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Old 09-14-2012, 10:48 AM   #1
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Mike Shatzkin U-Turn? Rethinking what’s happening with ebook prices

http://www.idealog.com/blog/rethinki...-ebook-prices/

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Could I have gotten the DoJ impact on ebook pricing completely wrong? Could the elimination of the Apple-mandated pricing bands actually be such a good thing for publishers that loosening the restraints on discounting won’t actually disrupt the marketplace?

The early evidence seems to point that way
although we need to emphasize the word “early”.

What Cader was the first to write publicly (and which he told me in conversation before he posted it, but obviously it didn’t sink in) was that the publishers’ ability to raise ebook prices and ignore those bands offered a powerful antidote to the retailers’ ability to offer discounts.

The first reports when HarperCollins titles showed up on Amazon and other ebook retailers with discounts didn’t focus on the fact that the base price before the discounts had gone up on many of their titles.

Cader did the work required for sound analysis: grabbing Harper list prices from their site (showing that they had “re-banded” their prices higher, so that discounting up to 30% wouldn’t change consumer prices much from what they’d been) and doing price checks at a number of accounts.

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1. We will for the forseeable have a trifurcated ebook supply chain. Assuming Hachette and S&S employ Harper’s strategy of setting prices higher so that the retailer discounting just brings them down to about where agency had originally set them....


2. The discounts that were shown on the Harper books (also researched by Cader) tended to be 5%, 10%, 20%, 25%, or 30% off the publisher price, or else the trusty old $9.99. This is simple, probably human-set, pricing. It also doesn’t begin to test the upper limits of what retailers can do in discounting. They’re allowed to discount a particular publisher’s ebooks up to the total margin they earn across the list. So for a 30% agency publisher, all the books being sold at positive margin (anything from less than 30% off to full price) contribute to their ability to discount below cost on other books, if they want to.
Does that mean HarperCollins books are still on agency but the retailers are now allowed to discount? (the settlement allowed for agency pricing with retailer ability to discount).

HarperCollins set the list price (say $17.99) as the "agent." The retailers can discount all they want. If they discount their full 30% commission, then the price would be $12.59. If the list price is $14.99, discounting the full 30% commission will bring it down to $10.49.

Or HarperCollins ebooks are now sold wholesale? Or HarperCollins just outsmarted everyone by "setting prices higher so that the retailer discounting just brings them down to about where agency had originally set them."

Last edited by Top100EbooksRank; 09-14-2012 at 11:00 AM.
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Old 09-14-2012, 11:30 AM   #2
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Even with a wholesale model the publishers can keep ebook prices high by doing exactly what HarperCollins is doing (increasing the list price). Which is why the "race to the bottom" fear mongering and excuse after excuse by the publishers about how they had to collude to "save the market" were so ridiculous. The publishers still have a great deal of control over prices since retailers aren't going to sell every single book at a loss.
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Old 09-14-2012, 12:37 PM   #3
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HarperCollins is now back to wholesale pricing.

As before, HC sets a list price. Amazon buys a "copy" from HC for a set price (roughly half the list price), and the author's royalty rate is determined by the list price. The retailer can then discount any amount it wants, including losing money on the sale (aka "loss leader").

E.g. the ebook of Telegraph Avenue has a list price of $27.99, and Amazon is selling it for $9.99. Amazon is undoubtedly losing money on each copy sold.

The short-term result is that the publishers and authors make more money per sale with wholesale pricing. The goal of agency pricing is to prevent Amazon and Walmart from turning their premiere products into cheap commodities.

Amazon's goal, by the way, is not to shower its customers with cheap books out of the kindness of its heart. Amazon is willing to lose money to build dominant market share, and subsequently pressure publishers to slash list prices (and thus reduce Amazon's costs).


I don't know much about Shatzkin, but he's missing something if he doesn't think Apple can handle a price war with Amazon. H'm, what could it be, it's on the tip of my tongue... oh yeah:



Apple doesn't make money off of content, by the way. They make it off of hardware, and the only reason to have iBooks in the first place is to tie people to iOS, so they keep buying iPhones and iPads and iSockWarmers and so forth. I suspect there's a limit to how much they are willing to lose on iBooks, but there's no doubt they can afford to lose a heck of a lot more than Amazon.

In addition, Shatzkin fails to note that the real victim here will be Barnes & Noble. If they match or beat Amazon's prices, they will lose money. If they maintain higher prices, they will lose market share. Microsoft did throw $300 million at the Nook, but at their burn rate -- accelerated by what is now a partner requirement to switch platforms -- they'll be back in the red by the end of the year.

Yes, lower consumer prices are definitely a good thing. Too bad it's going to be at the cost of a duopoly or monopoly in ebook retailing.....
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Old 09-15-2012, 12:32 AM   #4
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I thought it was always obvious that the losers in these wars were the Brick and Mortar stores, and those people that liked to frequent such stores.
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Old 09-15-2012, 09:47 PM   #5
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Quote:
Originally Posted by Kali Yuga View Post



I don't know much about Shatzkin, but he's missing something if he doesn't think Apple can handle a price war with Amazon. H'm, what could it be, it's on the tip of my tongue... oh yeah:



Apple doesn't make money off of content, by the way. They make it off of hardware, and the only reason to have iBooks in the first place is to tie people to iOS, so they keep buying iPhones and iPads and iSockWarmers and so forth. I suspect there's a limit to how much they are willing to lose on iBooks, but there's no doubt they can afford to lose a heck of a lot more than Amazon.
This is kind of an amazing chart, but it conceals the fact that Apple makes hundreds of millions of dollars selling content through iTunes. It's just that the margin on selling content as retail is much lower than selling hardware; typically 2-3%. This is what Apple makes, and it's also what Amazon makes: the key to making money is to be very efficient and have such a high volume that the 2-3% ends up being a large number.

Amazon's profits are lower not due to them not making an appropriate margin generally, but due to them spending a lot of money building out distribution centers and developing various kindle products (which are less expensive than the distribution centers). The idea, of course, is that this will help them expand sales and once these one-time type expenses are gone, they will have increased volume from which to take their tiny margins.
Quote:

In addition, Shatzkin fails to note that the real victim here will be Barnes & Noble. If they match or beat Amazon's prices, they will lose money. If they maintain higher prices, they will lose market share. Microsoft did throw $300 million at the Nook, but at their burn rate -- accelerated by what is now a partner requirement to switch platforms -- they'll be back in the red by the end of the year.
I wouldn't count B&N out yet; there still is a robust paper book market, and they were able to quickly grab 25% of the e-book market even before agency went into effect, despite Amazon's early moves.
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