The Shatzkin Files

If Amazon pricing of ebooks is the problem, is agency actually the right solution?

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In the past week, I’ve had conversations with leading executives at two of Amazon’s competitors in the ebook space. They had strikingly different takes on whether the agency pricing regime, which is now in place by contract with all five of the biggest trade publishers, helps keep competitive balance in the ebook marketplace or prevents it.

Agency pricing was promulgated by Apple for the opening of the iBookstore in 2010. What it meant was that publishers would set a price that was “enforced” across the retail network. Apple liked this because it meant both that they didn’t have to price-compete with Amazon and because they didn’t have to think about pricing hundreds of thousands of items on a daily basis. (And it fit the model Apple used to sell other media.) Publishers liked it because they feared the erosion of print sales that cheap ebooks might lead to and because it seemed that level prices might reduce what was then Amazon’s stranglehold on the ebook market.

As we know, the Department of Justice interceded because they saw the Apple-publisher agreements as collusive. The DoJ cares most about price; discounting is a good thing unless it is “predatory”. If companies get together to prevent low prices, that’s clearly bad. So the short-term remedy was to enable retailers to discount off agency prices. That pretty immediately stopped the decline in Amazon’s ebook market share, which started to grow again once discounting was reinstated.

Now the big publishers have replaced the original agency agreements with new ones that appear satisfactory to the court because they were obviously separately negotiated. And the new ones seem to allow at least some of them more flexibility to set and enforce higher prices than the numbers in the original Apple-promulgated deals. And all of that has led to a reconfigured marketplace.

The good news for the publishers is that print sales erosion — at least for the moment — seems to have been stopped. (Print sales started to grow even before “new Agency”; when higher prices hit the ebook market, print was immediately assisted.) A variety of industry and company sales statistics seem persuasive on that point. The percentage of revenues coming from ebooks for big publishers has declined and the sales of print have risen. And there is even some anecdotal evidence suggesting that bookstore retail shelf space is increasing again. Even if that is true, it is an open question whether it is sustainable, or whether it is a delayed and temporary marketplace response to the shuttering of 400 giant Borders stores, which occurred in 2011. Bookstores might also be helped by the diminishing book shelf space at mass merchants, a venue where print continues to lose ground.

But there is also some good news for Amazon in how all this has worked out. Their market share on the ebook side is rising. Their margins on the ebook side must have gone up even more, since they’re being “forced” to keep the margin they earn on Big Five ebook sales. (Wouldn’t it be ironic if Amazon’s internal calculations are that they can afford more losses on their Kindle Unlimited subscription program because of the margin they’re earning on the Big Five single-title sales? We can only guess…) And certainly Amazon benefits from the increased sales of print.

In fact, they could be partly responsible for it. All the searches on Amazon for Big Five books show an agency-priced ebook with a highly-discounted print book, often cheaper than the ebook, alongside of it. How much of the print book sales increase is due to the reaction of consumers being presented with that choice?

(Let’s remember how much of a “better deal” it is for the consumer to buy print if the prices are the same or close. The print book can decorate a bookshelf. It can be resold, which the ebook can’t be, or at least can’t be yet.)

Only Barnes & Noble can even attempt to meaningfully compete with Amazon in this environment. The price-sensitive book consumer needs to see both the ebook and the print book to make a wise purchasing decision. They won’t see that at Kobo, Google, or Apple’s iBookstore.

So competing with Amazon on price is confined to B&N on print and confined to non-agency titles — which means only a sliver of the bestseller list — for everybody else. So, is everybody happy? Publishers are selling more print, which they wanted. There’s growth in the indie store base, which publishers also wanted. But Amazon continues to grow market share in relation to Barnes & Noble and now threatens to open bookstores to compete with B&N and the indies. And that is most definitely not what publishers wanted.

Is there any way to achieve both robust competition for Amazon and also to protect print books from being cannibalized by much cheaper ebooks?

The conversations I had this past week with two of the competitors to Amazon surfaced diametrically opposite opinions about whether agency was helpful or not in that regard.

One ebook executive suggested that the Big Five publishers should stick to the agency pricing margin but should do it on wholesale pricing terms. That person encouraged me to think through this proposition: what if those ebooks were sold to the accounts at 70 percent of the publisher’s price (or even a bit more), but without any restrictions on discounting?

The other believes that price-competing with Amazon is a game that is impossible to win and that there is clear evidence from the experience in the UK market, where several ebook players tried to undercut Amazon on price, that it is not an effective strategy.

The advocate for the wholesale model, which would allow discounting by retailers up to whatever the authorities decide is “predatory” (and that definition is anything but clear), believes that Amazon is being given a free ride. Of their competitors, it would seem that only Google and Apple would have the deep pockets to fight Amazon by sacrificing margin, but either of them certainly could and it would certainly be, at the very least, a big nuisance to Amazon if they did.

