The Agency Model. Not a bad idea, only illegal (in Australia)

by Darryl AdamsWith Random House entering the Agency Price Model with the rest of the 5 big publishers (Hatchet, Harper Collins, Random House, McMillan, Penguin and Simon & Schuster), there has been a lot of discussion about the practice.Firstly, to be clear, Agency Pricing is illegal in Australia. As a form of Price Maintenance, the practice is specifically barred under the Consumer and Competition Act of 2010.

As per the ACCC: http://www.accc.gov.au/content/index.phtml/itemId/322982

Suppliers may try to impose a resale price to maintain brand positioning or to give resellers attractive profit margins.

Any arrangement between a supplier and a reseller that means the reseller will not advertise, display or sell the goods the supplier supplies below a specified price is illegal.

It is also illegal for a supplier to cut off, or threaten to cut off, supply to a reseller (wholesale or retail) because they have been discounting goods or advertising discounts below prices set by the supplier.

A supplier may recommend an appropriate price for particular goods but may not stop retailers charging or advertising below that price. In most cases, a supplier may specify a maximum price for resale.

Suppliers may withhold supplies of goods to a company that engages in ‘loss leader selling’. That is, purchasing goods with the intention of selling the goods below their cost so that:

  • the company can promote their business
  • attract customers who are likely to purchase other goods or services.


This exemption does not apply to genuine clearances, or to when a supplier has agreed to supply goods to a company for the purpose of loss leader selling.

In Australia, a price can only be recommended hence the term Recommended Retail Price or the acronym RRP.

Part of the problem was that Amazon was setting a price (generally US$10 or lower), in order to promote e-books generally and specifically promoting the Kindle. Suppliers thought that the price was too low, hence when Apple entered the book market, Publishers pushed the Agency model where they set the price to the retailers.

A publisher in Australia can withhold supply if they believe if the retailer is using the goods as a loss leader, so there is some protection available under Australian law against dodgy selling tactics. Ironically enough, this could have been used in Australia if Amazon had a presence here instead of the Agency Model.

Now personally, I have no issues with Publishers setting a price. What I object to is that the price is set in a way where companies are not allowed to vary it.

Retailers should be allowed to compete on price. However there are issues with this as well.

Part of the problem is that with DRM, retailers can create strong vertical markets as they control the software, platform and the marketplace. A book with Apple Fairplay DRM can not be used on non iDevices, and Kindle books can not be read on non Kindle hardware or software. While it can be argued that the Kindle software is available on most platforms, users can not convert the books with programs like Calibre, or read it on Linux devices without breaking the DRM.

Another issue is that Publishers become content providers, and compete in a wider market which they do not control. It can be argued that they already compete with other entertainment formats like music, games, sport and movies, but with the rise of portable devices with the power and connectivity like iPads, iPhones, smartphones in general and the new Android/Blackberry tablets, almost all the entertainment content is competing on the one device.

So publishers need to price their books not only to compete with music and video, but against games and apps in general. Added to this web content also competes on these devices, and most web content is free.

Piracy is another issue, but not the way the publishers think. A lot (but not all) of piracy is consumers frustrated that they can not get the content they want in the format they want. This is a market failure in its starkest form.

Publishers are setting prices partly to preserve another product, printed books. E-books seriously compromise the old profit system, and many organisations have difficulty changing their business model (look at the movie and music industry). Some book retailers and distributers are adjusting (with Indigo in Canada forming Kobo, Barnes and Nobel releasing the nook, and Baker and Taylor with Blio). Publishers, especially Australian (that is British) ones, are being dragged kicking and screaming into the twenty first century. And they don’t like it.

I don’t like retailers setting price for books because a) they will set a price that suits them, and not concider the production costs and royalties to authors b) generally they will set a price that promotes the sale of unrelated products, like for example, Kindles and iPads.

In the perfect world, publishers set the price for their content, but lets the market do what it does best, set a retail price where supply meets demand in the most efficient manner. Both publishers and retailers are doing their bit to prevent this.

And of cause the authors are the one who gets screwed by both parties.

image via Flickr

6 Comments on The Agency Model. Not a bad idea, only illegal (in Australia)

  1. I am sooooo tired of hearing that most piracy stems from the fact that people aren’t getting the content in the format they want. That’s just bologna.

    I am 23. Everyone I know within a 5 year age difference of myself downloads music illegally. They do it because it’s easy, and freely accessible online. The content not being in the right format is a moot point. We could buy the songs on iTunes, but we don’t. It’s horrible, and it’s true. People need to be a bit more honest about the realities of piracy.

  2. I think that the statement “Agency Pricing is illegal in Australia” is not quite correct.

    From the ACCC: “When a company supplies an agent with goods, title does not pass from the company to the agent. Therefore supply has not taken place, and resale price maintenance will not have occurred.”
    Ref: http://www.accc.gov.au/content/item.phtml?itemId=801189&nodeId=4783021f23be781f6396709e69b16a48&fn=Resale+price+maintenance.pdf

  3. ?: You will always get people who will never pay for content. However, if there was a subscription service that offered streaming and downloading of music at a cheap price, would you use it?

    Doug: This is why I hate law. As i searched for that and found nothing. However the supply point is important, and can be challanged by the ACCC. What about from the retailer to the consumer?

  4. ?: and why did people start putting those MP3’s on the internet in the first place? Because you could buy them everywhere? No, because there was a lack of legal options. And once people get used to getting things free, you try to get them to pay for your service. And that’s the huge mistake the book business is making. They’re not giving the people what they want, so they’ll search somewhere else. And when they finally do decide to publish those books in electronic form, do you think those people that now know where to get it for “free”, will start to pay for it? Especially as you apparently pay for something you don’t own, and aren’t even guaranteed you can read on every device you own. While you could with that “free” copy…

  5. Darryl: I’m not going to make any guesses as to how things would turn out in Australia. My knowledge is pretty much limited to the referenced PDF, which says that it’s not the supply point that counts but whether title was transferred.

    In the case of e-books, title is not transferred. Licenses are granted, and the license that’s being paid for is from the publisher to the end-user. Or at least, this is what I suspect the publishers will argue.

    Here in the USA, the situation is sort-of the opposite. In a 1964 ruling, the US Supreme Court said that while the supplier can set retail prices in an agency arrangement, the supplier cannot *force* the sellers to accept an agency arrangement in order to be able to set retail prices. The ‘Big 6’ American trade publishers have all said “it’s agency model or no e-books for you”, so that seemingly would invalidate the “agency” defense in the US. However, in 2007 the US Supreme Court ruled that retail price maintenance wasn’t anti-competitive unless proven to be in a particular case.

    So where the publishers will probably rely on the agency arrangement in Australia because retail price maintenance isn’t legal there, in the USA they’ll probably rely on retail price maintenance because forcing an agency arrangement in order to set retail prices isn’t permitted. Or at least, those are my (non-lawyer) guesses.

    • I done some digging, and I think that Agency laws are done at the state law, which would generally be harmonised accross the states, but do have regional quirks that can be a pain to negotiate.

      The UK is investigating Agency Agreements http://www.thebookseller.com/news/oft-launches-investigation-agency-pricing.html, and since the case precedents I found would also applyto Australian case law (Ireland v Livingstone (1872) LR 5 HL 395) .

      And Australia also has strong Anti-trust laws here (we call them cartels) and the ACCC will launch action on a mere hint of cartel behavour.

      It is a messy situation, but you did raise a good point which is worth investigating

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