require that ebooks be sold in ePub with a publisher-approved DRM wrapper. Amazon needs content to survive and it is in the process of developing its own content. Because it is just starting the process, now is the time to strike.

Following this path has one other benefit. It will allow the publishers to create the ebook version themselves and be sure that errors aren’t introduced in Amazon’s conversion process (or if there are errors, that they appear universally in all ebookseller versions). Of course, this would mean that publishers would need to proofread and edit, but there is always hope that they might do so. This would just be an incentive to do so.

Alas, I expect publishers to wring their hands, palpably worry about their future, and do nothing. Their past practice indicates that they always do too little too late, and there is no reason to expect otherwise now, even though they can see their future demise if they open their eyes.

Is This the Next Sneak Attack on eBookers?

Here’s something I’m sure every major publisher is thinking about: How can I get consumers to buy both the pbook and ebook versions of a book? Well, maybe they aren’t really sitting around the table thinking about that, but with my latest pbook purchase, I’m wondering if they are thinking about it.

I have enjoyed the “Safehold Series” of books by David Weber. Because Weber is one of my favorite authors, I buy his books in hardcover so I can read them and add them to my permanent library. A week ago, the fifth book in the series, How Firm a Foundation, was released. I had preordered it in hardcover and eagerly awaited its arrival.

It arrived and I put down my Sony 950 Reader to take up Weber’s book. That lasted a whole five minutes and two pages. The publisher chose a font size that was so small I could barely read the text. For my eyes to read the text, I needed a magnifying lens. This is the first time this has happened; I don’t know whether my eyes suddenly got worse (not likely based on the lack of problem I have with any other pbook I own) or the font size was deliberately smaller than usual in an attempt to keep production costs down.

Now I was in a quandary. Do I struggle to read the book? Do I put the book aside and simply not bother to read it? Do I break down and buy the ebook version, thereby doubling my cost because the book is published by TOR, an Agency 6 imprint? I struggled with these choices for about 30 minutes and ultimately settled on the third choice. The ebook cost $1 less than the hardcover, which was significantly discounted, so I effectively doubled what I paid to read this book.

This experience started me thinking: Will this be the next ploy of publishers? Will the Agency 6 decide that a small font size that is difficult for a good portion of readers is the best way to force readers to buy an overpriced ebook?

Experience demonstrates that publishers are investing fewer dollars in quality control, and fewer dollars in otherwise standard production services like editing. Experience also shows that overpriced ebooks from the Agency 6 are likely more profitable for them, which means a push to agency-priced ebooks.

In olden days, I would not have even thought to view what happened through the lens of conspiracy. But the Agency 6 have so badly botched their public relations regarding ebooks and ebook pricing that the conspiracy lens jumps right out at me. The Agency 6 publishers have met their Waterloo — consumer mistrust that paints everything the Agency 6 does with the brush of distrust.

It seems to me that for publishers to maximize return, they need to help move readers to ebooks and away from any form of pbook. I know I’ve written this before (see, e.g., The Business of Books & Publishing: Changing the Pattern), but if I were a publisher today, seeing that the trend is rapid growth in ebooks and no to flat growth in pbooks, I would be working on plans to drop mass market paperbacks and publish only trade paperbacks, hardcovers, and ebooks. Phase 2 of my planning would be to eliminate trade paperbacks and just publish hardcovers and ebooks. Perhaps a decade or two down the road, I would look at publishing hardcovers in limited edition runs for collectors and those pbook diehards.

So, moving back to David Weber’s new book and the font size, I guess it is possible that this was unintentional (i.e., using a small font in hopes of selling the ebook version) but now that it has occurred, I wonder if someone at TOR is following sales closely enough to draw a conclusion whether future TOR books should also use this hard-to-read font size.

I’m continually amazed at how the Agency 6 stumble around the periphery of a plan for ebooks but never quite have the moxie to do something constructive for them and for their readers. Recently, I wondered if they were going to draw the right lesson from the Harris Interactive Survey (see The Survey Gives a Lesson?). It is not that I’m cheerleading for the Agency 6 — frankly, I think their pricing scheme is a major consumer ripoff that has no merit — but there are certain things that I would like to see the Agency 6 accomplish because I think it would be good for me as a consumer and for ebooks. The question is how to lead them by their collective nose to those things that would benefit everyone.

A Book Is a Book — Or Is It?

If we look back to the beginning of the agency model in ebooks, which began a little more than one year ago, we can find the publishers’ claimed rationale for changing models (which occurred with a mighty push from Apple): to protect ebooks from becoming mere commodities and to prevent consumers from establishing a mindset that $9.99 is the right price point. Okay, that was the rationale, coupled with a fear of Amazon becoming too powerful, that was bandied about. The question is: Were publishers successful in preventing the commoditization of books?