This raises again the question of what discounting would be permissible before the discounting would be labeled “predatory”. There is no definitive answer. Some believe that retailers are not permitted to discount below their own cost (although, even then, it is not clear whether that means on a per-title basis or across all their ebook purchases and sales or some other basis). By that interpretation, if an ebook were listed at $15.99 and sold at a wholesale price of $11.19 (70 percent), there could be a legal risk that pricing below that point could be considered “predatory”. In fact, ebook pricing flexibility is such that publishers could make that same ebook $18.99 for the first month ($13.29 wholesale), when the print is fighting for bestseller status.

(It should be noted here that Amazon sold Kindle ebooks at well below cost in the days before they had competition, as a carrot to get customers to buy Kindle e-readers, which were originally priced at $400. By doing so, they made the reader-and-content equation attractive to the people who bought the most books. The DoJ and Judge Cote said that Amazon’s pricing at that time was not predatory, but the Supreme Court could, at least theoretically, change that understanding. And, in fact, Amazon has continued to behave as though the $9.99 price point is the “right” ceiling for ebooks, even as the device-and-content equation has changed with considerably lower Kindle device prices and a plethora of multi-function devices having changed the market.)

Big 5 players going to wholesale could change the ebook marketplace in two ways. One is that it would unleash Google and Apple — both of which have plenty of cash — to discount aggressively to compete with Amazon. At the very least, that would diminish Amazon’s margin as they compete on price and it might also reduce their unit sales. It could also lead to the smaller publishers now selling wholesale to attempt to reduce their discounts. And that could lead to Amazon using its market power to resist a reduction in margin. That could be construed as an abuse of marketplace power, which is another test for anti-trust.

An anti-trust lawyer explained it to me this way. The analysis is more nuanced than just looking at whether prices are lowered. Generally, the antitrust enforcers do look favorably on practices that result in lower prices.

That being said, the goal of antitrust is broader: it is to protect the competitive process. It can get complicated in two-sided or multi-sided markets where prices might be low on one side of the market, but the platform uses its power on the other side of the market to harm competition. In the case of Amazon, one side of the market faces the consumer and the other faces the publisher.

It’s particularly problematic if the conduct locks in participants, raises barriers to entry, or results in the platform extracting more than its fair share on the other side of the market.

By that measure, perhaps the most problematic aspect of Amazon’s commercial terms could be the requirement for exclusivity to be part of the Kindle Unlimited subscription program. That keeps titles away from competitors.

But going to wholesale is not viewed as a solution by all of Amazon’s competitors. One of them thinks having agency in the marketplace is a big boon to competition. That executive saw the UK market as a “test bed”, because over the last three years a number of companies have tried deep discounting to buy share. It was tried pre-agency and during the post DoJ “agency lite” period. From this executive’s perspective, the results of those efforts make discounting looks like a pretty futile competitive strategy.

Unlike the “wholesale” advocate who thought the agency publishers were helping Amazon by preventing price competition from the other deep-pocketed players, this executive presented a completely different analysis. By their lights, market share comes from two sources.

Access to cost-effective customer acquisition sources. Amazon and B&N have their own existing customer bases. Kobo has retail partners. Apple and Google have pre-loaded apps and registered customers for iTunes and Android. So everybody has a pool of customers to draw on. (We pegged this as an advantage Scribd had over Oyster when those two companies started selling ebook subscriptions.)

Then the trick is to retain customers and capitalize on lifetime value.

What this executive believes is that price-cutting as a way to recruit customers is a fool’s errand. The customers who come aboard for a cheap deal will abandon you just as fast for somebody else’s cheap deal. They don’t stick. On the other hand, offering pricing advantages based on customer loyalty is a better bet. This player thinks that having agency in the market makes it easier to hold onto customers once a platform has acquired them. As evidence, that person pointed to the loss of market share by Nook that occurred once the DoJ restored discounting under agency.

It has seemed to me from the very beginning that making ebook discounts mirror print book discounts was a major strategic mistake by publishers. The two products are not comparable from the standpoint of the store’s economics. Stores don’t have to buy ebooks in advance. There is no “shrinkage”; they don’t get lost or stolen. They don’t have to be handled. Rent doesn’t have to be paid on the space they occupy before they’re sold. With such a different commercial reality, aggressive discounting by retailers should have been a predicted outcome when they were given so much more margin than they needed to operate.

So the division of the customer’s dollar instituted by agency is more appropriate to ebook realities and probably takes things back to where they should have started.

