Bye Bye $9.99 and Price Competition in eBooks

Bye Bye $9.99 and Price Competition in eBooks Editorials The mantra for many ebookers over the past year or so was “get rid of agency pricing and bring back lower ebook prices based on competition.” These ebookers are ecstatic over the approval of the settlement terms in the Department of Justice’s lawsuit against five of the Agency 6 publishers and Apple by Judge Denise Cote on September 6, 2012.

I think it is way too early to celebrate and I think ebook prices of bestsellers will rise, not become lower.

To set the mood to say goodbye to $9.99, here is a song from the past — Don McLean singing his Bye Bye Miss American Pie:

Now that you’ve been entertained, let’s discuss why I think we can say goodbye to the $9.99 bestseller and to real price competition among the big publishing houses which control the majority of popular publishing today.

The first problem lies within the settlement agreement itself. As Judge Cote wrote (p. 10 of the Opinion & Order filed September 6, 2012), the publishers, although they cannot use agency pricing, which presumably means a return to the wholesale pricing of the preagency days, can “enter into contracts that prevent the retailer from selling a Settling Defendant’s e-books at a cumulative loss over the course of one year.” This is a threefold problem for consumers.

First, it means that publishers will be able to require Amazon (and/or Barnes & Noble and/or Apple and/or all other ebooksellers) to disclose both sales numbers and pricing, something that Amazon has been loathe to disclose even to its shareholders. Under the current system of no such requirement, a publisher knows how many of a title have been sold by Amazon because Amazon has to pay for each title sold. But what has not been known, and what every analyst wants to know, is whether the sales are profitable, not just how many units are sold. Analysts want to know whether Amazon has sold 1 million ebooks and made or lost $5 million from the ebook sales alone. And knowing that information, analysts can determine whether or not Kindle hardware sales are profitable — all information that Amazon has steadfastly refused to isolate.

This is problematic because if Amazon has to verify that over the entire line of, say, Macmillan ebooks it is making a profit — and note that it is over the entire Macmillan line, not over the combined lines of Macmillan and Simon & Schuster — Amazon will have to be very cautious about pricing. One cannot easily take a loss on a million-selling ebook in hopes that over the course of the next months it will sell enough ebooks from that publisher to end the year in profit. How likely is it that Amazon will take that gamble and reinstitute $9.99 pricing?

The second reason this is problematic for consumers is because the order essentially orders a return to the wholesale pricing scheme but sets no boundaries on that scheme. There is nothing to prevent the publishers from altering the discount rate or even giving a different discount rate to different ebooksellers. As part of its order, the court did away with the most-favored-nation clause, which said whatever terms you give X you must give me.

I know the response to this is that the publishers need Amazon more than Amazon needs the publishers. I think, however, that Amazon’s caving in to Macmillan when Macmillan demanded agency pricing demonstrates that it is the publishers who are in the catbird’s seat, not Amazon. Amazon is the seller of product and thus needs product to survive. Each of the Big 6 publishers controls a significant portion of the necessary product that Amazon cannot afford to do without. Besides, I expect that each of the publishers will come, independently, to the position of squeezing Amazon similarly, so Amazon will have little recourse, just as it had little recourse in the Macmillan dispute.

The third problem for consumers is that the answer to the worries of the publishers that brought about agency pricing is simply raising the list price of newly published books. The way publishers do this is to take an expected blockbuster and raise its price to the new price point and watch sales. If expected sales (or close thereto) occur, then the next expected blockbuster is given the same price point, and this is repeated until there is confidence that consumers are now expecting to pay the price point.

And this is already beginning. J.K. Rowling’s new book, The Casual Vacancy, a Little, Brown, imprint, has a new price point for a novel: $35. If you check Amazon and Barnes & Noble, you will find that the ebook price at both is $17.99 — a far cry from the previous bestseller price point of $9.99 at Amazon. And the $17.99 is a 49% discount off the list price, which means that the ebook is likely to be generating a 1% gross profit for the retailers, just barely meeting the condition in the settlement order. I see this as an indication that the ebooksellers are concerned about profitability over the entire Little, Brown ebook line over the coming year.

Under the agency system, it would have been expected that Rowling’s new ebook would carry a price no higher than $14.99.

