The Shatzkin Files


Random House joining the (formerly) Agency 5, and what it might mean


Now the Big Six are all selling ebooks on the agency model. Random House has joined their five competitors.

It is almost a year since Apple launched the iPad, opened the iBookstore, and delivered big publishers an opportunity to rewrite the rules of the ebook marketplace, at least for their books and at least for a while. As readers of this blog almost certainly know, five of the top publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) used the opportunity presented by Apple’s arrival on the scene to implement the change to agency for all their customers. Random House, for reasons that made sense to me at the time and almost certainly delivered some competitive advantages to them over the past year, judging by the open annoyance of many of their similar-sized competitors, stayed with the original wholesale model.

The competitive advantaged stemmed from the fact that all the agency publishers “forced” a 30% selling margin in to the ebook retail channel whereas Random House may actually have drawn margin out of the retail channel.

Here’s what I get out of this change.

1. Agency has been successful in cracking Amazon’s hegemony over the ebook market. A year ago, it seemed possible that Amazon could have an enduring 75% or 80% of the ebook market. While they’re still the biggest piece, and almost certainly have more twice as big a chunk as anybody else, agency has enabled real competition to develop from the iBookstore, B&N’s Nook, Kobo, and Google. And the independents served by Google, Ingram, and Overdrive all over the world offer a lot of potential marketing leverage, if they’re not driven out of the game by price competition. Amazon is still the behemoth, but they’re no longer the only game in town. Agency delivered competitive advantage to Random House, but also to Amazon. If they had continued to be 80% of the market, you might not be seeing this switch.

2. Google may not (yet) be selling a lot of ebooks (as in having a big market share), but they are opening the business up to more and more independents. Independents talk to sales reps, and Random House has more sales reps than anybody else. I would imagine the company began to feel some discomfort about the feedback they were getting from the retail network they very much want to keep alive.

3. So far, none of the major publishers has taken the step of aggressively selling ebooks direct to consumers online. But they’re ultimately going to have to. You may recall that Random House’s CEO, Markus Dohle, told me last summer that he realized publishers needed to become B2C. He wasn’t suggesting he’d sell books direct-to-consumers then; in fact he insisted that there were other ways to manifest that vision other than selling direct. But, if it ever enters your mind to sell direct and you think about it for fifteen minutes, you realize that you either have to do it under agency terms or face complicated and very troubling conversations with your retailers.

And here’s what I’m watching for.

So far, as near as I can tell, there has been very little use made by the big publishers of their ability to manage prices in the market. I am not aware of much experimentation. I am not aware of any direct-marketing or dynamic pricing expertise (both of which would be relevant) being brought on board by major houses to help them realize the potential of the opportunities. And I can only think of one senior executive I know who takes much of a personal interest in pricing dynamics.

Maybe Random House will be different. They’ve been the traditional industry leader in operations and analytics. They do vendor-managed inventory for retail accounts; I’m not aware of any other major publisher who does. They’ve done sophisticated supply chain management for years.

Now they’ve had the advantage of seeing what their competitors have done, and not done, over the first year of agency pricing. It will be worth watching to see whether they approach the pricing opportunity more energetically than the other publishers seem to have done so far.

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  • Peter Collingridge

    So many thoughts but great post Mike.

    To be a little pedantic, or confused, are you perhaps conflating agency with “most favoured nation” clause, which is a related *part* of agency, but not agency itself?

    And how would dynamic pricing et work under MFN if it requires price consistency across all retailers? (I'm not challenging the idea, just interested in the mechanics)

    Finally the timing of this (from a uk perspective) is interesting; the OFT investigation of agency is in full swing…

    • /blog Mike Shatzkin

      Maybe I misused “dynamic” pricing. What I mean by that is publishers

      changing prices, up and down, to promote or experiment. It works with

      agency, and only with agency, because the prices change at all points of

      purchase in synch.

      You're right that publishers on a “hybrid” model — using agency-style for

      Apple and wholesale for everything else — will run afoul of MFN clauses.

      But, in fact, they already do.

      Mike

  • gous

    “Agency delivered competitive advantage to Random House, but also to Amazon.”

    Are you hinting that Amazon used Random against other retailers via deep discounting of their titles?

  • http://gravitationalpull.net/wp/ Aaron Pressman

    Great post. But I think the timing of this just as Apple has started to make life difficult for all its ebook competitors on iOS must also have been a factor. Random House’s “pain” from not being in iBooks was about to get much greater as Apple chokes off the air supply of Sony, B&N and Kindle on iPhones and iPads.

