As Apple planned the marketing of the iPad as an ebook reader, and the iBookstore as competition to Amazon, they offered a proposal to the publishers that fed their fears of Amazon monopolizing the book market and potentially becoming a publisher itself (which is already happening anyway). To level the playing field, Apple signed onto the agency pricing model, which gives the publisher 70% of the gross profit on a book (they normally get 45% on regular books) to make discounting costly to someone like Amazon, and the publisher sets the price for books, not the retailer, forcing all retailers to charge the same price for the same ebook. It is called agency pricing, since the retailer is acting as an agent of the publisher, instead of a buyer of the publisher’s product.
This move effectively stopped Amazon offering ebooks at $9.99, sometime at a loss to keep their grip on the ebook market and extend it. The idea was to make it easier for Apple to compete with Amazon on all the big titles. iPad owners would buy their books from Apple’s store rather than Kindle’s since they were the same price and Apple’s store is more convenient. That move plus the preventing of the Kindle app being put on Apple products was designed to keep Apple’s customers going to Apple for their books instead of other outlets.
There is currently a lawsuit by Amazon and Barnes and Noble, to accuse Apple and the publishers who have signed onto the agency pricing model of price fixing. Is it?
Strictly speaking, no. Here’s why. First, price fixing was a practice done by retail outlets. The classic example is a number of gas stations in town get together and as a group decide what to charge for gas. So no matter what gas station you go to, you’ll pay the same price and it will be higher than if they were competing. This was illegal because a group of retailers conspired to set prices artificially high in order that they would all make a good profit, instead of competing against each other and making marginal profits. And that was bad for the consumer.
But this isn’t an instance of retail outlets colluding to set prices, it is a group of publishers signing onto a contract with Apple that they will not sell their books to any other retailer that will cut a lower price than one they set. This is an instance of vendors agreeing to a contract with one retail outlet.
To charge price fixing, you’d have to prove that the publishers conspired with Apple to set these prices as fixed. But there is no evidence of such collaboration. First it was Apple and Macmillan that agreed to the pricing model. Then other publishers followed suit. Without the revelation that there was a secret meeting of several publishers with Apple that agreed to go this route, it may be hard to prove there was a conspiring to set prices, especially since each individual publisher sets their own price for their own books. They didn’t get together and suggest that all books with a page count of X will sell for Y, as far as anyone knows.
That said, it does accomplish what price fixing laws intended to outlaw: the same price for the same product at all competing retail outlets so as to eliminate competition among retailers. And that is never a good situation for the buyer. No more than Amazon becoming a monopoly on ebooks. As ebooks overtake paper books in sales over the next few years, Amazon is poised to hold most of the cards, given the estimates that while they have around 45% of the ereader market, they have around 70-90% of the ebook market.
But even given those numbers, I would doubt Amazon will be or maintain a monopoly. As ebooks become more popular, other outlets will rise up to compete. But how will they compete if they cannot undercut Amazon’s price, because the publisher won’t let them? They can’t. While agency pricing may give stores like iBooks, who doesn’t want to sell for lower prices, a chance to compete within their own hardware domain, the little eretailer is who this will hurt. It effectively freezes Amazon’s status as the dominate distributor of ebooks, and Apple will do little to chip away at that.
But price fixing may be charged through a different tactic. In Texas government, they have what many states have, a Sunshine Law, which ensures that there are no secret deliberations of local government officials. In the Texas law, what is known as a “walking quorum” can satisfy the violation of the law. Instead of the council members gathering in the mayor’s house and discussing things without anyone’s knowledge, one council member may talk to another about city business, which is legal. But then if one of those goes and says to another council member, “Henry thinks we should pave the roads with that money,” and that person tells another council member that, you have a walking quorum that violates the law.
In effect, the contracts with Apple to force all retailers to charge the same amount for the same book accomplish the same thing as telling all gas stations they have to charge a certain amount for gas, whether it is the gas stations doing it, or the gas companies. And so the “walking quorum” of each publisher signing onto an agreement at different times still violates the purpose of the law, to circumvent competition among retailers and keep prices artificially high.
