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The Aftermath of the Agency Model

“We are now in a very dangerous situation, thanks to the carelessness of the major publishers.”

By Roger Tagholm

LONDON: So Apple’s superbly designed wifi-enabled iWagons are to be encircled by the more pedestrian, but persistent, DoJ horses in June in what promises to be a fascinating shoot-out. The case is effectively Apple vs. Amazon, a kind of capitalist Super Bowl. True, Amazon isn’t in court itself, but you don’t have to search far to find publishers who will say that the DoJ’s action has “Amazon’s fingerprints all over it.”  

Apple is being portrayed by some as a hero in the fight to curb monopoly power and make the ebook playing field more even. While agency may indeed have that consequence, and publishers would certainly argue publicly that this was their intention, what about Apple? Was Apple really bringing agency to books for such altruistic reasons? Was its aim the wider good of the industry? Or was its primary aim to help the iBookstore and to curb Amazon?

In other words, was it acting in the same kind of cold, monopolistic way that many associate with Amazon? Are they, in fact, similar companies, both favoring the free market, but Apple choosing restriction in this instance because it saw an advantage in so doing?

Where does it leave agency now? Let’s recap. Why did publishers choose this model? Because they were worried about Amazon’s dominance on ebooks. This coincided with Apple’s similar concerns about Amazon, and Apple’s own desire to boost sales through its fledgling iBookstore.

What has been the result? Agency is all but dead, Amazon is as strong as ever and, despite the huge sales of iPads, is anyone buying books from the iBookstore in significant numbers? Anecdotally, we hear readers are buying from the iBookstore in increasing numbers, but not ones strong enough to register with the pre-existing Amazon user-base (at least in the UK/USA).

This certainly leads some in the industry to argue that the whole agency saga been an expensive waste of time. One senior UK publisher said: “The aims have not been achieved. It has cost the industry hundreds of millions of dollars, and has been hugely damaging for our reputation in the eyes of the public who simply saw it as price-fixing. It might have been worth it if Amazon had been forced into behaving a bit better, but that doesn’t seem to be the case.

“It’s true that we’re seeing more sales of ebooks through tablets in general, including the iPad, but it’s still significantly smaller than Amazon, and on the iPad many people are buying using the Kindle app. That function might be more important than the iBookstore.”

Tim Coates, founder of international ebookstore and library, Bilbary, goes further, criticizing publishers for their refusal to believe what they were told by the European Commission and Department of Justice. “It’s amazing how much they have protested. None of this has been worth it. It has been a terrible waste of time and money when publishers should have been thinking about how best to make use of the new technology.”

How We Arrived at Agency

Joaquín Almunia, Vice-President, EC decried price collusion as "unacceptable."

It’s worth remembering that agency itself was not being challenged, but rather the process by which agency was arrived at. Joaquín Almunia, Vice-President in charge of competition policy at the European Commission, said: “While each separate publisher and each retailer of ebooks are free to choose the type of business relationship they prefer, any form of collusion to restrict or eliminate competition is simply unacceptable.”

The agency model has been around for ages in many other industries, but whose idea was it for the book trade — Apple’s or the publishers’? It is arguable that we can trace its journey to the book trade to a particular day: 28 January 2010, the day after the launch of the original iPad in San Francisco. It was on this day that Steve Jobs told his biographer Walter Isaacson his thoughts on books. It’s worth quoting in full because, in hindsight, these things become more interesting.

“Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that — they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, “We’ll go to the agency model, where you set the price, and we get our 30%, and yes the customer pays a little more, but that’s what you want anyway.” But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too [a ‘most favored nation’ clause]. So they went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you the books.”

He added that Apple had to do this because “We were not the first people in the books business. Given the situation that existed, what was best for us was to do this akido move and end up with the agency model. And we pulled it off.”

Or pulled it off temporarily, at any rate. That was January 2010. Six months later Hachette UK began the switch to agency and other publishers followed suit. These publishers maintain that the move wasn’t done for Apple, but was made on behalf of all print booksellers. As one put it: “It may have suited Apple as well, but publishers weren’t trying to give Apple a leg up in particular, nor were they against any of the e-retailers. People’s primary objective was to make sure that, if possible — and as long as the public wanted to buy printed books — that print booksellers continue to exist.”

Was Agency Damaging to the Book Business?