The wholesale versus agency question is more complicated. But it does certainly seem like the time would be right for one of the Big Five publishers to break ranks, as Random House did when agency was originally instituted, in their own selfish interest. They’d achieve what Random House did then (before the Penguin merger): collecting the same or a higher price from the retailers and seeing them peddled to the public at a lower price. (Of course, nobody is doing this anytime soon. The current round of agency contracts which went into effect over the past two years still have some years to run.)

The same executive who analyzed the marketplace for me offered another observation that really matters. Less than half of the reading public has made the switch from reading print to reading digitally. There are a lot more future converts left in the pool. There is a lot of ebook growth left for retailers whether they’re attracting their competitors’ customers or not.

And so it would seem that the stability we now see in the ebook market is a temporary thing.

Thanks to Teleread for the Q&A with me they just posted.

And Digital Book World is just around the corner. I hope we’ll see you there.

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  • Robotech_Master

    “It should be noted here that Amazon sold Kindle ebooks at well below cost in the days before they had competition, as a carrot to get customers to buy Kindle e-readers, which were originally priced at $400.”

    It should also be noted that Amazon executives testified under oath that Amazon sold only a fraction of titles below cost, whereas most of them were at or above cost, and Amazon’s e-book operation was “consistently profitable” as a whole. The Department of Justice actually did investigate Amazon for this during the run-up to the agency pricing trial, and found the same thing.

    If Amazon were permitted to return to loss leader pricing, I remain skeptical that it would do so in such a way as to open itself to successful prosecution for predatory pricing.

  • Anthony Pero

    “All the searches on Amazon for Big Five books show an agency-priced ebook with a highly-discounted print book, often cheaper than the ebook, alongside of it. How much of the print book sales increase is due to the reaction of consumers being presented with that choice?”

    Not only that, but I actually purchased three books today where the combination of the print and the “MatchBook” Kindle price was less than the Kindle price “Set by the publisher”… so I bought the print copy and selected the slow, free shipping to get a $1 ebook credit, then turned around and purchased the Kindle ebook through the Matchbook program at $2.99… with a $1 discount on top of that! So, in about a week, I will receive those books, but I already have them on Kindle. So I’m sure I’ll turn around and sell the physical copies on eBay as brand new.

    Now, obviously Matchbook is not available with all books, and almost no new fiction releases by the major publishers, but I just thought setting the price that way was… odd.

  • InklingBooks

    I’m not surprised that sales are shifting back to print. I’ve found myself doing the same. In part, that’s because buying an ebook seems more nebulous, more like a long-term rental than a purchase. I can do more with that printed version and, if I buy used online, the price is often cheaper even with shipping than the digital version.

    There’s also an aesthetic factor. Printed books from a legitimate publisher almost always look better than any digital version from any publisher. Other than going fixed-format, which limits what device you can read on, the ebooks formats simply lack the formatting abilities of print.

    I’ve picked up hints that Amazon may be realizing that and beginning to improve their proprietary formats. When they upgraded the firmware on my Kindle 3, they talked vaguely about some improvements that would be showing up in some ebooks. I’m hoping that’s better line justification.

    And if Amazon improves their ebook appearance, maybe it’ll motivate those who set the ePub standards to do the same. I wasn’t impressed that the latter’s latest standards release, which centered on dropping one contents file and improving the metadata. “Who cares about that?, I thought. And I knew the answer. The same ‘who cares how it looks’ crowd who seem to have been determining ePub standards from the beginning.

    And it’s the inadequacy of all digital formats that makes ebooks look so ugly consumers are returning to print. That’s particularly true of those who’d be doing their reading on smartphones. The smaller the screen, the more the inadequacies of reflowable digital show.

    • Seems like much more “jumping to conclusions” than any persuasive evidence. But nothing really firm enough to argue with. Maybe I’m just immune. I read all narrative books on my phone. Just fine with it.

  • Elizabeth Lynx

    If one of the big publishers doesn’t break rank and lower their ebook prices they will lose a lot more money in the long term. I feel like the writing is so obviously written all over the wall with bright neon lettering and the big publishers refuse or are too scared to see it. They grasp at any ‘report’ that shows book sales are rising (so their clients are happy – the chain book stores) and ebook sales are taking a nose dive.
    Yet, if anyone really looked at the numbers they would notice only their (the big publishers) ebook sales are lowering and their book sales are rising. Why? As you, and a few of people who commented pointed out – their ebook prices are outrageously high.
    As someone who used to work in the printing industry I can say that it is expensive to create and store a book. It costs next to nothing to create an ebook. People aren’t dumb, they aren’t going to pay large amounts of money for something they know is cheap to make.
    I just feel bad for the big 5 traditionally published authors who are losing sales due this hot mess the publishing companies call a business plan. If they don’t do something soon more jobs will be lost and chaos will ensure. As an author myself I have been mulling over whether to take my book to a publisher (get an agent first, of course) for a while. But the more I learn about how Traditional publishers are dealing with sales, while cutting back on jobs and heaping more work on their current employees, the more I think I want to stay as far away from that sinking ship.

