By Mike Shatzkin, CEO, the Idea Logical Company
The most dramatic event in publishing in 2010? That’s easy. It was the face-down between five of the six biggest publishers in the US and Amazon over trading terms in the e-book marketplace: the shift from wholesale pricing to agency.
Even in theory, the shift was complicated. Publishers’ established prices went from near-print to about half-print. Margin offered to the channel was reduced from 50% of the established price to 30%. Control of pricing shifted from the retailer, who could charge whatever it wanted in the wholesale scenario, to the publisher who required the same price across all consumer touchpoints under agency.
But in practice it was even more complex than it was in theory. Shift of pricing control meant shift of responsibility at the point of sale and that meant publishers were now responsible for sales taxes, not the retailer. (Oddly enough, and the lack of public discussion of this point is a dog that didn’t bark, it did not result in the publisher, now seller-of-record, being told exactly who the customer is: the name and email address are still only known to the retailer.) Lawyers advised (at least some) publishers that agency required a contractual relationship between the publisher and each point of distribution, resulting in deal-making complexity that leaves some retailers without a full shelf of agency publisher books more than six months after the shift.
And literary agents representing the top authors required a lot of handholding. E-book royalties are a raw point in negotiations these days between agents and publishers, and the agency model reduced the royalty per copy on all books, at least during their hardcover life. Of course, the publishers’ take per copy also was reduced, a point the publishers no doubt made as they prevailed on the agents to accept a change they believed was necessary to prevent a potential perpetual monopoly on e-book sales by Amazon.
Adding to the drama surrounding the shift to agency was the fact that the biggest of the Big Six trade houses, Random House, sidestepped it. This put them in a position where they a) sell their books for more per unit, b) see their books offered to the consumer for less per unit, c) can tell agents their royalties are higher per unit, d) are not offered in Apple’s iBookstore (but are available on all Apple devices through Kindle, Nook, and Kobo, at least), and e) have earned the enmity of the other publishers in the Big Six.
The Agency 5 see themselves, not without reason, as having sacrificed revenue at a difficult time for the industry’s long run good while Random House takes tactical advantage of the shift (and, in the words of one CEO, are “gloating” about it).
(My editorial comment: this may all be true, but isn’t it the job of a company’s management to take tactical advantage of changing industry conditions? The overall point to this piece, of course, is that I applaud the move to agency. But it is hard to see exactly why, from Random House’s point of view, you’d voluntarily give up an advantage that makes all your competitors grind their teeth. As some analysis I did looking at royalties shows, the tactical advantages of wholesale are distinctly greater for hardcover and it may even be disadvantageous for paperbacks, but that’s a balance Random House is very capable of calculating.)
The most dramatic single moment of this long-playing dramatic event was last January when Amazon made a brief, and vain, effort to stop the whole agency movement in its tracks by pulling the buy buttons for Macmillan, apparently because they were the first publisher to officially notify Amazon of the forthcoming change. The giant retailer retreated in about 48 hours marking the first time in anybody’s memory that the publishers had forced them to back down.
Although the Nook and iPad devices certainly have something to do with it as well, agency seems to have accomplished its purpose of preventing Amazon from maintaining a stranglehold Kindle share through their deep-pocketed ability to forgo margin for a pricing advantage. The other retailers in the e-book market have their margin protected. With Google Editions still to join the fray, there is reason to believe that there can be a truly broad-based e-book marketplace for the next few years. What the Agency 5 publishers did was politically and logistically difficult and, because it involved reducing unit margins, somewhat counterintuitive. It would appear more than six months later that the tactic has achieved its most desired result.
Control of pricing immediately challenges publishers to get sophisticated, modern, and scientific at how they approach pricing. That would require, in a formulation I first heard from Peter Wiley (Board Chair of John Wiley & Sons), “constant, controlled experimentation.” Surely, that is taking place on a daily basis at Amazon.
So far, of course, the sales agent is controlling all the customer contact. Sooner or later that is likely to become a point of contention between publishers and their “sales agents.” It might be pushing things to expect that dispute to begin with the next round of agency contract negotiations in 2011, but expect that issue to make its way to the table in 2012 or 2013.
You can read more from Mike and follow the discussion about this piece and other issues about publishing on his blog.