Will eBooks Loose Their Triple 'A' Status?

If the ongoing DOJ negotiations with the gang of five as expected take away Apple's "most favoured nation" status, which prevents the publishers from selling e-books through rival retailers such as Amazon, Barnes & Noble, Kobo etc for less.

It will almost certainly reduce the ability of publishers to control prices. This will almost certainly lead to a resumption of skirmishes between some parties and reduce market prices.You could say that the market will certainly loose its triple 'A' status (Apple Agency Appeal).

The question of whether we shall see a return to $9.99 ebook pricing is not so important as the one as to what any removal of the status will do to Apple’s commitment to ebooks. Apple are unlikely to dominate the ebook market and like to keep things simple. They are not retailers and playing in an open market is unlikely to be appealing, will be very demanding and not very profitable. The ebook market is very small in Apple’s revenues and is unlikely to grow exponentially with the removal of agency.

We all have to wait for the Justice Department and the EU Commission’s judgement but is looking increasingly like that an agency model will stand as constructed today but the most favoured nation may only consist of one.

How Do You Price eBooks?

Some would suggest that current ebook pricing resembles the kitchen floor after the baby has had its dinner, with bits of food left all around waiting to be tidied up.

One of the greatest challenges we all face when introducing new offers is on how to price them and the current ebook evolution is no different. The challenge is somewhat easier when the offer is new and there is no real old offer to compare it with, or when the change is a disruptive one and the old offer is withdrawn. However, when the old offer still remains alongside the new, then we have the added comparison and potential confusion in the minds of the buyer.

• Am I buying the same thing or something different?
• Is the value of the new offer greater or less than that of the old one and can we attribute a value to it?
• Am I buying, leasing, renting or a subscribing?
• Do my ‘ownership rights’ change?
• What should the new form cost in comparison to the old?

When the CD first replaced Vinyl the price went up. Consumer’s cries of foul play were met with claims about the investment and transition costs and the price remained high despite several consumer body reviews. Now those prices have plummeted. Was the drop was due to the greater economies of scale from a more mature market offer, or was the original prices were just too high?

Is there a price ratio between the old and the new when the new offer is first introduced that changes and does this reduce as the market matures? Some suggest that when the mass market paperback first appeared, the price ratio to the hardback may have been as high as 1:10. Today the paperback to hardback ration is down to around 1:4. The figures are obviously open to challenge but the principle is there for all to see.

If we look at today’s offers we have in simple terms; hardback, paperback and ebook. Tomorrow we may well have enhanced ebooks with lots of added value but today it’s the same content. We may well loose or see a drastic reduction in physical units produced and sold in either form and if so how does that play out across the economics of the work itself? What should the price ratio between the offers today and tomorrow? What is the cross subsidy that takes place as the ebook share increases to that of the pbook? Also as the ebook share increases what is the economic impact on the pbook model, margin, net receipts and author reward structure?

Other factors such as the market sector, channel, geography etc are also worth noting as the perceived buyers value may well change with digital making which could effect the price charged.

Then we have the anti Amazon agency model and the obvious question of whether this is in the best interests of consumers? The US Justice Department and EU are separately investigating the issue. Some agency publishers may appear desperate to hold the pricing line, but what is clear, is that irrespective of the outcome, the mere visibility of the current investigations will impact and potentially further damage consumer perceptions on ebook pricing.

Another area of pricing challenge is the public library market. Unlike the pbook the ebooks doesn’t wear out the more it is loaned out. As a result the library doesn’t need to replace the ebook. HarperCollins approach to this was to create a ‘26 loans and renew’ policy, which basically replicates the pbook and says that the more successful the title the more HarperCollins wants to be paid. Today we read that Random House have adopted a different library pricing model based on a reported upfront 300% price hike on ebooks. Others have proactively walked away from the market and decided to sit on the fence on several ebook issues and play wait and see.

The interesting thing about the library pricing issue is that the issue could have far wider ramifications as we see new ebook on demand rental and lending services.

Other media sectors don’t have the same replacement revenues to protect and it is hard to see how publishers can sustain the current position especially when they are advocating the benefits of the digital book over the physical one but at the same time denying them when faced with a perpetual sale that is a resultant benefit! It is even harder to see the logic of creating potentially bad PR in making the public purse spend and not share technology benefits.

We did a 'ebook pricing' search on our blog posts and were amazed on both the number of articles posted on the issue and the history. Pricing is not easy but getting it wrong can be hard to undue.

Are eBooks Being Straight-Jacketed by pBook Thinking?

Today many see digital as an evolutionary and perhaps it’s the assumption that are being made in this thinking that is causing the issues, conflicts and challenges we face today. Some would suggest that some of the very basic assumptions being made and used to determine digital strategy may be fundamentally ungrounded and not safe.

First, many assume that the ebook is a replacement for the physical book (pbook). Many may accept that both will coexists for some time, but many also believe that eventually, pbooks as we know them today, will be displaced by ebooks. Secondly, we assume that because today we buy pbooks that this model will naturally apply to ebooks. This assumes that all transactions of ebooks will be outright purchase sales. Finally, we all tend to assume all books are for life and once bought are ours to own, build into our library and even pass on to the generations to come.

Today when we buy a pbook it is enshrined in a rights licence that is based on the properties and limitations of the format. We can share it, sell it, bin it, even drawn all over it, but we are not allowed to copy it or exploit it for commercial gain. It is a physical ‘asset’ which we can value, add to our collection and pass on freely to others. In principle the physical format dictates what we can and can’t do and that contract is entered into on its initial purchase. Imagine someone saying that you can’t share it, can only keep it for only a specific period of time, can only retain it on certain bookshelves and are not able to resell it to whom you wish for what you want. These restrictions would be totally impractical and unenforceable.

This is in fact governed more by the physical format of the book than anything else.

