Three A’s of E-Book Pricing: Amazon, Apple, and Antitrust

A few months ago, I noted that Amazon and book publishers were tussling over the pricing of electronic books. Amazon had originally acquired e-books using a wholesale pricing model. It paid publishers a fixed price for each e-book it sold, and then decided what retail price to charge customers. Retailers usually sell products at a mark-up above the wholesale price–that’s how they cover their other costs and, if possible, make a profit. Amazon, however, often offered books at promotional prices below its costs. For example, it priced many new e-books at $9.99 even if it had to pay publishers $13.00 or more for them (often about half of the list price of a new hardback).

Several large publishers hated Amazon’s pricing strategy, fearing that it would ultimately reduce the perceived value of their product. They thus pressured Amazon to accept an agency pricing model for e-books. Under this approach, the publishers would retain ownership of the e-books and, most importantly, would set their retail prices. Amazon would then be compensated as an agent for providing the opportunity for the publishers to sell at retail. Under this approach, Amazon would receive 30% of each sale, and publishers would receive 70%.

The strange thing about these negotiations is that their initial effect appears to be lower publisher profits. As I noted in my earlier post:

Under the original system, Amazon paid the publishers $13.00 for each e-book. Under the new system, publishers would receive 70% of the retail price of an e-book. To net $13.00 per book, the publishers would thus have to set a price of about $18.50 per e-book, well above the norm for electronic books. Indeed, so far above the norm that it generally doesn’t happen. … [In addition]  publishers will sell fewer e-books because of the increase in retail prices. Through keen negotiating, the publishers have thus forced Amazon to (a) pay them less per book and (b) sell fewer of their books. Not something you see everyday.

Publishers presumably believe that the longer-term benefits of this strategy will more than offset lost profits in the near-term. What they may not have counted on, however, is the attention they are now getting from state antitrust officials such as Connecticut Attorney General Richard Blumenthal. As reported by the Wall Street Journal this morning, Blumenthal worries that the agency pricing model (which is also used by Apple) is limiting competition and thus harming consumers. And the WSJ says he’s got some compelling evidence on his side:

The agency model has generally resulted in higher prices for e-books, with many new titles priced at $12.99 and $14.99. Further, because the publishers set their own prices, those prices are identical at all websites where the titles are sold. Although Amazon continues to sell many e-books at $9.99 or less, it has opposed the agency model because it argues that lower prices, as exemplified by its promotion of $9.99 best sellers, has been a key factor in the surging e-book market.

It’s also interesting to note that Random House decided to stick with the wholesale model, and many of its titles are priced at $9.99 at Amazon.

Of course, higher prices on select books are not enough to demonstrate an antitrust problem. Publishers will likely argue that there is nothing intrinsically anticompetitive about agency pricing, which is used in many other industries. Moreover, there is nothing to suggest that they are colluding on e-book pricing. Also, they may claim that their pricing strategy will allow more online retailers to enter the marketplace, thus providing more competition and more choice for consumers (albeit along non-price dimensions).

7 thoughts on “Three A’s of E-Book Pricing: Amazon, Apple, and Antitrust”

  1. I firmly believe publishers’ response to ebook sales is based almost entirely on trying to “protect” hardback sales because those have the highest profit. Pulishers are frantically trying to reassess the way they plan their business to allow for the role of ebooks. Most of the people who want ebooks are not people who would buy hardbacks. They are using eReaders (I’m including phones, iPads, and PCs in that definition) for a reason. A lost ebook sale is lost revenue, not revenue protected.

  2. In these volumes, this is really a *new* market so the right pricing is anyone’s guess. Lets see which publications succeed at which price points and watch the dust settle.
    I wonder whether the concept of agency pricing will survive. – where the supplier sets the price at which the customer ( the middle-man ) can sell. In many other markets it would be a non-starter. See priceadvice.wordpress.com.

  3. You forgot the fourth A.. Authors Guild.

    With the move to an agency model, and knowing that the ‘costs’ on ebooks are so much lower, you know the AG is really going to try and bring down the hammer on the publishers to increase the Author’s royalty cut for the sales of e-books as opposed to the dead tree editions.

    Not to mention if the move to agency pricing has hurt net sales numbers for the publishers, then the authors will be none too happy about that either.

  4. Regarding Karen’s comment:
    I firmly believe publishers’ response to e-book sales is based almost entirely on trying to “protect” hardback sales because those have the highest profit.

    This is sort of true but not as cut and dried as it, or the original posting argument, seems.

    First off, with the publisher-price determining ‘agency model’ the publishers (nearly all that I know of) do want to make e-books more expensive when the hardback edition is launched. However they will _reduce_ the price of e-books when the paperback edition is released.

    Hardbacks have a very delicate market with three principal components: libraries (whose budgets are always tight); collectors (a small fickle group); and avid devotees of an author (who want to read the latest book as soon as it comes out). Together the collective market for hardbacks is still very small and some publishers have given up publishing in hardback form for a range of their titles. (There is even some discussion in the trade as to whether there will be any meaningful hardback market in a few decades time.)

    The problem publishers face with e-books is that the hardback market is so delicate that if they lost the avid author devotees (who want the latest book as soon as it comes out) to e-book sales then what would happen is that more books would fail to have a hardback edition.

    In short the problem is as much one of competition between publishing formats as it is between publisher and retailer; who in any case should not be competing _aggressively_ as they are part of a production chain.

    In economic-speak, if a retailer was to sell e-books cheaply during the period when the hardback was out but before the cheaper paperback was released, then it would tend to undervalue the novel (as in new) intellectual content of the hardback in addition to the extra cost physically producing a hardback entails. As such the retailer would be enjoying an economic externality on the e-book.

    Of course if you do not believe that novelty (the time since publication) has a ‘real’ value then you would not mind paying the same price for newspapers but a couple of days after publication without ever seeing a newspaper on the day of publication (when they have their greatest ‘novelty’ value).

    Meanwhile back in the real world, we are all aware that videos of films (and now DVDs) are more expensive while the film can only be seen in the cinema. Once the film has been released for television broadcast the price of videos/DVDs comes down.

    All publishers want is an analogous situation for books.

    What retailers want is to attract customers and shift stock better than their retailer competitors, but without caring for the viability of a publisher (or publishers meeting their upfront commissioning, editing, production, and marketing costs) as (a retailer may assume) there will always be other publishers. Some retailers (and I wont mention any online e-book retailer names) have been known to sell an e-book for _less_ than the value they pay publishers as a ‘loss leader’. This may be good for the retailer to attract customers from their retail competitors, but it totally undermines the true value of the book from the publisher’s perspective. (And of course publishers cannot predict in advance which of their forthcoming titles will be treated this way by retailers and so factor that into their costings.)

    Finally, books are the property of the publisher (and intellectual property of the author). The author has a contract with the publisher and not the retailer. The retailer literally is acting as a retail agency for the publisher.

    In short, publishers should have the right to determine price and not the retailer (except once the title has been remaindered).

    Hope this helps.

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