The Price-Fixing Debacle

In the very short version of this story, Apple got together with big publishing and invented something called the agency pricing model.

This was their warm, fuzzy way of saying the publishers would set the retail prices.

Under the traditional pricing model, publishers charged booksellers something like half the cover price of a book, and allowed the booksellers to discount the books to whatever price they wanted. But Amazon took that even further and discounted the books to below wholesale price. Yes, Amazon was losing money on every eBook they sold.

Because the big publishers do not want eBooks eating into print book revenues, they do not want deep discounts on digital editions. The agency pricing model effectively eliminated any discounts on the cover price.

Despite the fact that Apple was the one nailed by the court, what really underlies this whole shameful episode is panic in the publishing industry. You see, Amazon continued to pay the full wholesale price for the books they bought from Random Penguin Solutions, et al. Every single one of the publishers would have made a higher per unit profit on books sold by Amazon than those sold under the agency pricing model. Obviously it isn’t just about the money. It is about survival.

The major difference between indie books and those put out with the little flightless aquatic bird on them is that the indie books will not end up on the shelves of the big chain bookstores. Those bookstores have been the private pond of big publishing. That is a huge advantage to traditional publishers.

But the big bookstore chains are in trouble. Some have closed up shop already and the rest are struggling. This is due in part to eBooks. Big publishing does not like digital. Digital means people don’t have to trot down to Barnes & Noble to buy a book. That does two things:

1. As eBook sales increase and take a growing share of overall book sales, more brick-and-mortar stores will fall. This will diminish big publishing’s advantage.

2. It puts the eBooks by the biggies elbow-to-elbow with those by indie authors in the same digital marketplace. Nobody checks for the hallowed seal of approval on an eBook.

The Big 6/5/4 need the eBook movement to fail. Their best bet was to narrow the difference in price between the print and electronic versions of a book, figuring people would be more inclined to opt for the hard copy if the digital version didn’t offer a significant savings over the print version.

They know most people won’t pay fourteen dollars for an eBook. They don’t care about that. They care about preserving their advantage in the print market, because it is now the only real advantage they have left.

The well-known chain stores don’t have to completely fail before big publishing collapses. They can cut deals with small presses and independent publishers. They won’t get the sweetheart deals they got with the big boys, but as profits dwindle and options evaporate, some will see the light. That will be the the death warrant for big ink, and the pool will no longer be private. With their high overhead, they are doomed.

I’m not sorry to see them go. They proved unworthy of the thrones upon which they sat. We have looked into their bag of tricks and see there is no real magic to what they do. Inflated sales numbers from fake pre-orders, sock puppet and paid reviews: these were strategies pioneered and perfected by the big publishers. Gatekeepers, preserving the integrity of the printed word? Don’t make me laugh. Ms. Rowling just showed the world that the vaunted gatekeepers are incompetent at recognizing talent. Neither was she the first to do so.

But what of Amazon’s role in this whole affair? They come out looking pretty good in this, but one cannot help but wonder why Bezos was willing to continue losing money on every eBook he sold.

If Apple now decides to walk away from eBooks (and who could blame them?) will Bezos derive the leverage he needs to force the publishers’ hands in lowering eBook wholesale prices so he can operate at a profit? Will the eBook market become Amazon’s own private pool?

Whatever your thoughts on Amazon, the dangers inherent in such a monolithic system must be apparent. This is not over — not by a long shot.

Author: Stephen Hise

Stephen Hise is the Evil Mastermind and founder of Indies Unlimited. Hise is an independent author and an avid supporter of the indie author movement. Learn more about Stephen at his website or his Amazon author page.

30 thoughts on “The Price-Fixing Debacle”

  1. While the people who profit from our work fight it out, where do we stand? And will the final results of the bloodshed be in our favor or not? Many questions. I guess we’ll have to see.

  2. You hit a whole bunch of nails on the head perfectly, Stephen. Anyone who goes to Apple’s iBook Store should be flabbergasted at how pathetically unuser-friendly it is. Compare it to iTunes. Amazing! You are so right that it’s questionable that they will stay in the game.

    What’s really interesting to me these days is while these behemoths have all been screwing around with their big ticket business models, the independent presses, indie writers (aren’t all writers indies, after all?), and small-scale tech entrepreneurs have been putting all sorts of new bookstores and other sales systems up all over the Internet.

    I see Amazon as defaulting into a kind of big warehouse. There’s too much in their catalog to really know what you want if you go browsing. Sites like Tomely, Scribd, XinXii, Kobo, Readmill, Awesome Indies, EbookFriendly, and, of course, IndiesUnlimited all provide a much more meaningful browsing experience. Some use Amazon as a warehouse, some have set up their own innovative transactions systems.

