E-Book Smackdown: Who Should Control Pricing—Publishers Or Amazon?

Gigaom

A couple of years ago, with Amazon steadily pushing down the prices of e-books, the fortunes of the big book publishers were sinking fast. Then Apple (NSDQ:AAPL - News) came along and helped enable publishers to set their own prices for their e-books across platforms. That model, known as agency pricing, has helped keep big publishers afloat in a time of major transition. But it’s also sparked controversy and legal battles, including threats this week of a lawsuit by the Department of Justice against Apple and its publishing partners. So who should be able to set e-book prices—the major publishing houses or retailers like Amazon? (NSDQ:AMZN - News)

Well, there’s been some debate on that question this week among our own ranks, with two of our writers taking opposite sides. So we decided to let them thrash it out on the site! Below, Mathew Ingram and Laura Owen debate the merits of the agency-pricing model.

Mathew Ingram [MI]: To me, the debate boils down to whether agency pricing is a justifiable and/or sensible approach by publishers to what is happening in their industry. In a nutshell, I would argue that while it might be understandable—in the sense that the Big Six are afraid of Amazon’s growing power in the book business, and want to protect their book margins as much as possible—it is neither justifiable nor (in the long term at least) sensible or advisable.

There’s no question that being a major player in a market that is in the process of being disrupted is not pleasant. Amazon is doing everything it can to not just drive down e-book prices but to disintermediate publishers in a number of other ways, including signing up authors to its own imprint. If you are a giant corporation that is used to controlling the marketplace to a large extent—both in terms of supply and in terms of pricing—then watching a new competitor wrest some of that control away from you is hard to do.

That said, I think agency pricing is unwise—and not just because it has attracted antitrust attention from the U.S. government and the European Union, among others, but because it isn’t in the long-term interests of either readers or (I would argue) of publishers themselves. There is a growing body of evidence that lower prices can boost sales of books by orders of magnitude—which suggests that publishers might actually be shooting themselves in the foot by trying to hang on to higher prices.

Laura Owen [LO]: I think agency pricing actually is in the interest of any reader who supports a vibrant book-buying marketplace that is not dominated by one company—i.e., Amazon.

You say that publishers are giant corporations, but Amazon is much, much larger than any single book publisher—or any other book retailer. Because of that, it can undercut chains like Barnes & Noble (NYSE:BKS - News) on price. It does so consistently on print books and on e-books that are not regulated by agency pricing. In fact, Barnes & Noble CEO William Lynch has said that Barnes & Noble has been able to remain competitive in the e-book game—the company currently has a 26 to 27 percent market share in the e-book market—because of agency pricing.

Some may say, “So what? I don’t feel any loyalty to Barnes & Noble.” With the closing of Borders, though, Barnes & Noble is the only remaining bookstore in many communities. Then there are the independent bookstores, which are definitely struggling as well. Through the American Booksellers Association’s partnership with the Google (NSDQ:GOOG - News) eBookstore, the indies can sell e-books through their websites. Because of agency pricing, they’re able to offer e-books from big-six publishers at the same price as Amazon. In this way, agency pricing can keep book spending within a community instead of sending it all to Amazon.

In addition, with the impending launch of sites like Bookish (which is quite delayed at the moment), book publishers are getting into selling direct to their customers—a move that will be incredibly good for the business. But efforts like that won’t go very far if Amazon is consistently undercutting them on price.

MI: That’s a great point, Laura. You are right that agency pricing does to some extent protect independent booksellers, or allow them to compete on more equal footing with Amazon, and I am as much in favor of a competitive bookselling marketplace as I think you are. I also recognize the fact that Amazon is a gigantic corporation—and perhaps even one that is using books as a loss leader for other products—and there are risks of having a lot of market power concentrated in the hands of single entity.

LO: Amazon is definitely using books as a loss leader. That’s why you’ll sometimes see print books priced lower than e-books: Agency pricing gives Amazon no control over e-book pricing, but it can still price print books at whatever it wants. People blame the publishers when they see hardcovers cost the same as or less than e-books, but that’s an image Amazon is able to manipulate behind the scenes because it’s willing to sell hardcovers below cost.

MI: True—but at the same time, the Big Six publishers are also owned by what in many cases are large international media conglomerates, and I don’t believe that their interests ultimately have anything to do with creating a more competitive bookselling marketplace, or a world that is ultimately better for book buyers and readers—or authors, for that matter. I think they saw agency pricing as a way of protecting their traditional profit margins, and they used Apple’s desperation to get into the book-selling business as a lever to get what they wanted.

