The Impending Price Battle
Last December, Bob LiVolsi the owner of Books on Board exhorted publishers to fight Amazon’s $9.99 predatory pricing. He received a standing ovation because publishers and other independent bookstores knew it could not continue to match Amazon’s lowered pricing under the current scheme. Ebook retailing, like physical book retailing, operated under the wholesale model. Publishers would sell their product to wholesalers and retailers at a discounted price, usually 40-50% off for the big publishers. Smaller, independent publishers, might be offered terms at 60% off the cover price.
On average, that meant for a hardcover, the publisher was getting around $12.50* per book and the author would be entitled to 25% off the $12.50. Amazon, in an attempt to gain market share by luring customers to its proprietary Kindle format, priced its hardcovers and trade paperbacks at $9.99. For every hardcover it sold at the $9.99 price point, Amazon was likely losing $2.50. However, for every trade paperback or mass market it sold, it was earning money. Further, not all hardcovers were priced at $9.99. Generally, only the most popular, bestselling titles received the loss leader treatment.
When Apple introduced the iPad and its intentions of getting into the digital book market with the iBookstore, publishers saw an opportunity for leverage against Amazon that they had not had in the past. Calling it the Agency model, publishers went to Amazon and informed Amazon that the wholesale model would no longer be available and that Amazon would have to agree to the Apple model of retailing. In the Apple model of retailing, the publisher sets the price and the retailer is allowed 30% off of each sale. (I don’t believe publishers are engaging in a true agency model here because I believe that if they were to do so, they would have to source the digital books themselves).
Recognizing that digital books have some value less than a physical book (or at least publishers acknowledge this to be the perception of consumers), Macmillan announced that its pricing for hardcovers would be in the $12.99 to $14.99 range. Initially, shots of the iBookstore showed pricing of the most popular books at $9.99 but more recent iBookstore screenshots show uniform pricing at $12.99 (this pricing is more consistent with what I have heard insiders indicate is on the internal pricing sheets).
The problem with the $12.99 pricing for publishers is that it is still getting far less money for each sale than it had in the past. Under the 70/30 share, publishers are getting $9.09 on each hardcover sale thus rendering the royalty share loss for an author at $.88 cent per sale.
For mass market paperback sales, publishers are going to come out ahead under the agency model. Assuming a $7.99 price point, under wholesale model, publishers were receiving around $4.00 per book. Under Apple model, the publishers could price the digital book at $5.99 and still be slightly ahead of the game. Macmillan stated that its low point for the digital editions of paperbacks would be $6.99.
For trade paperbacks, which make up a huge share of the fiction book market, the math is less favorable for publishers. Assuming a $13.99 price point, under the wholesale model, publishers were receiving close to $7.00. If they adopt a $9.99 price point for trade paperbacks, as Macmillan suggested that they would do, it’s a wash. Any price point under $9.99 will result in a proportional loss of per unit revenue.
Random House has decided that it doesn’t want to participate in the agency model, believing that selling its digital books at list price + some discount to retailers makes more financial sense than selling direct to consumers at a much reduced price, at least for the hardcovers.
My guess is that Random House believes that iPad owners will function like iPhone/iTouch users and download the Kindle App to get books from Random House which Amazon will continue to be able to sell at a greatly reduced price of $9.99 or less.
Problematically for the big 6, the Apple model requires them to place their eggs in a few, but big, baskets. Ingram, a wholesaler of digital books, announced last week that as of April 1, 2010, it would no longer be able to serve some 65 digital bookstores across the ‘net because of the Apple model that the publishers are trying to enforce. Bob LiVolsi, of Books on Board, elaborated on this in a comment at Teleread.org.
…as of Thursday afternoon, March 25, the 5 publishers still do not have all the necessary info to the distributors for cut over to new system – items such as sales tax nexus (because, under the new model, they will now require sales tax where the publisher has nexus/locations), ONIX feeds of the changed metadata that includes the new Required Ebook Pricing (REP), and rules for promotion, etc. These things require more than a few days notice to code and test for well over 100,000 titles. So we and others may not have all titles on April 1, but we'll still have over 200,000 to choose from, including thousands from our top publishers Random House, Harlequin and Samhain, none of whom are playing in this new pricing game.
Ingram notes that under the Apple model, the wholesale distributor must share the 30% with the retailer. (paid link)
Ingram would not speak to the proposed revenue splits, but publishers are indicating that the 30 percent seller’s commission under the agency model would not change when a wholesaler is involved. That means that Ingram and its clients need to agree on how to divide that 30 percent commission.
LiVolsi concludes that this will result in a number of independent digital retailers closing their doors:
BooksOnBoard will, in fact, come through this intact, but many of our peers will not. And our typical customer's choices will be diminished by significant price increases.
LiVolsi correctly gets to the heart of the consumer matter – less choice and significant price increases. In fact, Livosi says that the prices are going to increase to double the price that they are now:
If you have titles you want to buy from these publishers, the 5 publishers require prices to go up everywhere next Wednesday – in many cases, almost doubling. Some might not even be available while the publishers and our wholesalers change their systems to accommodate the change. If you know you want to buy eBooks from these publishers, you may want to buy them right away so as to get enormous savings versus what you will pay starting next Wednesday night, March 31st.
The problem for publishers is that discounting is an ingrained part of a reader’s buying experience. I doubt that many people have bought a hardcover at full price. All bestsellers are discounted some amount whether it’s 30% at Borders and Barnes and Noble or 40% or higher at Wal-mart, Costco, Sam’s, and other warehousers.
The best possible situation for the consumer is no proprietary formats and a number of retail channels to choose from. The competition would force retailers to provide increasingly better customer service. In this fixed price market, there is a loss of incentive to innovate. Further, Apple’s model of retailing actually reduces the number of retail channels because smaller channels will have to start serving its own digital books rather than obtaining them through a wholesale digital distributor in order to maximize their profits. In a true Agency model, the publisher would host and serve all the proprietary formats that are sold, cutting out the wholesaler and working directly with all the retail channels willing and able to deliver those books to the consumer. This is not likely to happen. Even Harlequin, as digitally advanced as they are, use a wholesale distributor.
What does this mean for consumers? Higher prices and fewer retail channels. Publishers gain control but at the cost of a lower margin. Is that a win? I guess time will tell. What I do think is that the publishing industry fight with Amazon and others is going to get uglier before it all shakes out. This means more buy buttons disappearing, more books becoming unavailable to readers, and higher prices which will serve to piss readers off more and more.
* These numbers are based on a $25.00 hardcover list price