e-book pricing begins a new era

HarperCollins Publishing on September 11, 2012 announced that it had reached a new e-book pricing agreement with sellers. The changes were the result of the recent final settlement with some parties of a Justice Department suit regarding price fixing between several publishers and Apple Computer. The recent settlement included Simon & Schuster and Hachette, as well as HarperCollins. Penguin, Macmillian and Apple turned down the settlement and the case is currently scheduled for trial next summer.

As an example of the new pricing, Michal Chabon’s new novel Telegraph Avenue is now available in e-book version on Amazon.com for $9.99, substantially less than other recently released e-books from other publishers such as Bob Woodward’s The Price of Politics and Tom Wolfe’s Back to Blood at $14.99.

In a standard free market retail model, the producer sets a wholesale price at which it sells to the retailers and the retailer sets their own price to sell to the consumer. When Apple sought to add e-books to iTunes for the iPad, they instead wanted the same type of deal they have with App developers. In that model, the App developer sets the price and Apple takes 30 percent. This is called the ‘agency model’. Apple not only got agency-model agreements from all the major publishers but also agreement that the publishers would change everybody else to an agency model at the same terms and price as Apple. It was this last point that really got the attention of the Justice Department.  The settlement with the three publishers requires them to drop the agency model and create no new agency model contracts for a period of time.

During the period of the agency model the price of e-book readers like the Kindle and Nook dropped dramatically. This partly occurred because the agency model allowed the companies to sell the readers at a small profit or even at a loss and make it up on content sales. Will this new deal bring an end to cheap e-readers? In a recent interview, Amazon head Jeff Bezos said that the company’s philosophy was to make a small profit at every sale on every customer. It appears that even though margins on e-books will be shrinking, the company still plans on being aggressive on e-reader prices. The recent announcement of new Kindle readers included more features for the same price as the prior models, and even lower prices for the existing models that were not discontinued.
One worry from their competitors is that Amazon would use their dominant position to negotiate lower wholesale prices than the competitors (much like Costco or WalMart does when ordering merchandise by the container-load). But this is not an analogous situation.  While there are substantial per-unit cost savings in producing and shipping large quantities of a physical book, there are no per-unit costs at all with e-publishing (meaning there are no cost savings either!) So the only advantage to be gained by the publisher in giving Amazon a lower wholesale price for higher volumes is the hope that Amazon will promote or feature the book. Of course, there are many routes to promoting an e-book that the publisher can take other than offering a price deal to Amazon.

Another possibility is that the various companies selling e-books will engage in a price war. But most e-book users are pretty entrenched in their chosen brand and would be unlikely to switch unless the difference in price was huge.

On the other hand, if the trial next year concludes along the same lines as the settlement, Apple might very well decide to simply turn over the selling of e-books for iOS devices to a partner, much like the recent strategic partnership between Microsoft and Barnes and Noble. Apple generally disdains competing with others for identical products based on price alone.

And what will this mean for the fate of the retail book store? Undoubtedly lowering prices will accelerate the already rapid conversion to e-books. However, while it may bring still more changes to retail book stores, I do not think it will mean extinction. We may see more ‘artisanal’ type book stores with small square footage and the feel of an old-time stationery store, featuring ‘Coffee Table’ books, collector’s editions, wall calendars, children’s books and other gifts, novelties, and educational toys.

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