Stars fall in Amazon protest about ebook prices

[HamsterRage]

Originally Posted by Kali Yuga

They might, but in doing so you're making a basic error in terms of the economics. Lower price may mean higher volume, but it also means lower revenues.

For example, let's say that Book X sells 1,000 copies per month. If it's an agency book selling for $12.50, that is $12,500 that is split between retailer (30%) and publisher (70%). The cover price also sets the royalty rate, let's say 20%, which comes out of the publisher's cut. So the publisher is getting $6.25 per book, or $6250.

Now they cut the price of the book to $10. To match the same revenues, they now need to sell 25% more just to break even. The publisher's cut drops from $6.50 to $5 per book, and the author is getting $2 instead of $2.50. (How many authors will be happy with a 20% cut in their royalties, by the way? )

There are numerous other factors, but the reality is that none of us here can definitively state that cutting the cover price by 20% will automatically generate a 25% or greater increase in sales.

Actually, the author comes out flat since he gets $2 on 1,250 sales instead of $2.50 on 1,000 sales.

The rest of that math is irrelevant since all of the equations involved boil down to identity (ie: "a=a"). Obviously, lower price is going to mean lower revenues and profits if the sales volume don't go up enough to compensate.

The theory is about lowering the price is that the sales will go up more than than the price goes down. There seems to be something to that. $10 might be a psychological barrier, get below that and sales might skyrocket.

[Kali Yuga]

As occasionally happens, the quote approach is getting impossible to read. So I'll address a few salient points.


It Doesn't Matter Who Sets the Price….
All that matters to people is that the price matches what enough people are willing to pay.

To wit: Saturn treated its dealers exactly the same way publishers treat Amazon. Saturn Corp set the prices; dealers were not allowed to haggle; dealers were restricted from being too close to one another. And people loved it. They were happy to pay full price, as long as the cars were good.

Similarly, Apple strictly controls the prices for hardware, and obviously controls the pricing in their major sales outlets -- the Apple website and stores. I believe they also exert very strict controls over the handful of retailers they cope with (and they definitely treat those retailers like crap on occasion). They also fixed the price for song downloads at $1 per -- a price that few complain about.

Oh, and if you buy a book from Baen or Harlequin off their website, then… who's setting the price? The publisher. It's not like Baen Retail is a wholly independent entity. And a primary reason why people don't complain is that they are satisfied with the prices.

Examples abound of a manufacturer controlling the retail process. American Apparel, H&M, Ikea... Lots of companies have full control over the pricing of their goods. Are these also violations of the concept of a free market? Is it a violation of capitalism that the only way you can buy an Ikea PLUGGIS is at their store, at the price they dictate?

And hey, what about everyone's favorite, Walmart? They invert the process, by basically strangling manufacturers who don't meet their price points. This can dominate pricing for a product in huge swaths of the US. Is this an unalloyed good thing? Is this the free market in action?

Furthermore, not everyone is tearing their hair out over $13 ebooks. About half of Amazon's Top 20 are over $10. I don't have exact sales figures (and neither does anyone else around here), but publishers do. They know exactly how much they are making off of numerous books at various price points. As such, if they figure that they can make up for the lower margins with higher volume, they will have a strong incentive to drop the prices. If they don't, perhaps that's because -- shock horror gasp -- people aren't quite as livid as some of y'all over a $13 ebook.

You may not like it, but really, let's be honest. If Hachette said "$10 ebooks for everybody," you wouldn't care who set the price. You are ticked off because you have a perception that the publishers are "socking it to you."

So, if you ask why I'm not grabbing a pitchfork and a torch like the rest of you, a nice big chunk of it is that the publishers simply haven't wound up charging me more than I'm willing to pay; and if they want too much for a book, I read something else until the price drops.


Agency Pricing Is Almost Certainly Legal
I slightly disagree with LakeLoon in that I'm fairly sure Leegin is relevant. It allows manufacturers to set price controls at retail, as long as it meets certain criteria.

For example, agency pricing does not prevent retailers from offering books from other publishers; the publishers aren't collaborating with each other on their prices. I.e. it's far from a slam dunk that this practice is illegal.

