e-book pricing and publisher business models

Interesting article in today’s new york times on e-book pricing and publisher business models.

While the article doesn’t explicitly mention the recent Amazon/MacMillon kerfuffle, it does supply some context to understand what was going on there.

Amazon had previously been paying a wholesale price that was (probably) 50% off the publisher-set retail price of e-books. This is the standard business relationship between retailers and publishers for print books, with 50% being a typical ‘discount’ a large retailer could get (it’s possible giganto retailers like Amazon got a bigger discount, and small retailers definitely sometimes get a smaller one, can be as small as 30% or even less, or no discount at all for some titles from small publishers, making them effectively unavailable to small retailers.).

But then Amazon could actually sell the e-book for whatever price they wanted, the suggested retail price was only a suggestion. They could sell for less and reduce their own margin, or they could even sell for under their wholesale price as a “loss leader”. Again, this is all the way the traditional print book market works too.

MacMillan wanted to switch to an ‘agency’ model like the iTunes bookstore is/will use.  MacMillan wanted to be able to set the retail price themselves, and then Amazon as retailing “agent” would get a fixed percentage of the sale, probably less than 50% (I think iTunes is doing 30%).

Now, depending on what prices MacMillan ends up setting for e-books, MacMillan might end up even making less per copy under the model they wanted (and eventually got) than under what Amazon wanted.   All the press coverage indicated that this wasn’t really about per-unit profit for the publisher, it was about MacMillan being unhappy that Amazon was selling their e-books at too low a price, they wanted control over the retail pricing.

Why would MacMillan care about the retail price being too low, if MacMillan’s wholesale price remained the same regardless of the retail price Amazon set? Presumably they’re worried about establishing consumer expectations for the emerging e-book market.

But the NYT article cited above quotes another publisher with a slightly different concern, that might be more simpatico to the librarian book-loving set: They’re worried about cannibalizing their traditional print sales:

Another reason publishers want to avoid lower e-book prices is that print booksellers like Barnes & Noble, Borders and independents across the country would be unable to compete. As more consumers buy electronic readers and become comfortable with reading digitally, if the e-books are priced much lower than the print editions, no one but the aficionados and collectors will want to buy paper books.

“If you want bookstores to stay alive, then you want to slow down this movement to e-books,” said Mike Shatzkin, chief executive of the Idea Logical Company, a consultant to publishers. “The simplest way to slow down e-books is not to make them too cheap.”

I don’t know how much this is just meant to sound good to the book-loving public (and to bookstores and libraries used to hating on publishers), and how much this is really anyone’s actual concern.  But it certainly could happen.  That scenario is predicated on the assumption that consumers will eventually switch en masse to e-books and e-readers for recreational reading, and/or that e-books being cheaper than print books will be sufficient to push them there, if hardware etc keeps going like we expect.

Many in the library and book-loving world are skeptical of this premise, but I suspect it is in fact true. (I don’t love that it’s true; I have an aesthetic relationship with print books too, and also concerns about the social/political effects of abandoning them for e-books.  But I suspect it’s true, love it or not.)

Now, interestingly, in the US, in many cases wholesalers “fixing” retail prices is an anti-trust problem. There are some cases where a wholesaler/manufacturer/publisher can get away with this, but in general it’s not allowed for a wholesaler to force a retailer to sell a product for a certain minimum price.  Which is pretty much exactly what MacMillan just did to Amazon.  I wonder if the FTC is considering it. If e-books really do continue increasing in market share to become a significant portion of the book market, we can expect the FTC will at least look into it, although I’m not a lawyer and can’t predict what they’d decide, there are some cases where a wholesaler can get away with that kind of “price fixing”.

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6 Responses to e-book pricing and publisher business models

  1. Sue says:

    Thanks for pointing this out. I’m going to look for it today. Since I’ve moved to the medical world I’m more interested in textbooks than in the past. We *do* buy textbooks–that’s a change for me. Here I’m seeing publishers trying all kinds of new models. It’s similar to when they were trying to figure out how to move journals online. In the end it’s all about the revenue stream. I think what they want is unmediated access to the reader paid for by the institution (via the library.) It works for journals because we can buy at the article level (cheaper than a whole book) while the quality of work is filtered at the journal level through peer-review and various other surrogates that let us evaluate journal without having to know everything about “Earwax in North American Mammals.” We don’t have a similar mechanism in place to evaluate books. Your library and mine are looking at a patron driven ebook models. That’s the other way of evaluating the usefulness of ebooks. It has its upside — no ebooks sitting on the shelf that we thought people would want but didn’t. But it’s hard to figure out how to budget for that initially.

  2. Karen Coyle says:

    “but in general it’s not allowed for a wholesaler to force a retailer to sell a product for a certain minimum price”

    Is that true? Apple, for example, has price controls on its products, which is why even discount sites sell Apple computers for about the same price. I assume that Apple doesn’t want anyone undercutting its stores.

    As for the NYT article, the cost breakdown didn’t seem to include the editorial costs — not copy editing, but the whole editorial “thing” that publishers do, which I’ve been told is quite expensive (and that they are doing much less of it today because of that).

    Another issue that never seems to get mentioned is that there is probably some actual limit to the number of books that our society can consume, based on the number of active book readers (a number that seems to be dropping), and the amount of time they have for reading. At some point, you could drop the price to zero and not sell more. There is more demand for music and movies than for books, and more of that demand is probably unfulfilled. On that note, it would be interesting to know the breakdown of sales on Amazon between books, supposedly their main business, and all of the other things they sell.

  3. jrochkind says:

    Karen, I know sometimes wholesalers are allowed to set minimum prices, and in other cases they aren’t. I’m not sure of the parameters of each under US law. These wikipedia article may (or may not) help: http://en.wikipedia.org/wiki/Price_fixing
    http://en.wikipedia.org/wiki/Resale_price_maintenance#United_States_law

    Looks like the US Supreme Court changed the law to be quite a bit more liberal with regard to allowing retail price floors in 2007 too, so maybe my knowledge is old.

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