eBooks: Is Agency Pricing Good or Bad?

Recently, there has been a lot of focus on the "conspiracy" between 5 major publishers and Apple regarding agency pricing and whether these 6 entities have violated antitrust law. The focus is not on whether agency pricing is good or bad, but whether the parties colluded. That question I'll leave for the US Department of Justice.

I'm more interested in whether agency pricing has been good for me as a consumer. Various forums have been discussing this and Mark Coker, president of Smashwords, has written an excellent piece defending agency pricing (see Does Agency Pricing Lead to Higher Book Prices?) Mark Coker makes several salient points, but they are points from the author and distributor perspective, not the consumer perspective.

(Mark Coker does make, however, one interesting observation: Before agency pricing, there was the wholesale pricing model. A publisher would set a book's list price at say $30 and wholesale to booksellers for $15. The booksellers were free to sell the book for any price they wanted, be it $5 or $10 or $25 or $30. The reality was, however, that no bookseller could sell all books at less than cost and survive, not even Amazon. At some point, a bookseller has to turn a profit or at least cover costs. Consequently, the wholesale price was, in effect, an agency price; that is, a minimum price at which a book could be sold without putting the bookseller out of business. In other words, there really isn't much difference in effect between the wholesale scheme and the agency scheme as far as consumers are concerned. For retailers, the agency scheme ensures that the retailer makes a profit on every ebook sold.)

But what about from the consumer perspective, and even from the indie author perspective?

In the days before ebooks (i.e., my participation in the ebook marketplace), I spent, on average, $5,000 a year on pbooks, mainly hardcover. I am now into my fifth year of ebooking and each of those years has seen a steady decline in the amount of money I am spending on books overall. Combined, my pbook and ebook spending doesn't exceed $2,000 in a year, and is often quite a bit less.

One reason, if not the major reason, for this is agency pricing. The traditional publishers, namely the Big 6 (Random House, Hachette, Simon & Schuster, Penguin, Macmillan, and HarperCollins), are overpricing their ebooks via the agency pricing. Consequently, I am simply not buying agency ebooks published by the Big 6. The newest James Patterson novel simply isn't worth $12.99 or higher to me. They are good reads, but let's face it -- classic literature that I would read again and again and savor each phrase they aren't. They are formulaic books that provide entertainment but do not evoke a lasting passion.

Consequently, I consider agency pricing to be a positive for the consumer. It helps dissuade ebookers from spending excessive amounts of money on books that in an open marketplace, and without publishers setting a retail price that bears no correlation to the true value of the book, would not command such high pricing in perpetuity. It might command it for weeks or months, but not years.

Agency pricing has had another benefit for the consumer. It has made the rise of the indie ebook distributor, like Smashwords, possible along with the rise of the indie ebook author. It is not that these entities didn't exist before; they did in the form of vanity presses for the pbook crowd. Rather, they have become legitimized, something the vanity presses never were able to accomplish.

Because the Big 6 agency pricing is so high, readers like me began to explore alternatives. And now I buy primarily indie authored ebooks at places like Smashwords. The competition among indie authors to get noticed and read has been such that ebooks are often priced at $2.99 and less, all the way down to free. Even here, however, agency pricing is beneficial because I can buy those books at Smashwords or Barnes & Noble or Books on Board or any number of outlets and not worry about price -- it will be the same at every store.

I'll grant that if my only interest in reading is today's popular books by big name authors, what we used to call the New York Times Bestsellers but which name is no longer appropriate, agency pricing is a problem. After all, Amazon demonstrated that it was willing to sell those ebooks at a loss in order to gain market share. (Which raises another interesting observation: When Amazon was able to sell the bestsellers as $9.99 or less ebooks, it cornered nearly 90% of the ebook market. With the advent of a more level playing field, introduced by agency pricing, its market share has dropped to about 60%.) Amazon had the fortune to be able to sell at a loss because other product lines were making a profit and could support the ebook losses; most ebook sellers did not have that option if they wanted to remain in business.

Agency pricing doesn't ensure the lowest price; the Big 6 demonstrate that daily. But from my perspective as a consumer, the advent of agency pricing has made ebook selling more competitive. Not because the ebooksellers are being price competitive but because the indie authors are being price competitive. Agency pricing has also ensured that there won't be one supplier of ebooks, which is also important to me as a consumer.

In balancing the scale of good or bad, I think agency pricing is good for me as a consumer. It has saved me scads of money by limiting the number of expensive ebooks that I buy to a handful. It saves me money because I no longer spend as much on pbooks; I have too many ebooks to read in my to-be-read pile, so I buy fewer pbooks. It has broadened my reading. Before agency pricing I did as many readers and bought reasonably priced ebooks by name authors. Since agency pricing, I browse the indie author ebook offerings and buy indie ebooks at very reasonable prices.

