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Did agency pricing help publishers and if so will they return...

Agency pricing was instituted ostensibly to increase competition and decrease Amazon’s control over the emerging digital book market. Publishers had three years in which  they were allowed to set prices in accordance with the pricing schedule imposed by Apple.  In the beginning of  2010 it was estimated that Amazon enjoy a 90% market share of digital books.

This monopolistic control is what led publishers to collude with Apple agreeing to take lower revenue per sale of each book with the hopes that Apple could become a major competitor in the digital book market and decrease the power Amazon held over publishers. Publishers weren’t just concerned about the $9.99 price point but also that the growing power of Amazon would result in larger and larger discounts under the wholesale model.

In the summer of 2013, we can safely say that Amazon’s  control over the e-book market has eroded to somewhere around 60  percent. That number is a rough estimate given Barnes & Noble’s claims to 25 to 27% of the market, Google, Sony, Kobo, and Apple’s claims.

The most difficult problem is ascertaining whether  natural market conditions would have resulted in a more robust e-tailer market without agency pricing.  We know that in the short term agency pricing helped Barnes & Noble gain traction in the marketplace. It launched the e-book store and hybrid e-ink devices in 2010.  On August 31, 2011, B&N announced it’s first quarter 2011 results.

Barnes and Noble retail sales went from 28.8 percent of the company’s gross margin to 29.5 percent. Barnes and Noble website sales went from 3.7 percent of the company’s gross margin up to 27.3 percent compared to the same period last year. Gross profit from Barnes and Noble’s website went from $5.3 million in the first quarter last year to $41.5 million.

According to B&N, the majority of those digital book sales are Agency priced books along with PubIt! revenue. Three years later Barnes & Noble gained at least the third of the digital bookstore marketplace yet despite the help, Nook is a floundering technological albatross around the neck of the retail giant.

Agency pricing meant no bookstore could compete on price which is one of the major forms of competition retailers have. The margin for ebook retailers was reduced from 50% to 30%. Loyalty programs, coupons, and other  targeted discounts were completely disallowed during the three-year period. The inability to compete on price meant that every retailer had to compete on depth of catalog, service, customer experience, and ease-of-use.   Small companies had a difficult time competing on the basis of depth the catalog and customer service.

Barnes & Noble was unprepared for the type of customer service it would have to dole out to e-book readers, mostly because of DRM. All Romance e-books one shared that 95% of the customer service complaints that they deal with have to do with DRMed books.

Depth of catalog, service, customers experience and ease-of-use were all things that Amazon excelled at and therefore it is no surprise that they are flourishing even with agency pricing. But, Jane, you say how can you say that they are flourishing if their market share has decreased? Amazon’s market share was always going to decrease. They were first in and they offered an attractive alternative to print books; however money attracts money.

In reading through Judge Côte’s decision, it is clear that Apple had every intention of entering the e-book market given that the publishing industry is actually larger than the music industry.

By June, Cue’s team had assembled data that showed that the book market in North America was larger than the music market. The book industry was estimated to be roughly $35 to $42 billion in size, with trade books comprising $12.5 billion of that figure. While trade e-books accounted for just $100 million or so of those numbers, that market was growing at an exp` Apple’s McDonald predicted that the e-book market could reach nearly $1 billion in 2010.

Apple did consider splitting the baby with Amazon.  Per the decisions, Judge Cote noted in a footnote, “Some months earlier, Apple had considered proposing to Amazon that they simply divide the e-market for books and music, with iTunes acting as “an ebook reseller exclusive to Amazon and Amazon becom[ing] an audio/video iTunes reseller exclusive to Apple.”

Any purveyor of digital content was going to want to offer books in addition to movies and music or else their catalog wouldn’t be as attractive as a competitors. So despite Google play books not being the fierce competitor that it might have the potential to be, there was likely never any question in Google’s mind that they would refuse compete for the trade book market.

