The Shatzkin Files


If you like irony, you must love the publishing world of today


Anybody who doesn’t find the publishing business interesting in its time of digital change is simply not paying close enough attention. No matter what story we’re focused on, scratch the surface (or scratch your head) and you find you are pondering something else. This was a week for the press to be asking me (and many others) about the lawsuit against Apple and the publishers surrounding the implementation of agency. I have little expertise to comment on the suit’s legal merits, but a week of thinking about agency has made me (and others) realize implications that hadn’t been evident to us previously.

As I was reviewing my last blog post before publishing it, I had the new thought (referred to in a brief postscript) that Amazon was actually doing the Big Six publishers a favor by denying agency terms to everybody else. Since big authors have a common interest with big publishers in maintaining retail prices for ebooks that don’t undercut print and which deliver a per-copy revenue flow comparable to print, there is reason for a big author to prefer a publisher that has the power to maintain the ebook price across the retail network. Full-fledged agency publishers have that capability; the others do not.

A moment of explanation might be required for any readers who might be lost in the details of the agency, wholesale, and hybrid models of ebook-selling. Agency is the term for “the publisher actually sells the ebooks to the consumer, not the retailer; the retailer gets a cut but cannot change the price from what the publisher has set.” Wholesale is the term for “the publisher sells the ebooks to the retailer, based on the notional retail price set by the publisher; the retailer can then set the consumer price keeping all, part, none, or less than none — selling as a loss-leader — of the margin that the publisher’s discount provided.” And hybrid is the term for “the publisher has to agree to giving Apple a fixed percentage of the selling price; Amazon insists on a wholesale arrangement by which they set the price; therefore, Apple’s standard arrangement by which it can lower prices (and the publisher’s share) to match any other retailer on the web makes the publisher vulnerable to having its revenue from Apple readjusted downwards based on discounts offered by somebody else.”

The short story is that only under a total agency model does the publisher control price. In any other case, the price is effectively controlled by the retailer willing to offer the lowest price. That would be the retailer willing to live with the least margin and, as was amply demonstrated by the discounting that took place before agency came to publishing, that might be a negative margin. Retailers in the US (although not in all countries) can sell below cost if they think it is to their advantage to do so.

All the actors are rational here. Amazon extends agency terms to the Big Six publishers because, after the Macmillan dust-up of January 2010, Amazon has been persuaded that they could lose the ebooks of those publishers from their shop if they don’t. Losing the ebooks from one of the major houses would damage what has been one of Amazon’s main strategic advantages since the Kindle was launched: the widest selection of commercially-attractive ebooks in the marketplace. They take the gamble, which appears to be a winner, that publishers smaller than the Big Six will not want to withhold product from the world’s biggest ebook retailer, the one that still accounts for substantially more than 50% of the ebook sales for many titles.

And, in some cases, publishers have avoided the discomfort of the hybrid model — which requires them to commit to Apple that Apple will have the lowest price on the Web when they can’t actually control everybody else’s price  — by not selling to the iBookstore because Apple won’t buy on wholesale terms. So Amazon yields where they think they must (to the Big Six) and continues to enjoy the advantages of price control with the rest, while at the same time discouraging some publishers from making their titles available through a competitor. This all makes sense to me as I understand their point of view.

What I noticed while writing the last piece is that there is an unintended consequence here for Amazon way upstream from the ebooks sale: the policy is strengthening the Big Six’s already powerful grip on the biggest titles from the biggest authors. Amazon wants to compete for those authors and can offer a better royalty on Amazon sales to entice them (when Amazon pays 70% to the author, the author keeps it all; when they pay 70% to the publisher, the author does not get it all, even if s/he succeeds in negotiating something better than the industry standard of a 25% ebook royalty share.) But Amazon reportedly wants ebook exclusivity, which cuts out a big chunk of the ebook market, and they are seriously handicapped getting a print sale through brick retailers.

(If you want a more thorough explanation of the way ebook revenues get split up, I wrote in detail about ebook royalties under the agency and wholesale models here and here.)

Because print sales in stores still matter (and for as long as they do) there is a risk and a sacrifice for any author giving exclusivity to Amazon, although there are also clearly compensating considerations as well.

At about the same time I was noticing this, my friend Eoin Purcell in Ireland was noticing something else. Apple’s new policy on apps, by which you can’t sell through an app without giving Apple its standard 30% cut, also offers up a sparkling new opportunity to agency publishers that would be accessible only at some risk to any but the Big Six.

The immediate consequence of Apple enforcing this policy of theirs was to drive the direct-to-our-store connection from the Kindle, Nook, Kobo, and Google apps. Because those retailers only get 30% margin from the publishers, they can’t afford to give 30% to Apple for the privilege of in-app selling.

But publishers don’t have that margin problem. They already pay 30% for their sales, and if they put their own apps up with sales enabled through them, they’d only be paying what they already are to a retailer for the privilege. So apps for authors or genres or series of any kind could be offered as free downloads through the App Store with direct-purchase buttons inside. These could send you to the iBookstore, if the right kind of landing environment could be created, or to the publisher’s own landing page where sales commissionable to Apple could be made.

Of course, the same thing could be done as a Nook app in the B&N ecosystem, and it would be smart for the publisher to offer one, as well as a web app that constituted an Amazon version (which wouldn’t be offered through the Apple App Store but would have to get to you another way), to keep relative peace among its customers. But a publisher can only do this if it is sure its prices won’t be undercut, which would force a further margin reduction under Apple’s rules.

Like Eoin, I have no idea whether any of the Big Six publishers are working on this idea or whether any of the major agents have suggested the possibility. But we’re talking about literally hundreds of smart people here, so it would be surprising if nobody’s exploring this possibility (except if Eoin and I are both missing something that makes it a non-starter.)

