Jul 14 2013
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.