My disclaimer: This paper deals with speculation about agency pricing up to March 31, 2010. Someone next year can write about what actually happened from April 1 onward!
If it’s not one thing about the iPad (like the Modern Family iPad commercial episode), it’s another… and believe me, one of the most recent flurries of drama and speculation in the publishing world also traces right back to Apple. That would be, of course, the agency model for selling ebooks that many major publishers are switching over to as of April 1, 2010 (or in the days and weeks after). This represents a pretty radical, large-scale shift in the publishing industry, but it is unprecedented elsewhere as well: according to Michael Tamblyn, “this is the first time a media industry has raised the price on an existing format across all retail channels simultaneously.”[1] Whether this new model is good or bad, successful or catastrophic, it’s going to happen and it’s going to happen soon. This paper will look at what implications this move could have on the publishing industry and its stakeholders, from retailers and publishers to authors and readers.
First, though, a quick look at all the intrigue of how agency pricing came into effect – and yes, we start with Apple. Apple handles its app store through this method: the app creator sets its own retail price, and Apple gets a 30% cut. In Apple’s plans to launch an iBookstore for the iPad, they proposed the same model to book publishers. Publishers, long upset with Amazon pricing ebooks in the Kindle store at $9.99 (which publishers perceived as giving readers an artificially low expectation of what ebooks were worth), saw an opportunity here to fundamentally change the game. But Apple had a condition: publishers could not allow any retailer to sell an ebook for a price that was lower than the iBookstore’s, which necessitated publishers changing their current agreements with Amazon.[2] To condense a long story, this culminated in a nasty, high-profile feud between Amazon and Macmillan, with Amazon temporarily removing the buy buttons from all Macmillan titles (both print and electronic). Amazon has now in principle accepted agency pricing (with certain publishers), and a significant percentage of the industry is poised to adopt this model very shortly.
To understand what exactly the agency model is, we first have to look at the traditional way ebooks were sold. (Can something be traditional if it’s a product of the last ten or fifteen years?) Ebooks were sold like print books, in a “wholesale” model: the publisher sold the ebooks to a retailer (with an established discount structure), and then the retailer could set any price to sell to the consumer.[3] On the other hand, in the agency model, the publisher sells to the consumer: the retailer acts as the agent of the publisher. The publisher determines the selling price and the retailer receives a commission for their assistance. Think of a real estate agent.[4] A real estate agent never owns the house: she helps the buyer to sell it and the purchaser to buy it, and she receives a pre-set commission. So in the ebook agency model, the publisher sells the book to the consumer, with the retailer acting on the publisher’s behalf. (Presumably, the retailer will continue to actually deliver the title to the consumer.) Publishers, then, want to firmly set the consumer’s purchase price of an ebook, and pay a 30% commission to retailers.
With the new model, ebook retailers (and wholesalers) have been forced to quickly make a number of significant changes. Whereas Kobo says it has been able to accordingly renegotiate contracts at a record pace,[5] Ingram Digital recently announced that it would need more time to reach new individual agreements with both the publishers and retailers it serves.[6] There will undoubtedly at least be gaps in ebook stores’ collections for the next little while as everyone struggles to implement new agreements – and some retailers and retail programs might end up going out of business. In fact, ebook retailer Fictionwise just quietly discontinued its Buywise Club.[7] Club members received regular discounts on ebooks, and according to the terms of agency pricing, retailers cannot offer discounts. Now retailers are unable to set or alter an ebook’s price with promotions or discounts or coupons – which is somewhat worrisome, given that retailers are the ones with the experience and expertise in selling books. Nonetheless, since retailers will no longer be able to compete on price, they will start competing on non-price factors: customer service, ease of use of their online stores, and most of all, brand awareness. More than ever, retailers will seek to become the destination for ebook purchasing, so we can expect to see some serious ebook retailer marketing campaigns shortly.
