Agency pricing

A dispute broke out on Brantley’s list this morning and I’m in a distinct minority. Maybe a minority of only a bit more than one.

The brouhaha started with observations about ebook pricing, with some very disdainful remarks about Agency pricing in principle and the big publishers’ execution of it in particular. The complaint was “ebook prices are too high” and there was support for Amazon’s protest to the ebook consumers in the UK and even a statement that one should choose what to read based on whether it was priced by Agency rather than wholesale.

Of course, I’m in the camp that believes Agency pricing has, at least (and probably) temporarily, slowed the (still) inexorable downward spiral of ebook prices for branded (big author) books. It has also contributed to breaking Kindle’s hegemony over the ebook market which is not solely a function of deep discounting (it is a great device and a great shopping experience!) As of the last time I checked (two months ago), two Big Six publishers reported to me that the Kindle share for their titles had dropped from the mid-80s to the mid-50s. They no longer dread “the call”, which is the metaphor for the message they feared would come one day from their biggest account saying “I can’t pay $15 for what I sell for $10 anymore; I’m going to give you $5.”

Now, it is possible that the Nook and the iPad would have created a lot of this market erosion under any pricing regimen, but I doubt it. I have heard that Barnes & Noble told publishers last year that Amazon’s ebook pricing was going to kill them and reduce their ability to keep bookstores open if they had to compete with loss leaders in the ebook arena. And Apple still gives a good imitation of an outlet that won’t play except on their Agency terms.

But what really caused the thinkers on the list to take issue was me was my contention that it is logical for the major trade houses to try to keep ebook prices higher in defense of print. From my perspective, the core value proposition of the major houses is “putting books on shelves.” That is the function that requires scale, capital, and a legacy organization with a lot of know-how. If that’s right, the fate of the big publishers is inextricably linked to the fate of brick-and-mortar stores. So of course, they would try to preserve them.

Not all publishers are in the same boat. O’Reilly Media, for example, has told the world that its second largest account is its own aggregated ebook platform, Safari. Print is still important to them, but they’re not nearly as dependent on bookstores as the major trade houses are; they probably sell a higher percentage of even their print online than the big houses do. (They say that Amazon is the one account bigger for them than Safari.) Perhaps it will even be to O’Reilly’s competitive advantage as bookstores diminish, raising the relative value of the customers they can reach directly. O’Reilly is an outstanding example, but not a unique one.

But without bookstore shelves to fill, I fear the major publishers have very little to offer. In their own defense, they tend to fall back on “curation” as their strong suit, but I’m afraid their curation is B2B and the B they curate for is the book trade! They have very little curation “brand” with consumers. I know there are efforts to build marketing capabilities that benefit from scale, but nobody has ever made a convincing case to me that they can do that. Generating robust metadata could benefit from scale if there were real verticality — tagging around the same subject matter again and again — but big trade houses don’t have that.

Another digital head at a big house, responding to my quest for power in scale, pointed out that they’ve been spending scads of money on tax compliance and lawyers. Of course, part of the reason they spend that money is because they have a lot to lose. But it is also true that the tax compliance issues can be offered at scale by third parties. In the US, at least, an outfit called RoyaltyShare is doing just that for publishers trying to live up to the requirements of Agency selling.

We really have at least two trade publishing businesses at the moment, the big houses and everybody else. The big houses pay almost all the substantial advances; they pay the highest royalty rates (which is actually, when you think about it, more than a little bit odd); and they generally get the best terms from their intermediaries. Their executives probably put their pants on one leg at a time (to quote an old baseball line) but, otherwise, they don’t have much in common with everybody else.

When one studies the industry and tries to analyze behavior, it is critical to keep that distinction in mind. It is appropriate that Random House and HarperCollins have a different strategy than O’Reilly or F+W Media for ebook and print pricing and for marketing. They really have different businesses.

All of this recalls the old cliche: where you stand depends on where you sit. If you’re a big publisher, every move you make should consider the fate of brick-and-mortar bookstores and you should be doing everything you can to preserve them for as long as possible. That’s the first element of a survival strategy. The second element could be to try to be “last one standing”. Our client Ingram has demonstrated with two recent deals (with Macmillan and with Springer) how publishers can pull back from their massive bookstore-supporting infrastructures but, even so, a diminution in bookstore shelf space is going to force consolidation. Maybe big houses will merge their back offices (which is, in effect, what Ingram is offering as a third party) but I think it is more likely that we’ll see a lot of mergers in the next ten years.

