mark coker.jpegEditor’s Note: This article appeared on the Smashwords blog yesterday and I apologize for missing it. It explains, in detail, why Smashwords moved to agency pricing and in my opinion, it makes sense for them to have done so. Given the disparate pricing models out there now, and Amazon’s position on pricing, I don’t think they had much choice. Read on to find out why. PB

Our authors and publishers spoke (and some wrote, screamed, begged and politely asked), and we listened.

Effective today, all Smashwords retailers are pricing Smashwords books at the price set by the author or publisher. No more discounting.

It also means we have significantly increased the royalties we pay our authors and publishers.

To summarize how we got here, and what it means to Smashwords authors, publishers and readers, let’s take a stroll down memory lane to review how books have traditionally been priced, distributed and sold.

For most of the last several decades, the book industry worked under a wholesale pricing model. A publisher would ship their books to a distributor or wholesaler, who would then sell the books to brick and mortar bookstores. In advance, the publishers and their supply chain partners would work out a discount schedule in which the retailer would purchase the book for some percentage off of the suggested retail price.

For example, a retail bookstore might purchase books from the wholesaler/distributor for 50% off of list price, which means the retailer would pay $15 for each $30 list price book they sell. The retailer could then set the price. Most retailers, taking advantage of their close proximity to the customer and their understanding of consumer behavior, had the ability to discount the book to such a price that they could achieve their objective.

For example, if a retailer’s objective was to maximize the per-copy profit, they might sell the book at list price (when I was Brazil in October, I learned some airport bookstores sell print books for more than the list price). If the retailer wanted to maximize their overall profits, they might sell the book at a discount and make up the difference in increased volume. If a retailer wanted to attract buyers into their store, they might even sell the book at below cost.

To the author and the publisher, the discounting didn’t make a difference, because the author and publisher were paid a fixed percentage of the suggested list price. Retailers liked this pricing model because it gave them the flexibility and freedom to use price to help serve their customers and serve their bottom line. Everyone was happy.

Then ebooks came on the scene, and the pricing of ebooks followed the same general wholesale model, only rather than shipping physical copies of a dead-tree book to a warehouse or distributor, the publishers or their distributors would ship a single digital copy of the book to the retailer, and the retailer would make digital copies each time they sold one.

Retailers, responding to customers who expected to pay less for ebooks than print books, started aggressively discounting. Many publishers dreaded such discounting for fear it would devalue books, or would cannibalize print book sales. Then Amazon, in an effort to serve their customers, started selling many best-seller ebooks for under $9.99 – for less than what Amazon had to pay the publisher for the book.

An ebook price war broke out, and other ebook retailers tried to match Amazon’s price.

Now remember, in the print world, publishers didn’t care too much if a retailer discounted the book, since the publisher is paid based on a predetermined discount off of list. Publishers also understood that if the retailers couldn’t sell through their inventory of books, those books would be returned to the publisher for a full refund. So the discounting double-benefited the publishers.

You might think the publishers would have been happy that Amazon and other retailers were pricing books at below cost. The low costs drove up demand, helped accelerate the growth of the ebook market, and helped the publishers sell more books.

But no, the big New York publishers were not pleased. They feared that Amazon and other retailers, by pricing their books under $10.00, were devaluing books and setting an inappropriate customer expectation that ebooks should be priced at $9.99 or less. Publishers feared Amazon was exerting too much control over prices, and further feared that some day Amazon would come back to publishers and demand greater discounts, thereby permanently lowering the publisher’s list prices and profits.

When Apple came on the scene in April 2010 with a new pricing model known as “agency,” one in which the publisher set the price and Apple, acting as a sales agent, would not discount, five of the big six New York publishers jumped for glee. Finally, they thought, Apple would be their savior – their counterbalance – to Amazon’s increasing influence in the ebook business. Publishers also appreciated that Apple would pay them 70% of the list price, as opposed to the traditional 50% or less that they earned under the conventional wholesale pricing model.

So the five big New York Publishers – now known as the Agency Five or A5 – put a gun to the heads of all the major ebook retailers, and basically told them, “you need to either switch us to the agency model April 1 or we’re going to stop allowing you to sell our books.” As you might imagine, the retailers were not pleased. First, no one appreciates threats, especially from suppliers who are supposed to be your partners. And second, if you take away a retailer’s ability to control the price, you make it difficult for retailers to do what they do best, which is to use price as a tool to sell more product and make customers happy.

