The Shatzkin Files


What’s so hard to understand about Random House’s strategy?


Since Apple made its iPad announcement last January, five of the Big Six publishers have been featured participatants. That not only means they’re making content available for the iPad “form factor” (color and connectivity like the iPhone, screen size like the Kindle) but also that they’re buying into the new “agency model” for sales. As anybody who cares about this stuff already knows, under the agency model the control of pricing to the consumer moves from the retail point of contact to the publisher.

In return for that control, the publisher lowers the “established retail price” and, although the stated margin to the retailer is reduced from 50% to 30%, the effective margin rises because the retailer sells at that publisher price, not something substantially less. And the publishers going to agency are happily accepting less for each book sold to gain that pricing control and price stability across all retailers.

Random House has been prominent by its absence from the group. And some people, including some who are really well-informed about publishing, wonder “why?”

I wonder why they wonder.

Although it is certainly possible that iPad book sales will be startling right out of the box, that’s not really likely. Unlike the Kindle, which is purchased by consumers solely for the purpose of reading books, the iPad will attract customers for all manner of reasons and, actually, reading books would be pretty far down the list for most people. Although there are pockets of skeptics, I’m sure most publishing people accept that the iPad can grow into a very robust bookselling channel but it isn’t clear how long that will take or whether narrative text will be as much a beneficiary of the device as books that are more complex presentations of words and pictures.

In the short run, which from this seat looks like some months, if not a year, Kindle and Amazon are still likely to be the leader in ebook sales, and other established ereader platforms that are optimized for text (Nook, Sony Reader, the new ereader from Kobo) will remain important. By holding themselves out of the new channels, continuing the current policies of “wholesale” discounting, and allowing the retailers to set prices, Random House will be maximizing their short-term sales and profits. Assuming they maintain their publisher-established  prices near their current levels (and why would they not?), Random House will collect more money for each ebook sold than their competitors do while the public will will pay less for each Random House ebook they buy than for comparable titles from other publishers.

That’s a pretty significant short term advantage. Why wonder why somebody would do that?

Of course, most publishers hope — if not believe — that the proliferation of new devices and platforms combined with the more widespread use of the agency model setting retail prices will disperse the ebook market among many more players. Will Apple or any other player hold it against Random that they were slow to make the change if they decide to join the party after it really gets going? My hunch is “no.”

And that may be Random House’s hunch too. They may be making a perfectly conscious and rational gamble that the sales they’ll lose in the short run by not being on the iPad will be more than compensated for by margin they’ll make through higher wholesale prices and greater sales through lower retail prices than any of their Big Six competition in the still-dominant Kindle channel.

And if Amazon is willing to retaliate against a publisher’s print business over dislike of their ebook policies, wouldn’t they also be likely to favor the books of a big publisher that cooperates with them when everybody else doesn’t? Couldn’t that add a further incremental edge to Random House in the short run while the iPad book-reading audience is still ramping up?

I have read nothing to tell me whether Apple would or wouldn’t accept Random House books on the wholesale model. (The other publishers embraced the agency model; they didn’t need to be talked into it.) If they do, Random House could persist with this strategy for a long time, even when they start putting books on the iPad. Even though their “listed” ebook prices would be considerably higher than their competitors’, the prices at which they’d be offered to the public could be lower.

If this all works the way the agency publishers envision, we’ll have a multi-platform, multi-retailer, price-stable ebook market before too long. If that happens, Amazon may tire of paying more for Random House books, whether they sell them for less or not, and the wholesale model with retail price reductions is not a palatable combination for publishers. But that’s not imminent and for the foreseeable future, all the Random House position means to them is more revenue per copy and lower prices to the consumer.

There is a school of thought that ebook consumers are very sensitive to price. Starting with the appearance of the agency model next week, ebook prices to the consumer for (usually author-) branded frontlist titles are going to rise. It will be interesting to see if the IDPF reports of sales show any change in the trend line starting with the reports of sales in April.

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  • KassiaKrozser

    Mike — Good thoughts. I think taking a wait-and-see approach is a smart move, and agree that if RH waits, it's not the worst thing for them. While I advocate for new models to reflect the reality of the new marketplace, it seems, based on what I've read/heard, that Random House is aware of the impact changing the model has on the various stakeholders. The books being (for lack of a better term) beta tested with the agency model were contracted with different expectations, both with authors/agents *and* distributors/retailers.

