Amazon says 'will have to capitulate and accept Macmillan's terms'

[Elfwreck]

Originally Posted by HarryT

Could you explain what "agency pricing" is, and why it's bad?

Instead of acting as a distributor/retailer, where Amazon buys books from Macmillan at a set price (~50% of suggested retail) and sells them at whatever price they choose, taking more profit if they go with the suggested full retail, and less if they run sales, Macmillan is insisting that Amazon act as their "agent," taking a 30% commission from the price that Macmillan sets.

It means (1) Amazon won't be able to have special promotional sales (without special negotiations with Macm, which aren't likely); (2) Amazon won't be allowed to lower the price of a poor seller to get more sales at lower profit-per-ebook; (3) Macmillan is the seller, not just the producer, of the ebooks, which may have weird legal ramifications. (If there's bad/glitchy formatting requiring returns, it's possible that Amazon can send those complaints along to Macmillan to fix; agents may not have the same responsibility over the product as retailers.)

With physical goods, agents stop carrying products that don't sell well enough; they're not worth the resources it takes to stock them. In Amazon's case, the resources to "stock" an ebook are miniscule--but I wouldn't be surprised if part of the backlash included changing the listings system, telling Macmillan (and any other publisher who insists on a similar model), "We're sorry, but we just can't justify front-page listings of things we can't be sure of selling at that price. If we had the option of lowering the price to boost sales, it would be different."

Certainly physical stores often put "commission" items in a different area from their "main" merchandise; it's less important for the store to sell the commissions.

Originally Posted by kilron

who's the bad guy here? amazon or macmillian? i'm sorry, but its amazon.

You say that like it has to be one or the other.

There aren't any good guys in this conflict.

[Pardoz]

Originally Posted by Kali Yuga

But my primary points are that 1) ebooks are not 60% cheaper to make and sell than paper books

I haven't seem much data, but all the hard numbers I've seen tend to indicate that returns on e-books are an order of magnitude or more lower than they are on paper books. Most of the figures that get thrown around on the production costs of a paper book don't take into account that a third of the average print run ends up in a landfill.

2) price does not, nor should it have to be, inextricably set at, say, 5% above the cost to produce the item.

Oh, absolutely.

In the short term this will lead to a cannibalization of higher-margin hardcover sales (you don't really think it costs 3x as much to make a hardcover as it does a paperback, do you?).

Sure, but publishing was a profitable industry before a wonky tax decision on power tools created the current dependence on the Big Hit Hardcover, and there are indicators out there that e-books could signal the return of the profitable midlist publisher. The catch is going to be surviving the transition between models; some will thrive, some will die, same as every other time something's shaken things up.

[mcl]

Originally Posted by Kali Yuga

Retailer's costs are part of the package, and that's going to figure into whether or not a specific price is sustainable. As to just the publishers, of course ebooks will increase the IT infrastructure costs. But my primary points are that 1) ebooks are not 60% cheaper to make and sell than paper books, and 2) price does not, nor should it have to be, inextricably set at, say, 5% above the cost to produce the item.

Yes, retailers' costs are part of the package. And Amazon's $9.99 pricing was not sustainable over the long term. But Amazon was gambling (right or wrong) that eventually their costs would come down, making the price sustainable. Whether that was due to wholesale prices decreasing or other costs decreasing is anyone's guess.

Wait, it's irrelevant that publishers don't make money on most of their titles to begin with? Or that their margins could be destroyed by ebooks?

No, the retail price, and how many copies are sold at that price, is irrelevant in a non-agency model because the publisher makes their money from wholesalers, not retailers. Retailers do not buy directly from the publisher. As for margins, Macmillan had no decreasing margins for ebooks; Amazon was paying 50% of hardcover price, just as always. In fact, Macmillan lowered the monies paid to authors by 5%, INCREASING their margins (on top of the existing increase they saw with ebooks as a whole, due to the lack of printing, warehousing, distribution, and returns).

If you're referring to the publisher's fear that ebooks would destroy their margins across the board due to decreasing physical book sales, well...that's just too bad. Expecting ebook purchasers to prop up their margins on dead tree media is just a stupid business move. Would you pay $4 per MP3 just to preserve the margins on CDs? No. Neither would I. It's an idiotic business decision, and one that's insulting to the consumer. The market is changing, and publishers need to adapt, or die. The MPAA is learning this. The RIAA is still struggling with this but will ultimately have to adapt. The print publishing industry needs to learn it now. The advancement of technology is inexorable; they may delay the inevitable, but it WILL come, and they MUST change, margins be damned.

The common assumption is that Amazon (and other retailers) were going to pressure publishers to lower the wholesale cost.

So? That's ALWAYS an assumption in business: Producers are going to attempt to charge as much as they can get away with, and the rest of the retail chain is going to look for cost efficiencies wherever they can be had. That includes a constant downward pressure on the supply cost.