Amid this awkward shift to agency for the A5, the A5 also gave second shrift to the smaller independent ebook retailers, even though a thriving ecosystem of indie ebook retailers would assist the A5’s master plan of creating a counterbalance to Amazon. Due to logistical problems, contractual holdups, tax collection requirements and prioritization, the small indie ebook retailers were not allowed to switch immediately to agency, which meant that the indie retailers lost access to most of the best-selling books in April. I’m told more than one indie retailer went out of business after the virtual rug was pulled out from underneath them when they could no longer sell these books.

The move to agency also created conflict within the supply chain, and it created challenges for Smashwords authors too. Prior to the advent of agency, three our original retailers – Barnes & Noble, Sony and Kobo – were under the traditional wholesale retailer model. Previously, most Smashwords authors and publishers didn’t care that their books were discounted, because the discounting only helped sell more ebooks, which benefited authors, publishers and readers.

But then around July, Amazon increased their royalty rates for direct publishers to match the Apple 70%. For the authors who chose to work directly with Amazon, they had to agree that their books would not be sold elsewhere for less, and if Amazon discovered the book priced elsewhere for less, they had the right to discount the author’s book to price-match the competition.

This is when the proverbial fertilizer hit the fan for some Smashwords authors who publish direct with Amazon via DTP and then use Smashwords for all the non-Amazon retailers. I recall receiving one especially frantic email from a Smashwords author on disability retirement who was faced with the prospect of seeing his Amazon sales slashed due to discounting at our retailers. This author, like some other panicked authors who had been selling at Amazon for a long time, decided to remove their books from Smashwords retailers. This, to me, was an especially disconcerting trend, because these authors were hurting themselves by removing their books from important retailers like B&N, Sony and Kobo. Some of these authors even removed their books from our Apple channel, or unpublished their books at Smashwords altogether, even though Smashwords and Apple have never discounted. When someone yells “FIRE,” it’s tough to think straight. Matters weren’t helped when some authors, clearly talented on the imagination front but lacking hard details, jumped to erroneous conclusions in online message boards, which further fueled more panicked responses.

When an author pulls a book from retail, it destroys their sales rank, they lose all their reviews, and they deny themselves the opportunity to reach new readers. In other words, no author in their right mind should ever remove a book from retail.

On the other hand, it’s difficult to maintain your right mind when your friends are panicking too, and you’re suffering real measurable harm when an auto-pricing robot cuts the price of your book at the largest retailer – a retailer said to control 70% or more of the ebook market. Remember, Amazon had every right to do these price corrections – and the authors agreed to this when they signed the Amazon contract – though it did create a situation where some authors felt forced to take actions to preserve their sales at Amazon. Some of these authors eventually waded back in, or tried to compensate for the expected discounting by raising prices at Smashwords, or raising prices across the board.

The obvious solution to me, given the impossibility of managing two incompatible pricing models, was to give our authors and publishers complete control over the price of their books. We’ve always done this for sales at Smashwords.com, our small retail operation, but I knew it would be a bigger challenge to move our retailers to the agency model, or something agency-like. Needless to say, none of our retailers were too keen to do this when I first started requesting this in June. I can’t blame them for their hesitation, because the agency model creates all kinds of complexity and expense for the retailer to administer. I imagine many were still smarting from the insult of being forced to do it in the first place by the A5.

Today, however, I’m pleased to report that Kobo, Barnes & Noble and Sony have transitioned all Smashwords books to the new model. I’m also pleased to report that unlike the tactics used by the Agency 5, we did not put a gun to the head of our retailers. No shots fired, no threats made. In the end, I think each retail partner decided on their own that what is best for Smashwords authors and publishers is also what’s best for them and their customers in the long term.

Possibly I have a different view of our retailers than the view from the large publishers. I see our retailers as true partners. Our mission at Smashwords is to help our authors and publishers connect with readers. One of ways we accomplish this is by supporting our retail partners because they more than anyone know how to connect readers with books.

Every once in a while I’ll see people suggest authors should only sell their ebooks direct on their own websites, as if all intermediaries between the author and the reader are to be excised. Those folks are smoking opium. Smart authors put their books at retailers who can put their books in front of customers.

So effective immediately, all our retailers are on the same page. Like with our other agency retailers Apple and Diesel, we now pay our authors and publishers 60% of the author/publisher-determined list price for books sold at Kobo, Barnes & Noble and Sony. Simple.