The most important metric for big publishers to watch over the next few years is “total shelf space available for books in retail stores.” (I’ve even come up with a pretty simple way to track that and suggested it to one of the companies that could provide it.) That’s almost certainly not the most important metric for upstart and vertical publishers.

It is often said that the big mistake railroads made was not realizing they were in the transportation business, or they wouldn’t have let airlines pass them by. I don’t buy that; running a railroad in no way qualifies you to run an airline, let alone to invent one. One listmember in the discussion in which I appeared to convince nobody suggested that the big publishers should focus on how to be more upstart and more vertical. I am afraid that trying to be something that you’ve never been is a very hard path to follow.

All this means that you need to think about which publishers you’re talking to and about when you frame conversations. At Digital Book World, for example, we’ll have a panel on ebook distribution for small and midsized publishers. But we’ll also have some unique research about the ebook royalty deals being made which focuses on agents and big publishers. The experience of smaller publishers, who almost always pay higher royalties, would almost certainly just confuse the issue. Any “industry data” that doesn’t separate the bigs from the smalls has to be parsed very carefully or it could lead to wildly erroneous conclusions.

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A year ago, before Agency was ever publicly discussed, I was grasping for what publishers could do to get control of ebook pricing and curtail, or at least manage, the degree to which ebooks undercut paper and, in turn, brick-and-mortar. At the time, people told me that it was possible for a manufacturer to control the pricing of their goods at retail and pointed to Apple’s success doing that and to other manufacturers like Bose that managed to do it. I believe the key was that they controlled the entire supply chain, right to the point of consumer purchase (although we know that other retailers do sell Apple products.)

I never got a grip on how this could be made to work, legally.

Then, along came Agency. The concept is that the publisher is the selling party in the retail transaction so the publisher sets the price. The intermediaries (the retailers) wouldn’t actually buy and sell the goods, as they always did. They would, instead, be “agents” for the publisher. That approach pushes the responsibility for sales tax back to the publisher, no trivial matter (although services are springing up to help with it). But it gives the publisher price control.

From Publishers Lunch, and then picked up by the Wall Street Journal, comes the news that the Attorney-General in Texas is investigating Apple and the publishers participating in Agency over the legality of the Agency arrangement. For publishers who had been struggling for years with the real market control exercised by Amazon, Apple’s arrival on the scene and willingness to accept unform pricing across outlets (to be followed shortly by Google doing the same) constituted liberation.

But one can see a logic to the Texas investigation. Amazon’s strategies required no cooperation with any other company. They bought the ebooks at the prices publishers charged them and sold them at the price they thought was best for them in the marketplace. But the Agency agreement with Apple (as I understand it; I’ve never seen one) allows (or maybe requires) that Apple meet any lower price for the same title offered by another retailer. So there is a “combination” and it is “restraining” trade. That’s a speaker-of-English talking here (which I am), not a lawyer (which I’m not.)

It would make many publishers very unhappy if the Agency model were deemed illegal. One major house CEO I spoke with two weeks ago was positively rhapsodic about the control the new paradigm gives the publisher. That CEO told me about one major bestseller at their publishing house which suffered no loss of unit sales when the price went up from the Amazon-set $9.99 to the Agency price of $12.99. Struck by that, the CEO further raised the price of that title to $14.99 and saw immediate sales erosion. So, two weeks later, the CEO took the price back down to $12.99 for that title, where it sits.

As this person said, “I can’t ever see going back. I have never had this ability to maximize revenue before or to experiment with pricing.”

I’m personally persuaded that universal set prices for ebooks are good for the industry and, ultimately, for consumers. They will definitely foster competition among retailers. My belief for a long time has been that the day will come when almost all web sites will offer their own curated selection of ebooks. (Why shouldn’t ESPN.com be selling the new Willie Mays or Steinbrenner biography?) That will work great in a price-set world. It would make the retailing opportunity about “location, location, location”, rather than “price.” It would boost sales for publishers and authors by putting ebooks a click away from interested consumers across the Web. But it isn’t going to happen if web sites figure that their curation efforts will just be triggers to send people to a deep-pocketed etailer that is pricing for market share.

It would appear that the Agency model is good for just about everybody except the etailers that would use price to drive others out of the market. But will it ultimately be ruled legal? I don’t think we know yet.

Late add: The vision of every-site-a-curated-bookstore got some confirmation a couple of hours after I posted this when Ingram and F+W Media announced a partnership by which Ingram will power sales of all publishers’ ebooks through the online stores F+W operates for their communities. I’d expect this to become increasingly common.

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