Let’s talk about profit margins. Publishers’ desperate attempts to maintain their existing profit margins on print books could be preventing them from seeing the larger opportunity in e-books, just as a fear of Apple and digital music caused record companies to miss the boat when the MP3 revolution came along. I’d hate to see publishers make that same mistake—and I think agency pricing just encourages them to cling to the past instead of trying to adapt to the future.

LO: We’ll have to agree to disagree about the value of book publishers. I will have a soft spot for them as long as they are publishing the vast majority of the books and authors I want to read—the “no-substitute” books, as Seth Godin puts it.

MI: Yes, but do those profit margins they are trying to protect with agency pricing help authors and book buyers? In some ways, yes. Traditional publishers still serve a number of important purposes, including discovery and professional content curation (or editing, as we like to call it)—but I think they are also fighting a rear-guard action aimed at protecting their control over the distribution channels through which writers reach an audience, and it’s not clear to me that this is ultimately a good thing for anyone but the publishers themselves.

LO: It’s a good point that publishers have high profit margins with e-books. (That’s not to say that publishers have NO costs publishing and distributing e-books—they do.) It’s an issue that’s gotten more attention recently, as some book publishers report flat sales and increasing profits. I think the answer is higher digital royalties for authors.

Right now, most publishers are paying a royalty of 25 percent (net) on e-books. As you pointed out, Amazon pays self-published authors a 70 percent (gross) royalty on e-books priced at $2.99 and above. (On e-books below $2.99, Amazon pays just a 35 percent gross royalty.) I’d like to see traditional publishers pay a much higher royalty on e-books, with the industry standard at 50 percent. It’s a great way to engender goodwill, acknowledge that the costs of distributing books in digital formats are lower (though not zero) and reward authors for sticking around instead of going it alone (or with Amazon).

MI: And who has done the most to make it easy for new authors to reach an audience, traditional publishers or Amazon? I would argue that it is Amazon by a landslide, thanks to the Kindle platform and related features—many of which provide writers with a far greater share of the proceeds from their work than any traditional publisher has ever dreamed of paying.

If the profit margins that agency pricing provides are just used to shore up the walls that the Big Six maintain around the publishing process, how does that help authors or readers? I agree that a competitive book-selling marketplace is a positive thing, but there are other benefits that appear when a market is disrupted the way that the book industry is being disrupted.

LO: Does Amazon make it easier for new authors to reach an audience? Not if those authors want to reach print readers. Around 80 percent of book sales are still print; bricks-and-mortar bookstores are still a major source of discovery of new titles (the number-one source, in fact, for kids’ books.) In part because of its extremely poor relations with other booksellers, and in part because it’s not a priority, Amazon can’t do much to get its authors’ titles into those physical stores.

In a few cases, it’s working with Houghton Mifflin Harcourt to handle its print side, but many booksellers, including Barnes & Noble, have said they won’t stock those titles in their stores (at least as long as Amazon doesn’t offer them the e-books). Traditional book publishers do a much better job than Amazon does making titles available across a wide variety of platforms—not just online but also in stores and in libraries.

MI: What do you think of my argument that publishers are actually shooting themselves in the foot by fighting to keep prices high—and that their resistance to lower pricing is a lot like the resistance that the music industry mounted against lower CD prices and subsequently to low prices in the iTunes stores? I think the nature of book pricing has changed in an e-book world, and publishers need to step back and try to take advantage of those changes, instead of simply throwing up walls around their traditional business models.

LO: I agree with you that publishers need to experiment much more with e-book pricing, taking into consideration factors like whether a book is new or old, whether its author is well-known or unknown, etc. In fact, I think agency pricing has made publishers much more willing and able to experiment with lower e-book prices—across retailers.

With agency pricing gone, Amazon would be running those pricing promotions itself, and competitors like Barnes & Noble, Kobo and Google will have to decide whether they want to spend resources matching those prices instead of building up their platforms in other ways.

MI: And I agree that having too much power concentrated in too few hands is not good for the industry or for readers and authors. But I think Amazon is on balance a force for good, in that it is pushing publishers to become more flexible and adapt to the changes that are happening in the book world—and that could wind up being a benefit for everyone.

LO: OK, and my last point: agency pricing is abolished and Amazon gradually becomes the only player in the game, there’s no guarantee that it will keep e-book prices low…or that it will keep paying self-published authors generous royalties. Why should it, if it doesn’t have any competition?

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