Well, mostly simple. Here are some additional fine print details of interest to Smashwords authors and publishers:
This change means that for sales at B&N and Sony, we have significantly increased our royalty rates. Previously, we paid 42.5% of your suggested list price. The new 60% represents a 42% increase (42.5*1.42=60). At Kobo, we’ve increased our rate from 46.75% list to 60% list for most sales, a 28% increase. At Kobo, the new royalty rate applies for books priced between $.99 and $12.99, and only for dollar-denominated sales. We can no longer ship books to B&N that carry the price “Reader Sets the Price,” so if you’re one of the very few authors with this price setting, and you want distribution to B&N, then please change your price asap to $.99 or higher. All three have the freedom to price match if the same book is sold elsewhere for less. Make sure your prices at Smashwords are the same as elsewhere. Click to your Smashwords Dashboard’s Channel Manager for summarized details.
With this change comes new responsibility for authors and publishers to price their books at a level customers want to pay. Here, I think indie authors and small publishers do a much better job than the big publishers. Already, the average book at Smashwords is priced under $5.00. At $5.00, a Smashwords author earns $3.00 profit for every book sold at retail. Large publishers can’t compete against that (a traditional mass market paperback sold for $8.00 earns the author about 40 cents), which is one of the reasons I firmly believe the future of publishing lies in the hands of indie authors and small publishers, and in the years ahead we’ll see more and more big-name authors go indie. They can earn more money per sale while serving their readers with a lower cost product. It’s a win-win for the author and reader.

If you’d like to learn more about the agency model, Mike Shatzkin did a good post on it a few days ago at his Idealogical blog in which he concluded agency pricing represents the most significant event in 2010 for the publishing industry. Click here to access it.

If you’d like to learn about the transition to agency from the perspective of an indie ebook retailer, Kelley Allen over at Diesel has been posting a fascinating blow by blow as the events unfolded from April through today. She thinks the agency model will eventually be good for indie retailers and customers in the long term, though the path to here was fraught with much pain. Some links from the Diesel blog:

April: Most of the posts on this page deal with agency. Start at the bottom first for a chronological blow by blow: http://blog.diesel-ebooks.com/?m=201004

May:
Jilted (this caused quite a stir): http://blog.diesel-ebooks.com/?p=124

Day 43, Landing Harper Collins: http://blog.diesel-ebooks.com/?p=137

Day 45 days, they got Penguin: http://blog.diesel-ebooks.com/?p=130

June:
Mobi announces that they are no long selling Agency
http://blog.diesel-ebooks.com/?p=161
http://blog.diesel-ebooks.com/?p=179

July:
Diesel inteviewed by Kat Meyer of O’Reilly about Agency
http://blog.diesel-ebooks.com/?p=201

September:
Day 153: Hachette back up http://blog.diesel-ebooks.com/?p=368

October:
S&S back up http://blog.diesel-ebooks.com/?p=520

Nov:
Kelley Allen’s recap of her latest thoughts on agency
http://blog.diesel-ebooks.com/?p=704

My sincere thanks to Smashwords authors, publishers and especially our retail partners for their support in helping us navigate these exciting times.

9 COMMENTS

  1. I blame the big publishers for this situation. They forced the agency model onto Amazon, Amazon responded by forcing the agency model onto its self-publishers and small presses (by penalizing Kindle publishers who worked with retailers that didn’t adhere to the agency model), many Smashwords publishers/authors responded by refusing to submit their e-books to any retailers who didn’t adhere to the agency model (I was one of those who made that choice, and man, did I agonize over it), and Smashwords responded by politely asking the retailers to switch to the agency model.

    It’s all a mess, and I’m not going to make cheerful remarks about “a level playing field,” because I think the agency model is bad for everyone: readers, retailers, and publishers. I’ll just say that I don’t think the situation is as bad as some commentators here are making it seem. One just needs to realize that Amazon’s legal language covers very specific scenarios and doesn’t cover other scenarios. There are various, legitimate ways for publishers to continue to make their e-books as cheap as possible. The big publishers are clearly not interested in minimizing their readers’ expenses, but many small presses and self-publishers are. I think we’ll see some creative solutions to this problem in the coming months.

  2. Dusk, I don’t think you can say that Amazon “forced” the agency model onto the small publishers. As I’m sure you know, they give you a choice (described for the benefit of other readers):

    1) a wholesaling arrangement in which Amazon buys your e-book at a 65% discount from your list price, leaving you with a nominal 35% royalty. Amazon sets the actual selling price. Even if Amazon decides to give your e-book away, they still pay you the 35% of your list price.

    2) an agency arrangement in which Amazon takes a 30% commission from the actual sales price, leaving you with an (almost) 70% royalty. You set the sales price, *except* Amazon reserves the right to reduce the sales price to price-match the competition. If that happens, you get (almost) 70% of the reduced sales price — this is the clause that caused the panic that Coker was talking about. This 70% royalty option is only available if your sales price is between $2.99 and $9.99.

