Mike Shatzkin has another fascinating essay in which he goes into detail about how e-books are priced by various actors in the e-book publishing industry. He explains that the break between agency pricing and non-agency pricing creates two separate standards—the “digital retail price” (of which agency vendors take 30% and are not allowed to change), and the “suggested retail price” (which is usually close to the cost of the lowest print version, and agency vendors pay half of to the publisher but can then choose to mark down for their own sales).

The non-agency publishers who sell to Apple are obliged to have both: their DRP is the price Apple will charge (until and unless they’re undercut) and the SRP is the price that forms the basis of discounts to wholesale customers. I haven’t studied this but I think most publishers set SRPs higher than the break-even point because they want wholesale customers to go agency and would trade less revenue to achieve that, as they did when they switched over in the first place. (The publishers could set the SRP at a point where 50% of it equals 70% of the DRP, so their take is the same either way.) Theoretically, the publisher can count on the wholesale-purchasing retailer to discount the book to match the DRP, reducing their own margin and being competitive with the DRP in the consumer’s eyes.

This pricing strategy depends on the retailer discounting from the SRP to keep the pricing of the ebook from looking ridiculous. Not discounting is a way for the retailer to push the publisher to lower the SRP, which could start a cascade of price-cutting. That discounting has usually started with Amazon; others then follow suit. There are anecdotal claims that Amazon is starting to foil this strategy by letting publishers who set high prices live with the prices they set more often than they once did, but nobody but Amazon knows that for sure.

He also discusses the prices charged by e-book distributors, such as BookBaby, BookMasters, Smashwords, and various literary agents, and also the percentage of royalties paid to authors by publishers (currently the standard is 25% of the 70% of revenue after the agency vendor takes its cut, or 17.5% of the cover price). Shatzkin notes that the services publishers offer, including advances against royalties and a print revenue stream, will still give authors ample reason to stay with them rather than self-publish for four times the royalty rate, but expects the royalty rate to go up as more books are sold as e-books.

Shatzkin predicts that over the next few years, the revenue structure may change to favor publshers and authors, and that publishers’ rates will become more competitive with self-publishing as the global e-book infrastructure gets more mature. Of course, we still have a way to go yet before that can happen.


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