Apple enjoys a huge market share of the tablet industry and it used to dominate the smartphone market as well, but in the last quarter, Samsung has been outpacing  Apple worldwide. If there is money to be made, someone else is going to want a piece of that.  Competition for Amazon’s share was inevitable.

As price price? The most formidable challenger to price is self publishing and this is one area where Agency pricing and publisher animosity might have hastened its rise.  When Kindle Direct Publishing was first announced, the royalty rate was 35%.  From Judge Cote’s decison:

Amazon was adamantly opposed to adoption of the agency model and did not want to cede pricing authority to the Publishers.  On January 20, Amazon disclosed how it would respond. It would appeal directly to authors and encourage something the Publishers feared: disintermediation.

That day, Amazon announced that authors and publishers of Kindle e-books could choose a “new 70 percent royalty option” for e-books with a list price “between $2.99 and $9.99.” Under this option, the author would receive 70% of the list price, net of delivery costs. Using as an example an e-book being sold for $8.99, the author would make just $3.15 under the standard option, but $6.25 with the “new 70 percent option.”

This was not happy news for the Publishers. With an author receiving $6.25 of $8.99, and Amazon keeping the rest, this amounted to a naked play to eliminate the Publishers as a middle-man between authors and Amazon. Shanks observed, “On Apple I am now more convinced that we need a viable alternative to Amazon or this nonsense will continue and get much worse.” HarperCollins’ parent News Corp also reacted with anger. News Corp’s Rupert Murdoch called HarperCollins to complain and in no uncertain terms expressed a desire to take revenge on Amazon.

Would Amazon have moved to the 70/30 model for KDP had it not been for its anger with publishers?  Why would they? If that was a model that Amazon felt was the best, they could have launched with it but instead, the 70/30 KDP program was announced on January 20, right after they were feeling the brunt of the combined shaft of Apple and Macmillan and knowing what was coming down the pike with the rest of the publishers.

Self publishing came of age in 2011 and continues to place untold pressures on publishers, not only about price, but the ever present (and almost too difficult to answer question) of what can you, the publisher, really do for me, the author.  The author has more power and more choices than ever and it is self publishing that is placing the crowbar of pressure on publishing more than Amazon.  Amazon just created the crowbar and handed it to authors.

But what about readers? Well, readers shouldn’t expect a wholesale drop of prices from $14.99 to $6.99 or under. The major price promotions have been publisher driven. The $1.99 price points? Those are from publishers who are strong believers in moving titles based on price promotions.  Penguin and Random House have rarely engaged in price promotion even when it was in their power to do so.  It was HarperCollins, Hachette, and yes, Macmillan, who have been the primary publishers using promotional pricing as a tool.

Amazon isn’t likely going to start discounting Penguin and Random House books wholesale.  Instead, you might see an occasional discount here or there.  What we could see happening is a ramp up in loyalty programs and coupons to drive consumers away from Amazon but wholesale, across the board discounts? Those aren’t likely to happen. They didn’t exist pre-Agency and I don’t expect them to exist post Agency.

What will continue to drive promotional pricing by publishers, though, is the ability to use deep discounting to drive up awareness of a title and hope that the book is good enough to catch on.  Just as it was used in the past, pre-Agency.

Jane Litte is the founder of Dear Author, a lawyer, and a lover of pencil skirts. She spends her downtime reading romances and writing about them. Her TBR pile is much larger than the one shown in the picture and not as pretty. You can reach Jane by email at jane @ dearauthor dot com

18 Comments

  1. library addict
    Jul 14, 2013 @ 10:16:41

    For Penguin and its imprints it is like they are still on it as nothing has changed for their books since they settled. They still aren’t eligible for coupons or loyalty programs at Sony, ARe, Kobo, etc.

    I could easily see publishers going back to it.