The most obvious change that publishers face is that now they, not retailers, will be in direct control of the purchase price for books. Publishers are expected to use their new freedom to raise the price of bestsellers from $9.99 to $12.99 – and yet it’s important to note that in many cases, publishers will now be making less than before. (Instead of 50% of list price, which could be $35 for a new hardcover release, they’ll be making 70% of $12.99.) Looking only at the short term, this is baffling. But publishers have deemed it important in the long term to raise the public’s perceived value of the ebook, and now must determine what that value actually is. Going along with this new role is the strong possibility that publishers, not retailers, will now be responsible for dealing with sales tax.[8] So publishers will undoubtedly encounter a number of pricing and administrative headaches.
But there are serious logistics problems for publishers as well. Since Apple is only using the agency model and won’t allow ebooks to be sold for any less elsewhere, any publisher wanting to jump on board the Apple wagon has to switch to agency pricing across the board. Amazon has reluctantly agreed to these terms with five of America’s six biggest publishers (Macmillan, Simon & Schuster, Hachette, HarperCollins, and Penguin – with Random House as the holdout), but has reportedly stated that it will not negotiate agency terms with any other publishers, and will stop selling both the ebooks and print books of any publisher who demands an agency model.[9] This, of course, is deeply troubling to small and medium-sized publishers, who don’t want to risk being shut out of Amazon. At least two other publishers (Perseus Books Group and Workman Publishing Company) have just committed Apple, and talks with Amazon are in the works.[10] I think it’s highly unlikely that Amazon will be able to implement its threat to categorically pull publishers’ entire lists. For one, readers (and book buyers) generally have no idea who publishes what. Even those who are highly involved in the publishing industry don’t really know. Just witness this March 30 Twitter exchange:
@mdash says: @PenguinCanada Stephanie Meyer announces new book — http://j.mp/cA9PY1 Fans (and publishing industry) rejoices.
@PenguinCanada says: @mdash Property of Hachette, not us ;)
@mdash says: @PenguinCanada Oops sorry about that.
Readers don’t care who publishes what – they care that what they want is available. Excluding certain publishers would be extremely frustrating for consumers, who have come to expect Amazon to have what they want. And the same holds true for the new iBookstore: I think consumers would be very annoyed to be unable to buy big titles from small publishers, like Pride and Prejudice and Zombies, published by independent Quirk Books. So either Apple or Amazon will have to concede or relax their conditions, or it’s a missed opportunity all around. With retailers having to compete on non-price grounds, not making consumers mad has to be a top priority.
Some publishers are also taking this opportunity to try to solidify ebook royalty arrangements with authors. HarperCollins has offered to lock in a long-term 25% royalty on ebooks, but the Authors Guild suggests that may not be enough.[11] The publishers (who are reluctant to enter into long-term contracts with retailers, because they want to be able to wait and adapt to the changing digital market), are trying to push long-term contracts on their authors (who also are reluctant to enter into long-term e-royalty contracts, because they want to be able to wait and adapt to the changing digital market). Kind of ironic, yes? Teleread has suggested that the entrance of the agency model actually presents a great opportunity for small publishers, since they won’t be locked into the long-term contracts that retailers are requiring from the agency publishers.[12] They’re not fixed in, and should be able to be more flexible in their dealings with retailers.
I think that the biggest, and most significant, consequence of agency pricing will be that publishers will soon start experimenting with price like crazy. After all, publishers have relatively little experience in price setting for consumers, and they’re going to have to continually and responsively adjust as they figure out what works and what doesn’t. Publishers hope to capitalize on the fact that most people haven’t yet purchased an ebook and so haven’t become accustomed to Amazon’s $9.99 bestseller price point. Pricing theory (accessed via Brian O’Leary’s agency pricing toolkit) shows that “those who are least informed about price levels will be the most responsive to… pricing cues.”[13] So those who don’t yet have any expectations about what an ebook costs (i.e., new ebook consumers) will be more likely to accept a higher price as normal, provided that the retailer (or publisher) provides cues that they are getting a good deal. However, consumers also have strong opinions and perceptions on the price of digital content (including music and film): usually that it needs to be cheaper than a physical copy. Publishers will be conducting almost real-time experiments with price points and the public tolerance as they seek to grow the ebook market.