The reports from the Agency 6 indicate that ebooks are rapidly becoming a significant source of revenue for publishers, perhaps even their primary growth area. Latest reports show growth in ebook sales (Barnes & Noble reports 140% rise in digital sales; Hachette reports ebooks as 20% of U.S. sales and 5% of worldwide sales; Penguin and Simon & Schuster report digital as 14% and 15% of revenue, respectively; Bertelsmann/Random House reports digital sales in the first six months of 2011 as exceeding all digital sales in 2010);  and a significant decline in mass market paperbacks (down 14%). Profits are up slightly, even though volume appears to be down somewhat. All of which seems to favor the notion that the publishers did the right thing.

What we don’t know, of course, is how the sales are breaking down by price point. I can relate anecdotal evidence that the agency pricing scheme is a failure on several levels, but no data has been released that enables a careful analysis.

I’ve mentioned it before, yet it is still true: Whereas before agency pricing I bought a lot of hardcover books and ebooks from the Big 6 publishers, my purchases have declined since the institution of agency. Whereas I used to visit my local Barnes & Noble at least once a week and buy a few books each time, it has been nearly five months since I last visited the store and bought an Agency 6-published book.

If the Agency 6 intended by their action to make me accept spending more than $9.99 for an ebook, they have failed — and failed miserably — because I am pretty unwilling to accept even $9.99, let alone a higher price point, as the sweet price point. Instead, I’ve gotten used to the indie author price points of $5 and less, with less being the dominant word.

I still occasionally “buy” an Agency 6 book, when they offer it for less than $5 or offer a bundle, such as three ebooks for $9.99, but more often when they offer an ebook for free. Agency pricing has backfired not only with me but with nearly all of my acquaintances who buy ebooks. The principal hurdle for the Agency 6 to overcome is the lack of physicality of the ebook.

Even though I and my friends have transitioned to ebooks and much prefer reading on our electronic devices to reading the pbook version, we have not made the price transition, and it is that transition that the publishers need (want?) us to make. Yet it is the publishers who have made the problem worse.

Publishers do not accept the idea that a book is a book is a book, regardless of whether it is electronic or print. In contrast, consumers like me have always thought that a book is a book is a book, regardless of form. We understand the difference between a hardcover and a paperback because we can both see and feel those differences; consequently, over decades we have become accustomed to paying more for a hardcover than for a paperback, perceiving — rightly or wrongly — greater value in a hardcover than in a paperback. (In fact, it was this perceived disparity that brought about the rise of the trade paperback. The trade paperback is perceived by consumers as offering less physical quality than a hardcover but more than a mass market paperback, and thus worth a price between the two.) But we continue to have difficulty wrapping our heads around the idea that, even though it lacks physicality, the ebook is worth more than the paperback and the hardcover (ever note how many times the ebook price is higher than the hardcover price or so close to it that there is little price differential?) at worst, and worth more than the paperback and only slightly less than the hardcover at best, or that it is worth the same as the trade paperback.

Because we have difficulty wrapping our heads around the agency pricing continuum, we have spent more time and money buying indie books, which seem to be priced more logically. Thus, I suspect that our experience is the experience of many ebookers; that is, we buy more indie ebooks than agency ebooks (with some exception).

The Agency 6, however, can point to the rise in revenues, and sometimes even in net income, they are experiencing, which is occurring even in the face of declining volume numbers and is attributable to increased ebook sales at the higher agency price. It is mixing, I think, apples and oranges in the sense that I suspect the biggest growth in volume and dollars is occurring in the indie/non-Agency 6 ebook market, not in the Agency 6 market. So the question not being asked or answered is this: What would the Agency 6 ebook sales volume and profits be if they had let the market do the pricing? Would their growth be significantly higher than what is being reported and would their net income be more marginal?

Also not asked and answered is what effect the commoditization has on consumer buying habits. Ultimately, will this cause even hardcover sales to decline significantly? This takes us back to the questions raised earlier in Clashing Perspectives: Coming Home to Roost and leaves us in the same place.

I used to “revere” books that I purchased. After all, I paid a lot of money for a hardcover and I treated it reverently. Take one off my library shelf and it appears in virtually the same condition as when I bought it. I wouldn’t let my children borrow one of the books until they learned how to handle them gently and carefully. None of this matters with my ebooks. Even if an ebook is accidentally deleted and the bits and bytes written over, I can replace it for free from my backup and have it in the same condition as when I bought it. There is no need to be reverent. Thus, the ebook is viewed as a commodity — a book is a book is a book.