Digital content changes these basic freedoms and in their place often imposes constraints and controls that were previously unenforceable. The number of times a file is copied can be controlled, sharing files can be severely restricted if not obviated altogether, the selling files negated and even what devices the files can be played on can be restricted. This shift in what can be granted under a licence makes digital different and demands that the rules and assumptions once applied to the physical book, are no longer relevant. The books aren’t different; it is digital that is different. All sales are rights sales, buy the rights associated with ebooks and the basic assumptions on which these are based now need to be reviewed as merely apply physical logic is unsafe and just results in the ill thought-out stances we have seen recently.

The next set of assumptions we must challenge are about the life expectancy of the ebooks themselves. Do we believe that digital formats are really persistent and perpetual? Maintaining access to digital archives within libraries may be a reasonable expectation, but maintaining the same access privately may not be so simple. Remember Microsoft Reader, or some of the other less popular formats? Remember betamax, eightrack, and formats tied to long forgotten devices. MP3 may not be the highest quality recording but until it was widely adopted DRM free music was being strangled by its own DRM and associated formats. Formats will evolve, but not all versions will remain backward compatible. Some formats will be superseded others may just disappear and that ebook that you thought was for life may have a very limited shelf life. Some believe that DRM (Digital Rights Management) protects and enforces copyright, others that it is yet another factor that radically changes the nature of the transaction and rights sold. Importantly we must recognise that DRM can tie the sale to a specific manifestation of a title and even to a specific service that distributed it. In other words an ebook today can be tied to a specific buyer, a specific distribution server and even a limited number of devices. Fine today but will those relationships still exist in say 10 or say even 5 years time?

Social DRM has yet to make its mark, but is gathering some momentum. This is about specific watermarking of digital content at a transactional level and to be effective needs to be both visible and invisible. Social DRM does not enforce restrictions and could enable the ebook rights to be aligned more closer to the pbook . However, today we still live in the draconian straight-jacket of encrypted files that can only be unlocked by DRM licence and with their own self interests in mind some want it to remain so.

So at one end of the spectrum we have the pbook trading its rights in what could be described as being driven by ‘market forces’ and sold outright. At the other end we have the ebook and its digital shackles, relationships and restrictions that make an outright sale a joke.

At the heart of the current challenges lies the question of what exactly are we ‘selling’? Some would suggest that we are trying to impose horse drawn carriage rules on today’s cars. They like pbooks and ebooks are fundamentally different. Moving towards a more open licence approach to ebooks may change to total way we sell rights, what rights are sold, educate the buyer into why digital is different and create a less volatile trading market. It could challenge still further the model conflict between libraries and the High Street, but rather than being a negative this could be a very positive move for all parties. We may see ebooks move into a rental, ‘pay as you read’, ‘loan on demand’ and subscription based models of consumption and away from today’s inappropriate outright purchase model. In doing so we may also find a commercial model that rewards stimulates and unites those that matter most the authors, illustrators and creators. Ironically we may also actually create an environment that actually enables the physical book to co exist alongside the ebook.

OFT to investigate Agency Pricing

The U.K. Office of Fair Trading (OFT) is investigating antitrust complaints related to digital-book pricing, after receiving "a significant number of complaints."
The investigation is over the new agency pricing model and follows similar investigations that have been initiated in the US by attorneys general in Connecticut and Texas.

The agency model, forces retailers to adopt prices set by publishers ensures by contract that these are not undersold. The retailer merely becomes an ‘agent’ and collects a fixed percentage of each sale. The major publishers who have adopted this practice include Penguin, Hachette, HarperCollins, Simon and Schuster but do not include Random House who have elected to stay outside of the practice and continue to trade all their books via the existing wholesale model. Any online retail or wholesaler who does not accept agency pricing is effectively starved of agency priced titles.

Some would say this was a clear return to retail price maintenance, albeit on a selective basis and as such restricts retailers and also means that consumers do not benefit from a free and open market and competitive pricing.

The practice was initiated at the launch of the iPad and was strongly advocated by Apple and opposed by Amazon. The publishers claimed that it was Amazon’s deep discounting that had driven them to take control of pricing. Some suggested that the fact that it only was applied to ebooks and not physical ones, which were equally being discounted, would suggest the driver was aimed at building an alternative eplatform for Apple and assisting their launch. Some would suggest it was also aimed at enabling publishers to establish their own direct market offers free of being undersold by retailers. The claim by some was that this would create a level playing field for all retailers but the reality is that many retailers today face pricing challenges, not on ebooks, but on suicidal discounting and trading on physical books. There are many questions over contracts that prohibit any discounting and also whether the UK companies had any choice but to follow their US ‘parents’.

Why does agency pricing only apply to digital.

In 1962, The UK courts declared that, the then Net Book Agreement (NBA) was in the public interest to allow publishers to subsidise works of authors. However some would suggest that the NDA stifled creativity as much as it supported it. But today’s return to fixed pricing is not in support of creativity but to control pricing nothing more. It may ironically kick start even more authors to go digital by themselves with the likes of Amazon offering authors attractive ‘agency’ royalties.

The agency model is to some is a backdoor return to the NBA, albeit the eNBA. The NBA/ agency model is not bookselling, nor is it retail, it is a false economy that hurts the one person who puts real money into the mix – the consumer. We believe that the agency model is flawed just as the NBA was. Digital renditions are over priced and the real control is with the aggregators, new entrants, technology providers not any publisher.

We welcome the investigation but are cautious of it delivering a blow to the agency model and remember their investigations and findings into the initial CD price issues many years ago.

source WSJ

NBA = Net Book Agency

We don’t welcome back the Net Book Agreement in the UK and especially through any backdoor and have written before of this somewhat valueless move.

We now have three major trade house setting or ‘fixing’ the prices of their ebooks in the UK. Anyone now wishing to sell their books must sell at the price the publisher sets and the commercial terms are on a fixed commission basis. We also now have two major retailers refusing to play and even after publishing an open letter objecting to the practice, Amazon have understandably capitulated. As Amazon's commission is now guaranteed on all ebook sales, some will suggest Amazon is secretly rubbing their hands at the move.