One last observation: Even if the Department of Justice pursues the collusion matter, there appears to be nothing inherently wrong with agency pricing. I expect that at worst the 6 parties being investigated will pay large fines but I think agency pricing is here to stay.

What do you think? Is agency pricing good or bad for the consumer?

14 Comments on eBooks: Is Agency Pricing Good or Bad?

  1. “Consequently, the wholesale price was, in effect, an agency price; that is, a minimum price at which a book could be sold without putting the bookseller out of business. In other words, there really isn’t much difference in effect between the wholesale scheme and the agency scheme as far as consumers are concerned.”

    I disagree. Under the old model a savvy consumer could wait for sales. The agency model doesn’t allow retailers to put ebooks on sale.

  2. Saying that agency pricing I’d good because it forces a consumer to start reading Indie books isn’t a good argument. I want to read the books I want to read, whether they’re from big names or small. By inflating the prices of big name books, the publishers are losing a potential sale to me because I’d rather save my money. Ebooks are just bits, they shouldn’t cost anywhere close to pbooks.

    • Yep. Just because Agency pricing accidentally accomplishes something good doesn’t make the model itself good. You cannot take credit for anything that happens due to the law of unintended consequences.

      • You don’t have to give the publishers credit- it wasn’t even their idea! Steve Jobs came up with it.

        The point is- Agency pricing is democratic- every book has the same markup.

        Think about this situation- a self-published author is willing to write a book for $0.01 a book just to get his name out there, but Steven King demands $10 a copy.

        Under the agency model the consumer gets to see that discrepancy. The indy author gets his sales.

        But under the old wholesale model, the indy author’s work would end up getting marked up $20 by the bookstore (because it is “long tail” and most competitors aren’t carrying it) and Steven King’s title is actually sold at a $2 loss. The consumer buys the $8 book instead of the $20 one! Was that fair to the indy author?

        When there’s one less middleman putting a thumb on the scale, that’s a good thing.

  3. We do have a fixed bookprice (not for ebooks, but for pbooks) for this reason:

    “Which raises another interesting observation: When Amazon was able to sell the bestsellers as $9.99 or less ebooks, it cornered nearly 90% of the ebook market. With the advent of a more level playing field, introduced by agency pricing, its market share has dropped to about 60%.”

    The fixed bookprice was invented to remove the unfair advantage general stores had over bookstores: they could sell at a loss because their profit could come from other sources.

    The one difference between our fixed bookprice and apparently the agency pricing is this:

    “Under the old model a savvy consumer could wait for sales. The agency model doesn’t allow retailers to put ebooks on sale.”

    Retailers can still put pbooks on sale, but only after certain points had been met, such as the length of availability. You can discount books that have been sitting in your storehouse for x months… But how that would work with ebooks, I’ve no idea…

  4. I certainly think the price fixing that is agency pricing is bad. Though it’s hardly the only thing around ebooks I see as bad. And really it just encourages me to stick with print for the most part.

  5. Let me turn this issue around and ask this question instead…

    Is Agency pricing good or bad for paper books?

    If the six publishers, that have instituted the Agency pricing model for their eBook titles, did the same thing for pBooks tomorrow, do you think that would be a good thing for the consumer? I don’t.

    I also don’t understand the argument that Amazon will drive everyone else out of the eBook business with predatory pricing, then raise the price of books once competition is driven from the market. That will never happen. The sales and delivery of eBooks is quite simple. You’ll have current online retailers like Target, Wal-Mart, Google, etc. all be able to add eBook sales to their existing online stores with very little effort. The publishers could even sell these eBooks directly to the consumer.

    I do see a problem for someone like Barnes & Noble because their business is mainly book sales and their online eBook business has to support all those expensive retail book stores. But forcing Agency pricing in order for a business with a faltering business model (retail paper book sales – just look at Borders) isn’t fair to the consumer. Imagine if Borders had lobbied to the six publishers to use the Agency pricing model for paper books so that Barnes & Noble or Amazon couldn’t sell the books at a cheaper price and put them out of business. The book buying public would be outraged. And yet, this is what has happened with eBooks.

    If you couldn’t tell by now, I want the Agency pricing model to be abolished as soon as possible. I think it will lower prices and offer consumers more choices in how to consume digital content. Subscription services such as an Netflix for eBooks will likely happen. A secondary market of selling used eBooks will evolve sooner. These advances would take forever to appear in the market if all the six publishers had to get together and decide how this would be implemented. Leave it to the individual retail, I say. The innovation will come sooner and that’s always good for the consumer.

