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Thursday, April 12, 2012

Thoughtful Thursday - EBook Prices, Will They Change?

Nathan Bransford, author of the Jacob Wonderbar series, wrote an interesting article on his blog back in 2011 regarding why some eBook prices are higher than their hardback cover cousins.  Turns out the fluctuations have to do with pricing models (Wholesale vs. Agency).  I had no idea as to the cause, I just knew that some eBooks appeared terribly over-priced, so I didn't purchase them.

Originally, (Once Upon a Time), there was only one model, the Wholesale model.  For both hardbacks and eBooks sold under the wholesale model, the retailer set the price (which meant Amazon and B&N could have sold the same eBook for different prices) and the publisher would have received 50% of the Hardcover price, regardless of the retailer's selling price.  Say a book sold in hardcover for $24.99.  Publisher was paid 50% ($12.50) for any hardback or eBook sold by the retailer.  The retailer then got to set their own selling price, which could be more or less than $12.50 they paid for the book.
 So, back in the good ole days, Amazon set an eBook price ceiling of $9.99 for its customers.  That meant for any hardcover costing more than $20.00, Amazon took a loss in the sale of their eBook for the Kindle, but the customer got a great deal and the publisher's payment remained the same.

As you probably already know, Amazon sold many, many eBooks that way.  Consumers were happy, but publishers weren't, since consumers were flocking to buy all their eBooks from Amazon.  Then Apple's iPad came on the market, and everything changed.  Why?  Because Steve Jobs came up with a brand new pricing model—the Agency Model.  Under the agency model, the publisher sets the price for the eBook, not the retailer.  In return, the retailer receives 30% of the publisher's eBook selling price, but they have to sell the eBook at the publisher's listed price--no discounts.

One publisher alone couldn't force Amazon to follow this new model, so all the large, NY publishers agreed to follow Steve Jobs' new Agency model, leaving Amazon to either join in, or not sell any eBook published by a major New York publisher.  Since refusing to play would mean consumers would have to go elsewhere to purchase their eBooks, Amazon reluctantly fell in line with the other retailers.

Below Nathan provides an example of the two models laid out in what he calls "napkin math."  I love it.

Napkin math for a $24.99 hardcover/$14.99 eBook.  The e-book would have sold for $9.99 at Amazon in the old days (under the wholesale model), but under the new agency model the publisher wants to charge $14.99 (with no discounts allowed):

Wholesale model e-book: (retailer sets price - no longer available)
Amazon paid publisher: $12.50 (publisher got roughly 50% of $24.99 hardcover RRP from retailer)

Amazon customer paid: $9.99
Amazon loses:
- $2.50 (paid publisher $12.50 for an eBook they sold for $9.99)

Agency model e-book: (Steve Job's brainchild put in place when Apple introduced the iPad)

This is where the publisher sets the price for the eBook, irrespective of its hardcover price and no discounts allowed.*
Customer pays: $14.99
E-Bookseller pays publisher: $10.49 (70% of $14.99)
E-bookseller (including Amazon) keeps: $4.50 (30% of $14.99)

In order to have more control over pricing and allow more e-booksellers to compete with Amazon, publishers were willing to take less money for eBook sales. ($12.50 under wholesale, $10.49 under agency)

*Steve Jobs reportedly said to the publishers, "the customer pays a little more, but that's what you want anyway."

Publishing executives were desperate to get Amazon to raise its $9.99 price point for eBooks, and with the release of the iPad they were able to achieve their goal.

 So now, hardcover books sell under the Wholesale model, and eBooks sell under the Agency model.  And the reason eBooks can be more expensive than the hardcover on Amazon is because Amazon is treating the hardcover as a loss leader (meaning they lose money on the sale of the hardcover book, but potentially keep their customers happy even though they can no longer discount the eBook).

 Below is the example Nathan gave for:


Publisher's selling price:
E-Book: $11.99
Hardcover: $27.95

Amazon's selling price:
E-book: $11.99
Hardcover: $11.89

Breakdown between publisher and Amazon:

E-book sells for: $11.99 (price set by publisher)
Publisher receives: $8.39 (70% of e-book price from retailer)
Amazon receives: $3.60 (30% of e-book price from sale to customer)

Hardcover sells for: $11.89
Publisher receives: $13.98 (50% of $27.95 list price)
Amazon receives:
- $2.09 (customer price minus $13.98 paid to publisher—a loss)

Since retailers can still set their own prices for hardbacks, the publisher has no control over what Amazon charges their customers.  As it is, publishers make more money on the hardcover sale.  By setting the list price for the hardcover at $27.95, and the e-book at $11.99, they don't have much incentive to discount the e-book any further than it already is.

Interesting, right?

Well now, boys and girls, the US Government has gotten involved and they are suing Apple and the publishers, who haven't already settled, for "raising eBook prices via the agency model."

"The government alleges Apple and the publishers of having a conspiracy (collusion) to raise the price of electronic books that cost the consumer over $100 million over the past two years by adding $2 to $5.00 to the price of each eBook."

Wow.  So, what does this mean for the consumer (us)?  15 (possibly 16) states have filed a separate complaint with the publishers, and of those states Connecticut and Texas reached agreements with Hachette and Harper Collins to provide $52 million to consumers in restitution.  According to Pete Yost in the Associated Press, "this dollar amount was set using a formula based on the number of states and the number of eBooks sold in each state, so other states may sign into the agreement.  The federal government has reached an agreement with three of the publishers (Hachette, HarperCollins and Simon & Shuster), but will proceed with its lawsuit in federal court against Apple, Holtzbrinck Publishers (doing business as Macmillan) and The Penguin Publishing Co. Ltd. (doing business as Penguin Group)"

 Macmillian's Chief Executive Officer, John Sargent, said in a letter to authors, illustrators and agents that the company has not settled because it is "hard to settle a lawsuit when you know you have done no wrong.  Macmillan did not act illegally, Macmillian did not collude."

According to the Wall Street Journal, "Despite settling, HarperCollins and Hachette both denied violating antitrust laws and defended the agency model. HarperCollins said it made a "business decision" to avoid a legal battle. Simon & Schuster confirmed settling but declined to comment."

Since this potentially affects millions of readers' purses, it should be an interesting case to follow.  Not sure if the case will affect authors, illustrators or their agents, but I don't believe it will.

Below are additional links regarding the situation, including Nathan Bransford's original article posted back in March of 2011.

1 comment:

  1. Excellent and thought-proving piece. Thanks for taking the time to bring this to my attention.


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