The statement from HarperCollins in yesterday’s Bookseller states, " Experience has shown in the US, where the market is more mature, this is the best way to stimulate competition by offering good value to consumers and maximising the number of channels to market."

However, some would suggest that ‘good value to consumers’ is illogical as value is determined by price. In this case the price goes up and will no doubt go up again with 20% VAT in the New Year. Some would also question just how it maximizes the number of channels to market if two of the UK’s major retailers channels aren’t playing and Amazon was clearly taken there against its will. Finally, the US experience matters little, as it is a very different market,is covered by different laws and different business relationships. Some would suggest that once again the US parents are probably demanding their UK children step in-line.

So why are we not going whole hog and bringing back fixed retail pricing for all books? After all its deep discounting fears that is driving the latest hysteria. We now have a consumer muddle with a wholesaler pricing model for physical books and an agency fixed price model set by publishers for ebooks. A reseller can't offer a discount even if they wanted to. Yes the recent poll in the Bookseller came out in favour of the agency model, but that is hardly consumer based research and some would suggest that is like asking communists party members in China to vote against the state.

When America's book publishers wrested control of e-book prices from Amazon earlier this year and established this new agency model, the results where predictable prices went up. Amazon started to make money on loss leaders and it was hardly consumer orientated, but there again it was hardly done by consumer facing people.

So where is this all leading? If ebook sales are only expected to capture some 15% to 25% of market share over this next 5 years, will authors really benefit from this dual market? Will it favour best selling front list and penalise mid and back list authors? Will mid and back list authors vote with their feet and go for the higher prizes available for going alone and price point at a level that earns them more whilst clearly differentiating themselves for this non value pricing?

If publishers set the price then they become effectively the reseller and in some cases liable for more than just setting the price. Under agency, publishers can experiment with prices as much Amazon did before agency agreements were established but can they react and change prices as effectively across the market? How will they bring prices down or will they simply stay at the original price set. Publishers are once removed from consumers and this is only going to demonstrate how big that gap is.

If agency pricing is aimed at creating a level playing field for all retailers to compete evenly on ebooks, we would suggest that no one wins a beauty contest in an ill fitting one piece standing next to a stunning Amazonian in a cute bikini. Levelling price is not the answer and some would suggest not why we got into this net ebook agreement.

Agency Pricing: Amazon UK Tells its Customers Who Is To Blame For Higher Prices

Below is a letter from the Kindle team in the UK to their staff. Its a pity its not taken as an advert page in the broadsheets as it clearly states the case from the consumer perspective and that is a hard one to argue against. The case for mid and back list authors would be just as compelling.

Dear Customers,

Recently, you may have heard that a small group of UK publishers will require booksellers to adopt an "agency model" for selling e-books. Under this model, publishers set the consumer price for each e-book and require any bookseller to sell at that price. This is unlike the traditional wholesale model that's been in place for decades, where booksellers set consumer prices.

It is indeed correct that this group of publishers will require Amazon and other UK booksellers to accept an agency model for e-books. We believe they will raise prices on e-books for consumers almost across the board. For a number of reasons, we think this is a damaging approach for readers, authors, booksellers and publishers alike.

In the US, a few large publishers have already forced such a model on all US booksellers and readers. You can read the thread we posted about that change here:
http://www.amazon.com/tag/kindle/forum?cdForum=Fx1D7SY3BVSESG&cdThread=Tx2MEGQWTNGIMHV&displayType=tagsDetail

As we're now faced with a similar situation in the UK, we wanted to share our thinking and some details about what we have observed from our experience in the US.

First, as we feared, the US agency publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) raised digital book prices almost across the board. These price increases were not only on new books, but on older, "backlist" books as well (in the industry, "backlist" books are often defined as books that have been published more than a year ago). Based on our experience as a bookseller setting consumer prices for many years, we know that these increases have not only frustrated readers, but have caused booksellers, publishers and authors alike to lose sales.

There is some good news to report. Publishing is not a monolithic industry - there are many publishers of all sizes taking a wide range of approaches to e-books. And most publishers in the US have continued to sell e-books to us and other booksellers under traditional wholesale terms. They make up the vast majority of our Kindle bookstore - as a simple proxy, in our US store 79 of 107 New York Times bestsellers are priced at $9.99 (£6.31 GBP) or less, and across the whole US store over 585,000 of 718,000 US titles are priced at $9.99 or less.

Unsurprisingly, when prices went up on agency-priced books, sales immediately shifted away from agency publishers and towards the rest of our store. In fact, since agency prices went into effect on some e-books in the US, unit sales of books priced under the agency model have slowed to nearly half the rate of growth of the rest of Kindle book sales. This is a significant difference, as the growth of the total Kindle business has been substantial - up to the end of September, we've sold more than three times as many Kindle books in 2010 as we did up to the end of September in 2009. And in the US, Kindle editions now outsell hardcover editions, even while our hardcover business is growing.

In the UK, we will continue to fight against higher prices for e-books, and have been urging publishers considering agency not to needlessly impose price increases on consumers. In any case, we expect UK customers to enjoy low prices on the vast majority of titles we sell, and if faced with a small group of higher-priced agency titles, they will then decide for themselves how much they are willing to pay for e-books, and vote with their purchases.

Thank you for being a customer,
The Kindle UK Team

Comments are already being posted against the letter. To read the letter and comments posted

Are eBooks Different?

Unlike the music, game and video sectors, the majority of books today don’t exist in a digital form, they exist on paper. The consumer choice is not one of changing or upgrading a device, or moving from tape to CD to MP3, or going from DRM protected music to DRM free music. In other media sectors, the headphones may change, the screen may be now mobile, the games console may become wireless but the basic experience remains the same all that has changed is the delivery. Books are different. Unless we are talking about a pair of glasses, the vast majority of consumers and book readers don’t own a reading device today, they have to buy it. Also today when we buy a book we own it and can, give it to a friend, write all over it, destroy it and even resell it to someone else. The biggest change consumers face is the realising that when they buy a digital book they will not own as yesterday and that may be tethered to specific technology or platform that has not got a lifetime guarantee. These two changes are significant and hold the keys to many of the issues we are all grappling with.