    If you don’t want to do agency with Amazon, you don’t have to. But I have to admit it’d be kind of hard to ignore the difference between 35% royalty and (almost) 70% royalty. Once you choose to go Agency with Amazon to get that higher royalty on what’s certainly going to be the bulk of your e-book sales, that’s when you start feeling the pinch from simultaneously dealing on a wholesaling basis with the other retail channels. With Agency, you pretty much need to be all-in or all-out.

  3. @Doug, I only wish it were that simple.

    First of all, if you look at Amazon’s new DTP contract, you’ll see that it requires the following (with my italics added): “you must adjust the List Price as required to ensure that the List Price, plus 15% (the statutory Luxembourg VAT rate) for sales to UK customers, does not exceed the lowest of: (a) the lowest suggested retail price or equivalent price for any digital or physical edition of the Digital Book; (b) the lowest price at which you list or offer any digital or physical edition of the Digital Book on any website or other sales channel”. This is for the 35% option, not the 70% option.

    Secondly, the reports are that Amazon is going beyond the terms of its 70% agreement. The 70% section of the contract says, “But if we sell the Digital Book at a price that is below the List Price (after deducting 15% (the statutory Luxembourg VAT rate) for sales to UK customers) to match the price at which a third party sells any digital or physical edition of the Digital Book or to match the price at which we sell any physical edition of the Digital Book, the Royalty will be equal to 70% of the amount equal to the price at which we sell the Digital Book less the Delivery Costs . . .” The 70% section also says, “If at any time your Digital Book does not meet the requirements for the 70% Royalty Option, the Royalty for the Digital Book will be as provided in the 35% Royalty Option.” Those are the two options offered in the 70% section of the contract: that if the e-book is sold for a lower price elsewhere, Amazon will either lower its own price or it will give the publisher a 35% royalty.

    But according to this post, when an author offered his e-book at another retailer for a lower price, Amazon actually removed the buy button from his e-book. When the author enquired about this, Amazon replied, “We have logic that temporarily suppresses the buy box to ensure that the digital list price of a DTP book does not significantly exceed the lowest suggested retail price of any digital or physical edition of that book on other stores.”

    So yes, I would say that Amazon is forcing publishers to adhere to the agency model. Both from their contract terms and from their behavior that goes beyond the contract terms, Amazon is making it impossible for DTP publishers to work with retailers who offer the traditional wholesale model.

  4. As a consumer and not an author, and as a retired person, my book budget is fixed. If the price increases, my purchases decrease within that fixed budget. As more baby-boomers reach retirement, more of us will be in the same boat. I simply cannot buy the same number of books in the future by increasing my budget. I will continue to seek public domain classics and bypass higher prices and new releases. Someone may make more profit, but it won’t be from me.

  5. mldavis2, not to be too negative, but you spending the same amount for less product does seem like a good method of expanding others profit. They have to do less work, but you are still handing over their money.

    Of course, the publishing industry is not a monolithic entity and your buying fewer books also translates to fewer opportunities to take a shot at those dollars.

  6. What makes me most angry, is that I buy an eBook with DRM and every kind of restriction and don’t get the same value as from a printed book. I bought a long time ago the printed version of Pullmans Dark Materials, never read it though. Recently I got his first first book as ebook in a Halloween discount promotion. I love it and wanted to buy the other two books, but I am still hesitating. At the end I get two ebooks for a higher price than the printed version, which at least I cant sell and get some money out to finance the restricted ebooks, which are only for me. A printed book I can give to friends, sell it on ebay or trash it in the bin.
    At the moment I just get much less value for an ebook, but still have to pay the same or a higher price than the printed version… sorry, but I only see greed there in the agency pricing.

  7. It’s all about perceived value. With a fixed budget, higher fixed prices, for me, simply means fewer opportunities to read new releases. I don’t care where the money goes, although I’d rather see authors receive it and not a middleman. If prices are too high, I’ll head for the library or borrow from a friend. It has been a very long time since I purchased a new release from a ‘major’ author in paper format, and it appears that my eBook purchases will follow suit.

    It is absurd to pay the same for a DRM-crippled electronic ‘copy’ of the same text without paper, printing, shipping, display and middleman costs embedded.

  8. If Doug is correct about the 70% royalty requiring ebooks to be priced between $2.99 and $9.99, then we will see the first Amazon imposed price increase on ebooks as a result of the Smashwords deal. I expect that some, if not many, indie authors whose books are priced below $2.99 on Smashwords and elsewhere will raise their price to $2.99. It will be interesting to watch the indie pricing trends.

The TeleRead community values your civil and thoughtful comments. We use a cache, so expect a delay. Problems? E-mail newteleread@gmail.com.