Mar 11 2012

What Kind of Competition Has Retail Price Maintenance for Digital Books Fostered?

By Jane • Ebooks • • Tags: , ,

Last week, news came out that the Justice Department was readying a petition to sue five of the largest publishing houses in North America along with Apple for colluding together to maintain artificially high prices for digital books.

This was initially instituted in January 2010 after Macmillan pulled its entire digital catalog from Amazon unless Amazon concede to these new terms. Under the new terms, Macmillan would set the prices for digital books and Amazon and every other retailer would not be allowed to discount. This became known as Agency pricing, but the term “Agency pricing” is a misnomer. What the publishers are doing is engaging in retail price maintenance, not Agency pricing.

Amazon had been discounting popular front list digital titles heavily, marketing their nascent digital book program as having most of its digital content priced at $9.99 and under. Discounting is commonplace for paper books with large wholesalers like Costco and Sam’s Club pricing hardcovers at 40% or more off. Barnes & Noble also heavily discounts print bestsellers.

However, publishers worried that low digital prices would speed up the adoption of digital books, create large losses for print books, and wreak havoc with their current business model. Further, allowing Amazon to undercut prices would imperil others attempts to enter the market.

William Lynch is quoted as saying that agency pricing helped Barnes & Noble achieve its 25-27% of the market.  I’ve argued as much here.  Much discussion around Agency pricing involves the issue of competitiveness. It appears that the publishers (not Apple) are going to argue that without agency pricing, market competitiveness would decrease.  They will point to the decline in print sales as an example.  The goal of publishers will likely be to get a broad definition of the market such that it includes both paper books and digital books; trade fiction and non fiction; and academic works.  This likely works both for and against them.  First, Amazon only has market dominance in the trade fiction and non fiction categories in digital works.  It does not have market dominance in the digital textbook market, the print textbook market or even the print trade market.

The publishers will point out that Amazon’s aggressive digital pricing is dooming independent bookstores and contributing to a decline of print book sales and a decline in businesses selling print books.  The question that publishers will not be able to answer, however, is how Agency pricing helped to increase competitiveness at the increased price to customers.  First, there has not been an attendant rise of independent brick and mortar bookstores since 2010 when the publishers impose retail price maintenance on print books.  Second, there has not been an attendant rise of independent digital bookstores since 2010.  In observing independent digital bookstores on the internet, the move toward RPM was dismay not jubilation.  Kobo Books had to discontinue consumer oriented programs as did Fictionwise and All Romance eBooks.

Lori James of All Romance EBooks shared her thoughts on this matter.

1. We at All Romance appreciate the publisher’s desire to control pricing. We have direct relationships with hundreds of publishers and since the day we opened our contract has stipulated that we will not change the sale price of their work without permission.

2. Under the Agency model we can not offer incentives. We do offer incentives from time to time for Non-Agency, but that is our cost, not the publisher’s cost. In those cases, customers still pay full price for the Work. So, for example, we can spotlight a non-Agency publisher like Harlequin and offer customers a 30% rebate to purchase Harlequin titles for a two week period. Those purchases are for the full list price and Harlequin get’s paid based on the full list price. The cost of the promotion is completely ours and Harlequin enjoys increase sales and tons of brand advertising for free. As things stand we can’t offer that to Agency Publishers. It’s the same with our loyalty program and our bookclub. I understand they don’t want the offering of incentives to dilute pricing. But I don’t think a flat-out policy that they can’t happen is best either and it’s placing Agency titles at a disadvantage.

3. There was much talk originally about how Agency would level the playing field for the little guy who couldn’t hope to engage in the kind of loss leader pricing Amazon was doing. Instead, we could compete based on “service”. Yeah! We’re great at service. It sounded good. Then the content was pulled. It was many months before contracts were even available for initial review. Meanwhile – it’s back on Amazon and B&N. It’s on Apple. Getting Agency back was a priority but it took over a year to get those titles back due to numerous delays. And, this also required significant IT build-outs.

Meanwhile, fortunately, our customer base found many other titles they were interested in and continued to purchase. The loss of Agency didn’t end up really impacting our bottom line because we were in a unique position, having strong relationships with Indies who were supplying our customer base with a steady stream of delicious romance. Would we have done even better with Agency during that year? Yes. It’s hard to compete without content.

I have to wonder how many of the bookstores that were getting content prior to Agency are approved and still getting content today. And, it would be interesting to know how many new Indies have entered the arena. From where I sit, the numbers seem to be shrinking.

Agency pricing (aka Retail Price Maintenance) was designed to slow the adoption of ebooks, bolster print sales, and move marketshare away from Amazon.  It was not designed to increase competitiveness in the market.   I don’t think any one disagrees that one publisher and one retailer of books is a bad idea.  No one, not even a card carrying Amazon Prime member like I am believes that.  As Amazon becomes larger, it pushes for more concessions from its suppliers.  Publishers are getting squeezed and it would not surprise me in the least if Amazon reduces the self publishing royalties using exclusivity as the modifier.   But artificially maintaining a higher cost of a good isn’t increasing competition in the marketplace.  No one will leave Amazon until something better comes along and in this case, with prices being equal, you can’t beat Amazon’s service.  The question will be what will?  My ideas include Loyalty and rewards programs.  Better search and filter options.  More targeted recommendation services.  What are yours?

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