Some believe that digital is just an extension of the physical and as such just another rendition. Arguing that as they own the right to publish the books, this should be on any platform, but authors and agents are instead saying that digital rights, if not specifically covered under a contract, remain with the author. It is reasonable to argue that the digital rights traded to the consumer aren’t the same as the physical traded rights and if not, then the rights acquired and developed must also be different. If this is correct then its perfectly logical for authors and agents to treat them separately and not dance to the publishers tune. There may be are secondary rights acquired to develop or enhance a digital work and these need to be contractually thought through moving forward. However, where the text from the physical book is merely poured into the digital jacket the point that should be considered is the traded rights not whether it is just another rendition. It is read differently and the usage rights and restrictions traded are different and these should be the points that determine whether it is the same or different. .

The issues of digital pricing rages on, with one side saying that the price must be comparable with the physical and the other shouting cheap or no deal. The questions should not be about what the publisher’s believe is fair, but what the consumer expects or is prepared to pay. Also low pricing can stimulate growth and high volume and low margin is often better than low sales and high margin. We should remember that consumers aren’t stupid. The music industry got initial CD pricing woefully wrong and despite the alarm bells keep coming up with the lame excuses for artificial high pricing. The result was that consumers voted with their clicks and created Napster, Kazza and a whole new independent channel. We hear similar explanations about the cost of digital on publishers today and it makes one wonder if some should be working for the Ministry of Disinformation. The message is clear - be careful what you wish for.

One of the major reasons that the economies of digital aren’t always appreciated by the public is that they don’t understand that in the digital age many publishers still live, work and develop content and the marketing collateral in the Dark Ages and simple convert it, post production as an afterthought. Yes distribution and printing may only constitute some 10 to 15% if the cost but that isn’t where the greatest cost saving is offered by digital! The one thing that is clear is that Digital Publishing should be publishing and not an adjunct and afterthought. While publishers still maintain their pre and post production worlds they will fail to grasp the true benefits of digitisation on their business and continue to play ‘pin the tail on the digital donkey’ whilst they are blindfolded in the market.

eBook Races: Thoughts on the Winners and Losers

If ebooks are to be as significant as predicted, who will be the biggest supplier? Will it be publishers supplying direct, social networks, traditional aggregators, the book-chains, device manufacturers, Celebrities, libraries? We have long regarded Amazon, Google as favourites and we can’t ignore the likes of Apple, but will these global brands conquer all, or will the business splinter? What will are some of the factors that will determine the winners and the losers?

Global Brand Recognition

Today Amazon claim that they have between 70% to 80% of the eBook market and that 80% of their sales are to Kindle owners. We have to remember that global brands and consumer awareness shifts more units of anything. No matter how big Barnes and Noble are in the US, or Waterstones are in the UK, the average buyer will only know, or have even heard of one of them. The acid test is to ask 10 people, on any High Street in any country, if they have heard of Amazon, Barnes and Noble, Kobo, whatever. We can predict the one to score consistently across all respondents in many countries will be Amazon. When consumers are uncertain they will go for safe bets on the known and trusted players.

Everyone is a Potential Retailer

Today, the business model adopted by many is similar to that of the traditional internet market, where someone aggregates all the content and sells it through what we refer to as ‘white label’ stores. The stores act as a shopping window, holding no stock, but branding the store and its stock as theirs. They merely ‘pull down’ stock from a digital aggregator only at the time of sale. This is achieved by separating the customer and transaction from the actual file access and download. Anyone can sell any file, as long as they have a commercial web site and an agreement with and ability to link to the aggregator. The ability to sell ebooks is not restricted to stores, it can be clubs, non traditional retailers, even celebrities such as Oprah Winfrey can sell ebooks alongside physical books and have them all supplied transparently by the likes of Amazon. Even libraries don’t have digital files they simply connect to the likes of Overdrive.

Repository Size doesn’t Matter

How many aggregators are needed to supply the market? As wholesalers and distributors from the physical world move into being digital wholesalers and compete with true digital aggregators, will they all survive, or have the lost the battle even before it has started? It is easy to believe that the biggest aggregator will win – after all those were the rules in the physical world. However in the true digital world, it’s all about networks and transparency of links, not accumulation of files. If you can identify where the file is and can connect to the custodian, all you have to do is send a ‘pick pack and dispatch’ message in real time and collect the money. The more repositories you can connect to, the greater the offer. Why do publishers want to send digital files to tens of aggregators when they could effectively store them within their own digital warehouse and only release then on a sale? There will always be a Amazon who demand the files, but there are only a handful who can justify the risk.

Price Can’t be Fixed Upstream

As predicted, the agency model is now coming under scrutiny with a second US state attorney now questioning it. Price fixing contracts that are 'never undersold' are counter productive in the short term and futile in the long term. Some would argue that the price is too low, others that it is too high, but entering into a model simply to try and control Amazon and discounting is not the answer. It was obvious that the ‘famous five’ agency pioneers would find themselves;open to a US legal challenge, taxation issues and be accused of reintroducing the NBA (price maintenance) in the UK through the back door. The best price control is the free market and the best people to set prices are those closest to the market and not sat behind desks in a distant office.

Is a ‘Book’ an ‘eBook’

We now have at one end, the book morphing into a multi media format and at the other, fragmenting into sub sections. What is clear is that there will be a vatiety of offers which may be genre defined. The book will no longer be straight jacketed and constrained in size or by two pieces of cardboard? This more than anything starts to change the relationship between author and publisher and also has an impact on rights. It starts to change the way we look at bibliographic information and other metadata. If the package becomes far richer it has implications on its promotion and marketing and also who owns what? If the book is fragmented then we also have to be able to tie the associate parts to together. These changes start to redefine and preserve the publisher’s role and remit in a digital world.

Spread Betting

So we return to the winners and losers.

Amazon has clearly played a very strategic game and has placed itself between author and reader, accumulated a sizeable repository and the right to demand files. It has also positioned itself across all digital platforms, channels, in the consciousness of the consumer and as a destination store. It will succeed because it has spread its bets.

