The Shatzkin Files


Rethinking what’s happening with ebook prices


Could I have gotten the DoJ impact on ebook pricing completely wrong? Could the elimination of the Apple-mandated pricing bands actually be such a good thing for publishers that loosening the restraints on discounting won’t actually disrupt the marketplace?

The early evidence seems to point that way although we need to emphasize the word “early”.

What Cader was the first to write publicly (and which he told me in conversation before he posted it, but obviously it didn’t sink in) was that the publishers’ ability to raise ebook prices and ignore those bands offered a powerful antidote to the retailers’ ability to offer discounts.

The first reports when HarperCollins titles showed up on Amazon and other ebook retailers with discounts didn’t focus on the fact that the base price before the discounts had gone up on many of their titles.

Cader did the work required for sound analysis: grabbing Harper list prices from their site (showing that they had “re-banded” their prices higher, so that discounting up to 30% wouldn’t change consumer prices much from what they’d been) and doing price checks at a number of accounts.

The price checks contradicted my initial speculation about pricing in another way. I thought Apple would be challenged to keep up here; in fact, they were sometimes the low-price leader, undercutting (at the moment Cader took his soundings) Amazon on several titles.

So, with your usually-trusty sentinel now awakened to the reasonably obvious (I’m embarrassed to say; this is a circumstance that frequently provokes me to point out that it is not uncommon for smart people to do dumb things) strategy that the publishers would just set the agency prices higher, here’s what to keep in mind going forward.

1. We will for the forseeable have a trifurcated ebook supply chain. Assuming Hachette and S&S employ Harper’s strategy of setting prices higher so that the retailer discounting just brings them down to about where agency had originally set them, we will have a) three agency lite (again, hat tip to Cader for that description) publishers with higher retail prices being discounted; b) three “true” agency publishers with lower retail prices that, for a while at least, no retailer can tinker with; and c) everybody else, mostly selling “wholesale” at even higher listed prices but providing 2/3 more margin to the stores to use for discounting.

This raises the question of why any publisher would stick with wholesale terms — which requires setting a totally unrealistic retail price — unless they faced players in the supply chain that wouldn’t agree to sell their ebooks without getting 50% of the listed price. Eliminating the MFN (uniform prices across ebook retailers) makes the principal distinction between agency and wholesale that agency ebooks carry are assigned a sensible and defensible retail price by the publisher and wholesale-model books aren’t. (And this is still true with the price increases, although a little less true.)

2. The discounts that were shown on the Harper books (also researched by Cader) tended to be 5%, 10%, 20%, 25%, or 30% off the publisher price, or else the trusty old $9.99. This is simple, probably human-set, pricing. It also doesn’t begin to test the upper limits of what retailers can do in discounting. They’re allowed to discount a particular publisher’s ebooks up to the total margin they earn across the list. So for a 30% agency publisher, all the books being sold at positive margin (anything from less than 30% off to full price) contribute to their ability to discount below cost on other books, if they want to.

3. The settling publishers have some significant advantages over their competitors. They’re not restricted by the Apple-mandated price bands. Because they raised prices, they’re getting more per unit sold and because the retailers are taking less margin, they’re not being made less competitive to the customers.

4. Random House, which gained enormously in the year following Agency implementation by staying at wholesale — keeping their unit revenues higher and their retail prices lower than other big players — now finds itself on the other end of that stick. They, along with continuing litigants Macmillan and Penguin, now see the settling publishers have taken over that position of competitive advantage. (Of course, all of these publishers can reconsider their pricing and terms strategies whenever their current contracts with retailers conclude.)

5. I had speculated that Apple would find it hard to compete. The first returns say I’m wrong, but I’m not convinced yet. Managing the discounting on just the newly-liberated Harper titles could be done by hand; it’s not that many titles. And Amazon hasn’t pushed aggressively on this. (Pushing aggressively would mean discounting many titles more than 30%.) I still believe they will (although others, notably Chris Meadows at The Digital Reader, thinks they won’t.) If Amazon pushes the envelope on discounting, then it will take bots and algorithms to keep up.