    Which has me thinking about the Ingram issue, and wondering if my initial worries that going agency will consolidate power with a few (Amazon, BN, Apple) rather than making it easier for smaller players to move into the space. Splitting the 30% between distributor and retailer changes the financial model of both parties (rather unexpectedly on their part), making it less attractive for retailers to enter the space.

    (BTW, did you see the rumored screenshot of the iBookstore. NYT bestselling titles were priced at $9.99. Not unexpected, of course.)

    • /blog Mike Shatzkin

      Thanks for the comment, Kassia.

      I don't take the “contracted with expectations” thing too seriously with the
      big houses. First of all, you can be damn sure that the agents have been
      brought along about this every step of the way. I think most people who
      profit from substantial book sales were concerned about the total handle at
      the track going down; the $9.99 established price for highly-branded content
      scared a lot of people. It is rational to me that an agent could support the
      agency concept and the new pricing model but also see for his Random House
      authors that having them take a contrary strategy could work to their
      immediate advantage. And, anyway, the ebook market has been exceeding
      anybody's reasonable expectations since the Kindle arrived 28 months ago
      (the only question being to what extent it might have cannibalized
      possibly-higher-royalty paper sales, from a writer's point of view.)

      It's all speculation at this point (and now you're making me write good
      stuff that could be another post!!!), but I think that agency will generate
      diversity in the market, precisely because of the contractual requirement
      that the price not be broken. And, for that reason, I also don't think the
      shared margin will be a problem. I haven't talked to any of the etailers,
      but my hunch is that 20% *real* margin because they're selling at full price
      (assuming that's what they get out of the 30; it's a number that will
      ultimately be set by a market and not necessarily end up the same for
      everybody and in all situations) will be more profitable for them than
      whatever they were actually managing to get before. And they have a real
      argument to give their customers: “no, Amazon will *not* be cheaper!”

      Which is why I don't take the screenshot too seriously. I don't know the
      story behind it but I can tell you for sure that publishers are taking less
      money for a reason: which is to force higher retailer prices, force margin
      into the retailing sector, and do their best to create a multi-player
      market. People have been pulling all-nighters slaving over the contracts;
      they're won't be discounting outside the rules. I know of at least one major
      house putting on “reps” to deal with online retail accounts so they can
      handle more of them and give them better service. I'm sure that will be a
      trend, if it isn't already.

      I think what Random House is doing makes complete sense tactically, but I
      also think that what the other houses are doing is helpful to the overall
      industry strategically.

      Mike

      • KassiaKrozser

        Hmm. I've heard from more than a few agents, and they're still trying to figure out what the agency model means for their clients. And one independent digi-retailer mentioned that the new model was not good for business. Granted, the deals are still being worked out between parties (and this retailer was blindsided by this shift).

        I've gone back and forth on this. Initially, it seemed like it would consolidate power in the hands of the few. Over time, I came to believe it might level the playing field for independent booksellers. Now, I am not so sure. Removing pricing as a retailer tool forces independents to compete largely on consumer experience. I'd feel a lot better if there were less device/retailer interdependence, or if more effort were put toward lifting up non-device based reading systems (Ibis is leading the pack there because it's well-constructed and HMTL-based, meaning it on a range of systems).

        The optimist in me hopes this works out as envisioned. The existing model wasn't going to work in the digital realm (and despite Amazon's current hardball reaction, they would have forced change at some point; publishers, by choosing to move now, at least get to take control of the shift).

      • /blog Mike Shatzkin

        There's a big unresolved question with the agency model and author royalty
        which is whether the 30% agency fee is deducted before calculating the
        author's percentage. Overall, I'd expect that authors get a bigger
        percentage over time, particularly as sales move online and the author is
        established as “the brand.”

        Indies can *never* compete on price. It is actually close to criminally
        stupid for them to try. I suspect the differentiators that can make it work
        for them are content, community, and curation. (Oooo-there's a blogpost in
        that! Don't steal it.)

        Mike

      • ShemCohen

        “There's a big unresolved question with the agency model and author royalty which is whether the 30% agency fee is deducted before calculating the author's percentage.”