Google and Apple are forces, but interestingly have failed to spread their bets to date. Others will come and go, but will be always playing catch up and although there may be an outsider its hard to see one among today’s runners.

Agency Pricing; The Great Leveller?

Publishers Lunch raised an interesting aspect of the new Agency Model yesterday. Their report claims that the new agency model will be applied equally to all, irrespective of size, channel whether they sell direct or indirect. The implication is that wholesalers such as Ingram will be treated no different to resellers such as Apple.Apparently, Ingram have sent a letter to some 65 retailers that the company serves alerting them that they will have to discontinue the availability of ebook titles from all publishers wishing to do business under an agency model and enter into new agency agreements.

In one move, major and minor ebook outlets could be effectively marginalised. The move means that wholesalers will have to move to the same agency model and terms as others such as Apple and Amazon and if they supply resellers they have to do so within the same agency share. Ingram expects to continue serving its ebook retail clients under the new agreements with publishers. However, they now expect to have to share the 30% agency commission with no movement.

So when some stand on their pulpits and say that the agency model makes it a level playing field for all, they appear to have forgotten the existing trade channel. So much for publishers supporting the existing channel and in enabling resellers to participate in ebooks and the digital world. This channel can’t afford to build the repositories to be independent and they rely heavily on the wholesaler model to supply them economically. Equally the wholesalers rely on the wholesaler model to justify their huge digital investments. Some would conclude that agency publishers only are focused on supporting the big digital channels and not in supporting the existing channels in a digital world.

We hope that in a few years time they don’t look around the digital lansdscape and wonder who killed to independent and medium chains and prohibited them from participating in the ebook market.

Digital Pricing: Be Careful What You Wish For

The agency pricing model shifts the pricing control back upstream to the publisher who can now play digital retail from behind their desk. But is this a real or just a hollow victory? Hachette Book Group, HarperCollins Publishers, Macmillan, the Penguin Group and Simon & Schuster have agreed agency terms under which they would set e-book prices and Apple would serve as an agent to sell the books to consumers. Apple would take 30% of each sale, leaving 70% for publishers to ‘share’ with authors.

The New York Times report that the Apple terms include a pricing formula that allows for a price reduction if it becomes a bestseller. Apple wants price flexibility for the hottest books, which are heavily discounted in the physical world and at rival retail sites. Apple also wants e-book prices to reflect cheaper hardcover prices where a publisher offers comparable hardcover editions at lower prices. Apple is merely acting as a reseller and there is nothing wrong with that.

So ebook pricing is variable and can be triggered not just by some age factor, but also by sales volume. However is the sales volume triggered through one channel or agent, or all channels and agents and the New York Times best-seller charts? Is the price to be applied universally or uniquely, locally or globally? So will the price to start at $15, $14 or $13? Is the price hike we were told was for the sustainability of the digital market the mere ceiling price point? If the hottest books ship cheaper, are publishers shooting themselves in the foot and giving away the winners, instead of playing them? How will this magic price change happen and who will control this morphing from 'also ran' to 'best seller' and potentially back again? will books at the edge of the charts see saw up and down like yo yos?

We now have an open market with tablets and mobiles appearing weekly. The ebook is only a fraction of their appeal and this technology driven roller coaster is about defining the ultimate media player. Just as we learnt Google was about selling advertising so we should look at others motives.

Multi media devices play; games, videos, TV, music, magazines, newspapers, are social network enablers and can also display books. Its about capturing eyeballs to capture the dollar. Books not only have compete on access and availability, but on time and spend. Apple are already moving the TV and video goalposts on price downwards and price will be a very important element that decides spend and ultimately success.

The ebook will sit and compete with many others and if it holds up everyone wins, but if it doesn’t then prices will be realigned and the people who will do that are the ones closest to the street, or with clear vested interest, not those sitting behind desks.

Walking Backwards to a Net Book Agreement World?

Some would suggest that the publishers have wrestled price control back from the discount chasm that was in danger of undermining the economics of publishing, others that the winners are the authors and some that Amazon merely backed out of a price war to win a fixed margin on all ebook sales. The reasoning will differ according to your allegiance, but what is clear is that the battle is far from over and the water has just got a whole lot muddier. As always we jump to applaud something new before we understand the real implications.

We now have a clear difference in pricing models between the physical and digital book.

One is free and unrestricted the other now set by the publisher. The physical price has been set to accommodate the current high discounting and only the foolish would pay the false price on the physical jacket. It is common to see high discounted price, bundled offers and generally everyday low pricing on the hardback. Now we have a price hike from Amazon’s ebook $9.99, to an agency model price which is set by the publisher and is aimed at guarantying ‘acceptable’ ebook pricing and margin whilst also guarantying hardback sales don’t collapse.
So it will be highly possible to see a hardback for sale at a high discount competing side by side with a more expensive ebook with no discount. We will also see ‘extras’ being added to the ebook, some would suggest not to primarily enrich the content and experience, but to merely justify a higher price. We then we have tax which current is not evenly levied against the two different format types, but has to be paid for the digital copy by the consumer or buried in the price.
Last week we were in Holland and discovered their ebooks, unlike their physical book prices, aren’t controlled. So a physical book is sold at a fixed price with a tax of 6% and ebooks are sold at discount with a tax of 19%. The ebook market is growing but the ebooks are attracting lots of special bundle deals and obviously are ‘cheaper’. The Amazon deal presents us with the opposite a controlled price on an ebook and a free or unrestricted pricing on physical books. UK pbooks are tax free whilst their ebook counterparts attract full tax at17.5%.

So we wondered whether we now find ourselves walking backwards into the UK’s old Net Book Agreement or just another ebook pricing issue? In those NBA ‘safe’ days booksellers were unable to discount and except for the month of January and the National Book Sale, it was a level playing field for all. We wonder what it would have been like if paperbacks were controlled then and Hardbacks not, or visa versa? How can we advocate controlling one market whilst letting the other be free of control? What message does that send out to consumers? What is competitive and what is price fixing and anti competitive?

