With all the buzz about the agency model, the Justice Department, allegations of collusion, etc., I figure the time is right for a post about ebook pricing. Here are some quick thoughts as both a consumer and a publisher:
Eliminating waste is always a good thing — Walmart has mastered this for years. They squeeze every bit of waste out of the supply chain and generally end up with the lowest prices. I’m a frequent Walmart customer and I greatly appreciate this. In fact, the only people who don’t like this are (a) other retailers who can’t match those prices and (b) ecosystem players who are part of the waste that’s being eliminated, including suppliers.
Loss leaders are a great retail model — Selling some products at or below cost is a great way to bring customers in the door, regardless of whether that door is physical or virtual. I’m sure I’ve bought many cartons of milk at a loss for the retailer who made it up by selling me other items at a nice profit. It’s a model that works, but have you ever seen a store that sells most of their products at a loss, every day?
Taking loss leadership to a new level — Remember when Amazon first launched the Kindle and pretty much every ebook was $9.99? It’s no secret that Amazon was losing money on the majority of those sales. In fact, they still are. Prior to the agency model Amazon was free to set whatever customer price they wanted for ebooks, even if it meant they were selling every single one of them at a loss. That brings up the razor/blades model, where it’s not unusual for the razor to be sold at a loss but the profit is made on the sale of the blades. So if ebooks are the razors what are the blades? The ereader device? According to iSuppli, the Fire’s manufacturing cost is slightly higher than its retail price. How long can a retailer stay in business when they’re losing money on both the razors and the blades? Presumably they’re making some money on other products they’re selling (e.g., shoes, electronics, etc.) Perhaps. Then again, if they have deep enough pockets they can continue selling all their products at a loss till the cash dries up. In the mean time, competitors will find it difficult, if not impossible, to compete, so they’ll disappear. What happens after that? Do prices remain low as products are still sold at a loss? Not if that company wants to stay in business.
The agency model prevents brand erosion — Think of the premium products you’ve bought or admired. Oftentimes their prices are higher than most of the competition’s. What would happen if those prices were suddenly significantly reduced? Would those products retain the full value of their premium brand? Highly unlikely. And shouldn’t the owner of that brand have a say in what price is associated with it? Again, it’s OK for a short-term loss-leader model but I’m talking about selling something at or below cost for years and years, not just for a day or two. Over time the value of that brand is affected. That’s why I think publishers should definitely have the option to go with the agency model so they can manage retail prices and not let their brand lose value. Btw, consumers will ultimately vote with their wallets. If they feel the publisher’s prices are too high they’ll stop buying and that publisher will either need to make adjustments or go out of business.
Fixed prices vs. price-fixing — In the U.S. we’re so used to competitive retailer discounts that we’re surprised to hear of the fixed price models used in other countries. For example, in Germany the price you pay for a book doesn’t change from one retailer to the next. They’re all required to sell them at the same price. Obviously there’s a huge difference between Germany’s fixed price law and the price-fixing the Justice Department is alleging. Germany’s model doesn’t lend itself to squeezing out waste like the U.S. model but I’ll bet it prevents one deep-pocketed retailer from putting their competitors out of business.
I don’t work at a big six publisher but I believe publishers should have the option to choose between the agency and wholesale models. The key issue though is that the Justice Department has suggested that Apple and a number of publishers colluded to keep prices high. I think this article by Gordon Crovitz in The Wall Street Journal sums it up quite nicely, particularly in the closing two paragraphs. Read that piece and ask yourself if the Justice Department’s efforts will actually fix or merely add to an existing problem.
What’s your opinion of the pricing questions and allegations currently facing the book publishing industry?
I’m not a fan of Amazon and I’ve never bough an e-book from them. I maintain that all they were doing was establishing a rational price in the marketplace. Consumers understand that the total end to end cost of providing an electronic book is significantly cheaper then a paper book and expect to pay less for it. When Amazon was selling best seller hard cover books at $12 to $14 then $9.99 is a rational price in the market. The only reason they were taking a loss for so long was because the publishers refused to adjust the list price. The argument that they were doing this to eliminate competition would be a lot stronger if the publishers reduced the list price to $18 and then Amazon dropped their price from $9.99.
I don’t believe for a minute that Amazon was pricing at a loss because they were trying to establish a monopoly. I haven’t seen them do that for any other products so why just e-books? Why not MP3? Why not movies?
There is a big difference from a country establishing price controls and an industry price fixing. The USA publishers had the option of lobbying the government to establish price controls. That would have been legal. I don’t believe that any industry has the right to demand price control. I’m sure they all think they should have it though. Just for their own industry of course, not for their suppliers.
Eliminating waste and wringing out ‘efficiencies’ is not always a good thing. In one case, Walmart convinced an entire Mexican community to gear up to produce low-priced Christmas ornaments. It then abandoned the community when it found it could produce those same ornaments for pennies on the dollar cheaper in China. The community was left even poorer and probably more drug and crime riddled than before, a pathology that isn’t going to be stopped by our borders.
A utilitarian calculus has its place, but it can’t be the do all and end all. Every field of human activity needs to take into account the whole and not just the bean counting. Slash and burn agriculture, for instance, is very efficient. You buy land cheap, you destroy a forest for farm land and then exhaust that land in a few years. Then you move on, since new land is cheaper than restoring that exhausted soil.
The entire system to create, publish and distribute books is like that forest. For a time, you can slash and burn, ignoring everything but the final cost of the product. But in the end, you find yourself looking at a vast wasteland. Squeezing every last penny out of the system in the name of efficiency will, in the end, destroy the system.
The illustrations are numerous. A masterpiece like Cry Beloved Country was only published because a publisher could afford editors who read every book that came in. Tolkien’s Lord of the Rings was only published because Unwin had enough profit to published a masterpiece it thought would never sell well. To Kill a Mockingbird only became one of the most influential books written because its publisher could afford to have an editor who insisted on rewrite after rewrite.
It’s the surpluses and inefficiencies that create a healthy environment for things to grow, whether they be trees or books. Creativity needs open spaces. That’s not something I think Walmart understands nor is it something Amazon knows anything about. In the long run, if Amazon has its way, authors will be treated as shabbily as Amazon treats workers in their huge distribution centers.
And that’s why no retailer distributor should be allowed to dominate ebook distribution no matter how “efficient” their system is.