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Final and non-reviewable: Competitive pricing and ebooks

August 25th, 2010 Posted in Digital Books, Licensing, Publishing | digg it blank

Today I attended the GigaOM summit on the “Disintermediation in Publishing” session, run by Giga’s Michael Wolf. One of the most heartening things about the meeting was the relatively large number of authors and agents attending, and one well known agent, Nathan Bransford of Curtis Brown in San Francisco, was a panelist.

I was intrigued by some of the complaints from authors about pricing policies relating to major retailers. I had heard about these issues in various forums, but I had not grappled with them in sufficient detail to grok their consequences. Today, I began to understand how authors – particularly those pursuing self-publishing – are trapped by the struggles around publisher pricing strategies, major online retailers, and distributors.

I was directed to an Amazon program as an example of how an author’s selling options can be coerced. Amazon recently initiated a self-publishing program for ebooks called the Digital Text Platform that permits authors to claim royalty rates of either 35 percent or, within certain strict limits, 70 percent. As they are enacted in the real-world, those limits unfortunately have the consequence of restricting competition in pricing and dampening ebook markets.

Among its other restrictions, the 70 percent royalty rate can be claimed only against U.S. consumer sales, and only when the book is sold within a very narrow band between $2.99 and $9.99 (accessed 25 August 2010). Fine. Well, not fine if the book is sold elsewhere for a lower price – Amazon can set the new ebook price as the lowest price in the marketplace. Here is the relevant text in the Pricing Page (accessed 25 August 2010):

For any Digital Book for which you select the 70% Royalty Option, at all times that the Digital Book is available for sale through the Program, you must adjust the List Price as required to ensure that the List Price does not exceed the lowest of: (a) the lowest suggested retail price or equivalent price for any digital edition of the Digital Book; (b) the lowest price at which you list or offer any digital edition of the Digital Book on any website or other sales channel; (c) 20% below the lowest suggested retail price or equivalent price for any physical edition of the Digital Book; (d) 20% below the lowest price at which you list or offer any physical edition of the Digital Book on any website or other sales channel; and (e) any maximum List Price we provide from time to time in the Program Policies.

That’s a strong statement. For anyone abiding by agency pricing agreements, we’re sitting pretty – the publisher (/author) gets to set the price and that’s that. But there are major ebook vendors that don’t always play by agency – among them, Kobo Books, Barnes & Noble, and Sony. While increasingly they might sign agency contracts, they might not always, particularly against small publishers. Further, any existing distributor contracts have probably one to three years to run before expiration.

If any of these booksellers discounts the price of the author’s book as obtained by a distributor, then Amazon will reset its own for-sale price to that discounted level. As an author, I have no attractive recourse against this:

Our determinations regarding price-matching are final and non-reviewable. If you object to our price-matching determination with regard to one of your books, your sole and exclusive remedy is to switch your Royalty option for future sales of the Digital Book to the 35% Royalty Option … .

This policy has a variety of consequences, most of them negative for the author. (N.B.: Apple is reported to have similar “most favored nation” [pdf] pricing policies, but I have not seen them, and Apple does not have the market share of Amazon).

Under the DTP conditions, if I (in a guise as author) present a book that I have approved to sell at $9.99, and Barnes & Noble discounts it to $7.99, then Amazon will automatically reset its sale price to $7.99 and provide me the 70 percent royalty against that figure (less “Delivery Costs”, as common to all royalty tiers). Of course, Barnes & Noble could then discount the book further, driving down my aggregate income from the book’s sales on each iteration.

I could theoretically attempt to game the system: e.g., I could price my book at $9.99 knowing and expecting that B&N is likely to discount to $7.99, and then expect that pricing at Amazon. However, that places final pricing control in the square dance between B&N and other discounting retailers on one hand, and Amazon on another.

There are more pathological conditions. Should the price be discounted below Amazon’s minimum threshold of $2.99 by another bookseller, my only resource as a self-published author is to be content with a 35 percent royalty rate, cutting my royalty rate in half. That’s a tremendous loss of revenue.

That wouldn’t matter if Amazon was merely one retailer in a competitive market. But it might not be. Recently, the VP for Kindle, Ian Freed, was quoted in C|net as stating that Amazon overwhelmingly dominates the ebook market:

CNET: Well, Apple’s saying it’s got 20 percent market share and I’ve heard Barnes & Noble saying it’s got 20 percent as well, so that would leave you guys with…

Freed: Honestly, something doesn’t add up because we’re pretty sure we’re 70 to 80 percent of the market. So, something, somewhere isn’t quite working right. I encourage you to do some more research. Obviously, from the beginning of Amazon we’ve been very metrics-focused and we don’t typically throw out numbers we don’t firmly believe in.

This level of market dominance, combined with the pricing controls as enforced through the Digital Text Platform, would lead me as an author to do some quick spreadsheet calculations on my sales data and pricing levels. And here’s what they might suggest:

In many cases, it would behoove me to remove my books for sale from all other retailers except for Amazon (and possibly Apple), because, due to price maintenance, I would make more money as an author by only utilizing Amazon (and possibly Apple). The curve crosses far more quickly if I am threatened with dropping below the $2.99 threshold price for the 70 percent royalty rate.

While such a strategy makes short term financial sense for me as an individual author, in the long term it severely restricts my opportunities to reach readers through other outlets, and it makes me dependent upon a single retailer. It is also detrimental for the broader ebook market because it generates a positive feedback loop that deepens Amazon’s share of self-published and low-priced ebooks. For anyone who believes that self-published ebooks will grow as a percentage of book industry sales, there should be concern that Amazon’s pricing policies will weaken retailers that are abandoned by authors seeking to avoid triggering Amazon’s pricing retaliation.