6. A couple of years ago, an Amazon executive told me that they deep-discounted 4% of the titles which amounted to 25% of the sales. I’d assume that the discounting the retailers would want to be doing now would extend across a similar title band. What we’re now seeing is a surrender of, usually, a third or two-thirds of their margin on that group of titles. Giving up two-thirds of margin on 25% of sales would only constitute a sacrifice of 16.7% of total margin. If that’s where it stops, then the net immediate impact of the DoJ suit would be a rise in revenues for publishers, a not-disruptive reduction in margin for retailers, and something pretty close to price neutrality for consumers.

Note that if a retailer chose to accept negative 20% margin on that same 25% of the sales of any particular publisher’s (selling at about 50% below the publisher’s listed retail price), they’d still be in compliance with the settlement’s mandate to not give away more margin on a publisher’s list than they earned. (This is a slightly dodgy comparison because much more than 25% of the Big Six lists would fall into the 25% of the total that Amazon previously deep-discounted.)

It would take that kind of discounting to be disruptive. I think it is important to remember that the smaller reason publishers were concerned about Amazon’s deep-discounting was the impact they had on shifting sales from print to digital. The larger reason was the fear that the discounting would give them such a huge market share that they’d be able to dictate terms. If the levels of discounting that occur don’t contribute significantly either to creating economic hardship for the other players or growing Amazon’s share, it won’t be of much concern to publishers.

7. Every publisher except the remaining pure agency players are actually counting on the stores to discount their ebooks. The wholesale-priced ones were always set at levels that would look ridiculous to most consumers and now the agency lite players are similarly relying on the retailers making a margin sacrifice to keep their pricing competitive.

I still don’t think it will stay this way. I will admit in advance that I will be utterly amazed if Amazon lets Apple, or anybody else, steal their spot as the perceived low-cost provider. But in the earliest moments of this new ebook era we’re not seeing the discounting that I expected. And we’re not getting the result that was presumably what the DoJ sought: lower prices for consumers.

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  • http://www.facebook.com/eric.riback Eric Riback

    In the end, if the industry is to fully maximize the sales opportunity of e-books, all prices for consumer fiction and non-fiction will be $9.99 or less. While this can be achieved somewhat through discounting, eventually the MSRPs have to come down.

    • http://idealog.com/blog Mike Shatzkin

      Is “maximizing the sales opportunity” the same thing as “maximizing the sales revenue”? I think that in the long run the prices will come down lower than that, but let’s remember what John Maynard Keynes said about “the long run”.

      Mike

      • http://www.facebook.com/eric.riback Eric Riback

        George W. Bush said something similar when asked how he would be viewed by history. I was thinking of revenue, but I would say the operative term is “maximizing profit.”

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  • AlNorman1

    5) Nope, Mike. You’re right. Apple is not competing in the same sense these folks are claiming. Apple is still on the agency/MFN contract–or was as of last night.

    Here is what data those folks used to assume Apple was willing to play the price cut game:

    Amazon went on its discount frenzy with the HarperCollins titles, and Apple, which was still operating on the old contract, had its MFN clause in force. When Amazon dropped a price, Apple’s bots picked up the price and then made the match.

    However, (and this is the “smoking gun” for those who claim Apple is playing the discount game) Apple made what appeared to be unilateral moves below Amazon’s prices, such as when Amazon priced a book at 10.94 and Apple dropped to 9.99. Unfortunately, this was not a smoking gun at all.

    Apple has a strict policy of everything ending in a .99 price. Steve Jobs loved that uniformity, and it is undoubtedly written into the contracts of all sellers. Even Smashwords says a price must end in .99 to be listed on the Apple bookstore.

    So what really happened is that when Amazon dropped the price to 10.94, Apple went to 9.99 (per their contract). Going to 10.99 would have made the MFN useless, and a strict price match would have undermined the .99 uniformity.