The transformation of publishing is rich with circumstances to amuse anybody who appreciates irony. Cheaper ebooks, which consumers love, are making bookstores, which consumers also love, gasp for the breath to survive. The closest thing to a monopoly threat in the business, Amazon and Kindle, work to drive consumer prices down. Apple’s great success with new devices coupled with their very slow start at retailing, generates agency pricing and sales opportunities for other retailers that probably benefited Barnes & Noble the most. B&N, the brick retailer most skilled at logistics but only newly-minted as any sort of tech company, finds not one but two unoccupied niches in the eink product suite: color and touch-screen.

And now, Amazon’s policy limiting the publishers that can fully implement agency, designed to isolate the Big Six and enable discounting of everybody else’s ebooks, may be spawning a new opportunity for big authors and big publishers to work together that other publishers can’t compete with. Perhaps denying this capability to other publishers actually helps Amazon be alone as a 7th competitor, but it certainly has its ironic aspects at a moment when Amazon is putting on a full-court press to persuade big authors to work directly with them!

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  • Sebastian Posth

    Hi Mike,thanks for this important post, that provides again so much inside knowledge, and furthermore, the consequences to be derived from these insights. I dare to add one comment to it.You link to Eoins post:”The opportunity this created and that everyone missed, even me (till this weekend when it dawned on me), is for publishers to go direct to consumers and launch their own apps selling ebooks to readers.” This is line of your argumentation: “Apple’s new policy on apps, by which you can’t sell through an app without giving Apple its standard 30% cut, also offers up a sparkling new opportunity to agency publishers [...].Publishers don’t have [a] margin problem. They already pay 30% for their sales, and if they put their own apps up with sales enabled through them, they’d only be paying what they already are to a retailer for the privilege.”I think both statements could be true, “(except if Eoin and I are both missing something that makes it a non-starter.)” Actually, the brackets made me think:1) It is clear: Book-Apps will not be supported by Apple. Apple will concentrate all their forces to market the iBookstore and it’s content. There, publishers will have loads of opportunities to present their titles and address their customers. 2) The ambitions of publishers to establish a direct relation to theirs customer is only at the beginning. Of course, some (actually only a few of the Big Six) publishers had the same thoughts about direct sales of print books via their website shops. But until now, these ambitions failed.I think, that you can compare the two strategies: a) Sell books via shops directly to customersb) Sell ebooks via apps directly to customersAnd both will probably have the same result.

    Best, Sebastian

    • /blog Mike Shatzkin

      Website shops won’t make sense for big publishers. The job of harvesting consumers is going to require a multi-pronged strategy. An app would just be one weapon, but I think there are circumstances where it can be a very good one. Ultimately, it won’t matter whether the sale goes to iBookstore or not; they key for the publisher is just to get the sale made and to keep the reader involved with the family of content.

      Mike

  • stonetools

    The book publishers could do it in partnership with the Ibookstore,
    the way that magazine publishers are doing it in partnership with
    Apple’s forthcoming Newsstand app. Come to think of it, its not totally
    crazy to think that Apple might not have had something like this in mind
    when they announced their much maligned policy change!

    • /blog Mike Shatzkin

      If they did have it mind, you’d have thought they’d have said so. But maybe not. I certainly don’t know enough about the Apple mind to psychoanalyze it.
      Mike

  • Charles

    You really haven’t thought this through.

    All that’s happening here is that Apple is trying to take over the retail position from companies like Amazon, B&N and Kobo. And they’re trying to do it without offering the sort of sales relationship that publishers traditionally enjoy.

    Why on earth should a publisher increase their costs and support overhead by selling books through an app when they get the same amount by selling through a proper book retailer?

    This post simply doesn’t make any sense.

    • /blog Mike Shatzkin

      I think you should add the words “to me” to the last sentence.

      If there is yet another channel available to publishers at the same cost as the existing channels, it would be appealing. And, frankly, anything that dilutes the Amazon share is also appealing to most publishers.

      I’m always open to learning something new or getting an additional insight, as I hope the post made clear. However, I don’t think that whatever might be wrong with my logic has been pointed out to me yet.

      Mike

  • Tonywlls

    “Agency is the term for
    “the publisher actually sells the ebooks to the consumer, not the retailer; the
    retailer gets a cut but cannot change the price from what the publisher has
    set.”

    Help me out here. Doesn’t
    Amazon offer self-published authors and indie publishers this same option via
    their Kindle Direct Publishing platform? In which case it seems to me they would not necessarily be “denying agency terms to everybody else” but the Big Six. Unless Amazon in its agreement with indie authors and presses reserves the right to change the list prices.  

    • /blog Mike Shatzkin

      You drove us to do a little research! Thanks.

      Under KDP, Amazon can change the price from what the publisher set and will pay based on the price actually charged if the publisher is working with the 70% royalty.

      Mike

  • Samantha Francis

    I think the reason publisher apps don’t make sense is that the branding isn’t there. Branding, in publishing, still rests at the author level (and sometimes at the series level). 

    I wrote a response to Eoin last week (link below) and I think it holds up. Readers aren’t loyal to publishers so they won’t look for books by publisher. They’ll still seek out a more complete listing.
    http://booknetcanada.ca/index.php?option=com_wordpress&p=2488&Itemid=319

    • /blog Mike Shatzkin

      Samantha, I wouldn’t try to do a HarperCollins (just picking them as a random Big Six example) app featuring all HC books. You’re right; it has to be more targeted than that. But Harper could do apps by author (to your point) or by genre that would work.

      Mike

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