        I don't think this is an unresolved question unless you are unclear on how net receipts is defined.

      • /blog Mike Shatzkin

        As an industry, in the agency model (which has never existed for books
        before), we *are*, indeed, unclear about how net receipts are defined!
        That's the point. Ask an agent and you'll get a different answer than you
        will if you ask a publisher. How will it come out? Possibly not identically
        in every house.

        Mike

      • ShemCohen

        You're overplaying the issue. “Not identical” is far from “different”.

        There is a large degree of understanding about what it means. Obviously people can have different opinions of what should be but I don't think it means there is confusion.

      • /blog Mike Shatzkin

        I'm not reading you. Some publishers will claim that the author's share
        should be calculated on the 70% after the payment of the agency fee. Others
        will pay the author's percentage on the total paid by the consumer. I think.
        We'll see. My point is, no, we're not “clear” about how this works. It is
        not self-evident. It is still being fought out.

        Mike

      • Golly

        Can we assume that any publisher who has said they will count net receipts as before the deduction of the agency fee mis-spoke.

      • /blog Mike Shatzkin

        No. That might be the policy they plan to pursue. My repeated point
        is: this isn't settled and is still a point of potential contention.

        Mike

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  • jasondunne

    Hi Mike

    Great post, as always.

    You mention the issue of price sensitivity among e-book consumers. As a former book publisher turned app publisher, my experience is that iTunes is characterised by strong price sensitivity among *publishers* too!

    Traditional publishers are not used to being able to change retail prices in an instant, as one can on iTunes. It's going to take a strong nerve not to react to competitive price pressures, and I wonder how many of us have that nerve.

    I've noticed that app publishers (particularly the less experienced) chase each others prices to an extent that will make traditional publishers wince. I can see the same thing happening to iPad book-based apps. “Our app was first to market but now someone else has made a similar app? I know, let's drop the price – that'll show 'em!” It doesn't take long before everyone starts to give stuff away, hoping to make it up on ads and sponsorship. On the app store your prices will still be set for you, only now they're set by your dumbest competitor, not your smartest. Technology makes it too easy to respond and counter-respond.

    I predict that, as a side effect of all this, the corporate sales.special sales guys will soon enjoy a higher profile in the big Six: they'll soon be busy offering in-app product placement deals to big brands. Product placement was derided during the print era: perhaps we'll all have to swallow our pride now!

    Keep up the good work Mike.

    Jason Dunne

    • /blog Mike Shatzkin

      Jason, these are excellent points and open my eyes to a few things. Thanks
      very much.

      Mike

  • gregor_wolf

    Hello Mike, thanks for the post as always.

    May I dare to disagree to your skepticism about the success of the iPad?

    The existing eBook readers are all based on the Idea that readers would want to read, and nothing else.

    In my view, the Kindle has been successful for three simple reasons: 1) It closes the chain from “search – find – download – read”, in the same way as the Ipod/phone did it for music 2) The physical and optical reading experience is not worse than with a printed book 3) It had an enormous market reach and hype right from the start, because it is from Amazon.

    Doubts about the iPad’s success as a reader are primarily based on the argument, that it’s optical reading experience is substandard compared to a (Kindle et al) ePaper reader; People would not look at it as an eBook, but as a multimedia device (by the way, if this is the case, why doesn’t it even have a camera?).

    I believe that the iPad will be a very (!) successful eBook device, but only (!) for a very new kind of colored, and interactive eBooks, as demonstrated in e.g. http://www.youtube.com/watch?v=0QCAPv-IKuU&feat…. We may have a conceptual debate whether such interactive content applications are still eBooks – but they will appear, and in many instances they will be the better product compared to the Kindle-alike-read-only-eBooks. I will not go so far that the iPad will take over the eBook market, but I would encourage every publisher to think about the enormous potential of interactive content application based on book content. ePub on an iPad will certainly be boring and substandard compared to other devices.

  • babetteross

    Mike, please correct me if I'm wrong. I am under the impression that iPad owners have the option of accessing RH books through the Kindle app and the B&N app. So readers with iPads do have ways to read RH titles with their shiny new ipads.