  • Bibliofuture

    In regards to your comment about selling ebooks to consumers there is the story today about Amanda Hocking who has become a millionaire selling her ebooks on Amazon. What I think is most significant about Amanda is that with previous authors that have self published they have been successful enough to make some money and they are then more likely to be picked up by a major publisher. In one of the articles about Ms. Hocking there was this comment that is the game changer — If you do the math, this means Hocking is earning somewhere in the neighborhood of $2 million per year — a staggering amount. In fact, according to Novelr, “there is no traditional publisher in the world right now that can offer Amanda Hocking terms that are better than what she’s currently getting, right now on the Kindle store, all on her own.” Source (http://bit.ly/fPkbh9) Here is an author that would not even want to hear from the big six and if she did hear from them they would have nothing to offer.
    Other links to the story about Amanda Hocking — http://www.huffingtonpost.com/
    Running a Google search and clicking on “News” will pull most of the major stories about her.

    • /blog Mike Shatzkin

      I'm quite aware of Amanda Hocking. Everybody watching the ebook space is.

      She's quite a sensation.

      What Amanda is giving up with her no-publisher strategy is any

      *significant* sales

      at retail (although, if I were Barnes & Noble, I'd be saying, “go ahead and

      do whatever you're doing, but may we go ahead and print 10,000 copies and

      put them on sale at prices higher than your ebook price (so it won't steal

      any sales from you) and give you additional money in royalties?”) That's the

      tradeoff for the self-published author; it take capital investment to put

      copies on sale in stores. And somebody takes a risk.

      That's still somewhat important because book sales are still 85% physical

      for many titles. It will be less important every day going forward because

      digital sales will become an increasing portion of the total for a long

      time.

      Mike

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  • roberttenison

    The European Commission can confirm that on 1 March 2011 Commission officials initiated unannounced inspections at the premises of companies that are active in the e-book (electronic or digital books) publishing sector in several Member States. The Commission has reason to believe that the companies concerned may have violated EU antitrust rules that prohibit cartels and other restrictive business practices (Article 101 of the Treaty on the Functioning of the European Union). http://europa.eu/rapid/pressRe

    • /blog Mike Shatzkin

      It would be the height of irony (and boneheadedness) if agency were blocked

      as a theoretically “anti-competitive” practice. I think Amazon would prove

      very quickly that it is eliminating agency that will eliminate competition.

      But that doesn't mean it can't happen.

      Mike

  • MerchManiac

    More terrific insights, Mr. Shatzkin. I'm never bored (or confused) when I read your stuff!

    While I agree that selling direct is something the big six will naturally want to try, it seems to me the only way to make it work is to 1) collaborate to build a single Amazon- or Barnes & Noble.com-like storefront and 2) make a deal with a Kobo-like device manufacturer to make a dedicated reader device to access it.

    But maybe your reply is that neither is necessary if you decide to put all of your eggs in the iPad (or maybe I should say iTunes store) basket. However, given Apple's total control of iTunes and its apparent lack of interest in iBooks so far it's fair to ask what publishers pursuing such a strategy could do if they found Apple's ebook merchandising less than satisfactory.

    On the other hand, I don't have an Android phone or tablet but I would guess going forward all such devices will be configured for easy access to Google's bookstore. I guess that would be Plan B — and Google only takes 10% of the sale, right?

    Or have you envisioned some unintermediated way for Bix Six publishers to sell ebooks direct to consumers? That's the part I have trouble with.

    • /blog Mike Shatzkin

      I don't think creating another “horizontal” store is the answer big

      publishers need. There are plenty of them (and there will be plenty as long

      as there is agency.)

      What I think publishers should do is build “vertical” customer bases. For

      most of them now, those would be author- or genre-centric. There would be no

      expectation that the sales from the direct channel would be large any time

      soon. But publishers need to do more and more direct consumer engagement;

      selling direct is a way to claw back an extra 30% margin, to solidify the

      customer relationship, and to offer bonus material (free or paid) that can

      enhance the customer relationship. And, by the way, all this would further

      secure the relationship with their authors.

      Mike

      • MerchManiac

        Well, I'm sure you realize what an underwhelming job publishers have done selling physical books directly to consumers — a problem I've never blamed on publishers because A) they tend to avoid deep discounting to avoid competing with their retail partners and B) more importantly, no consumer wants to have separate accounts with Random House, S&S, HarperCollins, etc. just to satisfy a book appetite. Amazon's online bookstore, after all, is an analog of the offline bigbox bookstore. The convenience of one-stop browsing for everything out there.