There is also the question of whether Amazon has gotten used to actually making money on ebooks and is using the profit to subsidize the Kindle hardware. Nate Hoffelder raised this question in Did the Agency Model Lead to Cheap eReaders?. Having made money on ebooks over the past year, how likely is it that Amazon will want to subsidize both the hardware and the content, perhaps taking a loss on both? At some point, Amazon has to show a profit to prevent shareholder rebellion. And now it has the perfect excuse to do so: Judge Cote’s approval of the settlement agreement that allows publishers to require Amazon to earn a profit on ebooks.

It is the combination of forces that have been unleashed by the approved settlement agreement that will result in no agency pricing for at least 2 years but, instead, higher prices for consumers and the end of the $9.99 bestseller price. We may occasionally see a bestseller being offered at the $9.99 price, but it will be the occasional bestseller, not all bestsellers as in the past. And if we watch prices, I think we will see list prices climb; it will be the rare bestseller that will have a list price below $30. Rowling is leading the way and if her book is a bestseller at $35, it won’t take long for other top-tier writers to insist on equal list pricing. That is how it happened in the past and how it will happen this time.

I may be wrong, but I doubt it. History does tend to repeat itself and the DOJ and Judge Cote have let loose a rising tide. Do you agree?

image by Craig Murphy

16 Comments

  1. Eric Welch12 September, 2012

    In other words, the publishers get what they want in either case, i.e. higher book prices, although they admitted they made less money under agency than they had with the wholesale model. Still, the column is merely speculative, a pastime anyone can indulge in which requires little actual work. And why, pray tell, did agency limit prices to no more than $14.99 as per the example you cite of Rowling’s book? I have dozens on my ereader watch list with prices much higher under agency.

    Reply
  2. Format C:12 September, 2012

    The point IMHO is: will 35$ book actually be “best”selllers? Or rather will 9,99$ novels from lesser known authors sell more and be the new best sellers?

    If readers will still buy more lower price books, those will be bestsellers. And if subsequent books from the same authors will be sold at higher prices, they will sell less copies…
    And so on.

    In the end, 9,99$ ebooks will be bestsellers.

    Reply
  3. beth12 September, 2012

    Much as I like ebooks, I would not pay those prices for any ebook. I will just wait and buy the hardcover used when it drops down to .01 from Amazon independent sellers. I know I’m probably not the norm, but I cannot afford those prices.

    Reply
  4. Doug Schiller12 September, 2012

    Are these article created just to get people to comment?

    Are you kidding me?

    Face it, the days of paying hardcover, dead tree prices for ebooks are dead.
    They are already lowering the prices on the publishers that settled.
    Where are you pulling this fantasy from that the book prices will creep up?

    Are you saying they will charge $16 for an ebook now?

    How do you think the market, yes that crazy thing called the market, will react to that?

    Get over it, what Apple and the publishers did was price fixing and they got caught.
    Let’s see how well the iBookstore sales go when they have to actually worry about selling at a reasonable price now.

    Reply
  5. Conrad12 September, 2012

    I happen to agree with the earlier comment that now we will see clearly what makes a bestseller and how much the price counts; sure people may buy the new JK Rowling at 35 (though personally i think that switching genres tends to generate huge drops in sales so I think it as likely as not that the Rowling will bomb at least compared to expectations), the question is are they going to buy the next Rowling at 35 if this one is ok but not great?

    same with all the rest of the currently bestselling authors if prices are raised and to be honest i think that actually publishers are doing a rational thing once the shackles of uniform pricing that the print world had, have been broken

    We’ll see but interesting times ahead for sure.

    As a prediction, i think that most bestsellers are very price sensitive and will not sustain high prices

    Reply
  6. Vonda Z12 September, 2012

    I agree that Amazon will be less likely to take as many losses on books as it used to, when it was using e-books as a loss leader to get people to buy their e-readers, which at that time were quite pricey. Now that ereaders are priced much more reasonably and Amazon has a large customer base locked in, they can afford to allow themselves to make a little more money on the e-books, which is the business they really wanted to be in from the start.

    This would have happened eventually with or without the Agency model interjecting in between and publishers could have saved themselves a lot of headaches if they just let it get to this point naturally.

    However, even if the discounts aren’t as big as they used to be, Amazon has always found ways to be very efficient and to make money while still offering customers low prices. What we might see now are some of the following:

    1. Retailers able to offer Big 6 books as part of their Daily/Monthly Deals.

    2.Amazon may be able to add select books to their lending library.

