It’s difficult to overstate how big of a deal it is to bookselling culture that the Department of Justice is reportedly planning to sue five publishers and Apple for colluding over e-book prices*.
In order to understand why this is a big deal, here’s a brief recap of what led us here (this summary is described in greater detail in my post Why Some E-Books Cost More Than the Hardcover).
Wholesale vs. Agency
At the time Amazon kicked off the modern e-book market with the introduction of the Kindle, e-books were sold according to the traditional wholesale model. Essentially, publishers set a cover price and they got half, the bookseller got half. If a book was listed at $25, publishers got $12.50 on an e-book sale, the bookseller got $12.50.
Problem was from publishers’ perspective, Amazon was selling some e-books at $9.99 and taking a loss on those sales, all the while locking readers into their proprietary format. Not only did this devalue what consumers felt a book “should” cost, publishers were worried that competitors wouldn’t be able to enter the e-book space because they wouldn’t be able to compete with Amazon’s prices. No competitors would mean a virtual monopoly for Amazon, and publishers were presumably concerned about Amazon’s ability to then dictate terms.
Along comes Apple and the iPad. Steve Jobs talked the publishers into the agency model – publishers set their own prices and they get 70% of the proceeds.
The irony is that the agency model actually meant publishers received less money per copy sold. Napkin math for wholesale: $25 cover price, they got $12.50. Agency: Price that e-book at $14.99 and they get $10.50.
Publishers then turned around and imposed that agency deal on Amazon, which is the subject of the DOJ investigation. The end result: There really is more competition in the e-book world, but prices are higher than they likely would be if Amazon and others were able to discount as they saw fit.
Competing on Price
I don’t presume to know what the end result of the current discussions will be and it appears that there are a range of possible outcomes. But if it ends up meaning the end of the agency model this will have massive, massive repercussions across the book business.
Up until now, conscious or not, consumers have grown accustomed to the idea that e-books cost what they cost. The decision of what e-reader to buy or which app to read on has largely been driven by user experience preferences.
Do you like the feel of the nook? The ease of the Kindle app? The pretty iBooks page animation? Those are the decisions people have been basing their decisions on – the reading and buying experience.
But if the agency model is dismantled in whole or in part and Amazon and others can go back to pricing as they see fit, suddenly price is going to be at the forefront of consumer choice.
It doesn’t take a genius to see that Amazon and their deep pockets are going to have a big advantage in that environment.
Who wins?
The irony of returning to the wholesale model is that publishers may actually make more money per e-book copy sold even as prices go down for consumers.
This sounds like a win win for publishers, but it ignores the big losers: traditional bookstores, who will be even less able to compete with cheaper e-books. Publishers are not eager to lose those outlets and will be forced to wind down huge print operations as print continues its (inevitable in my opinion) decline. Print won’t go away entirely, but it will be a tough transition for publishers, which is why they may have tried to slow down e-books with higher prices.
This is the point that author and Authors’ Guild president Scott Turow made in a recent post:
Given the chance, any rational publisher would have leapt at Apple’s
offer and clung to it like a life raft. Amazon was using e-book
discounting to destroy bookselling, making it uneconomic for physical
bookstores to keep their doors open.
That said, it’s also worth considering author Barry Eisler’s rejoinder to Turow:
Maybe Scott would also argue that Apple is destroying computer-selling
by selling so many computers, but logically, it’s pretty hard to see how
someone could destroy bookselling by selling tons of books.
What about authors? Well, if agency goes away, in the short term they may make more per copy along with publishers since most e-book royalties are based on the publishers’ net. But in the long term they’ll also have to contend with an inevitably shrinking pie. And as Mike Shatzkin points out, self-publishers who have banked on getting attention through low prices won’t stand out as much if all prices are low.
So who wins?
In my opinion: Readers. Yes, there are dangers to publishers, which may result in collateral damage to authors. There are certainly dangers to non-deep-pocketed e-booksellers. It would be chaotic to say the least to have lots of different e-book prices and to have to contend with different formats and standards and try to decide where you’re going to buy your e-books.
But if the agency model is dismantled, e-books are getting cheaper and the book market will steadily get more efficient.
More books for less money?
As a reader: sign me up.
*Disclaimer: I am an employee of CNET, which is owned by CBS, which is the parent company of Simon & Schuster, which is one of the companies named by the DOJ. I have no direct connection to Simon & Schuster or any knowledge of its operations. The opinions expressed herein are entirely my own and do not necessarily reflect the views of CBS or anyone else for that matter.
For years, Amazon took losses on their experiments with innovating. They still do when they decide they should lose money in order to invest in innovation. It’s boggled my mind for years that brick-and-mortar bookstores and publishing houses haven’t invested in the digital age and set competitive prices. No one stopped them from hiring inventors to develop their own eReading devices. No one stopped bookstores from setting up cozy reading areas for customers to read eBooks on eReader devices. Bookstores were willing to add coffee shops to their buildings and celebrity books to their shelves, but invest in the inevitable digital revolution? No, they couldn’t do that.