Some observers believe agency has made a difference in its short tenure, pointing to the increased market shares of Barnes & Noble and Apple in the US since agency came in. They say too, that it has stopped the radical deflation that was happening two or three years ago. On this point, one UK publisher commented: “We were seeing our books typically having their price slashed by people who weren’t going to sell many ebooks. It didn’t cost them very much, because no one came to them in the first place, but it gave the public the perception that booksellers were profiteering and that ordinary print books were very expensive, and that wasn’t in the industry’s interest — not in the interest of authors, or booksellers or publishers.”

“Amazon will say we’re happy to sell your ebooks, but the contract must not be agency, otherwise we won’t sell your ebooks.”

Publishers argue that they chose agency to avoid a meltdown in the industry, a race to the bottom, and they argue that despite the legal costs and disruption, there has been some positive effect.

But what of the future? The authorities on both sides of the Atlantic have ordered cooling off periods in which limited discounting is allowed and a five-year ban on ‘most favored nation’ clauses. And after that? Here’s how Coates reads it: “Amazon will never accept agency agreements, and now that there can be none of the collusion between publishers that is alleged to have taken place and which brought in agency agreements in the first place, there is no chance of agency coming back. Amazon will say we’re happy to sell your ebooks, but the contract must not be agency, otherwise we won’t sell your ebooks.”

And which publisher is going to refuse to supply its biggest customer? Surely, reluctantly, publishers will agree to Amazon’s terms and the industry will be back to where it was in the first place — only, as Coates observes, “with the market now three times bigger and Amazon’s dominance even greater.”

Observers say this is why consolidation is happening, to give publishers more clout to fight Amazon. “However, I’m doubtful this will work,” one publisher commented. “Put it like this: getting agency in was hard enough, and it will be next to impossible under the current set up.

“My sense with agency is that the publishers blew it, if they were guilty. Agency isn’t dead, but five years is a very long time in this area, and the lock-in on devices and platforms is huge. So they have given away a huge advantage. And when publishers can eventually go back, who is to say they will be strong enough? It took everyone jumping before to make it really work, and that is clearly off the cards [because that would lead to allegations of collusion again].

“I think we are now in a very dangerous situation, thanks to the carelessness of the major publishers. The central worries are price and the long-term ability of Amazon to squeeze everyone. The consumer gets a short term win in lower prices, but possibly at the long-term detriment to the whole eco-system of reading.”

Looking ahead, observers believe much depends on how sensitive publishers are about pricing — and perhaps it’s likely that we will see more roles like that of Eloy Sasot at HarperCollins where he is their Director of Pricing and Analytics. “We have learned a lot in the last three or four years about what the public regards as an acceptable price and what they regard as an unacceptable price,” said one publisher. “I think it’s very likely that publishers will be sensitive to public opinion and indeed, to their own commercial interests. So I don’t think at the end of the period you’ll suddenly see provocatively high prices.”

Another publisher commented: “We don’t really know what will happen with all of this. New accounts are emerging all the time. Kindle is most publishers’ biggest account now, but a new gadget could come along. Everything is changing. I honestly think Waterstones and the indies had a better Christmas because of Amazon and the tax question. Apple’s share price dropped because of the mapping debacle. These people aren’t invincible. And I certainly can’t read books on the iPad — it’s backlit and I get a headache.”

A senior UK publisher even hinted that agency may be an irrelevance. “Don’t underestimate publishers’ desires to have a direct relationship with the reader,” he concluded. “Also, more competition is coming. Tesco may not be a big player globally in this field, but who’s to say they won’t be? And Google may be small when it comes to ebooks now, but what about the future? So I’d say we’re only about 10% into all this now — there is a lot to play out yet.”

SURVEY: Has the Agency Pricing Debate Damaged the Book Business?

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7 Comments

  1. Posted February 12, 2013 at 3:57 am | Permalink

    Provocatively high prices? Take a look at the current UK Top Ten ebooks on Amazon; eight of them are priced under a pound, seven are selling for 20p. Illegal downloads of ebooks are readily available on the internet – everything from my indie novels I sell for £1.99 to the latest from Hilary Mantel at £9.99. Readers are aware that at point of sale, an ebook costs the producer virtually nothing.

    I’m interested to see which wrong tree publishers will be barking up next.

  2. Hans Maerker
    Posted February 12, 2013 at 5:22 am | Permalink

    I really can’t believe that Lexi Revellian said that, “…Readers are aware that an ebook costs the producer virtually nothing”. How wrong can someone be ?

    Obviously that person is NOT in business, or otherwise a different tune would be heard. What about the author’s time, invested in research and in writing the book? What about the utility bill? An ebook is produced on a computer. I never heard of a computer working without electricity.