    3.While Amazon may not take a loss on every best seller anymore, they can still take a loss on certain titles and discount to pretty close to their break-even point on others.

    4. Retailers could start offering special discount programs again – rewarding readers who buy more books with special promotions.

    5. Since retailers are once again in control of pricing both the print and the e-book versions, we shouldn’t see too many cases of the e-book being more expensive than the print version – except in the case of bargain books that are discounted to clear out inventory.

    It may be true that publishers try to raise their prices to ensure higher consumer prices. However, if they continue to do it by raising the list price of the paper book, this may have a negative impact on sales of their paper books.

    I wouldn’t take Casual Vacancy as a typical example, though. First, this book is only available for pre-order, and the price could change when it actually goes on sale. When it was first announced, the price was $19.95 for the e-book, and there was a lot of complaining on the forums. The fact is, HC knows it can get away with charging more for this book because the die-hard fans will buy it anyway. Even amidst the consumer outcry, there were still a large number of people who said the were going to buy it anyway. That is just supply and demand – the demand is huge so the price can go up. But there are only so many authors that can get away with this and J.K. Rowlings is probably at the top of that list. Very few other authors will have this luxury. If they try it, their readers may just skip it.

    Reply
  7. willem12 September, 2012

    Exactly 90% of paid-for app downloads are priced at less than $3. Apps costing between 99¢ and $2.99 are set to account for 87.5% of the paid-for market in 2012 and 96% in 2016.

    Publishers believe they will keep prices at $9.99 or even above. Good luck with that!

    Reply
  8. Timothy Wilhoit12 September, 2012

    “Under the agency system, it would have been expected that Rowling’s new ebook would carry a price no higher than $14.99.”
    Would have been? “The Casual Vacancy” is a Hachette book and retailers aren’t even setting the pre-order price on this one…yet. Hachette set the price. Amazon still has “This price was set by the publisher” on this one. The only “Fix” publisher that has retailer pricing so far is HarperCollins. Rich, I question your Magic 8-Ball on your predictions. In court documents, the DoJ has said that Amazon was in the black on ebook sales in the pre-Agency era. There’s no reason to suspect that will change.

    Reply
  9. Maria (BearMountainBooks)12 September, 2012

    The problem in knowing whether you are right or not is that ebooks have been creeping up in price over the last year and a half anyway. If that trend continues, it’s impossible to say whether the agency going away had anything to do with it.

    I follow a few bargain sites (Mainly http://www.DailyCheapReads.com) Publishers used to cycle books to a discount temporarily to boost sales (so the first in the series would go on sale for 1.99). Over the last 6 months or so, there has been little new on offer. The publishers have instead opted to publish short stories or novellas by popular authors and price them at 99 cents or 1.99. They leave these novellas/shorts as the teaser and the books priced with no discount.

    There are still a few bargains every day, but they are much less frequent than they used to be when publishers were using ebook and pricing to gain attention for a series or author. Backlist books were coming out at under 5; now I see more of them coming out at 8.99 and 9.99 (that’s even higher than the current mass market prices, but for backlist books there often isn’t a paperback in print.)

    One thing is for sure: Prices will keep changing.

    Reply
  10. Peter12 September, 2012

    “And the $17.99 is a 49% discount off the list price, which means that the ebook is likely to be generating a 1% gross profit for the retailers, just barely meeting the condition in the settlement order.”

    Two questions for anyone who may actually know the answer:

    1. Is list price 2x the standard wholesale price for ebooks now? The agency commission was 30%.

    2. The “peacock clauses”, as I like to call them, which required annual profitability, were optional. Does anyone know if any retailers actually agreed to them? If so, what did the publishers offer in exchange?

    Reply
  11. fjtorres12 September, 2012

    List price is irrelevant, all that matters is wholesale price.
    And if any publisher thinks pricing the ebooks (“bestseller” or not) to sell at extremely high prices is wise they should go and do it.
    Let’s see what happens.
    Me, I think that pricing “bestsellers” at the quote retails prices is a very good way to ensure they do not become bestsellers at all.
    As for the discount restrictions; feh, it is trivial to manage.
    The BPHs must think Amazon’s accounting dept is as bad as theirs.
    Amazon *knows* on a moment-by-moment basis how many books they are selling of each and every title. They also know what the BPHs have coming for the next year plus.
    So all they do is make sure they don’t exceed the discount quota on a weekly basis.
    Trivial.
    This is a company that throttles product prices on a minute by minute basis depending on demand and inventory. Automatically. Keeping track of a given publisher’s sales? Trivial.