Some would suggest that it was easy to take on Amazon with Google Editions and Apple coming into play, but that it would be very hard to take on the physical discounters.
We now also have the next new policy of tiered pricing, where the price will drop after some period at the whim and control of the publisher. It is like a ‘sell by date’ where the shelf life is determined but some marketing manager in some distant publisher’s office. How will that be managed, communicated and explained to consumers? Perhaps it will be like the National Book Sale after all or more likely prices will be moving every month.

Finally, authors have now mainly moved over to 'net receipts' contracts, which are based on the price that publishers receive from the resellers. So what should the author deal now be on ebooks? Should it be based on net receipts, on a fixed margin, related to other renditions and will it be higher or lower in real terms to the physical book? If publishers can neatly separate the physical from the digital why can’t authors do the same.

What we have is a change of ebook pricing driven by the perceived need to control digital discounting and the agency plays of Google Editions and Apple. However can we have one price model for digital and another for physical, or is that the next target?

Rumble in the (Amazon) Jungle

Last week was a big week for books with everyone expressing their support, or their concerns for Apple’s industry game play on their iPad. Publishing is renowned for its ability to play ‘follow the leader’ and until the dust settles it is often difficult to separate the real news from the noise. We also witnessed the final closure of objections to the Google Book Settlement with some staking their claims for a seat at the table, whilst others continued to point out the hypocrisy of a deal that sanctions breaking copyright whilst arguing for the support of the very same laws.

Authors are clearly pawns in the game and amazingly still have not been balloted by the very bodies vocally supporting the deal.

We now have a major house, Macmillan, squaring up to Amazon over pricing. They clearly find the $9.99 price unacceptable and have demanded a change of terms to one they find acceptable or said that they would change their digital release windows. Amazon in response has clearly refused to be dictated to and have appeared to have delisted all Macmillan direct sales. It is almost impossible to introduce price maintenance unless you effectively own the market and no one does in publishing.

Pricing is an emotive issue and digital pricing one which clearly is now becoming a battlefield. John Sargent’s open letter in Publish Lunch displays either calm and calculated nerves or a speedy and questionable reaction. Who is right and who is wrong is immaterial. What is important is the message that this public spat sends out to the two people that matter, the author and the consumer. There is only winner in a price war is the consumer and the player with the deepest pockets. You can call it whatever model you like, the issue about digital pricing is not going away, the more it is raised the harder it will be to manage.

If all publishers were to follow Macmillan and all publishers where locked out by Amazon life would become interesting. However, the publishing marketplace’s diversity is it greatest strength and how long can publishers turn their back on the biggest physical channel and the digital leading channel today? Remember the public cries of foul play when CDs first came out? Some would suggest that the case for cheap ebooks is even greater and the current public fight is a clear wake up call to all.

The one thing that is clear is that the US marketplace is setting many digital precedents in our global market. We are starting to see a landscape where the control of digital books is in the hands of Google, Apple, Adobe and Amazon. An interesting quartet of book lovers. Their platforms and technology are dictating the future and what deals are in place today may not be the deals in play tomorrow. Playing with Gorillas can be dangerous.

Amazon part 4: Give it Away

The New York Times asks the question ‘How do you make your book a best seller on the Kindle?’ Their answer: Give copies away.

The article poses the question as to what is meant by “best-selling” e-books on the Kindle. After all ‘best selling’ by what says means that something has been ‘sold’ not given away.

So we have the public domain give-aways, the aspiring authors promotions and then the publisher’s own limited window free promotions. Why are these counted alongside the paid for books? If the charts were only ‘paid for’ would we see ebooks for sale for a cent?

So do publishers want tiered pricing and to re-establish the hardback as the premium rendition? Do they want to delay ebook releases in order to protect revenues and re-establish the hardback as the premium rendition? Do they want to give away ebooks to promote them and again protect revenues and re-establish the hardback as the premium rendition?

There are also cases where giveaways are not of the latest title but of older titles by an author, with the purpose not of promoting the back list sales but to get readers to buy the new title at the expense of the back list.

Some would suggest that it’s a case of every way but loose. Others would suggest that it’s about who controls pricing. What is clear is that there is no harmony between publisher houses and it may be a case of every way but win.

We can learn from other sectors. Once you let the free out the bag, getting it back in is hard, if not impossible. So what is the price that publishers feel a ebook is worth? It is clear that the ball today is with the publishers but if they can’t decide, others will.

Brian Murray, chief executive of HarperCollins is quoted, “free is not a business model.”

Where In The World?

When it comes to looking at new offers we always like to check out the deal – doesn’t everybody?

So looking at the new 'Kindle for the PC', caught our eye today and we had to look past the glossy colour pictures as these were obviously positioned for those who read their books in black and white greyscale.

First we were keen to see how many titles were available:

US 372852
UK 296019
Africa 196166
Asia 304938
Australia 289163
Canada Nil
Europe 302511
India 293319
Latin America and Caribbean 308759
Middle East 301723

It was also interesting that the standard page threw up ‘The Christmas Bus’ and a romance with a very provocative cover ‘Bound for the Holidays (Ties That Bind book 1) under the Middle East selection! All the prices were in US dollars. So although the system could deal with the complexity of territorial rights and territorial pricing it only knew dollars.

We then looked at the newspapers and got really confused. The US pricing for UK newspapers was listed at $9.99, yet the UK pricing for the same digital file was $22.99. Obviously it costs a lot to ship the file back top the UK! We immediately thought the same would apply to magazines, but this was not the case and prices were comparable.









So what does this little exercise tell us?

Well the international offer is clearly at variance to the US and that their territorial regions are somewhat ambiguous. We still feel this is a real winner in the long term, so we are only critical of the pricing and territorial differences today. However, if Amazon with all its book knowledge perform so, what do we expect with regards other new entrants who know little and some may say care less about such sensitive issues?

