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March 14 2012

The state of ebook pricing

This post originally appeared on Joe Wikert's Publishing 2020 Blog ("iBooks Author: Appreciating Apple's Intent"). It's republished with permission.

With all the buzz about the agency model, the Justice Department, allegations of collusion, etc., I figure the time is right for a post about ebook pricing. Here are some quick thoughts as both a consumer and a publisher:

Eliminating waste is always a good thing — Walmart has mastered this for years. They squeeze every bit of waste out of the supply chain and generally end up with the lowest prices. I'm a frequent Walmart customer, and I greatly appreciate this. In fact, the only people who don't like this are (a) other retailers who can't match those prices and (b) ecosystem players who are part of the waste that's being eliminated, including suppliers.

Loss leaders are a great retail model — Selling some products at or below cost is a great way to bring customers in the door, regardless of whether that door is physical or virtual. I'm sure I've bought many cartons of milk at a loss for the retailer who made it up by selling me other items at a nice profit. It's a model that works, but have you ever seen a store that sells most of their products at a loss, every day?

Taking loss leadership to a new level — Remember when Amazon first launched the Kindle and pretty much every ebook was $9.99? It's no secret that Amazon was losing money on the majority of those sales. In fact, they still are. Prior to the agency model, Amazon was free to set whatever customer price they wanted for ebooks, even if it meant they were selling every single one of them at a loss. That brings up the razor/blades model, where it's not unusual for the razor to be sold at a loss, but the profit is made on the sale of the blades. So, if ebooks are the razors, what are the blades? The ereader device? According to iSuppli, the Kindle Fire's manufacturing cost is slightly higher than its retail price. How long can a retailer stay in business when they're losing money on both the razors and the blades? Presumably, they're making some money on other products they're selling (e.g., shoes, electronics, etc.). Perhaps. Then again, if they have deep enough pockets they can continue selling all their products at a loss until the cash dries up. In the meantime, competitors will find it difficult, if not impossible, to compete, so they'll disappear. What happens after that? Do prices remain low as products are still sold at a loss? Not if that company wants to stay in business.

The agency model prevents brand erosion — Think of the premium products you've bought or admired. Oftentimes, their prices are higher than most of the competition's. What would happen if those prices were suddenly significantly reduced? Would those products retain the full value of their premium brand? Highly unlikely. And shouldn't the owner of that brand have a say in what price is associated with it? Again, it's OK for a short-term loss-leader model, but I'm talking about selling something at or below cost for years and years, not just for a day or two. Over time, the value of that brand is affected. That's why I think publishers should definitely have the option to go with the agency model so they can manage retail prices and not let their brand lose value. By the way, consumers will ultimately vote with their wallets. If they feel the publisher's prices are too high, they'll stop buying and that publisher will either need to make adjustments or go out of business.

Fixed prices vs. price-fixing — In the U.S., we're so used to competitive retailer discounts that we're surprised to hear of the fixed price models used in other countries. For example, in Germany the price you pay for a book doesn't change from one retailer to the next. They're all required to sell them at the same price. Obviously, there's a huge difference between Germany's fixed price law and the price fixing the Justice Department is alleging. Germany's model doesn't lend itself to squeezing out waste like the U.S. model, but I'll bet it prevents one deep-pocketed retailer from putting its competitors out of business.

I don't work at a big six publisher, but I believe publishers should have the option to choose between the agency and wholesale models. The key issue though is that the Justice Department has suggested that Apple and a number of publishers colluded to keep prices high. I think this article by Gordon Crovitz in The Wall Street Journal sums it up quite nicely, particularly in the closing two paragraphs. Read that piece and ask yourself if the Justice Department's efforts will actually fix or merely add to an existing problem.

What's your opinion of the pricing questions and allegations currently facing the book publishing industry?

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Related:

March 11 2011

March 07 2011

Agency model may violate anti-cartel laws in Europe

ibooks2.jpg Random House's switch to the agency model for its ebook pricing structure last week delighted the American Booksellers Association and landed Random House in Apple's iBookstore, but not everyone is pleased with the agency model Apple requires. In a comment for a story in the LA Times, Dennis Morin, partner at BeamItDown Software, said:

The economic damage that Apple has wreaked on small ebooksellers is enormous. It is all pocket change for Apple, but life and death for many. There is something fundamentally wrong when companies can wield such power.

(Indeed, John Naughton argued at the Guardian's TheObserver, that Apple has ousted Google as the reigning evil enterprise.)

Agency pricing may not only be damaging to the little guy and helping to fund Apple's evil empire — it may be illegal. Investigators in the UK are looking into the ebook agency pricing that most major publishers have adopted, in part, to put ebooks on Apple's iBookstore shelves, as a possible cartel. Benedicte Page and Leigh Phillips reported in a Friday post at the Guardian that European Commission investigators raided several publishing houses earlier that morning:

Investigation teams have asked many of the biggest London publishing houses, including HarperCollins, Hachette and Penguin, for all records and documents relating to ebook sales.

The [Office of Fair Trading] said the investigation was "at an early stage", stressing: "It should not be assumed that the parties involved have breached competition law." It is thought the investigation could last a year.

A spokeswoman for the investigation team commented in the story that if investigators find publishers guilty of price fixing, the penalties will have lasting, far-reaching effects:

We have suspicions of collusion to keep prices high. But if our suspicions prove to be founded, this would have an impact across the EU because ebooks are sold across borders.

Such findings may also have potential to affect industry policies — and profit margins — worldwide.

Ronald Blunden, head of communications at Hachette, argued in the story that agency pricing is not a cartel, but rather a way to prevent retailers like Amazon from driving down the cost — and perceived worth — of ebooks:

It's important for the publisher to control the retail price. We don't want the items sold below cost, as the perceived value of books becomes damaged. Once this happens, can we expect online retailers to absorb the cost of financing the editing and publishing of books?
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