    Me, I think there is nothing the publishers can do to raise consumer prices that won’t boomerang on them and hurt them more than it hurts consumers. I do wish they’ll try.
    As Inspector Harry Callahan said: “Go ahead…”

    Reply
    1. Peter12 September, 2012

      Wholesale price is what matters, yes. But that number is a secret; noone will tell you what Amazon et. al. are actually paying.

      List price, OTOH, is public knowledge.

      Since Google, Amazon, and Barnes and Noble all have a bunch of titles at exactly 70% of list, my guess is that is the standard wholesale price.

      But Rich Adin here is implying it is actually 50%.

      He’s somewhat of an insider. I’m not.

      Reply
  12. William Ockham12 September, 2012

    This article is nonsense. Perhaps Mr. Adlin didn’t read the settlement order or it is simply beyond his ability to comprehend. Or maybe he’s engaging in a propaganda effort. For whatever reason, his description of what the settlement order says is completely false. Here’s what the settlement order says:

    They [the settling publishers] must terminate those contracts with e-book retailersthat contain either a) a restriction on the e-bookretailer’s ability to set the retail price of any e-book,or b) a “Price MFN,” as defined in the proposed Final Judgment, as soon as each contract permits starting thirtydays after entry of the proposed Final Judgment.

    The publishers are barred from setting retail prices, they are not barred from entering into agency agreements. As a simple example of an agency agreement that would be acceptable under the settlement, take the agreement that Amazon uses for KDP. It’s the same 30%/70% split but Amazon has the right to lower the retail price. If the publishers want that deal, they can have it.

    Nor does the settlement require Amazon to disclose sales numbers and pricing to publishers. It simply requires retailers to prove that they didn’t sell one of the settling publishers entire line of ebooks for a loss. Retailer can still discount individual titles below cost, just not the entire line. This makes the disclosure problem a non-issue. The publishers already know how much Amazon paid them. Amazon already provides them with a mechanism for answering the pricing question. Just sign up for an Amazon Web Services development account and call the web services constantly asking for the pricing on all your books. Or stick with an agency model and there is no way Amazon could lose money on your ebooks.

    Based on his faulty understanding of the order, Mr. Adlin goes on to spin a ridiculous scenario involving the pricing of Rowling’s new book. He neglects to point out or doesn’t understand that the publisher of that book isn’t a party to, and therefore isn’t subject to, the settlement agreement. That makes his whole argument about the pricing of the ebook version completely irrelevant to any discussion of the settlement.

    Adlin claims that retailers are “likely to be generating a 1% gross profit” on Rowling’s book. The truth is that they are generating 30% gross profit. That’s astoundingly inaccurate. Reasoning from that level of inaccuracy leads him to make a whole series of misinformed and rather ridiculous statements.

    Reply
    1. William Ockham13 September, 2012

      I apologize to Mr. Adin for misspelling his name. The rest of my critique still stands. Everything about this article is simply wrong.

      Reply
  13. Michael13 September, 2012

    Not much in this piece is accurate.

    To the first point: Amazon always had to disclose sales to the publisher! How else could the publisher be sure they were being properly paid? They may not disclose overall sales to the public, but each publisher knows just how many copies of each of their books are sold on Amazon.

    To the second point: Harper, the first publisher to agree to new terms, has not returned to wholesale pricing, and the other publishers are also unlikely to do so. What publishers were forced to do is get rid of the MFN clauses, and they must now allow retailers to set their own discounts (within certain guidelines).

    And, to the third: yes, publishers who have agreed to the settlement will raise their “list” prices on new, popular books so that the discounted prices will generally be around $9.99 – $12.99. They’re going to fight a low price point on new bestsellers as best they can to protect their profits. But Amazon isn’t going to be looking to discount books that don’t sell as well–they have to make a profit somewhere–so I suspect we’ll see publishers continue to experiment with pricing on new authors, dropping the “list” price to entice customers.

    Really disappointed in just how off base this article is.

    Reply
  14. […] (here); Michael Cader, publisher of PublishersMarketplace (here, registration required); Rich Adin (here); and so on, the fall of agency pricing is leading to increased ebook […]

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