    Thus, Apple was not playing any price war game with Amazon. It was simply playing Agency/MFN pricing versus wholesale pricing.

    • http://idealog.com/blog Mike Shatzkin

      Interesting times two:

      In the way you intended, because you show that Apple’s undercut pricing was old behavior, and you also made clear (which I should have known but didn’t) that Apple has bots and algorithms working. The problem for them is that their algorithms are far too unsophisticated for the long run. However, that could be improved…

      Mike

      • Christian K

        Re: bots and algorithms.

        Apple is absolutely using any number of technical measures to insure their AppStore dominance, and the iBookstore would get carried along for the ride.

        eBooks seem to be only a small part of Apple’s digital pie. :) In earnings reports they lump iTunes, AppStore and iBookstore together (~2 billion Q3 2012), and only occasionally revenues/units from the specific stores. I’d doubt if they even have a dedicated “iBookstore” team. Mostly Apple sells apps, music and videos (which are far more popular and profitable than ebooks).

      • http://idealog.com/blog Mike Shatzkin

        Oh, they have a dedicated iBookstore team. And a capable one at that. But probably not nearly a big enough one. Let’s remember how much deep and broad contact with publishers Amazon and B&N have had for years; the fact that Kobo built itself off a bookstore base (Indigo) and that Google has had a large publisher liaison effort for a decade.

        But iI isn’t just about publisher relationships and those investments. I just checked again and the granularity of topic breakdowns at iBookstore just does not cut it in comparison with Amazon. “History” is just too broad a topic. All they have are “too broad” topics.

        And while apps have sold like crazy, I haven’t met anybody yet that feels that the app *merchandising* problem could be called “solved”.

        I really don’t think product merchandising is an Apple strong suit.

        Mike

      • Christian K

        Do you actually know that there is a dedicated iBookstore team or are you just assuming?

        Remembering how other companies manage publishers does not indicate how Apple will behave. Much of Apple’s behavior can be explained by the how few people actually work at there given how much they do.

        As an example Amazon has a larger head count and doesn’t design the hardware for phones and computers or the software for image, video and music recording and editing, codecs for playback, not to mention word processors, spread sheets, presentation software, and much more.

        The iBookstore simply isn’t important or valuable enough.

      • http://idealog.com/blog Mike Shatzkin

        Oh, I’ve *met* people from the iBookstore team!

        I think Apple will actually live to suffer from this inattention. Amazon has already started taking some book content off the table for other platforms to sell. Apple might be okay with that *now*, because Amazon wants to make content available across all devices through apps, etc. But books are really the only content form where it is really possible to corner the market for a large body of desirable IP. Amazon will be in a position to do that; nobody else will.

        This is not an immediate threat like this year or even next. But, over time, this could pinch all of Amazon’s competitors and Apple was the one with the deep pockets and vested interest (making sure their own platform ecosystem has all the content it needs) to present a barrier.

        Mike

  • http://gravitationalpull.net/wp/ ampressman

    I don’t understand this comment: “And we’re not getting the result that was presumably what the DoJ sought: lower prices for consumers.”

    There may be some cases where publishers have raised wholesale prices to maintain higher, agency-type prices, but lots and lots of best selling ebooks dropped from $12.99 to $9.99.

    See for example http://paidcontent.org/2012/09/11/the-price-drops-begin-what-do-harpercollins-ebooks-cost-now/

    • http://idealog.com/blog Mike Shatzkin

      I was referring to the analysis that Cader had done on the Harper books and presuming we’ll see a similar strategy employed by Hachette and Simon & Schuster.

      I think the overarching point of the piece is that it is too soon to know anything for sure, so I probably shouldn’t have made such a sweeping statement on such partial evidence. Let’s remember, I was agreeing that the settlement would lower prices. And I still expect that, driven by Amazon ultimately, it still will.

