What's the future of ebook pricing?

With some publishers settling their antitrust lawsuit with the US government, prices for ebooks in the US are expected to come down. But how much of a change will we really see?

The question of who gets to set the price of ebooks is at the heart of the government's antitrust lawsuit against Apple and five major publishers.
(Credit: CBS)

Editor's note: this article was written about ebook pricing in the US. What effect the US Department of Justice (DoJ) lawsuit will have on Australian pricing remains unclear.

In case you missed it, the US government recently filed an antitrust lawsuit against Apple and five of the country's largest publishers, alleging that they conspired to limit competition for the pricing of ebooks. Three of the five — HarperCollins, Hachette and Simon & Schuster — opted to settle the case, while Penguin, Macmillan and Apple didn't.

So where does that leave us?

Well, if you've spent any time reading through the terms of the settlement, you'll quickly realise that not everything's all that black and white, and is in fact quite muddled. For starters, a judge has to actually approve the settlement, and then the three companies that have settled have to unwind themselves from their current contracts with retailers. All of this should take a few months.

New terms

HarperCollins, Hachette and Simon & Schuster, which is owned by CBS, the parent company of CNET Australia, will have a couple of pricing models to choose from. Either they can go back to the old way of charging wholesale pricing (retailers buy a book for around half of its list price, and then sell it for whatever they want), or they can simply set the price for the book (as they are doing now under the "agency" model) and give a 30 per cent cut to the retailer. Apple operates both its iBookstore and App Store under the latter terms. (See "Why ebooks cost so much" for a detailed breakdown on the differences between the wholesale and agency pricing models.)

The big change will be that retailers will be allowed to discount the price of ebooks. Under the terms of the current agency model that caught the eye of the DoJ and precipitated the investigation and eventual antitrust lawsuit, no retailer could set a price for a book below Apple's price in its iBookstore. That so-called "most-favoured nation" (MFN) clause has been removed as part of the settlement.

So, retailers are free to discount under the new terms — but not without a caveat. The terms are only good for two years. After two years, publishers can negotiate a new agreement that would allow them to go back to the current terms and restrict discounting.

If that's not complicated enough, a retailer like Amazon, which was aggressively discounting titles to US$9.99 under the former "wholesale" model (and losing money on bestselling titles), isn't permitted to take an overall loss on a publisher's catalogue. In other words, a retailer's commissions have to at least equal the amount of discounts it's offering. For example, if a retailer makes US$100,000 from the 30 per cent commission it gets from the catalogue of publisher X, it can only discount (take a loss) of up to US$100,000.

What will change?

Amazon has already said it will begin discounting titles as soon as the new agreements are in place. You'll most likely soon start seeing titles that once cost US$12.99-$14.99 now costing US$9.99. Amazon firmly believes that it knows how to price and sell ebooks — and a whole lot of other stuff — better than anybody, and it wants to be seen as having the best prices for ebooks.

CEO Jeff Bezos' vision and marketing acumen was the catalyst for ebooks and e-readers taking off the way they did (Amazon did create the market), but it was Amazon's ability to undercut the competition on ebook pricing that played a big role in putting it in a dominating position that publishers worried would become a monopoly. Analysts estimate that Amazon once held a 90 per cent share of the US market. That has since dipped to about 60 per cent, with Barnes & Noble at around 25 per cent, Apple at 10 to 15 per cent and Sony, Kobo and others making up the rest of the pie.

The ebook version of Stephen King's 11/22/63 is currently priced at US$14.99, but Amazon could drop it to US$9.99 in the not-so-distant future.
(Credit: Amazon)

The new rules will certainly work to push ebook prices down, particularly prices for new releases and bestsellers, with Amazon taking the lead on the cuts. But the fact of the matter is that I don't think it will seem incredibly dramatic, especially with some players continuing to hold out. Also, people forget that Random House wasn't part of the DoJ's lawsuit, because it initially didn't move to the agency model along with the other five major publishing houses (it is on the agency model now). Random House is huge, and it's unclear just what it will do.

Beyond that, as you see a return to less uniform pricing from retailer to retailer, it will become harder for smaller players to compete. You are going to be left with Amazon, Barnes & Noble, Apple and that's it — in the US, anyway. The Sonys and Kobos of the world will probably do better to focus their attention on overseas ebook markets, many of which are just getting off the ground.

What won't change?

While the rise of ebooks has actually been a boon to many publishers, it's obviously been very disruptive to their traditional print business. One of the big reasons why publishers jumped in bed with Apple was that they were worried that Amazon was becoming too powerful, and would eventually have publishers completely under its thumb, and would dictate the terms going forward (ironically, Apple is known for this — think music, wireless providers and app developers).

One of the problems that publishers have had with the new world of ebooks is that readers have come to expect the digital version to be available the day that the print version launches. In the past, you had the hardcover, and the paperback would come out a year later (if the publisher decided to do a paperback). The gap between the hardcover and the paperback release was — and still is — called windowing.