    • /blog Mike Shatzkin

      Babette, you are absolutely right and that's a point I should have thought
      of and mentioned in the article. So Random House's tactic wins again — they
      don't give up iPad customers at all! And, frankly, I wouldn't be surprised
      if Kindle and Kobo and BN purchases for iPad are as plentiful as direct from
      Apple purchases, at least at the beginning.

      Mike

  • AB

    tesy

  • Golly

    Beyond the short term benefit of greater revenue per sale and preferential treatment from Amazon, there are some inherent problems Random House might have with agency.

    First, agency contracts demand that the agent be protected with MFN clauses on price and range.

    Second, once MFN clauses are in place with all agents, any competition benefits that might arise for publishers from having multiple retailers in this space are lost. When the contracts with Apple come to be renegotiated, they could (and probably will) negotiate for the pricing grid to be lowered. All other retailers on a comparable agency model with MFN clauses will automatically receive the same price reduction.

    Third, can publishers price their content dynamically to drive sales? This is a huge question, and one that may not have been given due consideration when the agency model was adopted.

    • /blog Mike Shatzkin

      I don't see problems with any of this.

      The MFN is absolutely necessary. You can't have agency deals locking some
      retailers into prices higher than others.

      As the number of players increase, the leverage any one will have (including
      Apple) to bully publishers into different terms will be reduced. My guess
      would be that if the 30% number moves anytime in the next few years, it will
      move *down*, not up.

      And it is my understanding that agency makes “dynamic” (i.e. changing)
      pricing possible for publishers. They can move the prices of books up or
      down and be sure all retailers are reflecting those changes.

      Mike

      • Golly

        The point I am making isn't around the thirty/seventy split. It is around the caps on consumer price linked to physical list price.

        When contracts come to be renegotiated with Apple and Amazon I think there will be pressure for the price caps to be further reduced. Both would have their reasons for wanting a lower consumer price.

        The second point is that with MFNs broadly in place, you lose the ability to use one retailer as a counterweight against another. In effect you can't discriminate against any retailer in order to get a better deal from another.

        The point being that by introducing agency publishers have not stabilized price (there will be pressure for it to go down still), but have lost their ability to play retailers against one another (by introducing universal MFNs).

      • /blog Mike Shatzkin

        Golly, are you writing from the UK? Because in the UK a publisher can
        “discriminate” against a retailer, isn't required to offer the same deal to
        like customers. In the US, under the Robinson-Patman Act, you can't do that.

        What is unusual about Agency isn't that the 30% has to apply to everybody
        (formerly, the wholesale discount, whatever it was, had to apply to
        everybody.) It is that the final price to the consumer is made uniform
        across the supply chain. And while that alone may not increase a publisher's
        leverage with an account, it prevents an account (read: Amazon) from piling
        up such a huge roster of locked-in customers that they have huge leverage on
        the publisher. That's the whole idea.

        Mike

  • michaelmhughes

    “Although it is certainly possible that iPad book sales will be startling right out of the box, that’s not really likely.”

    And that's where I disagree. Latest projections are for a possible 10 *million* iPads manufactured in 2010. And as the device is touted as a flashy e-reader and Apple is rolling out a new store with a captive audience (the millions of people with iTunes accounts) I think we'll see a huge spike of book purchases right off the bat. I know one of the very first things I will do when my iPad arrives is check out the bookstore and buy a book or two to evaluate the experience. And hundreds of thousands of others will do the same — watch for the spike and commentary in trade news a few days after the device launches.

    • /blog Mike Shatzkin

      It is always dangerous to generalize from the particular.

      My own hunch is that a lot more people will be checking out movies and TV
      shows and basic computing capabilities with their iPad than will be rushing
      to download a book. And even if we do have a universe of 10 million this
      year, it will take the year to get there. They don't all get their devices
      on Day One.

      But if you're right, and maybe you are, then the trouble for bookstores and
      big book publishers will be accelerated.

      Mike

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  • http://www.modularhomesnetwork.com/ modular homes

    of course, but of all the things you might do in your final ten …. What is so compelling about optical illusions is that everyone sees the!

  • http://www.schieldenver.com/ Book Publishers

    I'd also add that the iPad opens up more possibility for transforming the right stories into multimedia/enhanced books.

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