And manufacturers clearly have tons of leeway in terms of dealing with retail channels. A specific retailer does not have the right to force a manufacturer to work with them, unless there is some sort of illegal discrimination at work; the manufacturer can legally stipulate things like product placement or bundling. However, their rights definitely do not necessarily extend to absolute freedom to decide the price of a product.

It is entirely possible that the courts may find that agency pricing does not match the tests suggested in Leegin. Or, legislators may generate a specific law stating what qualifies as anticompetitive pricing (though I seriously doubt that one). However, the law does not state that retailers must have absolute freedom to price their goods as they see fit.


Paper Prices Are Irrelevant
Well, to me at any rate. I am aware that I am currently largely unique in this regard, but that won't be the case for long.

If a digital version is available, and the book is text rather than mostly images, then I have no interest in a paper version. Why, exactly, should I care if the paper version is ¢50 cheaper? All that matters to me is "are they charging a price that I am wiling to pay?"

And y'know, I really see absolutely no valid reason to peg that price to a format that I don't want. If an MP3 download costs more than a vinyl or 8-Track version, I see no reason why I should care.


Volume Is Not Necessarily King
Some of us had the displeasure of living through the Dot Com excesses. One lesson of that era is that you can't always make up for razor-thin margins merely by increasing your volume. (*cough* pets.com *cough* kozmo.com *ahem* )

I've already tried to make it clear that a reduction in price requires a significant increase in volume in order just to break even; deny it as much as you like, it's just a fact of economics. And even though we're dealing with a digital good, you need to do more than just slash prices to accomplish that, especially once the lower price becomes the norm.

It should also be clear that price isn't always a deterrent to success. E.g. people have squealed for years that Apple hardware is too expensive, that they need to cut their prices to increase sales volume and thus their market share; i.e. they needed to join Dell, HP and others in a "race to the bottom." Meanwhile, they've been living off of fat margins and sticking yet more capital under their mattresses -- and they are raking it in even in the midst of a major recession.

[HamsterRage]

Originally Posted by Kali Yuga

The "paper" costs for the publisher are only around 15% of the book's cost. So to make the same profits, they need to sell 2.85 times more books.

I can't accept this. Let's take a $10 paperback that sells a million copies. If the book wholesales for $5 and the publisher makes $1 per copy then that equals $4,000,000 in costs to the publisher. If the "paper" costs are only 15% of the total cost ($600,000), that means that the publisher spent $3,400,000 on editing, artwork and marketing.

Does that seem reasonable? Not to me.

[thrawn_aj]

Originally Posted by Kali Yuga

So is Apple setting the price of a single song download at $1. Same with Saturn telling its dealers that "this is the price you will charge, period, and no haggling." Tell me, did you vehemently protest those arrangements?

Nope. Because I wasn't in the market for either of those commodities. You seem to think that this is a matter of principle for me . It isn't - it's a matter of pragmatism, plain and simple. Also, the point you were replying to was a response to your statements about all this being market-driven plain old-fashioned supply-demand mechanics-nothing-to-see-here-move-along. The point was ONLY that the Agency 5 model is totally anti-capitalism and OPEC-style price-fixing plain and simple. Let's not move the goalposts 'kay?

By the way, the Saturn example is well-taken. The Apple example isn't. Apple (in your specific example) is acting as the retailer - they can set the price accordingly. Someone else (Amazon) is free to undercut their price and screw them over.

Regardless of all this, even if you ignore everything I said, the fact is that the market is also free to react to the Agency 5 bs any way it wants to. The star rating fiasco is one such way. I guess we'll see quite soon who pressures whom into doing what. In any case, it won't be too long before they're embroiled in anti-trust litigation - I'll be stocking up on popcorn for that show.

[LakeLoon]

Originally Posted by Kali Yuga

I slightly disagree with LakeLoon in that I'm fairly sure Leegin is relevant. It allows manufacturers to set price controls at retail, as long as it meets certain criteria.

Boy, try to say complex things in a few words, and you get into trouble! I was making a different point, kind of a technical one. I don't think we're in disagreement.

Under the antitrust laws that deal with "combination, contract, or conspiracy"--i.e., agreement--you cannot violate the law unless you establish that an agreement exists between 2+ entities. It is a threshold question. No agreement, no Sherman Act Section 1 violation (or its analogs under state law).