Pricing Winners and Channel Losers

The US digital edition of Stephen King's "Under the Dome," a new 1,088 page novel, will be released 1 month after the hardback and carry a hefty elist price of US$35. How the likes of Amazon respond with their $9.99 ebook best selling price point will be interesting to watch but it shows once again that some publishers do not see ebooks as different and view them as part of a scheduled release strategy.Today Amazon have the hardback on sale at $9 offering a staggering 74% discount or $26 off list. So why not release the ebook at the same time?


The real shame is that King is the one of the leading ebook exponents and pioneers and now finds himself back in the box. The other reality we have is a clear hardback price war in the US with the supermarkets lining up against each other and Amazon and all trying to create a low price perception ironically centred around the $10 mark. The clear losers on these new frontlist bestselling hardbacks and ebooks are all the retailers who can’t bear the cost of the fight and have to stand by and watch it from the side as each blow gets swung.

The publisher is able to put any price on the jacket but this becomes more and more meaningless in this discounted market and the emerging price points set the consumer trend. The publisher is ok as they can factor the discount, the consumer is great as they win a better deal, the author is fine unless they are on net receipts and these flow through special sales clauses and the channel potentially just gets rolled over in the battle.

The only way the existing channel can respond is to become booksellers and stop being merchandised. Many already have started, but many continue to sell ‘consignment stock’ at uncompetitive prices and expect to survive in what is clearly going to be a painful cull.

eBook Pricing Remians 'A Dog's Dinner' - All Over The Floor

Mark Coker the founder of Smashwords wrote a provocative piece in the Hugffington Post this week entitled ‘Why we need $4 Books’. This raised once more the emotive issue of pricing and sent many to the barricades to defend their respective positions.

Mark’s position is that most books are too expensive which puts their future at risk as they compete with cheaper alternative media. He suggests co-operation across the chain should bring down the cost and rejuvenate the market. He says much more in the support of his theory and suggests that the ebook is a low cost format and therefore the ‘white knight’ riding over the hill to save us all from obsolescence.

What is disturbing is that there is a great difference between geographies, sectors and even title to title and by applying a general brush Cocker hits accord with some and is dismissed by others as naive. The process from manuscript to production, costs money and irrespective of the balance of the renditions sold, each in fact share a great deal of cost. Many cross subsidize each rendition and also factor into the cost used, remaindered, white sales and punts. To say that ebooks cost little, so give them away as mass market paperback, may be right for pulp fiction, but is not for all genre or even all fiction.

The argument that low price generates volume is also questionable. Low cost offers volume by taking market share not necessarily growing the market. If the market is growing only marginally today then it’s fair to assume that Amazon’s growth has come more from taking market share than market growth. The argument the low price creates growth is very questionable and it is usually down to other factors such as availability, accessibility, consumer demand. Price is only part of the mix and it isn’t a driver by itself.

So who controls price today? In the markets without regulation RRP (recommended retail price) is set by the publisher and from this discount determines the price bought with the price sold free to be set be the seller. So using this model we have to ask who sets Mark’s ambitious $4 price point. Is it the RRP, the wholesale price or is it down the retailer? Then we have the inconsistency of tax and we soon have a minefield. We also need to ask what the author thinks and what the impact this has on their royalties.

In a nutshell the article continues to reinforce the view that epricing is all over the floor.

Going Rogue: An eBook Life

HarperCollins is planning to bring forward the publication of Sarah Palin's memoir, "Going Rogue: An American Life," from Spring 2010 to November 17th this year. They obviously believe that it can compete in that Christmas market and after all, the quicker its on the shelf, the quicker it will earn out.

The ebook version is being held back a few weeks until December 26th so that they can learn what impact it has on sales and according to CEO Brian Murray, ‘The publishing plan is focused on maximizing velocity of the hardcover before Christmas, at a time when hardcover sales in the industry are down 15%.’ However, in contrast Harper are publishing Michael Crichton's novel, "Pirate Latitudes," which will be available as an e-book Nov. 24, the same date as its hardcover release. Truly some would suggest that Harper see the market as one big testbed and consumers as mere numbers to be crunched in the pursuit of ‘maximising the velocity of the hardcover before Christmas.’

Today we are clearly seeing the emergence of a US ebook market. It has many consumer issues on price, DRM, devices, but confidence is growing despite these potential obstacles. If publishers are inconsistent in how they address these and the release dates, this will not only potentially confuse consumers, but begs the question as to whether consumers are being used in pursuit of ‘maximising the velocity of the hardcover before Christmas.’

Let’s not mix up issues. Harper are not saying that they are delaying epublication because of piracy issues, it is purely down to money. The jacket price will no doubt be factored to accommodate discounting and the marketing hype geared to sell hardbacks at maximum margin. Some would suggest it isn’t hardback cannibalistion that is the issue as much the lack of credible ebook price within the market. At a time when you want readers to invest and have confidence in digital the last thing you should consider is potentially insulting their intelligence.

Perhaps Palin’s title is quite apt!

The ePrice is not Right

The news this week that Sony want UK ebook pricing to come down demonstrates that the issue of ebook pricing has many vested interests. We can’t assume that these perspectives are shared and in many cases are in fact pulling in different directions.

What is clear is that there is no standard epricing approach. Most publishers choose to align the digital price to the recommended retail price (RRP) of the physical rendition, but even here there is inconsistency. Do they choose the hardback, the paperback or start with the hardback and then flip it to the paperback when it is released? Go they hold back its release and release it alongside the paperback? If the price remains aligned to the physical rendition does this mean that when a reprint is produced with a higher RRP the ebook price rises too? Audiobook pricing has long stood by itself and has not been aligned to the physical rendition, so why do it to ebooks? The big question remains - How does the consumer feel about different pricing for what is exactly the same product?

Some believe that a staggered release similar to that used in the film industry is the best way of avoiding the cannibalising of hardback sales. This may work for a few but the content isn’t any different and the experience is much the same and deliberately denying consumers access is an open invitation to the digital pirates who plague the film industry and feed off this staggered release policy.