      Mike

  • William Ockham

    I think you are focusing on the wrong thing. Track the difference between the Amazon retail price for the hardcover bestsellers and the retail price for the ebook versions of those books. When the publishers control the ebook retail price, the difference is very small, generally in the $2-$3 range. When Amazon controls retail pricing the difference is substantial.
    Ken Follett’s upcoming book is $21 for the hardcover and $19.99 for the ebook. Michael Chabon’s latest is $16.27 for the hardcover and $9.99 for the ebook. You guess which one of those books is published by a settling publisher and which one isn’t.
    Agency pricing for ebooks was never about maximizing the publishers’ income from ebooks (they said as much). It was always about minimizing the difference between the hardcover and ebook prices. I don’t believe that $19.99 is a sustainable price for ebooks, even for Ken Follett.

    • http://idealog.com/blog Mike Shatzkin

      Supporting print was one motivation but, as I said, I think the larger motivation was heading off what seemed to be an Amazon monopoly on the ebook side.

      Penguin is still on strict agency with MFNs. I agree that the prices from that group of publishers is likely to come down. I think the problem with a $19.99 Follett ebook is exacerbated if there are comparable ebooks (branded authors) available much cheaper.

      But I paid $19.99 for the last Follett (first in this series) and felt I totally got my money’s worth.

      Mike

      • William Ockham

        Why do you think publishers cared about Amazon having a monopoly on ebooks? This is an honest question. Obviously, it would have given Amazon even more clout in price negotiations with publishers, but if Amazon had a monopoly, they would be constrained by the antitrust laws. You could argue that the publishers’ lives would be much simpler if they only had to worry about one ebook format, etc.
        That last Follett (that you paid $19.99 for) is $9.99 for the ebook version today, but the hardcover is priced at $19.27, two years since it was published. Two years from now, the third book will come out. What do you think the prices will be for each of the three books then, assuming that the DoJ wins the lawsuit?

      • http://idealog.com/blog Mike Shatzkin

        I think relying on government monopoly management for the success of your business is unlikely to be appealing to very many people running large companies. And there’s a time short of monopoly when Amazon could have such a significant market share that they could squeeze publishers margins. In fact, we’re sort of at that point now with both Amazon and B&N, each of which have a dominant position in their retailing sphere. No accounts in the past ever held the power over publishers that these two do now.

        Mike

  • bowerbird

    you can’t even _spell_ “sentinel”…

    -bowerbird

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  • William Ockham

    Apple will settle with the DoJ and exit from the trade ebook marketplace. Apple exists to sell high-margin hardware. Everything else serves that goal. The iBookstore isn’t the reason anyone buys an iOS device. There is no reason for them to spend any time and money on selling content for other people at low margins. They’ll focus iBook author on the education marketplace (where it makes sense and is the one place that Apple is willing to pour money for a long play). They will convert existing kids books to apps and be done with it.

    • http://idealog.com/blog Mike Shatzkin

      I don’t buy the prediction even though I don’t really disagree with the logic. I think you’ve sketched out what Apple should do or should at least seriously consider. But I really and truly doubt they will do either.

      Mike

  • Peter

    Question-
    You keep mentioning the agency lite discount limit. I know what you’re talking about- the requirement to sell the entire catalogue at an annual profit, which I call it the peacock clause.
    But my question is, does anybody know if Harper Collins actually got any retailers to sign up for it? My understanding was that the DoJ allowed the settling publishers to negotiate such a limitations, but it was totally optional.
    Given that the requirement would be a “tragedy of the commons” sort of thing from the standpoint of individual retailers, it seems like the publishers would have needed to offer participating retailers something compelling in return.
    Perhaps HC simply went with the old wholesale model to speed up negotiations, and the other two publishers are working on something more complex? That would explain the delay.

    • http://idealog.com/blog Mike Shatzkin

      I don’t think Harper went to the agency model but I don’t know. And I also don’t know whether they negotiated the limitation on promotion that the court said would be allowable. I think it is likely that they did, though, since the initial round of discounts were pretty modest, particularly considering that the base prices were raised.

      Mike

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