In essence, publishers see elevated prices on ebooks as a form of windowing. Those ebook titles that you see at US$12.99 and US$14.99 are at those prices because publishers want to provide some coverage for the hardcover — and sometimes even the paperback — and not make the print version look so expensive that no one will want to buy it.

Publishers are going to have a hard time letting go of that windowing concept. As I said, under the new rules, publishers have a couple of pricing models to choose from. Back when they were using the wholesale model, one way that they sought to keep profit margins up, and essentially punish Amazon for pricing new releases at US$9.99, was to set the list price of the digital version at a very high price. For example, a typical hardcover carries a list price of around US$25. But publishers might price the digital version at US$30, so Amazon would have to buy it for US$15, thus losing US$5 on the sale.

The other option under the new terms is for publishers to set a relatively high price (say, US$14.99), and give Amazon its 30 per cent cut on that price. If Amazon chooses to sell it for US$9.99, it'll lose 50 cents on the sale. Either way, however, I expect that publishers will keep the list price for ebooks high. (As a side note, publishers would be smart to move retailers away from the 30 per cent commission that Apple established, and move to something closer to 20 per cent or less. Naturally, Apple, Amazon and Barnes & Noble wouldn't want to make that deal).

Amazon has deeper pockets and more customers, so it will be hurt less by these tactics, and gain in the long run. As it did before, Barnes & Noble will do its best to compete with Amazon's pricing, and also pick and choose titles to run with its own special discounts (that said, Amazon is remarkably adept at quickly matching prices). As for Apple, it's getting more sophisticated with its marketing of ebooks, but it's unclear what kind of discounting it would do, if any. With its app store, developers set the price, and that's it. It's been the same with the iBookstore.

Finally, Amazon is a publisher itself, and has also been a great supporter of self-publishing ventures. It will continue to aggressively promote and price Amazon exclusives, putting pressure on traditional publishers to lower their prices. In some ways, while it continues to push traditionally published books, it's also taking a YouTube/Facebook approach to creating user-generated content that it can monetise.

What needs to change?

We can spend a lot of time debating who the bad guy is in all of this, but if you look at things objectively, everybody has a perfectly reasonable position; it's hard to take sides.

Publishers are concerned that Amazon doesn't give a damn about anybody or anything beyond its bottom line, gaining market share, and that it's out to destroy the publishing industry as we know it. Amazon thinks it knows how to sell books and ebooks a lot better than publishers and brick-and-mortar stores — and, ultimately, it's helping publishers, not hurting them. Somewhere in the middle of all this, consumers just want ebooks to cost less.

I personally don't think that all ebooks are overpriced — just certain ones. And, no, I'm not talking about the latest Scott Turow novel that comes out and is priced at US$14.99. Or Stephen King's latest blockbuster, 11/22/63. Or whatever big title comes out from whatever big-name author.

Sure, they often cost almost as much as the hardcover on Amazon, but if people are willing to buy them at that price, why would publishers price them lower? It's a simple case of supply and demand. If the market's there at that price, then go for it, although take note that it's a really bad idea to price the ebook higher than the hardcover (yes, this sometimes happens, and it infuriates potential buyers, as well it should).

Ultimately, what I object to most is publishers' lack of flexibility in pricing. The fact is, not all books are worth the same. One may be written better than another, but that doesn't mean that it's worth more. It's not fair — and just plain stupid — for publishers to put the same price tag on a book from a well-known author as is on one from an unknown author. Readers may try a debut novelist at US$4.99, but at US$11.99 it's a difficult sale, unless the book has had some sort of publicity.

The beauty of an ebook is that since material costs are virtually nothing, you can be much more flexible with pricing. Self-published authors are constantly playing around with pricing and seeing how it affects sales. Why shouldn't traditional publishers? Yes, some are experimenting, but pricing on the whole should be much more dynamic. Don't just set a price and let it sit there. (Tip: you can monetise older backlist titles a lot better by simply pricing them at less than US$5.)

Each book is a product unto itself, and needs to be priced accordingly. I can tell you that Amazon and Barnes & Noble understand this, and publishers will eventually realise that the market is moving in a direction where it becomes much more about maximising sales on each product, and not just a few top sellers. All you have to do is watch Amazon's pricing on the titles that it publishes under its Amazon Publishing umbrella.

Publishers also need to have a better understanding of how people buy ebooks. The way people shop for ebooks is much more like how they shop for apps. Sure, people have their favourite authors, but a lot folks simply browse top products lists, stop on something that seems intriguing, is rated highly by users and is priced right. They may not ever actually read the book, but, hey, plenty of people buy print books and never read them.

My last suggestion: use price cuts as advertising. Most books don't have big marketing budgets — or any marketing budget, for that matter. Also, fewer and fewer publications bother to review books anymore. So, price can be a publisher's best marketing weapon.

Some of this sounds like 101 stuff, but somehow it seems to get ignored in all this talk of agency and wholesale models and antitrust lawsuits.

The fact is, pricing is an art. You can publish that.


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