Some argue that the publishers have given away control of price but others would suggest they never really had it and their only action was to raise prices to offset discounts but maintain margin.

We must also remember that audio books and ebooks incur tax. In the UK physical books are tax free or zero rate whilst digital is at full rate 15%. In other countries the rates differ between the physical digital renditions and across Europe there is little standardisation on VAT. An ebook to a Dublin reseller will not cost the same as it does to a London reseller, but they may well sell for the same price. As all books are sold VAT inclusive, the consumer is often unaware of the tax incurred and only sees the price paid. However, unlike other products, here we have an identical product where VAT is charged differently based on whether its digital or physical. We all see the stupidity, but we must not assume that cash strapped governments will level them at the lower rate.

Then we have the retailers who want to create a price incentive and some big players are prepared to discount at a loss. We have ebook device manufacturers who like Sony only understand volume sales and want cheap books so they can sell more devices.
Finally, we must also not forget the author who is struggling to establish a living based on royalties that can appear to be a moving target. If the ebook becomes a cheap rendition how will the author be rewarded? Where do they want the price to be set?

We already have royalty contractual issues on ebooks. Should these remain as a fixed percentage of RRP, should it be a % of net receipts, should digital be fee based, should they be treated as special sales?

Its understandable to reduce the price of ebooks, to sell them at a fixed price point, even give them away as promotional leaders but the author must be included in the mix. Today we read that Smashwords, a self publishing operator is to supply B&N with their titles. They publish some 2,600 titles per year and give the author 82% of the sale. Is it now time for more authors to wake up and smell the self-publishing coffee?

What we believe is important is that each perspective is understood, but that the industry is not seduced by new entrants with different drivers and works to bring some sanity to this new market opportunity that will enable it to grow whilst rewarding everyone who adds value.

Joseph Esposito's Concentric Publishing Circles

Today we read what we believe is a very interesting viewpoint from our friend and US publishing consultant, Joseph J. Esposito and immediately ask and received his kind permission to share his thoughts with you. A lively discussion on ebook pricing and releases has ensued within the community ever since Sourcebooks said that they would hold back the ebook of ‘Bran Hambric’ until after the hardcover had had its sales opportunity. Joe’s view:

‘There are many things that are taken into account in setting prices, formats, venues, etc., just as consumers have a wide range of choices. This is simply to say that the environment is competitive. Over-the-top example: Someone who wants to buy Robert Darnton, offered at $20, is not likely to buy Danielle Steel, offered at $10, at least not on the basis of price alone. But if Darnton were $200, the needle begins to move for some portion of Darnton's prospective readers. At $1,000 it moves further. But there is no price at which Steel takes ALL of Darnton's readership. (Darnton, for those outside the US literary world, is a distinguished historian and now head of the Harvard library. If you don't know who Steel is . . . . ) All of this was true before there were digital books; what ebooks does is create greater options and complexity (including pirate sites).

For a publisher, a useful metaphor is to think of the market as concentric circles. At the inner circle (for a particular book) is the hard core readership that will put up with any indignity, any price or format, to get that book. My daughter was in this category for the Harry Potter novels, my son for Lord of the Rings. (For me, say, Italo Calvino, and when I was a kid, it was all Asimov all the time.) At the next circle out from the center, the consumer exercises some discretion ("I will wait for the paperback"). Move another ring out, and there is more discretion ("I'll only purchase this if it comes in the Kindle format"). Any publisher can make up their own typology to define each circle--in effect, an algorithm covering price, format, options, timeliness, alternatives, etc. And this typology gets adjusted for every book.

When someone says, that they will only purchase something if it is in a specific ebook format and costs under ten bucks, to a publisher that prospective customer is in an outer ring. The question for a publisher is how to maximize the return across ALL the rings, which means that some rings compete with the others (aka cannibalization). For Grisham the inner rings are potent; for O'Reilly books perhaps the outer rings are more important. And in five years the relative weighting of the rings (the formats, etc.) may be very different. Indeed, the weightings are changing as we speak.

The reason that legacy publishers with legacy brands pay unequal attention to legacy formats and legacy channels of distribution, is that the legacy world is still generating more money than the world of new media for certain kinds of books. Again, that is changing every day. A smart publisher has to play the game with skill; there will always be catcalls from the bleachers. Mike Shatzkin's idea of debut pricing is one way to play this game. If you are a customer out in the outer circles, you won't like this. But it is not a publisher's job to make you happy. A publisher's job is to make shareholders happy (and to abide by applicable law, including contractual commitments to authors). Part of the skill is in not hurting the people in the outer ring too much as revenue is extracted from the circles as a whole.’

The problem is that there are no silver bullets to digital book pricing and what works for one will not work for all. Perhaps the concentric circles are more like Venn diagrams in their appearance. In the end, we believe that we live in a consumer centric driven market and pricing and availability of content, in whatever form, will be ultimately driven by them.

Are Free eBooks Wise?

There is no such thing as Free and you can offer so much free content that the consumer starts to believe all content is free. Remember Napster and Kazza they created ‘free’ and music never really recovered, iTunes created the $0.99 track and prices only went one way.

Irrespective of the jacket price, we are now close to establishing the $9.99 price point in ebook retail, but even more alarming, some publishers now appear to be hell bent on using the ebook as a promotional release and giving them away free.

James Patterson's latest ‘best seller’, The Angel Experiment, was published some 4 years ago. Readers are getting it from the likes of Amazon’s Kindle site and at a price which is very good even for an old title - free. Patterson is taking the ‘mega author’ big picture perspective and is happily introducing readers to one book free, in order to promote the sales of another. Thousands have been given away. After all, he has probably made his money on the original, so what does he care?

This ‘priming the sales of one book by giving away another’ may be good for big publishers and young marketing wiz kids, but it is bad for smaller authors and publishers who don’t enjoy the ability to give books away!

The problem is that we haven’t established the ebook market and already some have decided they know best and are smart marketers. Promotional ebooks may work for some, but will effect all and some would say that its madness and would urge them, to be careful what you wish for.