    The question is what will happen as the current group of e-reading consumers (about 30% of the potential market) moves to a more informed level of book shopping, AND, the next group of technology adopters slowly buys new tablets and learns to use their smart phones to read (I gotta say, I’m surprised at how satisfying the reading experience is with my iPhone).

    Great piece here. Everyone should pay attention. You do a fabulous job of defining where we are. And that none of this is over — “not by a long shot.”

    1. And yet, David, when I tell friends that reading a book on an iPhone is not nearly the awful experience they believe it will be, they refuse to believe me. Their loss, I guess. 😉

  3. They didn’t invent the agency pricing model. They just decided to apply it to ebooks. This model has been used in other businesses and for those who publish through Smashwords to other retailers, how they price.The agreement between the Big (however many, 5 of them, IIRC) publishers and the DOJ doesn’t allow them to use agency pricing for some period of time, but they could go back to doing so after that if they wanted. What made this illegal was they conspired to artificially inflate ebook prices as a group.

    I agree though that other viable competitors in the ebook market is going to benefit everyone. (I think it actually even benefits Amazon too by helping prevent them from getting complacent.) My biggest complaint is that the companies that might be able to give Amazon any kind of a challenge seem to either not be interested in competing or they have the wrong people leading the effort because they’re completely missing the boat.

    1. Al, I wonder whether other potential competitors hear about how Amazon’s taking a loss on e-book sales, and how Apple got smacked down by trying to level the playing field (albeit illegally), and figure it wouldn’t be worth the hassle.

      EM, you’ve done an excellent job of summing up the situation. We’ll just have to see how it shakes out, huh?

      1. That’s right EM. And what are the chances of that ever happening? 😀

        Lynne, the mainstream and a lot of the non-mainstream press have consistently got this wrong and tried to paint a picture of what happened to fit their narrative instead of the truth. I guess that incorrect information might have mistakenly influenced potential competitors. I know that Mark Coker from Smashwords made a lot of noise about agency pricing that made it seem like a much bigger part of the case than it was. I’m not sure what to make of that.

  4. One of my day-job mentors would say “When the elephants are stamping, the mice should hide.”

    After reading the latest Hise posting, I see that Indies are the mouse that roars. In time, the elephants will have an Indy infestation that will sweep their Royal Lemmingness over a cliff, or something.

    We went through the Beta / VHS wars, and now they are ancient history. Hollywood was making great money on DVD sales, but now, due to streaming, Hollywoodians are groaning for the lost revenue. Somewhere down in that mix are the eBooks versus paper in brick-and-mortar battles.

    The bottom line from my perspective is that people will always crave stories (and non-fiction books) that match their life time and interests. The delivery mechanism changes, but the demand for stories stays constant.

    I don’t need much to survive, and I believe the key to winning out in the current climate is to persevere. We will outlast the wannabees and the flightless aquatic birds of the publishing industry. Then we can divide the spoils of the war that we won.

  5. OK, couple of bits here.

    First off, Amazon never lost money on ebooks. They DID discount a select few titles to below wholesale, but this was the exception, not the rule.

    Remember that their target price at the time was $9.99. And wholesale was 50%. So only ebooks whose suggested retail was over $20 were losing money for Amazon when they were priced to $9.99.

    Most ebooks were priced in the $14-18 range at the time, so Amazon was still making a buck or two an ebook, even when they slashed the price.

    The DOJ investigated Amazon for this practice, and found that overall they were earning money on ebooks – using a few as loss leaders, which is completely normal retail practice.

    ***

    As for publishers? They never needed ebooks to fail. They needed a *delay*. They needed to stall the shift. There was fear, in 2008, that by 2012 90% of all books sold would be ebook, and that terrified publishers because they had huge infrastructure costs and long term contracts in place for their print business.

    Publishers today generally make more per ebook sale than they do from a MMP sale, and about the same amount as they make from a hardcover sale. At 70%, publishers make $9.09 per $12.99 ebook, vs $12.50 on a $25 hardcover. But they don’t have to pay the $2.50-3.50 in printing, shipping, and returns. And author royalty in the $12.99 ebook are only $2.27 vs $3.00-3.75 on the hardcover.

    Publishers are at this point totally OK with print going away at its present slow pace. They’ll gradually make the switch to ebooks, which are MORE profitable for them than print by a huge margin. And they’ll do just fine. They delaying action is over, and profit is up at most major publishers.

    1. Kevin,

      Perhaps I misread it, but I site this article from Slate:

      In pertinent part, the author states: “The company dealt with publishers under the so-called “wholesale model,” meaning that publishers sold books to Amazon for a set price, and then let Amazon choose the retail price. Publishers often set the wholesale price at $12 to $14. Amazon then sold the books for $9.99—i.e, for less than it had paid for them.”

      Source: http://www.slate.com/articles/technology/technology/2013/07/apple_e_book_price_fixing_federal_judge_rules_in_amazon_s_favor.html

      And I believe losing print will be bad for big publishing, because they will be forced to compete on a level playing field.