    • Those ships are taking on some water but they’re a long way from sinking. Depending on what you write and what agent you could get, you might be far better off with a publisher. Or, if you have a talent for entrepreneurship and self-marketing and a knack for tech, maybe you’d be better off self-publishing. But the big boys will be here for quite a while yet.

  • Steven Zacharius

    We just joined the ranks of agency pricing beginning on February 1st but we did lower the digital list price to hopefully be competitive with what the large ebook retailers were previously selling the ebooks for under wholesale. There are some minor variations here and there but overall we think we did a good job balancing the ebook pricing to remain competitively priced with where we were before.
    So many people scream that they don’t understand how the ebook price can be so high when there is no cost to an ebook but they always forget the advance that the publisher is paying with greatly diminished print sales occurring over the past few years. Some of this was from ebook eroding the print sales but a lot was done from less retail space being available as well.
    We won’t know how the new agency pricing changes our overall ebook sales for a few months but we’re hoping that it encourages sales across all ebook platforms.
    With almost all of the major publishing being done at agency pricing now it would appear that the Kindle store will encourage even more indie publishing and KU will be almost entirely indie books. There is a segment of people who buy ebooks based on price and they are very vocal online. There’s also a larger segment that buys books based on finding an author they are already well familiar with or they recognize the name from bestseller lists and will pay a higher price for those ebooks. There’s room for both to co-exist.

  • robertgottlieb

    The answer is not complicated. First publishers want to assist B&N in it’s struggle as the book chain is very important to them and the industry at large. Raising ebook prices impacts B&N is a positive manner by making ebooks prices closer to those of hardcover books. Second it is about publishing margins. Now that Amazon is no longer paying full freight for ebooks to trade publishers and no longer selling at a high discount publishers are seeking a path that allows them to maintain margins. It is a double edged sword for publishers in the ebook space as sales have declined due to higher prices while Amazon’s sales of ebooks has risen especially with hybrid authors.

    Robert Gottlieb
    Trident Media Group

  • And then there is the question how many people impulse-purchased a lower priced ebook and loved it so much, they later bought a print edition? Reverse showcasing?

    • I haven’t seen any stats on that but I believe (on faith, without any evidence) that the number of people who do own both an ebook and a print copy of the same title is very very tiny.

      • Not that I planned it this way, but I started Publerati as a lit fiction publisher of ebooks only, but then had many requests from readers of the ebooks requesting a print edition, so I made them only available in print through the Espresso Book Machine. Shakespeare and Co. and other Espresso locations started putting our titles in with the main fiction titles and we have been selling more print per store this way then we would have going the preprinted route. Just need more machines out there! Interesting experiment. Great article by the way, thanks.

      • That’s the first Espresso Book Machine “success story” I’ve heard! Doesn’t that mean you’re in the Lightning database? If so, your print book is also “available” at Ingram, right? Are you selling a handful, dozens, or hundreds? And thanks for the kind words, but check out that I’ve “corrected” this post!

      • No Ingram, just Espresso. That one store has sold about ten of each of our top titles since November. Remember, I only publish lit fiction, midlist, overlooked, too small to care about titles. But that format is the best I’ve seen for a new physical world bookselling future. Dean and DeLuca–style cafe in front, machine in the middle, its purpose to help build community and fascination, then an intelligent classics and new paperback section. No toys! Looks like the B&N at Herald Square now sells about 60% books in the total mix. Depressing.

      • Why NOT set up with Ingram?

      • I’m an experiment not really interested in print. One futuristic networked new player hope for print eventually mostly outside of bookstores is enough. Like what I was involved in with the new photo machines back when. I would be completely lost in the old Ingram book world and want to be forward-looking, not backwards. Not sure how many publishers are actually originating new content through Espresso, and that appeals to me. But the potential of digital to help save literary fiction is what interests me down the road. Who knows, I might change my mind! Like Drumpf.

  • Apologizing in advance for bringing up such a trivial nit, but… you keep using “digital” incorrectly.
    Any finite character set is a digital signal. With 26 characters (+ capitals and punctuation, but still a finite, not analog, signal), all reading is digital regardless of medium. You really mean to say electronic reading vs reading ink on paper, or dead tree reading or whatever.
    Again, I apologize for polluting your page with such trivia but you’ve been doing this for years and I’ve never said anything…

    • I don’t mind hearing it, and I see your point, but I may continue to do it. I think pretty much everybody understands exactly what I mean. And, believe me, I’m appreciative of anybody who knows what I’ve been writing for years!