by Darryl Adams
With 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:
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