    B&N buying them and then agency pricing killed Fictionwise. The glory days of 100% Micropay seem like a dream. I know there’s no going to back to that. And I can’t say I won’t pay agency pricing as so many of my favorite authors write for Penguin and I did pay it for many books in the past few years. But it has made me not try new-to-me authors. Who knows how many of them may have become auto0buy authors for me.

    I also bought a ton of self-pubbed books in the past few years, but find I don’t keep as many of them even though space isn’t the issue for my digital library. There are multiple reasons for this, but the obvious lack of editing in so many books is probably the main one. I’ve gotten to the point where I no longer purchase so many self-pubs as well.

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  2. carmen webster buxton
    Jul 14, 2013 @ 11:41:38

    Interesting! I don’t think I have seen anyone connect the KDP model to Amazon’s annoyance over having agency pricing forced down their throats. The irony top me is that agency pricing happened because publishers wanted to sell fewer ebooks! It was all about protecting hardcover sales. However, as a self-published author, I have found the KDP model to be a godsend, so I’m happy the publishers went with agency. Actually, KDP is a form of agency in that the author sets a price and gets a percentage, but Amazon retains the right to discount the price or even to make the book free, if it’s free elsewhere. Smashwords actually gives me a higher percentage but my sales from that platform are tiny compared to my Kindle sales. Smashwords’ real value comes in getting the books into iBooks, which is hard to do otherwise.

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  3. Mike Cane
    Jul 14, 2013 @ 13:17:08

    Given what just happened with “Galbraith” — aka JK Rowling, but before she was outed — I wonder if it says writers are better off with KDP than any publisher?

    https://twitter.com/Beathhigh/status/356356158166016000

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  4. SAO
    Jul 14, 2013 @ 14:17:21

    It’s very hard to figure out what might have happened in a rapidly changing environment. Publishing was ripe for disintermediation and the publishers’ only goal was to slow, inhibit or prevent e-books, rather than look at how the change could work for them.

    What I’d expect as the next step in disintermediation is some players, other than publishers, to step up and become brands. Editors, maybe? I might read books selected by Jen Enderlin, for example.

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  5. William Ockham
    Jul 14, 2013 @ 19:34:14

    Sigh… Why does everybody get this wrong? The big 5 are on agency today. They just can’t fix prices. Read the settlement agreements. Agency is allowed. MFN clauses are not allowed.

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  6. Jane
    Jul 14, 2013 @ 19:38:33

    @William Ockham: Um dude, sigh. Have read the settlement documents. Parsed them out fully herein. The settlement documents approved by Judge Cote on September 6, 2012.

    http://dearauthor.com/ebooks/judge-cotes-rules-in-favor-of-settlement-in-dojs-price-fixing-case/

    “The question, thus, was a measurement of whether it was in the public interest to proceed with the proposed settlement. The settlement contained four basic requirements. Each settling publisher must:

    Terminate their agreements with Apple within 7 days.
    Terminate any agreement with another retailer if it a) restricts the right of the retailer to discount or b) has an MFN clause.
    Not contract to restrict the right of a retailer to discount for two years.
    Not include an MFN clause for five years.

    So, sigh, where are you getting your information?

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  7. Cindy
    Jul 14, 2013 @ 19:53:22

    @library addict I was able to use the 50% off coupon @Kobo on a mystery from one of Penguin’s lines today. And I could have used it on the most recent Murder She Wrote title, had it been multi-use. That was this morning. I couldn’t believe it!

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  8. library addict
    Jul 14, 2013 @ 21:04:07

    @Cindy: I hope this means all Penguin books will soon be eligible. None of the ones on my wishlist show as eligible as yet. And even though S&S and Pocket Books are supposedly now eligible, only certain titles seem to be.

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  9. Cindy
    Jul 14, 2013 @ 21:15:46

    @library addict I hope so as well. I think both titles are from the Signet line…I suppose it’s a work in progress to change all of the titles over. Wish my coupon would have been multi-use in case it was a glitch and they change their minds.