Where you are talking about the relationship between a principal and agent, arguably there are not two entities, economically speaking. Just like you cannot have an antitrust conspiracy between the president and the vice-president of the same company. Just like a parent corporation is not "price-fixing" when it agrees on pricing with a wholly-owned subsidiary.

Leegin does not address this question of "what constitutes an agreement?" One could easily have raised the argument before Leegin, and Leegin did not make the argument any more or less valid.

However, if you assume that the "agency" argument is rejected, and the principal and agent are deemed to be two separate actors capable of entering into an anticompetitive agreement, then Leegin becomes relevant. I think this is your point, and if so I agree.

Addendum: if you are really interested in this question, the Supreme Court's recent decision in American Needle deals with exactly this type of issue (although a different fact pattern). See in particular footnote 5, talking specifically (albeit in dictum) about agency.

[JSWolf]

The other issue Kali is not really dealing with is the issue that Agency 5 eBooks are not allowed to be put on sale. That is an issue that is causing all sorts of problems. Some eBook stores were never designed to allow sales on only certain publishers and the only way they can deal is to no longer offer sales. The Agency 5 sets the price, screws the customer and wants us to be happy about it.

[Barcey]

Kali, we seem to disagree again.

It does matter who sets the price. Especially when the purpose is to raise prices. If a publishing house wants to stop selling through retailers and sell direct then they can set the prices. If they want to set up 5 different websites and sell the books at the same price they can. If they want to sell through a retail chain and set the target price they can. If they want to sell through a retail chain and then tell them they can't change the price then it's a problem. If they want to sell through a retail chain and then tell them they can't change the price but it's OK because we'll call them "agents" it's still a problem.

If General Mills is concerned that Walmart is "devaluing" the price of tasty toasted oats and decide to tell all the grocery stores that they can no longer change the price of Cheerios I would have the same problem with it. If all the companies that sold products through the grocery stores did the same thing and suddenly people's weekly grocery bill went up to 2 to 3 times you bet the government will recognize it as illegal.

Paper prices are relevant to the majority of the consumers. As long as there are paper book editions that people can baseline against it will continue to be relevant. Especially when the delivery to market is so obviously cheaper.

[GreenMonkey]

Originally Posted by LakeLoon

Under the antitrust laws that deal with "combination, contract, or conspiracy"--i.e., agreement--you cannot violate the law unless you establish that an agreement exists between 2+ entities. It is a threshold question. No agreement, no Sherman Act Section 1 violation (or its analogs under state law).

Where you are talking about the relationship between a principal and agent, arguably there are not two entities, economically speaking. Just like you cannot have an antitrust conspiracy between the president and the vice-president of the same company. Just like a parent corporation is not "price-fixing" when it agrees on pricing with a wholly-owned subsidiary.

Leegin does not address this question of "what constitutes an agreement?" One could easily have raised the argument before Leegin, and Leegin did not make the argument any more or less valid.

However, if you assume that the "agency" argument is rejected, and the principal and agent are deemed to be two separate actors capable of entering into an anticompetitive agreement, then Leegin becomes relevant. I think this is your point, and if so I agree.

Is the argument that the various publishing houses are making, then, that Amazon (and Apple or whoever) is their agent, not a retailer?

I personally believe MAP / RPM laws, allowing corporations to restrict how much retailers sell their products for, are anti-competitive and an anti-trust problem. Companies should be allowed to price products they are selling as they want (for good or ill) in order to compete.

Problem is, the Supreme Court right now seems to be awfully nice to corporations, so it's legal. That doesn't keep me from believing it to be anti- free market at its heart. I sympathize with states that have attempted to ban the practice.

[gollu]

I don't understand people leaving 1-star rating for a price when they should be rating the content. If the price is too high - there are enough dark ways to obtain the book, and apparently that's the response the book industry will understand. Every person that doesn't buy the book because of its high price is a sale lost, $$ less income.
Then one can come back to Amazon and rate the book with 5 stars, while suggesting book was acquired in an alternative way.