So your argument is that, because the wholesale cost might go down, the publisher should just force retailers to accept the retail price the publisher demands. That's specious, because the publisher already controls wholesale cost. The only difference between now and an agency model is who gets to balk at the price. Now, it's the retailers. Under an agency model, it's the consumers.

Know why Macmillan wants the agency model? Because the consumers have less leverage than the retailers. In short, it's easier for them to walk all over us, than it is for them to walk all over retailers.

Why would you willingly want to surrender what little power remains on our side (if one can paint Amazon as having been on our side)?

In addition, publishers are facing the erosion of the value (perceived and actual) of their product. In the short term this will lead to a cannibalization of higher-margin hardcover sales (you don't really think it costs 3x as much to make a hardcover as it does a paperback, do you?). In the long term it could lock them into an unsustainable price for years, regardless of the effects of inflation for example.

It's the cost of doing business. The wonderful thing about business is that it evolves, even though some overfed bureaucrat in Manhattan may fight tooth and nail to see that it doesn't. So their margins decrease for several years? So what? They're not going to go out of business, and they're not going to suffer any great hardship by making slightly less profit. They don't have R&D costs. There's no need for significant reinvestment of capital back into the company from profits taken.

As for declining value, that's always going to happen. It's the nature of the beast. Value declines. Get over it. One nice thing about a digital economy is that as value declines, volume increases. So one offsets the other.

[Shaggy]

Originally Posted by fjtorres

Actually, Amazon has laid out a perfect defense against federal price-fixing charges.
And set up MacMillan and any other publishers that follow them for a nice antitrust investigation.
This could get interesting...

Theoretically price fixing is illegal, but in this day and age the content industry pretty much gets to make any laws they want. If they can rewrite their own copyright laws, why not rewrite the sherman antitrust act as well?

[asjogren]

Control. Why can MacMillan dictate terms? Because mergers and acquisitions have reduced the playing field for Publishing.

What will happen going forward? I think the Big 6 will reduce in number. Why? Mergers and acquisitions will give the surviving publishers MORE control. So they can dictate terms more aggressively.

I think that the publishers only have a decade left. They are only middlemen for electronic media. We watch them attempt to force fit an archaic model onto a new reality. We watch them responding to their own desires instead of their customer's.

A new paradigm is coming that connects the content creators with the content consumers. The Big 6 Publishing houses cannot escape the evolutionary reality:
ADAPT OR DIE.

By their actions, you can guess their fate.

[wallcraft]

Originally Posted by Elfwreck

Macmillan is the seller, not just the producer, of the ebooks, which may have weird legal ramifications.

I am hoping that someone can get a class action suit going about non-interoperability of DRM schemes. Since it is the publisher selling the ebook, why can't it work on every device? If that does not fly, there is the case of an "agent" going out of business. It seems that the publisher would have to take up the slack and support the orphan ebooks at that point.

Overall, I think the publishers would have been better off not using "agency" but just cutting out the wholesaler and dealing directly with retailers. There have been a couple of blogs about the deal that suggest that this is what the publishers are actually doing.

On the other hand, it is clear that publishers "should" be selling ebooks directly to the public, e.g. as Baen does. The agency model is closest to this, and recognises that some retailers (e.g. B&N, Sony, Amazon, Apple) actually add value by providing a single store front for their customer base.

[kilron]

the agency model for e-books is where the industry NEEDS to go. it makes the most sense. amazon's old model was absolutely screwing publishers.

seriously, who care if a book seems too expensive? are they holding a gun to your head, forcing you to buy books that you deem as too expensive? do realize that most of you paid several hundred dollars for a device that allows you to buy and read books. lets not cut off any ears to spite our faces here...

but the agency model is probably the future of the industry. if we value books and authors, then we should embrace this type of model. if a book is too expensive, guess what's going to happen?? they won't sell, and the publisher will lower the cost! why is that so hard to understand?

most of these publishers are very large companies and they probably have some very nerdy folks working for them that simply try and figure out the best price to sell something to maximize sales and profit. it sounds like many of you are saying that they'll raise the costs just because they can and just to spite you. why on earth would they want to do that?

if the ebook is the same price as the physical book, personally i'd rather have the ebook, because that's why i bought an ebook reader in the first place... to read books on it!

[bwaldron]

Originally Posted by kilron

but the agency model is probably the future of the industry. if we value books and authors, then we should embrace this type of model.

No, sorry.

Originally Posted by kilron

if a book is too expensive, guess what's going to happen?? they won't sell, and the publisher will lower the cost! why is that so hard to understand?

Yes, markets work. However, why are you allowing only publishers any pricing power?

[mcl]

Originally Posted by kilron

the agency model for e-books is where the industry NEEDS to go. it makes the most sense. amazon's old model was absolutely screwing publishers.

seriously, who care if a book seems too expensive? are they holding a gun to your head, forcing you to buy books that you deem as too expensive? do realize that most of you paid several hundred dollars for a device that allows you to buy and read books. lets not cut off any ears to spite our faces here...

but the agency model is probably the future of the industry. if we value books and authors, then we should embrace this type of model. if a book is too expensive, guess what's going to happen?? they won't sell, and the publisher will lower the cost! why is that so hard to understand?

if the ebook is the same price as the physical book, personally i'd rather have the ebook, because that's why i bought an ebook reader in the first place... to read books on it!