The big problem with agency pricing is that traditionally, it has been the retail outlets that set prices, not the publishers. The publishers set what the retail price is, but the bookstore can charge whatever it likes for a book. The publishers don’t tell a bookstore, “You will charge X or we will not sell this book to you.” Why? Because such a rule was unenforceable. What publisher has the labor force to monitor every bookstore in the country, even a handful of them, to ensure bookstores are not discounting their product?
And the traditional model makes sense. All the publisher should care about is getting paid their wholesale price, not what price Bob over at Discount Books is selling it for. If the bookstore wants to take a loss on a book, it’s no skin off the publisher’s back, as long as they get their price. The retailer, once they buy the book, should be free to sell that book at whatever price they want.
Another factor is traditionally there has usually been a middleman between the publisher and the bookstore: the distributor. Most bookstores buy their books from a distributor like Ingram. The publisher sells books to Ingram, then Ingram sells them to the bookstore. That removes publishers one step away from dealing with bookstores, which makes it even harder to enforce price limitations.
But that was with physical books. Now we’re dealing with ebooks. Ebooks are sold directly from the publisher to the online retail outlet, like Amazon. And unlike a book, the ebook isn’t held in one’s hand. Amazon doesn’t have to stock ten copies of an ebook, and probably doesn’t even have to pay for them until after they’ve sold. And being online, it is easy for a publisher to do a quick check to see if the major online retailers are selling the book at the agreed to price. Because there are only a handful of big players instead of hundreds of smaller players that are hard to track short of visiting their location, a publisher enforcing price limits became possible.
But is this good for the reader? Yes and no. Yes, if the reader is in favor of the big publishers staying in business and they are willing to prop them up. The problem for big publishers is their overhead is so high, the base cost for an ebook is about the same as a regular book. Distribution and warehousing only make up a small percentage of the cost of a book, somewhere in the $2-$4 range, depending on the book. Because they pay the author, the agent, marketing department, the editing department, the sales force department, the executive salaries, and their big New York City office space, each book, including ebooks, have to make enough to pay for all that cost. Labor is the biggest cost in publishing a book. There is some cost reduction between an ebook and paper, but that doesn’t account for as much as some might think, especially when one factors in the cost of labor to format and upload to various sites as offsetting the cost of warehousing and distribution.
So, as ebooks sell more and physical books sell less, if the publishers take a loss on selling ebooks, eventually they won’t cover their employees’ salaries and administrative cost. Then guess what? They’ll be out of business. And because they are currently still the biggest supplier of not only paper books, but ebooks on the market, that would be a negative for the readers, as it would reduce what they have to read.
But it will not be good for the reader in the short or long term. You can’t fight monopolies by creating another. Monopolies are always dealt with by government intervention and usually splitting it into competing companies that introduce competition into the environment once again, and gives the smaller retailers a chance to compete. To artificially prop up prices beyond the actual cost and value of the item is the equivalent of the “too big to fail” mentality of the government bailouts. If a company can’t figure out how to remain competitive, adjust to meet market demand, then they don’t deserve to be propped up by arbitrary prices that in the end, penalize consumers for the poor management of those companies. If they want to stay competitive, they’ll figure out ways to cut cost and make a profit at a reasonable price.
But the reader is not totally out of options. There is the indie book market, which does regularly sell its product for much less. Primarily because their overhead cost is so low. They can sell at $4.99 a copy or less and still make a profit. Traditional publishers can’t even think about competing with that price. And there are books just as good as what the traditional publishers put out to find in those bins. As a matter of fact, it could be agency pricing is the equivalent of the publishers shooting themselves in the foot. They supply the majority of ebooks as it is. Do they really want to give readers a reason to go to the indie authors, some who have been traditionally published previously, so people know they are good writers?
I would suggest indie authors have the most to gain from this situation. Some have said Barnes and Noble have gained the most, and they may have in the short term. But why then are they partnering with Amazon in a lawsuit against Apple and the publishers if they think it will benefit them in the long term? Because no retailer wants the vendor to tell them what they can sell a product at once they have “bought” it to resell.
Who do you think are the biggest winners and losers with agency pricing?