Agency pricing of eBooks – who benefits?

Originally published in August 2011

As a new player on the English language book and eBook block, Books4Spain, has been watching closely developments in the pricing of eBooks over the last year.  eBooks in fact have been at the centre of many of our programming issues since they have different VAT rates and territorial rights attached to them than physical books.

In addition, Amazon’s discount pricing strategy in the US, along with the launch of Apple’s iPad led to the adoption (or imposition) in mid-2010 by leading US publishers of the agency model for e-books.  This essentially involves the publisher setting the retail price and the retailer acting as the publisher’s agent and not being the seller of record.  This opened a can of worms, not just because of the fact that retailers were losing control of setting the price but also about the fulfilment process, record keeping and collection/payment of sales tax.  Nevertheless, the system remains in place in the USA and 5 leading publishers in the UK have subsequently adopted the same model.

Other than in the UK, aggressive discounting of books has not been a feature of European markets, mainly because of agreements between retailers and publishers, but the advent of “borderless” e-books has created ripples of “fear” amongst publishers and retailers alike.  The French (no surprise here) are leading the way in trying to maintain high eBook prices.

I have mixed views on whether the agency model is an appropriate response to the e-book “threat” and also if it can survive over the long term – it is currently subject to investigation by competition authorities on both sides of the Atlantic.

Authors are interested in selling the maximum number of books and generating the highest royalties possible.  If their royalties are based on the recommended retail price they are protected from aggressive discounting.  If royalties are set on the discounted wholesale price charged to retailers then again they have some protection.  In both cases, discounting is likely to improve unit sales and hence increase their level of royalties.

In the agency model, if their royalties are based on the actual price of the eBook AND that price is the same or higher than the current recommended retail price or the discounted wholesale price (depending on which one the royalties are calculated) then authors should be happy EXCEPT where the price acts as a limiter to incremental ebook sales – as happened in the US when publishers first introduced the agency model.

The current discount system for English language physical books puts the power firmly in the hands of the retailer – and ultimately the consumer.  The agency model shifts the balance of power back to the publisher and away from the consumer.

So for authors, which model is best for them depends very much on the level and basis on which their royalties are calculated and sensitivity of sales to pricing.  There is no easy answer!

As a large retailer competing mainly on price, e.g. Amazon, I am very unhappy with the agency pricing model due to lack of control I have over the sale price and hence the limited impact I have on sales volumes – although my margins are higher.  As a small, niche or independent retailer I am happy because I am not competing with the larger players on price but on other factors such as customer service and valued added services.

As a publisher, the agency model gives me control and enables me to “manage” the price to ensure sales of eBooks do not cannibalise sales of physical copies of a particular book and to increase my profit margin.

However, the early evidence suggested that setting a fixed price for a potentially best selling eBook which is close to the recommended retail (but discountable) price for the same physical version does impact negatively on sales of eBooks.  So again, the challenge for all concerned is to get the balance right.

Despite the debate about the pros and cons of the agency model and the pricing of e-books, it should be noted that publishers and retailers already operate differentiated pricing for both physical books and eBooks depending on the genre/type of book.  For example, business books or text books attract much smaller discounts and hence higher margins but lower sales volumes.  It is in the area of best sellers where the real debate lies.

In any event, major publishers have started to experiment with different pricing and also launch dates for eBook versions of new releases so at least they are beginning to try and understand consumer behaviour and come up with appropriate responses.  At the same time, Amazon has gone hell for leather to encourage authors to self publish via Kindle, increasing the number of cheap, and generally poor quality, Kindle books available.  So any “noise” you read about Amazon selling more Kindle books than physical books needs to be tempered with exactly which Kindle books are they selling more of, real best sellers by proper authors, or cheap self published books below USD3.99 (and often at USD 0.99) which buyers often don’t end up reading.

Note that most of the above only really applies to English language books and eBooks since:

a)      English language books are by far the largest market by volume and value; and

b)      the UK and USA book trade enables retailers to set the price of physical books, regardless of the recommended retail price set by the publisher.