I agree. But publishers like Macmillan give the agency model a bad name. Look at Baen. Look at their prices. Look at how they compensate their authors.

Now look at Macmillan.

Notice a difference? The issue here isn't the agency model. The issue here is Macmillan's abuse of the agency model.


"But authors can just change publishers!" I hear some cry. Well, I've made that argument in the past as well. But many correctly point out that many authors are locked into contracts. Contracts that many of them were apprently so desperate to sign that they jumped at the first one waved under their noses.


Where the industry really needs to go is a reality in which publishers no longer exist. With print-on-demand and ebooks, retailers could hire an editorial staff and deal directly with authors (Amazon already owns a print-on-demand service). The only thing lacking then is publicity, and that's one area where the electronic marketplace still struggles, across all media.

But it will eventually catch up.

[kennyc]

Originally Posted by Shaggy

Theoretically price fixing is illegal, but in this day and age the content industry pretty much gets to make any laws they want. If they can rewrite their own copyright laws, why not rewrite the sherman antitrust act as well?

Unfortunately true...

[kilron]

Originally Posted by bwaldron

No, sorry.

great response. why? amazon was screwing them previously with their monopolistic guidelines. they were driving DOWN the profits made by publishers and authors. can you explain to me how that's a good thing for books and authors in general?

Yes, markets work. However, why are you allowing only publishers any pricing power?

because its their content. how does amazon in any way change it or make it better? or for that matter anyone else? if the books are solely owned by macmillan (or any publisher for that matter), then why shouldn't they be allowed to dictate the cost?

[kilron]

Originally Posted by mcl

I agree. But publishers like Macmillan give the agency model a bad name. Look at Baen. Look at their prices. Look at how they compensate their authors.

Now look at Macmillan.

Notice a difference? The issue here isn't the agency model. The issue here is Macmillan's abuse of the agency model.


"But authors can just change publishers!" I hear some cry. Well, I've made that argument in the past as well. But many correctly point out that many authors are locked into contracts. Contracts that many of them were apprently so desperate to sign that they jumped at the first one waved under their noses.


Where the industry really needs to go is a reality in which publishers no longer exist. With print-on-demand and ebooks, retailers could hire an editorial staff and deal directly with authors (Amazon already owns a print-on-demand service). The only thing lacking then is publicity, and that's one area where the electronic marketplace still struggles, across all media.

But it will eventually catch up.

agreed. i'm more championing the agency model that macmillan is enforcing on amazon rather than macmillan themselves as a company. by enforcing an agency model and moving towards e-books becoming the primary media for reading, the agency model opens many doors and could very well likely see the end of the giant publishers. with ebooks and a standard agency model, what's stopping an author from self-publishing and cutting out the publisher altogether? you mentioned publicity and that's a good point. though with the internet, publicity and marketing have changed a lot over the years. i have a feeling that those things could take care of themselves.

[texasnightowl]

Well, there was a brief report about this situation on my local noon news. It was presented as "Amazon gave in even though they object to the higher prices."

[DawnFalcon]

Originally Posted by LDBoblo

What I wonder is...what price will ebooks have to be before they can be half as well-crafted as even the cheapest paperback versions?

Funny, my Baen ebooks are fine...

[Daithi]

Originally Posted by HarryT

Could you explain what "agency pricing" is, and why it's bad?

Under "retail pricing" a retailer buys a book for let's say 50% of the list price and then the retailer sells the book for any price he desires. He doesn't have to sell the book at list price, but can discount the book by 20% or more. He doesn't make as much as if he had sold it at the full retail price, but he can still make a healthy profit. The consumer benefits because retailers are forced to compete with one another by offering the consumer the best price. Retailers also compete with one another through figuring out ways to reduce their costs, so that they can offer consumers the lower prices.

Under "agency pricing" the publisher sets the "sales price" of the book and the retailer gets a commission for each sale. Of course the price is set by the publisher will likely be much higher than if it had been set by the retailer. Less competition definately hurts the consumer in the form of high prices.

There is also less insentive for retailers to cut costs. Retailers like Amazon have been able to cut cost when compared to their brick and mortar counterparts. They pass these cost savings to the consumer so as to increase their volume, with the intention of making their profit on volume. Without the ability to lower prices a retailer can't substancially increase his volume, so he has no insentive to make the investments required to make the kind of cost cutting that is only feasable at high volumes. Once again, this harms the consumer since it results in higher costs.

There may be some anti-trust issues arising from the "agency pricing" model. Imagine if all retailers sold their products through the "agency pricing" model. Software, clothing, appliances, cars, etc. all with prices set by the manufacturer. Shopping around for the best price would come to an end. This is especially relevant in the case of books, where a publisher has exclusive rights to an author's work -- this heightens the anti-trust concerns in my mind.