(image courtesy rexray)
Last week, news broke that the Department of Justice is pursuing legal action against publishers and Apple for their “agency model” pricing structure. Under the Agency Model, books are not sold wholesale but at a fixed price with a set amount going to the retailer and the publisher. No retailer has pricing flexibility, and they are barred from offering coupons, discounts, and other ways to undercut the competition.
This is, to put it bluntly, incredibly anti-consumer. Imagine shopping for eggs, and the grocery store has to offer eggs at the same price as Target, 7-11, and the gas station, because that’s the sales agreement with the farmer. They never go on sale and you can never use a coupon. Sounds insane, but that’s how ebooks are sold. And understandably, the Department of Justice is a bit curious how five major publishers all decided at the same time that’s how they’d like to sell their ebooks.
I complained before about how out of touch the Author’s Guild is, but their response to the DoJ investigation absolutely blows me away. This is a family site, but after reading the Guild’s response, my first thought was “Did Jeff Bezos relieve himself in the Author’s Guild’s Cheerios?” Don’t believe me? Here’s a sample of the 1984-style propaganda being spouted:
Publishers had no real choice (except the largest, Random House, which could bide its time – it took the leap with the launch of the iPad 2): it was seize the agency model or watch Amazon’s discounting destroy their physical distribution chain. Bookstores were well along the path to becoming as rare as record stores. That’s why we publicly backed Macmillan when Amazon tried to use its online print book dominance to enforce its preferred e-book sales terms, even though Apple’s agency model also meant lower royalties for authors.
Our concern about bookstores isn’t rooted in sentiment: bookstores are critical to modern bookselling. Marketing studies consistently show that readers are far more adventurous in their choice of books when in a bookstore than when shopping online. In bookstores, readers are open to trying new genres and new authors: it’s by far the best way for new works to be discovered. Publishing shouldn’t have to choose between bricks and clicks. A robust book marketplace demands both bookstore showrooms to properly display new titles and online distribution for the convenience of customers. Apple thrives on this very model: a strong retail presence to display its high-touch products coupled with vigorous online distribution. While bookstores close, Apple has been busy opening more than 300 stores.
For those of us who have been fortunate enough to become familiar to large numbers of readers, the disappearance of bookstores is deeply troubling, but it will have little effect on our sales or incomes. Like rock bands from the pre-Napster era, established authors can still draw a crowd, if not to a stadium, at least to a virtual shopping cart. For new authors, however, a difficult profession is poised to become much more difficult. The high royalties of direct publishing, for most, are more than offset by drastically smaller markets. And publishers won’t risk capital where there’s no reasonable prospect for reward. They will necessarily focus their capital on what works in an online environment: familiar works by familiar authors.
Two years after the agency model came to bookselling, Amazon is losing its chokehold on the e-book market: its share has fallen from about 90% to roughly 60%. Customers are benefiting from the surprisingly innovative e-readers Barnes & Noble’s investments have delivered, including a tablet device that beat Amazon to the market by fully twelve months. Brick-and-mortar bookstores are starting to compete through their partnership with Google, so loyal customers can buy e-books from them at the same price as they would from Amazon. Direct-selling authors have also benefited, as Amazon more than doubled its royalty rates in the face of competition.
Remember, love is hate. War is peace. Anti-competition is good for everyone.
This is completely insane, and the Author’s Guild is so blinded by their Amazon hate that they can’t see how leveling the playing field was a short-term fix, but not a long-term solution. Yes, it took away Amazon’s price competition in books, but it made them far more price-competitive on hardware. Either way, it locked consumers into Amazon’s ecosystem. It’s also wildly unscientific to claim that there’s a correlation between the agency model and Amazon’s loss of marketshare. Barnes and Noble’s NOOK debuted in the fall of 2009. The iPad was released in Spring of 2010, and right before the iPad release is when the Agency Model went into effect. So did B&N get a leg up because of Agency pricing, or would they have grabbed marketshare anyway, because they’d spent years building a loyal brick and mortar business? Honestly, given the incredible success of the NOOKcolor and NOOKtablet, I’d wager a strong guess that their success has less to do with even pricing, and more to do with their 700+ bookstores.
In fact, I’d go as far as to say that they’d be in a BETTER position without the Agency Model. Barnes and Noble has run a very successful membership program for years. People pay $25 per year, and in exchange they get 10% off most books, including already discounted titles. Want to know how sticky this membership program made people? We would have people reach the registers at Borders, and upon realizing they were in a Borders, not a B&N, and we weren’t going to give them their 10% off, they would walk out and head to B&N. People went through all the trouble of picking out titles, but they’d paid for that membership card, and they were going to get their money’s worth!
So if the Agency Model didn’t exist, would those B&N member benefits extend to ebooks? Maybe not all of them, but certainly B&N would have the ability to extend some perks. And people who paid $25 for those benefits would be a lot more likely to get their money’s worth…and B&N would be sitting pretty! A consumer has to spend $250 at B&N to break even on the $25 card (assuming they just use the card to get their 10% discount), so B&N could either maintain or increase their member base, compete more effectively with Amazon on pricing, AND lock in more loyalty. None of that is able to happen under the Agency model, and like I said above, I truly believe B&N’s entry provided the first major competition to Amazon. Pricing was secondary to being the hot new player, and we STILL would have seen Amazon lose marketshare to a viable competitor.
Obviously this all depends on what happens with the Department of Justice, but maybe we’ll see the death of the Agency Model, or at least a loosening of the terms. And then we’ll see if I’m right, and if B&N competes not only as the non-Amazon player, but because they truly bring something to the table. The Agency Model didn’t bring us the NOOKcolor. The Agency Model didn’t bring us the NOOK Touch. B&N has done that on their own. It’s insane of the Author’s Guild to rob B&N of their innovations, and claim that an anti-competitive pricing scheme that’s made consumers frustrated is what has provided marketshare and growth. I say it’s not the Agency Model, it’s offering good products and services that drive sales. Do that, and you don’t need to kneecap your opponents or fix prices!