I had a chance this week to chat with a very smart person who works for a company that does a lot of business with book publishers. Some things articulated themselves in that conversation — one of my favorite collaborators, Mark Bide, has often observed that we “learn a lot by talking” — that seemed worth repeating for public consumption (while preserving the anonymity of my fellow conversationalist.)
What we talked about is the current situation with ebook distribution: agency model, wholesale model, and what is being called the “hybrid” model, but which I would simply call “a mess that won’t be sustained.” (It should be noted that this a pre-Google Editions conversation and analysis; when GE comes it will be disruptive and change many things, but, not knowing if it is coming next week, next month, or next year, this analysis is about where things stand now.)
Our conversation articulated five things worth repeating:
1. The “hybrid” model for ebook distribution, by which some publishers are selling to Apple on agency terms and Amazon on wholesale, is risky and likely won’t last.
2. Amazon is pursuing enlightened self-interest by forcing some publishers to the hybrid model.
3. The iBookstore could be in real trouble, and is going to find it difficult to build a title base that gives it a sustainable retail position.
4. Big publishers are forced into being disingenuous about their strategy, or what should be their strategy: keeping print sales through brick-and-mortar as robust as possible for as long as possible.
5. Amazon is also forced into being disingenuous about its strategy, or what should be its strategy: getting as many readers as they can hooked on the Kindle device because, as things stand, the only easy way to put a book on a Kindle is by buying it from Amazon.
The hybrid model
When Apple opened the iBookstore, they “insisted” on the agency model, in which publishers set the retail price across all accounts and pay a fixed percentage (reported to be 30%) from the “agent” whose web site brokered the sale. This differed from the wholesale model, in which the publisher “sells” the book to the web retailer who then re-sells it at whatever price it likes to the consumer.
Because Amazon has deep pockets and had the first successful ebook reader on the market, they were comfortable deep-discounting major bestsellers below their cost to build market share. (One should note that Amazon always claimed that they made up that margin on other books and always ran their Kindle file sales at a profit. What they told me once, not under NDA, was that 4% of the titles were deep-discounted below cost and they accounted for 25% of the sales. This data was from before iBooks and agency reduced the number of deep-discounted titles.)
When five of the Big Six publishers presented Amazon with their decision to switch to agency, Amazon agreed to the switch (after initially balking, famously pulling Macmillan’s buy buttons very temporarily), but only for the Agency Five. All other publishers had to remain on wholesale terms, allowing them to continue discounting.
A few publishers have responded by trying to execute on both models. This requires some pretty fancy gyrations, because the price the publisher establishes for an agency book (which is what the public will be required to pay) is considerably less — half or less than half — of the price a publisher establishes to base their discount if they’re selling wholesale. So a $30 print book might become a $30 retail price ebook for wholesale, with the store paying $15 and perhaps charging $9.99. That same book would have a $12.99 or $14.99 retail price in agency, with the publisher getting 70% of that (or about $9.09 or $10.49.) But that’s not what makes the model unsustainable.
The agency deal with Apple reportedly (I have never seen a contract) allows Apple to meet any price somebody else charges on the web. So if Amazon really does sell the book above for $9.99, and Apple matched it, they’d only owe the publisher $6.99! How long do you think Amazon would sit still for paying more than twice as much as a competitor matching their price? How long would you sit still for that?
I checked with one hybrid model publisher who had not faced this problem yet in any unmanageable way. Apple does let them know about books on which price adjustments are required, but so far the number of them has been very small and there have been no major bestsellers that would be very disruptive. But that publisher, and any other trying to execute on both models, must feel very vulnerable and, in a way, dread the runaway bestseller that could start a spiral of price-cutting.
Amazon’s objective here is to discourage publishers from putting their books into the Apple store. In this, they appear to be having success. The iBooks store has become the mall store of ebook retailing: they have most of the bestsellers (not all, because they don’t have Random House) and not much else. Meanwhile, Amazon and Barnes & Noble (and Kobo, despite some bad press about their dealings with small publishers) are building larger and larger title selections. With price parity at the very least and a much larger title selection, and the fact that anybody who might use iBooks (an iPad or iPhone book reader) can just as easily buy their ebooks from any of the three other big resellers, Amazon’s tough stance is making many smaller or medium-sized publishers question whether they need to be in the Apple store.
What happens to iBooks?
It is hard for me to see much future for iBooks unless they soften their stance about buying only on agency or, even less likely, unless Amazon softens its stance about taking books from publishers smaller than the Agency Five only on wholesale terms. The gap between what they have to sell and what the other major retailers have will continue to grow. All three of the others (and Copia, for that matter, when they go live) can be read on many devices. Purchases from iBooks can only be read on an iPad or iPhone. Over time, the only reason I can think of for somebody to buy at iBooks would be to get the two-page spread reader capability on their iPad. If there is any other proposition that would attract a purchaser, I don’t know what it is.
Furthermore, Apple has not devoted nearly the resources that its competitors have to publisher contact to get more books. They have fewer people and less interaction with publishers. It’s as if they don’t really care if iBooks lives or dies. And maybe they don’t, since anybody who has one of their devices can read books to their heart’s content from Amazon, B&N, or Kobo on their Apple hardware.
What publishers can’t, or won’t, say
I have written and said many times, going back to 2007 and before, that big general trade publishers depend on a bookstore network for their survival. Their core proposition is “we put books on shelves”; that’s what requires the scale and expertise that they have and that nobody else can compete against. When retail shelf space goes away, there’s little a big publisher can do that can’t be duplicated by anybody with the cash to put together an ad hoc team of freelancers and graft them to some service providers.
But as the response to my “why are you for killing bookstores” post some months ago made clear, “defending the old model” is a very unpopular position that mainly just opens up an advocate to ridicule. No big publisher will say that it is their strategy to restrain ebook uptake to save print at brick-and-mortar, but they’d be pretty dumb not to be thinking it.
What Amazon can’t, or won’t, say
But if Amazon likes to ridicule publishers for price-setting without expertise (which they’re doing in an attempt to keep ebook prices up and restrain the movement from print to digital), they also don’t talk about their core strategy: converting as many readers as possible to the Kindle device. While you can buy from anybody if you read on an iPad, as a practical matter you can only buy from Amazon if you read on a Kindle. Every Kindle convert is a lost customer to every other retailer and etailer.
So while publishers say anything but “we need to slow down the switch to digital” when they talk about “maintaining the perception of value” or “the costs we incur for ebooks” as justification for their agency and pricing policies, Amazon is similarly disingenuous when they talk about pricing their Kindle editions. “Offering great value to the consumers” and “pricing according to scientific algorithms” are much more palatable explanations than “we’re trying to own as much of the market going forward as we can”.
I have a friend in one of the big houses who just analyzes the business and thinks about strategy all day long, one of the few jobs in a publishing house that I could possibly even do! He’s very smart. He tells me that he’s not persuaded that pricing ebooks higher deters people from switching over from print. I can believe that he sees that in the data, but I can’t believe that is true regardless of the price differential. Keeping ebook prices up is also about preserving revenue as the market shifts to digital, but from here the hunch is that it is also, perhaps only in a very small way, keeping some people with print longer than they would if the price attraction to switching were stronger.