      Thanks for the comment.

      1. Their incorrect on the wholesale. I suspect they (like many other articles) are forgetting that the 70% rate only started with agency pricing – before that, it was 50%.

        SOME ebooks were $20+ before agency. Very few. Most were in the teens. And on any book under $20, Amazon made a profit.

        Like I said, the DOJ already investigated Amazon for all this. A lot of articles out there talk about Amazon losing money on ebooks, but they are all overstating the case. Amazon lost money on a few “loss leaders” only.

        As for print – I think it will be bad for publishers to lose print, too. I am not sure THEY think so anymore, because they have no clue how large a market share they’ve lost in ebooks. They honestly don’t believe that self published ebooks have taken ~40% of the market (which they have). They read the AAP numbers (which don’t include indie sales) and think those are accurate.

        Yes, they really are that misinformed. 😉

  6. My reading of the history of the wholesale model was that the publishers were indeed posting books at the suggested retail price of about 20% below the price for a first run hardback (best-seller). That meant a listed price of $22 – $27. They sold the rights (remember they weren’t actually selling anything real) to ebooks at a wholesale price of 50%, so $11-$14.

    The more important point here though is the question of “losing money.” It would make sense to use a loss leader approach on a first run ebook for say 6 months if you are seeing sales of the machines to read those books and then sales of other books in your catalog over and above that.

    It’s kind of funny. No one’s really talking about what Amazon and the publishers are making off of mid- and back-list books.

    1. Putting aside whether Amazon was actually losing money on those eBooks, publishers were compensated their usual wholesale price. Why should they care about the retail end except that they wish to keep the retail prices of digital editions high? And for what reason, except to keep eBooks from eating into paper book sales?

      Amazon sells practically everything under the sun. I imagine they could easily sustain losses in some eBook sales without much impact at all on their bottom line. Not so for companies like Apple. You can’t buy a snuggie or camping equipment from Apple. So, I don’t think Amazon “lost money” in the whole vast scheme of things.

      Neither am I one to confer sainthood on Amazon. I think there is much to be concerned about when so many eggs are in one, giant basket.

      I haven’t seen anything about how much money Amazon is making from mid-list and back-list titles, which makes me think they’re probably making a LOT.

      1. Yes – absolutely that was the reason. They wanted to keep ebook prices high to slow the growth of ebooks, so that they could keep selling print versions (especially hardcovers). And by and large it has worked. While ebooks have eaten heavily into the MMP market, hardcover sales have only slipped a small amount over the last few years.

        PS: Apple makes more *profit* per year than Amazon makes in sales. If Apple wanted to, they could give away ebooks for free, take a couple billion dollar a year loss on ebooks, KEEP doing it for a few years, just to put Amazon out of the book business, and it wouldn’t impact their bottom line that badly.

        In fact, Apple could sell ebooks at cost – at wholesale – forever, and it would have no noticeable impact on their bottom line at all. Sometimes I wonder why they don’t just do that, since it would certainly make their ebookstore a player in the field, which it really isn’t right now.

    2. But are publishers making much off their back-lists, when it comes to ebooks? I seem to recall a lot of sturm und drang about their having to renegotiate all those contracts that didn’t specify who owned the electronic rights (which didn’t exist when the contracts were written). I haven’t been following this part of the story lately, but we’ve all heard of the trad-pubbed authors who have won back the electronic rights to their own back-lists. Wondering if there are estimates anywhere of the percentage of back-list titles are still in publishers’ hands.

  7. Excellent article, Stephen, and as usual you have managed to stir up debate among the minions; the debate combined with your post makes an interesting front page read. Ever thought of getting into politics?

  8. As good an analysis of this as I’ve seen anywhere.
    The scary thing to me would be big publishers learning how to play the indie games and crowding us out of the methods we use. It’s almost like the less they learn about ebooks the better for indies. For all the ranting about how wonderful ink smells and what fun it is to have to turn pages, there are a lot of pressures towards paper books phasing way out in the future, and ebooks phasing in. They must realize it. It must be scaring them. Just like agents have to be petrified by what’s happening.
    So when you’re scared is a good time to start cutting deals and bending laws.

    1. Thanks, Lin. I do think they’re scared, but their edge will be gone when they no longer have an exclusive market. I don’t think they can survive as digital-only, or even mostly digital. There won’t be any reason for the big name authors to stay/go with them.

      1. That’s what I thought too, Steve and Lin. While the price on most books have the retail price on the jacket or (for paperbacks) the cover, when I was buying paper books I’ve rarely paid that amount and even in my younger days when that being the price most of the time there were exceptions.

      2. Well, sure. But it shows the mentality. How many products are produced with a retail price on them? If music albums had tried that, fans would have hooted.

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