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Rethinking what’s happening with ebook prices

September 13, 2012 by Mike Shatzkin 23 Comments

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.

Filed Under: eBooks, General Trade Publishing, New Models, Supply-Chain Tagged With: Amazon, Apple, Department of Justice, Hachette, HarperCollins, Macmillan, Michael Cader, Nate Hoffelder, Penguin, Random House, Simon & Schuster, The Digital Reader

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Mike Shatzkin

Mike Shatzkin is the Founder & CEO of The Idea Logical Company and a widely-acknowledged thought leader about digital change in the book publishing industry. Read more.

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