[orwell2k]

Originally Posted by gollu

I don't understand people leaving 1-star rating for a price when they should be rating the content. If the price is too high - there are enough dark ways to obtain the book, and apparently that's the response the book industry will understand. Every person that doesn't buy the book because of its high price is a sale lost, $$ less income.
Then one can come back to Amazon and rate the book with 5 stars, while suggesting book was acquired in an alternative way.

Why not do both? Just as a form of protest, use the star system as a weapon rather than 'following the rules'.

Stick it to the publisher by making it clear there are alternative sources for the content that is so highly valued, and bias the overall 'quality stats' of the product the publisher is trying to push to pehaps turn future cutomers away.

Just some further ramblings
- not really sure if they make sense as I just typed in my random thoughts on various aspects of this issue - food for thought, at least:

Business understand only one thing - $$$. Forget principles and fair trade practices and consumer rights and anti-trust laws. Money talks and bullsh*t walks! If consumers are unhappy then pressure needs to be brought to bear on the $$$ side of the equation: no sales = no revenue = no profits = no $$$.

In reality consumers have very little power to resist the 'market' but a concerted effort at forcing a change in pricing policy sometimes works. We like to think about capitalism an free markets, but it usually ain't the case.

I would like to see some kind of coordinated effort by Amazon customers to band together and boycott all eBook sales - even for a week or a month - just to send a message. Just to 'run it up the flagpole and see who salutes', so to speak.

And let's face it, rampant piracy would really be a bad thing all around - for publishers, authors and customers. But squeezing blood out of eBook consumers is one sure way to trigger a backlash. I think if book prices are too high more people will take the trouble to find alternative sources for some books - more and more if prices get too pushy.

And a word of warning to publishers and authors - piracy at the moment is haphazard - some people buy books and break the DRM then share them. But if publishers really start pressing the price hikes and force a true eBook black market, it will explode. Every form of DRM has been broken, and new ones fall within days. So a coordinated piracy effort requires only one official eBook sale for mass pirate editions to become available. Duplicate and spread these all over the web and the publishers will see what undercutting really means.

People have pointed out a fallacy in comparing eBook and pBook prices. There is also a fundamental difference in eBook and pBook content when it comes to piracy. Publishers should consider that when defining their Agency models.

The Apple iTunes experience has been mentioned, and regardless of agreeing or diagreeing it seems to have provide one essential lesson. Electronic content is so easy to copy and share that the only way to combat it is to make the original items cheap enough to exclude any significant desire to look elsewhere for sources.

Why try to find a torrent of an mp3 when you can grab it for $0.99 or whatever. Similarly to the iPad - why Jailbreak it (unless you really need some extra features) when apps are so cheap?: $1-$2, $10 for pages, etc. If publishers keep eBook costs attractive very few people will bother with looking elsewhere or pondering their next purchase - they'll just 1-click and buy, buy, buy! (probably spending more overall than when prices were high).

[Seli]

Originally Posted by GreenMonkey

Is the argument that the various publishing houses are making, then, that Amazon (and Apple or whoever) is their agent, not a retailer?

I personally believe MAP / RPM laws, allowing corporations to restrict how much retailers sell their products for, are anti-competitive and an anti-trust problem. Companies should be allowed to price products they are selling as they want (for good or ill) in order to compete.

Problem is, the Supreme Court right now seems to be awfully nice to corporations, so it's legal. That doesn't keep me from believing it to be anti- free market at its heart. I sympathize with states that have attempted to ban the practice.

Could you (or someone) please explain in which way Amazon or any of the ebook-sellers act as a retailer?
In my view they have found a no-risk niche (depending on the exact accounting practices), no expensive to store stock, no money to the producer to obtain the stock, no risk of having un-sellable stock. And if they keep the money they obtain for sold products for a couple of days they can sell the product without mark-up and still make a profit due to interest.

[Blue Tyson]

Originally Posted by orwell2k

And a word of warning to publishers and authors - piracy at the moment is haphazard - some people buy books and break the DRM then share them. But if publishers really start pressing the price hikes and force a true eBook black market, it will explode. Every form of DRM has been broken, and new ones fall within days. So a coordinated piracy effort requires only one official eBook sale for mass pirate editions to become available. Duplicate and spread these all over the web and the publishers will see what undercutting really means.

