April 20th, 2011 by Mike Fulton
Posted in eBook Publishing

A sad trend that’s developed recently is for the eBook edition of a new book release to cost a little more than the hardcover edition. For example, the pre-order page on Amazon for the upcoming new release in Charlaine Harris’ Sookie Stackhouse series (aka True Blood), Dead Reckoning, shows a price of $14.99 for the Kindle edition, while the hardcover edition is going for $14.70. Granted, it’s not a big difference, but as we’ve discussed several times before, it just doesn’t make sense for the eBook version to cost more.

On Amazon, when this sort of disparity exists you’ll often see a little notice next to the price, saying “This Price Was Set By The Publisher“. Or, as I like to think of it, “Yes we know it’s stupid but it’s not OUR idea.

The reason for this disparity has to do with a difference between how books are sold wholesale. For physical editions, the publisher typically sells each book to the reseller, such as Barnes & Noble or Amazon, at a wholesale discount from the cover price. The discount percentage may vary depending upon volume, payment terms, or a variety of other factors, but ultimately it typically falls in the area of 50-60% off the cover price. So if a new hardcover edition is priced at $26.99, the wholesale cost to the retailer was probably between $10.79 to $13.50.

This is how most products are sold, although the wholesale discounts involved vary quite a bit depending on the product involved. However, the one thing that’s the same across the board is the fact that once the original manufacturer (like a publisher) has set the wholesale price they’re charging the retailer, their involvement in the pricing process is finished. They often have a “suggested retail price” but the retailer can set whatever price they want. They can offer a 50% discount, a 30% discount, or no discount at all.

The situation with eBooks is different. Some eBooks are sold via the traditional wholesale model, but for certain categories, like new fiction releases or new major non-fiction releases, the market has been shifting to what is known as the Agency Model. This is where the publisher sets the final price for the end customer, and the retailer gets a fixed percentage of each sale. The prices always are the same from one reseller to the next.

Thus: This Price Has Been Set By The Publisher

You may think, isn’t price-fixing illegal? Yes, normally, but they’ve found a loophole. In this scenario, Amazon (or Apple or whomever else) is acting as a sales agent for the publisher, and you’re actually buying the eBook directly from the publisher, not from the retailer. In exchange, the agent/retailer gets a particular percentage of the sale as a commission. That’s why it’s called the “Agency Model”.

Smells a bit fishy to me, but apparently it satisfies the legalities involved.

One has to wonder why the retailers would ever agree to such a system that gives them virtually no control over pricing. My thought is that while this shift was caused by Apple to some degree, the situation that let them do it was caused by Amazon.

I know that many people think Amazon has been backed into a corner and that they’re holding the short end of the stick in the current situation, together with the end customer. I think that’s true to a certain degree, but I think we got here because Amazon was a bit short-sighted with regards to pricing policies in the first place.

Kindle Pricing In The Early Days

When Amazon first introduced the Kindle, instead of the usual wholesale pricing used for physical books, they decided it would be a good selling point if all new releases were priced at $9.99. Amazon would keep 65% and 35% would be split between the author and publisher. Basically it was not that different from the agency model mentioned earlier, but turned on its head, with Amazon setting the prices rather than the publisher.

If you look at the early advertising for the Kindle, it’s clear that Amazon thought that the $9.99 price for new releases was a major selling point. And it does sound pretty good at first, until you noticed that you were spending $400 (the original Kindle price) to save $5 or $8 on a book. Granted, not everybody does the math before they buy, but that sort of thing is pretty obvious. Those who actually did the math would realize they might have to buy 50 or 80 books before they broke even on the hardware.

It should have been obvious to Amazon that the convenience factor of an eReader was really the bigger selling point. And in fact, if you look at later advertising, you’ll see that the focus shifted from the price of new releases to the convenience of having a library you could hold in your hand.

Unfortunately, the $3.49 cut of the $9.99 price that went to publishers & authors was less profit per copy compared to a hardcover edition. I’m sure that Amazon hoped that the sales volume would ultimately grow to the point where the reduced per-copy profit was more palatable. However, early on when the installed base of Kindle users was still fairly small, it was essentially just a sacrifice for the publisher & author.

These pricing issues made many publishers upset, and eventually several of them rebelled against Amazon over pricing issues in early 2010.

At the time, Apple’s release of the iPad was imminent, and they were making deals with publishers for their new iBookstore. Furthermore, Barnes & Noble had just released the Nook and were in the process of making their own deals.

Apple wanted to ensure was that eBooks sold through their new iBookstore setup would not be available at lower prices from other resellers, at least for high profile new releases. However, there’s really no way to guarantee that with a traditional wholesale model, so they started signing agreements with publishers to sell books using the agency model. This allegedly included the provision that the publishers had to set their prices such that nobody else was selling the same book any cheaper than the prices on iBooksstore. Apple may not have been completely happy with the idea of giving up all control over pricing, but they must have figured that as long as nobody else’s prices were lower, it wouldn’t really matter.

Once publishers started signing up with Apple using the agency model, they had leverage to use with Amazon. Since Amazon was no longer the only game in town, the publishers were able to push through new deals based on the Agency Model. Amazon resisted the change for awhile, but eventually they agreed.

I have to wonder if the irony of the situation occurred to anybody at the time. The publishers essentially ended up reversing the same deal Amazon had originally done with the $9.99 pricing.

And that’s basically where we are today. The eBook segment of the market keeps growing, so most of the players are mostly content, but I can’t help thinking it would be even bigger if we had just adopted a regular wholesale model across the board in the first place.

Amazonian Missteps

The Kindle is a great example of a product that was so good, and the marketplace so ready to adopt, that it was able to survive and prosper despite a variety of mistakes and missteps along the way.

To those who followed the Kindle early on, the first big issue was simply availability. Amazon sold out of the first batch of hardware pretty much immediately and the device was perpetually sold out for the next 5-6 months. On the one hand, that makes sound like the device was selling great, and I’m sure it was by most standards. But just imagine if they had been able to meet the demand. Might they have sold twice as many devices? Three times? We’ll never know, but maybe they would have sold enough units that the sales volume for those $9.99 new releases would have been high enough to keep the publishers happy.

When I said Amazon was short-sighted earlier, I meant that they should have planned for the day when there would be some real competition, and they should have realized that publishers would have the option of jumping ship when that day arrived.

Amazon seemed to be relying on the idea that increased sales volumes would ultimately make their $9.99 pricing more acceptable to publishers, but it doesn’t seem they had contingency plans in case that didn’t happen fast enough.

They almost certainly should have given publishers a bigger cut of that $9.99 price early on, as incentive to get with the program and push the platform.

One has to wonder where things would be now if Amazon had went with a more traditional wholesale model for all Kindle eBook pricing from the start. Maybe some people might have missed out on a few good $9.99 deals those first few years, but I think maybe we would have been better off in the long run.

Not All eBooks Are Created (or Priced) Equal

Oddly, or maybe not really so much, these pricing issues seem mostly confined to fiction and or major non-fiction like political commentary. It mostly seems to be books that come from the old, traditional publishing houses.

If you look at other categories of non-fiction books, like computer books, for example, it would appear that eBook versions are sold more or less through the basic wholesale model. And for the most part, the pricing makes sense. Most telling is the fact that you never see an eBook edition that is priced higher than a physical edition.

Why they can’t manage to do the same thing for other categories of book escapes me, except that I can’t help noticing that we have mostly old traditional publishers on one side of the equation, and mostly newer, more tech-savvy publishers on the other side. Hmm…

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