    These are just the 2 most obvious financial items that need to be covered by any digital product. Not to mention the cost of living, rent, etc., if an authors tries to make a living with writing. As the general price for a book is low, profit comes only from a certain number of sold copies on.
    Maybe Lexi Revellian should take a business class first in addition to his writing activities.

  3. Posted February 12, 2013 at 5:56 am | Permalink

    Hans,

    First of all, Lexi is a “she” rather than a “he.” Secondly, she is a bestselling author who has a fine grasp on the business side of things.

    I presume Lexi is referring to marginal cost. From Wikipedia: “In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good.”

    With a digital product, the marginal cost of producing one more copy is close to zero, which means they can be priced extremely aggressively (and, indeed, customers often expect them to be).

    Dave

  4. Tanja Tuma
    Posted February 12, 2013 at 6:45 am | Permalink

    I wish I knew more in details how the French book market and their fixed price law which includes electronic books function in practice. I think it is a unique phenomenon where cultural policy tries to go with time, values electronic innovation, yet not on the account of traditional bookshops. An article on their situation would be most welcome. Tanja Tuma, Slovenia

  5. Posted February 18, 2013 at 10:30 am | Permalink

    Very interesting, thoughtful article. I take issue however with the idea put forward in one of the comments here that “with a digital product, the marginal cost of producing one more copy is close to zero which means they can be priced extremely aggressively.” It sounds like good economics (and I should know, I’m an economist) but in fact it isn’t.

    The question is far more complex. One needs to consider the whole production and distribution chain. It is true that with the digital revolution, Amazon (and others) are able to take care of distribution at very low costs (as long as you don’t ask them to distribute a super complex e-book with lots of illustrations etc – then you’ll find an extra charge eating in your royalties). That is the one, single big advantage resulting from the digital revolution. The rest is largely unchanged, let me explain.

    For an indie, production costs are minimal and could be even close to zero only under some very special (and rare) circumstances: (1) you need to be well-off or living on your pension and writing for the fun of it, not needing to price in the cost of your own efforts or the maintenance/cost of running your computer; (2) you’re such a remarkably talented indie that you don’t need to spend any money on any editing or proof-reading or on marketing to help book discovery, which is patently absurd, (3) you’ve sold so many copies right off the bat that you’ve paid back your initial costs of production/distribution/marketing and now you can engage in vicious price cutting to your heart’s content and without feeling hurt.

    Is this a likely situation? For some indie best sellers, may be. For most, this is not the case. And for a newbie who needs to earn a living, the situation does not present itself in this way at all, especially considering the marketing effort that is required of him/her to enable book discovery. Otherwise the ebook is dead, gathering internet dust on its virtual shelf.

    Publishers have huge costs that they can’t avoid if they want to maintain their presence on the market and their reputation as quality book gatekeepers. Now, certainly they could economize and cut back on some of these costs, particularly turning the digital revolution to their advantage the way Amazon has done (there’s a lot to learn there – Bookish has been set up to try and make some of the digital features work for them, unfortunately the book data base is far too small to make the website of real use in book discovery as I discovered when I tried it and looked for a book – but that’s another question which I hope PP will explore some day). So, for publishers, the threat of having to keep ebook prices too low for comfort looms large, given the sharp competition from indies who are free from the cost strictures publishers labor under. Meanwhile, Amazon doesn’t care…or does it? That’s another question altogether!

  6. Posted February 18, 2013 at 4:45 pm | Permalink

    Claude, your points are very good. When an indie author publishes a few ebooks, there are ways to avoid costs given that needed talents are available (e.g. editorial, design, layout, formatting, hosting, etc.) but this shouldn’t be compared with a publisher that releases, say, hundreds to thousands of ebook titles periodically where specific costs cannot be avoided. You have to invest in people with the necessary skills that you require (you do the same amount of work for a printed book with an ebook), technology and software (even Photoshop licenses and other basic tools are expensive), distribution costs, etc. For someone to say that publishing an ebook costs nothing, that statement should be qualified. That wouldn’t be fair to publishers at all, even small ones.

  7. Sandy Thatcher
    Posted February 21, 2013 at 7:43 pm | Permalink

    In one sector, scholarly publishing, publishers may have the last laugh when they all move to open access as a model, as most have already done for journal publishing, thereby eliminating the need for Amazon as an intermediary. Perhaps trade publishers, too, will find a way to make open access work for them, as some small outfits are already attempting. It would be so delicious to render Amazon completely irrelevant to book publishing, wouldn’t it?

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