Agency Pricing Settlement: Higher prices on the way?

An article over at Paid Content proposes an interesting theory: That the recent Department of Justice ruling on the agency pricing issue could actually lead to higher book prices—not lower.

This seems inexplicable at first: Only three of the Big Six publishers were named in the ruling, but the others may find themselves lowering prices in order to compete. And retailers are free to discount books as they see fit—packaging them into bundles, and so on. So … where’s the problem?

The problem is that there’s a clause in the settlement, stating that the retailers’ discounts cannot exceed their commissions overall. (No loss leading, in other words.) So they clearly won’t be able to bundle or discount all titles. The catalogue from any given publisher has to balance out overall.

As the article explains:

“Publishers Lunch’s Cader raises the seemingly counterintuitive point that settling publishers may actually raise their ebooks’ list prices. Nothing in the settlement prevents them from doing so, and “higher list prices could ‘use up’ a retailer’s annual discount pool more quickly and provide some protection against devaluation in the marketplace of a publisher’s biggest properties.”

Think of it this way:

Let’s say that you, the publisher, previously had an ‘agency’ price which netted you $10 per book in commissions. Retailers were not allowed to discount it. And you could get the full $10.

Now, let’s say that under the new system, retailers can offer a discount. But no more than, perhaps, 20 percent, or they’ll use up their ‘discount pool.’

Now, you are still allowed to set your own price here: Agency pricing in and of itself isn’t illegal—it’s only the ‘price fixing’ aspect of forbidding competion through bundling and discounts. So, you might say to yourself, Well, I still want to net $10 a book. So, you’ll raise your prices to whatever level you need to, in order to make sure that after the maximum possible discount percentage is applied, you still come out on top, financially speaking. And that is perfectly legal under the new ruling.

Of course, at some point, market forces will kick in here and publishers will have to adjust their offerings—and their prices—to what people are willing to pay. But the ruling might not be the clear-cut victory for consumers that it seems to be. We’ll have to see what happens once the current contracts expire, and publishers renegotiate under the new terms.

15 Comments on Agency Pricing Settlement: Higher prices on the way?

  1. Looks like HarperCollins books at Amazon are now non-Agency priced (although it looks like a work in progress right now).

    Looking at a few of Kim Harrison’s titles I see a drop overall. ‘A Perfect Blood’ which was $12.99 is now $10.94 and a lot of books that were $7.99 are now $7.59

  2. The logic here is really convoluted and doesn’t make much sense. If a publisher wants to make $10 on a book you set the wholesale price at $10. It dosn’t matter if it retails to consumer for $12, $20 or $0.99, the publisher still gets $10. There’s this bizare train of thought floating around by the anti-amazon brigade that Amazon discounting meant publishers were getting less money. This is a really strange concept fo retail.

  3. If the cost of ebooks doesn’t drop from the traditional publishers, we may see a rise in the cost of indie publisher’s books too. If the market is saying ebooks are worth $10 then they will rise to that level.

  4. @PA Wilson, a lot of indie publishers (not talking self pubs here) have already had prices in the $10 range. I’ve run into quite a few in the $8-$14 range.

    BTW: Books on Board has all HarperCollins titles on sale now according to an email they just sent out.

  5. I think the publishers already cut off their noses to spite their faces. A lot of readers abandoned them when they first implemented the agency model and have no reason to return. We now have thousands of free, indie, low-cost backlist, and library books to choose from. I don’t have to purchase another book as long as I live.

    I still buy books but am far more picky and NEVER pay retail prices. I have one exception, the new No Easy Day, only because I thought it may become unavailable because of the investigation and because I didn’t want to wait for the library to get the ebook version. Very few books, and no fiction, will ever fall in that category for me.

    They lost me forever.

  6. Uh, the logic there isn’t just convoluted: it’s *wrong*.
    It confuses List price with wholesale price:
    “Well, I still want to net $10 a book. So, you’ll raise your prices to whatever level you need to, in order to make sure that after the maximum possible discount percentage is applied, you still come out on top, financially speaking.”

    The discounting at issue is retailer-to-consumer discounting, not publisher-to-retailer.
    And what is limited by the settlement is the retailer’s ability to go below cost, not the percentage of discount from list.

  7. Given the Obama administration’s behavior in a wide spectrum of areas, the DOJ’s goal clearly isn’t lower consumer prices. It’s to increase federal control over every area of our economic life.

    Note how much government intrusion this ‘settlement’ involves. Discounting some ebooks means you can’t discount others. Every wholesale and retail price of every ebook will have to be reported and regulated by the feds. That won’t be cheaper for anyone, and if you’re a small publisher, the bookkeeping will be a horrible pain. Discount one book a bit too much near the start of the year and a publisher or retailer will not be free to discount a hot new book near the end of the year to jumpstart its sales.

    Much the same thing happened with the financial services industry bailout. Rather than prosecute wrong doing like the public wants, the Obama administration opted to create strangulation levels of regulation even on banks that never made the blunders that created the mess to start with. For the full details on that, you might want read Dinesh D’Souza’s The Roots of Obama’s Rage or see the documentary 2016, now playing in most major cities.

    Given our narrow focus, we’re only seeing how counter-productive this is in publishing, particularly how it works to the advantage of market-dominating bully Amazon. D’Souza’s thesis is that Obama was being unwittingly honest when he described his life’s goal as implementing “Dreams from my Father.” His father was a Kenyan socialist who hated the economic success of Western democracies. What better way to carry out the rage of his father against the U.S. than to cripple our economies, creating the longest economic downturn in seventy years?

    And that’s not conspiracy mongering. When an economy is down, you don’t:

    * Increase regulation, which drives up costs and increases uncertainty.