  6. People seem to be rooting for Amazon to take over the entire book trade, mainly because Amazon offers them lower prices. A lot of the time, those prices are actually lower than the cost of producing the book, so it’s not a sustainable model in the long run, but people don’t really seem to care. Nor do they care if Amazon becomes a monopoly – the only place the public can go for ebooks – and simultaneously a monopsony – the only people to whom authors or publishers can sell their books for resale to the public.

    Look, if you think that’s a good idea, I think you’re nuts. Amazon’s share of the ebook market is well over the share you’d normally think of as being anti-competitive, but what, publishers get hit with the DoJ investigations and the antitrust suits? Nuts.

  7. Amazon didn’t collude with its competitors (say, B&N and Kobo) to rip-off consumers.
    It’s actions may be hyper-competitive but they are not anti-competitive. Hence the DOJ doesn’t care and won’t care until they use their market power against *consumers*. US Antitrust law exists to protect *consumers*, not giant multinational conglomerates.

    The PriceFix Six are suppossed to compete against *each other* for consumer attention and since they all agreed to *raise* retail prices to the exact same price range with the exact same margins for themselves, the onus is now on *them* to prove their actions aren’t hurtful to consumers. Which they can’t.
    That is the reason they have a lawsuit staring them in the face.

    • Evidence was presented that shows wholesale ebook prices were previously 50% of list about $12-15. Now those books sell for $10-15. Most $12.99. I’m not sure “raised retail prices” is the same as not permitting discounting.

      Can the DOJ force the publishers to lower their prices? They certainly can’t demand retailers to sell below cost.

    • I disagree.

      As I understand it, the lawsuit isn’t actually about the us of the “agency model”- the idea that publishers and independent author’s should directly select the actual consumer price (as opposed to just the wholesale price) and that “retailers” should honor that price and take a commision.

      This, alone, is not price fixing at all- it is allowing price competition at the MOST competitive layer (thousand of publishers and independent author’s competing against each other’s books) instead of the LEAST competitive layer (Amazon competes with three, maybe four other ebooksellers for many titles, for many independent titles they are a monopoly).

      In an agency model market- of which there are many- the retailers still DO compete on price- they do so by varying their commission.


      In this case, the lawsuit is mainly about Apple’s “most favored nation clause”- i.e. the clause that says no publisher will sell a book elsewhere at a price lower than in the ibooks store. In a wholesale market, these clauses are fine- a retailer has the right to guarantee a fair wholesale price. But in the context of the agency model, this DOES fix prices because why would a competing retailer offer a different commission?

      If the publisher’s had forced Amazon to sign something that said, we’ll give you this wholesale price, but in exchange you can’t sell any competitor’s books for less than ours, that would be the same thing.

      In other words- Apple, Amazon, and Barnes and Noble are the price fixers, not the publishers.

      • Wow!
        Orwell would be proud!

        The publishers set prices, forbid any variation by any retailer, and they’re *not* the price fixers? Instead it is the retailers?

        A new record for the apologist camp!

  8. The agency model is bad for everyone really. Consumers pay higher prices or don’t buy the books at all, retailers are limited in what they can do with products they purchased for resale – no sales, dictated pricing, etc., and publishers and authors sell fewer books. It also creates ill will in the entire industry.

    Government isn’t the solution either, the market is. If publishers don’t like how Amazon prices their ebooks, then they shouldn’t sell them their ebooks. They should either sell elsewhere or create their own ebookstores. But they don’t want to give up the Kindle community.

    What’s really standing in their way is their dependence on DRM. Without DRM, anyone could buy any ebooks from any ebookstore. But publishers, and many authors, think that DRM prevents piracy, which is not true. It only makes it harder for consumers to purchase what they want, where they want. In many ways, it pushes consumers toward pirated copies – geo-restrictions, format incompatibility, etc. A good example are the Harry Potter ebooks. Even though they’re sold through Pottermore and don’t have traditional DRM, the British versions are still not available to anyone anywhere because of the geo-restrictions of the publishers. So if you prefer to read the British versions of the ebooks, you have to find a pirated copy, they just aren’t available legally.

    A free market with no DRM restrictions is the best solution for an equitable playing field for everyone.

  9. One thing few people mention in this argument is that indie publishers like me will probably have to sell their ebooks only on Amazon if they do away with agency pricing. Before agency pricing, if B&N discounted my ebooks, Amazon would pay me my 70% of the discounted price, even though Amazon was still selling the book for the full retail price. Since 94% of my ebook sales are through Amazon, I would be giving up a lot of revenue for just a handful of extra sales.

    Bottom line: if agency pricing goes away, the minute a non-Amazon distributor discounts my books, I will pull the book from distribution there. I don’t see how that helps the consumer.

    Catherine M Wilson
    Shield Maiden Press

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