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  10. library addict
    Jul 14, 2013 @ 22:00:46

    Checked again just now and they all seem to be coupon code eligible! Yippee. Now if only Sony and ARe were eligible too.

    ReplyReply

  11. Jean
    Jul 14, 2013 @ 22:13:57

    I could see publishers going back to it.. check this one http://www.ebookcreatormasters.com ..

    ReplyReply

  12. Cindy
    Jul 14, 2013 @ 22:34:49

    @library addict Yay! Yeah I keep hoping for ARe for the buy 10 thing since Kobo coupons are one time use and kind of rare. On the other hand, I get 5% back at ebates from Kobo, lol.

    ReplyReply

  13. No Dog Days for Publishing this Summer | Digital Book World
    Jul 15, 2013 @ 07:03:59

    [...] Agency Pricing vs. Amazon (Dear Author) “Agency pricing was instituted ostensibly to increase competition and decrease Amazon’s control over the emerging digital book market.” The question remains: Will natural market competition or the competition from self-publishing authors be the bigger factor is ebook pricing going forward? [...]

  14. William Ockham
    Jul 15, 2013 @ 08:30:56

    @Jane: As you outlined in the linked article, agency agreements are expressly permitted by the settlement agreements. To quote from the “Permitted Conduct” section, “a Settling
    Defendant may enter into Agency Agreements with E-book Retailers…”

    To quote from your September 2012 article:

    ” The settlement outlined one instance in which agency model could exist. The settlement agreement allows a retailer, like Amazon, to discount books but limits the discount in one year for one publisher to not exceed the retailers aggregate commission.”

    Agency pricing is clearly allowed by the settlement agreements and all the indications I have are that the contracts that the settling publishers have with major retailers are, in fact, agency agreements that allow discounting. So, I don’t understand what you mean by “going back to agency”. Are you asking if publishers will try to negotiate contracts with Amazon, et. al., that allow the publishers to set the retail price?

    ReplyReply

  15. Jane
    Jul 15, 2013 @ 08:35:40

    @William Ockham: Publishers already set the retail price. The institution of “Agency Pricing” (a legal misnomer) curtailed any discounting. It’s really a retail price minimum that the publishers were setting (see Leegin). What we’ve come to understand as Agency Pricing in the ebook retail setting is the absolute price minimum instituted across the board. This type of price fixing is disallowed for two years under the settlement agreement so using the term with the definition as everyone, including Judge Cote, is employing, then yes, Agency pricing is no longer in effect.

    The fact that there are some limits to discounting isn’t Agency pricing.

    ReplyReply

  16. Stephanie Doyle
    Jul 15, 2013 @ 08:52:55

    @SAO:

    I’ve been thinking along these lines as well. Where maybe we see these “big” publishers breaking down into small boutiques. Because as Jane said the biggest question facing an author today when considering how they want to publish is “what can this publisher do for me.”

    With self publishing the answer is – nothing – the author must do it all themselves but they take in all the profit.

    With traditional publishing the answer is experienced content editors, copyeditors, cover design and promotion/marketing. Which in theory should create a better product, thus the reason for sharing the profit.

    But you don’t need a massive company to make this happen in a digital word. A team of maybe 1 or 2 experienced book publishers could probably handle as many as 15-20 authors producing 4 books a year.

    It’s how some agencies are transitioning. Why not top editors?

    ReplyReply

  17. Ether for Authors: Nelson Signs Another Self-Publishing Star | Publishing Perspectives
    Jul 16, 2013 @ 02:01:23

    [...] useful post from Jane Litte at Dear Author, Did agency pricing help publishers and if so will they return to it when the ban is lifted? looks at the aftermath of the Cote court action, reminding us that “In the beginning of  [...]

  18. Total Return Pricing For BDCs | GuardiaNews | GuardiaNews
    Nov 26, 2013 @ 00:49:37

    […] for shareholders because stock prices are subject to macro issues. I will also compare my total return pricing to the standard multiples methodology for the 25 BDCs that I […]

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