In regard to the deep pockets of Amazon, Amazon’s deep pockets are nothing compared to the deep pockets of the umbrella organizations that own the big publishing houses. The big publishing houses have repeatedly said they can’t compete with Amazon’s deep pockets, but that’s complete and utter nonsense. Rupert Murdoch and Bertelsmann AG own a huge number of the big publishing houses. In 2011, News Corp. and all the businesses it owns were worth between $62 billion and $72 billion. I searched online, couldn’t find the net worth for Bertelsmann AG, but did find that from January through September 2011, their revenues were $10.7 billion. According to Forbes, as of this month Jeff Bezos is worth $18.4 billion and is $300 million richer due to the Kindle.
The weird thing is that the big companies own nearly all traditional book publishing and news outlets, so they can get a near mantra going for things it’s in their best interests to have the public believe. I cannot tell you how many places I’ve now read that Jeff Bezos’s deep pockets will take down and destroy the entire world of publishing and literature. The same thing in the realm of politics – there is an incredible amount of false information circulated as truth every single day in the news. If a handful of billionaires own all the traditional news outlets and it’s in their best interest to have the public believe something, it’s very easy for them to just print it up in multiple news sources. For example, 97% of reputable scientists report that global warming is real. However, despite rising seas, obviously warming temperatures, and tornadoes wiping entire towns off the map, the public at large kind of believes that the research on global warming is completely inconclusive.
DISCLAIMER: I’m published by Amazon’s KDP Select Program (and am very happy with both their royalties and the seriously respectful way in which Amazon treats their authors).
I just finished reading everyone’s comments, and am so sorry I didn’t discover this discussion until today. I hope the discussion hasn’t ended.
I wholeheartedly agree with Barry Eisler and Mira. Also, I’m truly baffled by so many people complaining that Amazon’s low prices will convince readers that books are worthless. It seems to me that people don’t understand how Amazon is experimenting with digital sales AND (gasp!) how they’re actually allowing authors to run a lot of their own experiments. For example, authors who sign up with Amazon KDP Select are only required to sign up for 90 days at a time; and within each 90-day period, they are entitled to five days on which they can price their book as a free giveaway. KDP Select authors whose books are "purchased" like wildfire during the free days are added to popularity lists on Amazon which offers higher visibility to those books, but only for as long as the book continues to sell. Authors can experiment with changing their book covers, changing their prices, etc. any time they choose in order to see if that sells more books. When three of my books were downloaded thousands of times for free and then started selling at 99 cents each, I raised the price to $3.99 each, and am now selling more copies at $3.99 each than I did at 99 cents each. And there’s incentive to price books higher. Whereas Amazon only gives authors 30% royalties on 99-cent Kindle books, they give 70% royalties on higher-priced Kindle books. Do the math: 30% of 99 cents vs. 70% of higher prices, and a number of authors have reported selling more copies at the higher prices. I’m not sure how any of that translates into Jeff Bezos lowering the true value of books. He’s experimenting with sales offers, not unlike my neighborhood bookstore having bargain bins or the low price of mass market paperbacks that publishers used to sell. People hardly think of music or computer games as worthless now that digitally downloaded music and computer game apps are so cheap.
And Jeff Bezos hates books? Oh, please. He’s a graduate of Princeton University. He gives away a lot of his money to charity. He’s also established Blue Origin, a company that’s developing new technology for spaceflight, in order to pursue his lifelong interest in space travel. NASA has actually invested $22 million in Blue Origin. Bezos is hoping to offer paying customers the opportunity to travel into space. Is it wrong that this could conceivably, if the price of spaceflight eventually becomes manageable for the average person, cause the car industry or the cruise ship industry to lose customers?
Colluding to keep prices high is against the law. Period. Laws may be changing to protect big businesses and special interests, but thank God many laws still protect consumers. That’s why the Big Six are being sued, but Amazon isn’t. I agree with Nathan that Amazon is a dream come true for customers who love books.
Nathan,
What is the picture? Is that a type of e-reader?
I agree completely with your post. There are really five options for dealing with technical progress.
One. Ignore it. Generally, the Borders solution.
Two. Resist it. The buggy industry tried to defend itself by pushing for laws against gas stations in certain areas.
Three. Actually drive it. The Kindle.
Four. Get out in front and pretend to lead the parade. DC Comics new digital inititative. Heck, see Baen.
Five. Capitalize on it. See Amanda Hocking.
I want to see publishing survive, but the Agency Model looks frighteningly like option 2 to me, and I don't see too many horse-drawn buggies at the supermarket these days.
E-readers can have the significant impact on the kids, especially a color model like Kindle Fire. In a device that weighs under the pound user can collect hundreds of children’s books…
Read full article here,
https://www.geekscover.com/2012/06/kindle-fire-deal-fabulous-opportunity-47-childrens-classic-e-books-99-cents/