You could actually have an organised place - people kick in donations to somewhere a la a demonoid or something - someone is in the UK, someone in the USA and they choose the books to buy, crack and systematically upload.
They might even choose particular publishers they disliked the most.

[LakeLoon]

Originally Posted by GreenMonkey

Is the argument that the various publishing houses are making, then, that Amazon (and Apple or whoever) is their agent, not a retailer?

I honestly do not know if they are making this argument right now. It's the kind of argument you would make to a court. However, I have to think that it is not by accident that the term "agency" has been prominently applied to this relationship. Presumably the publishers anticipated possible legal challenges, and the "agency" angle may have been one way to try to keep the arrangement legal.

Simply using the label "agency" does not automatically make it a true principal-agent arrangement. There are legal tests for that. I am not privy to the actual contractual arrangements between the publishers and Amazon, Apple, etc., so I have no idea whether the label is accurate. I would expect a court to look beyond the label to what was "really going on" in assessing the issue--that's what the Supreme Court directed in American Needle, and it sounds sensible.

Originally Posted by GreenMonkey

I personally believe MAP / RPM laws, allowing corporations to restrict how much retailers sell their products for, are anti-competitive and an anti-trust problem. Companies should be allowed to price products they are selling as they want (for good or ill) in order to compete.

First, let's separate out MAP from RPM. MAP is the "minimum advertised price"--i.e., it does not place any limits on your selling price, just what you can advertise. In some cases, the manufacturers provide retailers with money for advertising, and don't want the retailers using this cash to advertise ridiculously low prices. I am not saying MAP restrictions are necessarily always good, but they are in a different category.

Rather than try to list the arguments pro and con for RPM, I suggest you read the majority opinion and dissent in Leegin. Look in particular at the company Leegin itself, and the reasons why it didn't want the "big box" stores selling its "boutique" products at a heavy discount and providing a crappy buying experience and crappy customer support. You may find that you agree with the dissent (I suspect you will, given what you've said), but hopefully you will understand why many commentators believe that RPM might be justified in certain cases. One prominent argument is that, even if different retailers are not competing on price, different brands are still competing, and that is sometimes the most important competition. (However, interestingly enough, in the ebook world this is a less persuasive argument.)

And that phrase "certain cases" is the key. The Supreme Court did not even rule that Leegin (the company)'s policies were legal. All it said was, given advances in modern economic theory, we're taking vertical minimum RPM out of the "per se" category, meaning that each side to the dispute can argue about whether the arrangement was helpful or harmful. I'll make explicit what this implies: anticompetitive and harmful RPM agreements are still illegal. But "anticompetitive" and "harmful" are to be judged by economic theory and analysis, rather than anecdotal and seat-of-the-pants "well, it just seems wrong" arguments.

[Kali Yuga]

Originally Posted by HamsterRage

The theory is about lowering the price is that the sales will go up more than than the price goes down. There seems to be something to that....

I think you're slightly missing my point here. I stated several times that I view it as entirely plausible that dropping the price can result in more revenues and more profits.

I'm simply pointing out that in order for that to be the case, you need to sell significantly more copies than most people assume to be the case.

On a side note, authors are in fact demanding bigger royalties because they expect ebook cover prices to be lower than paper. Keep in mind that the author's royalty is not calculated off of the price the customer finally pays -- sales and discounts and coupons do not affect the royalty rates. So cutting the cover price results in a further deterioration of margins for the publishers.

So when the Harry Potter books were first released, if they put it out in paperbacks at a $12 cover price and sold them dirt cheap, there is no question they would have sold more copies. However, it is highly unlikely that even the HP books could've sold enough to make up for the revenues and profits lost by skipping the higher-margin hardcover sales.

Or, to put it another way: As you lower the ebook's price, you are also negatively affecting your margins. As a result, in more cases than most people presume (but definitely not all cases), you are better off selling fewer copies at higher margins.

[Worldwalker]

Originally Posted by Kali Yuga

So when the Harry Potter books were first released, if they put it out in paperbacks at a $12 cover price and sold them dirt cheap, there is no question they would have sold more copies.

They did.