    * Radically alter health care, adding mandates to what is already one of the largest costs for most businesses. The uncertainty of all that scares the daylights out of businesses and makes them reluctant to hire. Hence the high employment, particularly among you adults.

    * Threaten higher taxes on everyone making over $250,000 a year. Where I live in Washington state, we rejected precisely that sort of taxation because $250,000 what a small businessman who can’t afford to incorporate earns and from which he grows his business.. Tax him heavily, and he can’t grow his business, hiring more people. The fear of that happening keeps down growth. Why start a business if you’re going to be demonized and taxed for succeeding?

    * Drive the nation deeper and deeper into debt. More and more of our taxes will go to servicing that debt. Even liberals are starting to wake up to what that means for social programs. Money that goes to Chinese banks isn’t money that feeds hungry children here.

    I could go on and on, but I think you get the point. Bullying these publishers is on a par with berating Joe the Plumber, prosecuting Gibson Guitar, bashing the Koch’s, demonizing the 1%, etc. It cripples our society, setting everyone against everyone.

    Last but not least, going after digital books makes absolutely no sense from a market perspective. In the print world, large publishers, with their well-oiled distribution systems could dominate markets and at least partly keep prices high. Only they could push books into most bookstores. You have to be big to make big sales. That’s what Oprah discovered when she tried to push books from unknown authors and small publishers. She created a demand that in the paper print world, they could not supply. The result was a disaster.

    But in the digital market, a mere author with no publisher behind him can see his sales go from a few dozens a week to hundreds of thousands a few weeks later. No printing presses or warehouses are needed. The playing field may not be flat, but it’s far more so than for almost any other industry in human history. And in that sort of market, no one can dictate high prices. If the Big Six set their prices too high, people will do their reading from the Little 6000.

    And there is absolute no consumer-oriented rationale for regulating that sort of lively, highly competitive market. And yet that’s what our current DOJ is doing. We need to face that in this lawsuit crippling innovation and growth in publishing may be a feature rather than a bug.

    If the Big Six have so much trouble standing up to the DOJ that half of them have to settle out of court, what do you think will happen to you and I if they go after us? And what if they are actually going after us for what we’re saying, but using these complicated pricing regulations as a pretext?

    That’s certainly something to think about.

  8. I suggest you do more research into how the wholesale pricing model works. The vendor still purchases the book for the publishers set price, however they can then sell it for what they want even if they lose money. In addition the publisher pays a smaller commission for sales.

  9. @Jesslyn – I believe Joanna was referring to a little-reported upon exception to the DoJ’s settlement. Laura Hazard Owen explained it at length in a Paid Content post. (The first paragraph is a little confusing–at least, it was to me–but the second paragraph basically explains the situation in layman’s terms):

    “Agency pricing has been declared legal, and it doesn’t go away now. The settling publishers can still sell their ebooks to retailers under agency contracts, where they set a book’s list price and the pay the retailer a commission. The difference now is that retailers can discount the ebooks however they want.

    “However, there are limited exceptions: The settlement allows HarperCollins, Hachette and Simon & Schuster to negotiate new contracts that include “a commitment from an e-book retailer that a retailer’s aggregate expenditure on discounts and promotions of the Settling Defendant’s ebooks will not exceed the retailer’s aggregate commission under an agency agreement in which the publisher sets the ebook price and the retailer is compensated through a commission.” The settling publishers can also negotiate one-year contracts that “prevent e-book retailers from cumulatively selling that Settling Defendant’s e-books at a loss over the period of the contract.”

    “It’s not clear, though, how those “commitments” will be enforced or what kind of reporting the retailers would have to do to show publishers that they’re not selling all of their books at a loss. “If you were a publisher wanting to make sure that a retailer had not exceeded their allowed discounting, you would want to know precise data about how many units were sold at which price points,” Michael Cader writes in a really excellent explainer post at Publishers Lunch (paywall). “But retailers have never provided that kind of the data in the past, and are expected to resist strongly on that point.”

    [Link]: http://paidcontent.org/2012/09/10/what-the-doj-settlement-means-for-ebook-prices-now/

  10. Strangely, my mailbox was flooded today with price changes for books on my watch list. The kicker is that the same books whose prices are dropping on Amazon are going up in price in the Kobo store, therby creating a significant price difference between the two stores.

    One example is Pandemonium, which was 9.99 in both stores. As of today, Amazon is selling it for 8.74, while the Kobo book is now 11.99! How is Kobo going to keep any US customers?!

  11. PS: Pandemonium is a Harper Collins title, BTW.

  12. Once again, like a broken record, I must ask: why are there Kindle stores in European countries, such as Spain which has a very high unemployment rate, and there isn’t one in Canada which has a strong dollar and a lower unemployment rate. I cannot for the life of me make any sense of this. The only thing I can think of is the once Canadian company Kobo is causing *problems*. Remains a mystery to me.

  13. @devini, I know there were reports in the past of Amazon having troubles in negotiations with Canadian cellular providers (which is big for their Whispernet service), but I don’t know if that’s still the case or if it was a significant stumbling block. I’ve always thought it odd that there is no Canadian specific Kindle store. All the other markets, besides the UK, where they’ve opened a Kindle store are non-English language markets perhaps that plays into it???

  14. Hmm, it really does not make any sense, especially since they have French amd English books already. It’s not like in Italy or Germany, where they had to start from 0. I also hate that there are so many books in the French store that I cannot my hands on, even though they are electronic, because of publisher georestrictions. Idiotic in this day and age.

  15. Rich Adin over at An American Editor has a great blog post about this and concurs that higher prices may be on the way.

    http://americaneditor.wordpress.com/2012/09/12/bye-bye-9-99-and-price-competition-in-ebooks/

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