Even with the agency model, though, can’t the agency publishers work with the retailers in setting price? After all, a good real estate agent helps sellers to get the best possible – and most reasonable – price for their house, all the while knowing that they are receiving a percentage commission. So a good real estate agent provides feedback and data to her sellers and helps them to set the best price. If publishers and retailers become antagonistic and spiteful with each other (like removing buy buttons, or refusing to provide a retailer with titles), then the agency model won’t work. But – and maybe this is overly optimistic – isn’t it in the best interests of all stakeholders to sell more titles? So shouldn’t they want to work together to set the best prices? I think that agency pricing is going to work if (and only if) publishers and retailers view it as partnership. It doesn’t really make sense that ebooks inherited the same discount structure and wholesale model as print books in the first place, given that there is a far greater risk involved for the retailer in stocking a print title. Ebooks remove that risk and so a model that reflects that could very well work after all the kinks are worked out. I agree with Mark Bertils when he says that “we are treating this agency thing like it is life or death. It is not high school! Relax.”[14] Publishers and retailers should take advantage of this opportunity to experiment and work together and figure out what is going to work best for everyone (book buyers especially included).
[1] Michael Tamblyn, “Countdown to Agency (And Party Like it’s $9.99!)”, Kobo Blog, March 29, 2010, http://blog.kobobooks.com/2010/03/29/countdown-to-agency-and-party-like-its-9-99.
[2] Motoko Rich and Brad Stone, “Amazon Threatens Publishers as Apple Looms,” New York Times, March 17, 2010, http://www.nytimes.com/2010/03/18/technology/internet/18amazon.html.
[3] Mike Shatzkin, “Apple’s Disruption of the Ebook Market Has Nothing to Do with the Tablet,” The Idea Logical Blog, January 19, 2010, http://www.idealog.com/blog/apples-disruption-of-the-ebook-market-has-nothing-to-do-with-the-tablet.
[4] Michael Tamblyn, “Agency, Pricing and the Seven Things Publishers Need to Remember,” Kobo Blog, February 1, 2010, http://blog.kobobooks.com/2010/02/01/agency-pricing-and-the-seven-things-publishers-need-to-remember/.
[5] Michael Tamblyn, “Countdown to Agency (And Party Like it’s $9.99!)”, Kobo Blog, March 29, 2010, http://blog.kobobooks.com/2010/03/29/countdown-to-agency-and-party-like-its-9-99.
[6] “Agency Model Means Ingram Can’t Wholesale eBooks Until New Agreements Are in Place,” Publishers Lunch, March 25, 2010.
[7] Paul Biba, “Fictionwise Buywise Program is Discontinued – Killed by the Agency Model?”, TeleRead, March 30, 2010, http://www.teleread.org/2010/03/30/fictionwise-buywise-club-discontinued.
[8] “Ready or Not, Here It Comes,” Publishers Lunch, March 31, 2010.
[9] Publishers Marketplace, March 18, 2010, quoted in Jay Yarow, “Amazon Tells Small Publishers It Will Stop Selling Their Books if They Join Apple,” Business Insider, March 19, 2010, http://www.businessinsider.com/amazon-tells-small-publishers-it-will-stop-selling-their-books-if-they-join-apple-2010-3.
[10] Motoko Rich and Brad Stone, “Apple Adds 2 Publishers To Its Store for E-books,” The New York Times, March 22, 2010, http://www.nytimes.com/2010/03/23/business/media/23perseus.html?fta=y.
[11] Chris Meadows, “Authors Guild Warns Members About Random House, HarperCollins E-Royalty Rate Renegotiation,” Teleread, March 19, 2010, http://www.teleread.org/2010/03/19/authors-guild-warns-members-about-random-house-harpercollins-e-royalty-rate-renegotiation.
[12] Paul Biba, “Amazon Will Drop Smaller Publishers If They Insist on the Agency Model,” Teleread, March 19, 2010, http://www.teleread.org/2010/03/19/amazon-will-drop-smaller-publishers-if-they-insist-on-the-agency-model.
[13] Eric Anderson and Duncan Simester, “Mind Your Pricing Cues,” Harvard Business Review 81, no. 9 (2003): 101.
[14] Mark Bertils, “All Right, Mr. Jobs, I Am [Not]? Ready for My Close-Up,” Index // mb, http://indexmb.com/all-right-mr-jobs-im-not-ready-for-my-close-up.