        So while publishers may be able to do a better job of communicating with customers in the social-media always-connected smartphone era, maybe I'm just old-fashioned in thinking they'd rather not have to be on a zillion different alert lists to be kept apprised of what may meet their interests. True, a devoted Harlequin romance reader could probably benefit from and enjoy a “high-touch” direct-to-Harlequin relationship, but consumers with diverse reading interests, even one as specific as thriller fiction, would still, I imagine, prefer to browse in one spot (and get one set of alerts) for everything new, forthcoming, backlist — the works. Do you disagree?

      • /blog Mike Shatzkin

        I don't disagree. But I also don't think it makes sense for publishers

        to compete with the full line Internet bookstores.

        Mike

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  • Marilynnbyerly

    The annoying thing about publishing is that people keep reinventing the wheel, and it's usually square because they haven't done their research on what has come before.

    The great sell-it-yourself strategy for ebooks has failed since I came into ebook publishing in the late 90s when few vendors besides Fictionwise existed. According to all the anecdotal evidence I have from indie ebook publishers and novelists, for every book sold at a publisher's site a thousand or more are sold at a one-stop shopping site.

    Readers are lazy, they are paranoid about handing out their credit card numbers to publishers, and they don't want to have to deal with the small variations in the sites. One-stop shopping is what a vast majority of buyers want.

    Just putting the books up as an online catalogue simply won't cut it either, and the utter banality and poor design of the current sites of most publishers show they don't know what they are doing now so I have little hope they will figure it out when they go to the expense of adding books for sale.

    The only publishers who have been successful with their own sites have made them a destination for readers, not book buyers. For an example, look at what Baen has done.

    These publishers also market to a very specific reading segment like science fiction or erotica.

    Those publishers who carry a wide range of books, even if they are all genre niches, simply don't have as much success because readers tend to avoid buying a fantasy novel at a site with romance novels on the home page or vice versa, or they have such a wide range of novels that it's harder to find what the reader wants to read.

    Publishers would be wiser to concentrate on creating sites that are reader friendly with more information about the books they sell instead of opening up a storefront.

    • /blog Mike Shatzkin

      You're right that there has to be a community aspect to make a store work.

      Amazon and B&N and The Book Depository do that by having lots of information

      about lots of books and lots of customers providing feedback. Publishers can

      only do if they have a consistent audience. Harlequin is actually the best

      example. Hay House is another (although, actually, I'm not sure how much Hay

      House sells direct or how much they just really move the needle with

      Amazon…)

      But publishers should be getting more and more vertical and trying to have

      direct contact with more and more customers in logical groupings in various

      ways. If you're going to do that, you're going to create sales opportunities

      in a virtual environment. Ebooks are going to be available from many

      thousands, maybe hundreds of thousands, maybe millions of websites five or

      ten years from now, all curated for a particular audience. Some of them will

      be owned by publishers. It would be best to get started.

      Mike

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  • Mike Segroves

    Mike,

    In 2001 or 2002 both Random House and Simon had their own eBook stores that were built and operated for them by Overdrive. Shortly after that Penguin started up a store but I'm not sure if that was an Overdrive operation or if they did it themselves. Needless to say, Palm Digital Media was not happy about this competition directly from the publishers.

    • /blog Mike Shatzkin

      No, they wouldn't be. Retailers would never be happy about competition from

      their customers. And opening up a “bookstore” doesn't seem like a very smart

      move.

      But an increase selling direct is inevitable. The publishers who survive the

      next 20 years will have direct relationships with a *lot* of people. They'll

      have a great variety of transactional relationships with them. And they'll

      be selling more than just content. We're in the early stages of real

      transformation, but only in the very early stages.

      Mike

      • Mike Segroves

        But I'm not sure if the publishers will survive the next 20 years. How many consumers (book buyers) know who publishes Michael Connelly or Robert Crais or T. C. Boyle? How many of them care? I don't go to a publisher's website looking for information on my favorite authors; I go directly to the author's site. So I can see the authors having a direct relationship with the reader? But the publisher? I'm not so sure.

      • /blog Mike Shatzkin

        There's no disagreement. Ultimately we're talking about different

        publishers. The control will be by the brand. The big name author is a

        brand. But for subjects, there will be other brands and those will be the

        publishers. With direct contact with many in their audiences.

        Mike

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