Amazon’s stance might also force other retailers into broader adoption of agency pricing at a time when both Apple and Amazon have come under scrutiny by State Attorney Generals who question the legality of agency pricing.

Amazon’s pricing policies are unfortunate for authors, and ultimately, for readers.

3 Responses to “Final and non-reviewable: Competitive pricing and ebooks”

  1. bowerbird Says:

    so, um, peter, does removal of my previous comment mean that you _want_ me to
    tell you why your assertions in this piece are wrong wrong wrong? because i can…

    -bowerbird


  2. Martin Says:

    The DTP presents an interesting conundrum for authors (as Peter lays out). But it’s a very congruent conundrum to authors in the pre-digital print world.

    When I published books with a traditional print publisher (medium-sized publications houses) in the pre-electronic world, I had little (actually no) say in the price of the book and pretty much gleefully accepted the offered royalty rate (yay, they want my book! oh right, money).

    I then threw myself on the mercy of the publisher’s sales machine and lived with the realities of remainders, returns, etc. Such is the life of the author.

    Sadly, the vision laid out here (with authors at the mercy of “pubtailers” – the publisher/retailer) with the price war being carried out by Amazon/N&N/Apple seems the author is getting a choice to pick his/her own poison.


  3. bowerbird Says:

    peter said:
    > Amazon’s pricing policies are unfortunate for authors, and ultimately, for readers.

    first, amazon — like any retailer — is gonna demand “most favored nation” pricing…
    that’s perfectly understandable, and thus there’s not much anyone can do about that.

    so get over that.

    the big6 publishers cried like little babies when amazon tried to establish a _ceiling_
    of $9.99 on e-books. but nobody seems to have made a peep to protest the fact that
    amazon has established a “floor” of $2.99. that ploy just flew underneath the radar…

    oh sure, authors can still price d.t.p. e-books at less than $2.99, but they only get 35%
    if they do, as opposed to the 70% if they observe the $2.99 floor that amazon wants…
    (nor is this new; even before 70%, amazon would never discount a price under $2.99.)
    amazon wants to make sure that they make at least $.90 on every sale that they make.

    _that_ is bad for authors, and for readers too. but it’s certainly not the end of the world.

    (some people might even argue that a “floor” is _good_ for authors, simply because it’ll
    prevent them from engaging in a mutually-destructive “race to the bottom” on pricing;
    i don’t agree with that particular argument — lower prices sell more books for authors,
    there’s no room for argument about that — but thought it worth mentioning in passing,
    because it’s obviously the case that _amazon_ thinks that a floor is in _its_ self-interest.)

    as for the fact that amazon has reserved for itself the right to experiment with pricing,
    that’s a good thing. amazon has become tremendously skilled at doing experimentation,
    meaning that they make more profit. but since their profitability is positively correlated
    with the author’s profitability, that means their experimentation helps out authors as well.

    in the end, authors will make lots more money if they let amazon experiment with pricing.
    nobody knows more about book-pricing than amazon; let their expertise help your wallet.
    (this is why those agency5 are fools; they want to control pricing yet they know _nothing_
    about the reality of it; amazon subsidized them and their “suggested list price” fantasies.)
    amazon’s experimentation will find the optimal points for the pricing of _your_ books too.

    in sum, it’s a _mixed_bag_ when it comes to all of this, at least for authors and readers…

    until you consider the kicker, that is…

    the kicker is that, if amazon is making the sale, that customer is an _amazon_ customer.
    they’re not _your_ customer, even if they are buying _your_ book. this is very important
    for every author to remember… what you need to do is to make them _your_ customer…
    specifically, you need to entice them to come to _you_ in order to buy one of your books.

    every time you get ~$2.09 from amazon on the sale of one of your $2.99 books, you need
    to _realize_ that you just paid $.90 to amazon because you were using _their_ customer,
    and that — if you had enticed that customer to come to you _directly_ — you could have
    gotten the entire $2.99 from them. the web lets you connect to your customers directly,
    and that’s what you need to do. simply put, you need to cut out amazon as a middleman.

    by charging you their fee, amazon is doing you a _big_favor_ — consider it a _reminder_
    that they are the middleman-obstacle to a direct relationship between you and your fans.

    _use_ amazon — and apple and all the other retailers — to pull in _new_audience_, but
    then _convert_ that new audience into fans who come _directly_ to you to get your books.

    authors _and_ readers will benefit the _most_ when they remove all of the middlemen, so
    consider amazon’s pricing policies to be a constant reminder of that simple basic reality…

    at any rate, as this discussion shows, the simplistic notion that amazon’s pricing policies
    “are unfortunate for authors, and ultimately, for readers” is so simplistic that it’s wrong…
    the situation is much more complicated than that. more research, peter; more thinking.

    -bowerbird

    p.s. i must mention one more thing, out of fairness. the 30% that amazon takes is for
    handling the money-exchange, and dealing with the customer if unhappiness results…
    this is _not_ a huge charge for dealing with those two unappealing tasks, it’s really not.
    and the reason amazon takes more for foreign sales is because of currency differences,
    which — if you have never dealt with them — can be a particularly troublesome thing.
    maybe someday a competitor will underprice amazon for performing these functions…
    but in the meantime, it’s hard to begrudge amazon for their 30% cut. i’m just saying…