BOARD MEMBER’S CORNER

Amazon vs. the Agency Model

by Dave Marx

As a publisher, I’m fascinated by the tug-of-war over e-book pricing that is taking place as this issue goes to press. In shorthand, it’s a conflict between the Amazon.com/Kindle approach, in which the retailer has total control of the price, and the “agency model” championed by major New York publishers in connection with the new Apple iPad.

I think there’s a basic misunderstanding of what agency model means. It sounds like some new and exotic basic shift in the relationship between publisher and retailer. But in the world of e-books, a dramatic shift has already taken place.

In the print-books world, the retailer purchases physical goods from the publisher (or the publisher’s intermediaries), at a cost based on the publisher’s suggested retail price. At that point, the copyright law’s first-sale doctrine takes over. Once retailers own the goods (even if it’s only until they return them for credit), they’re essentially free to set whatever price they wish—list price, deep discount from list price, loss leader price, or anything in between. The publisher is isolated from the retailers’ pricing/discounting practices.

However, retailers do not purchase e-books, and they generally don’t pay licensing fees for the right to distribute copies of e-books either. With e-books, retailers function more or less as sales agents, paying a publisher only when they close a retail sale on that publisher’s books. In essence, they have a license to sell what they don’t own. Call it whatever you want, the Apple and Amazon e-book agreements both have some characteristics of an agency relationship. Neither, in my opinion, is optimal for publishers.

The major publishers seem to have adopted the term agency model from Apple’s use of the term. However, even Apple’s iBookstore agreement leaves the retailer with more power than I feel publishers should grant. Apple’s agreement includes price caps, as well as provisions that allow Apple to adjust retail price (and with it, publisher compensation) to maintain parity with Amazon’s e-book pricing.

The price caps have everything to do with Apple’s need to compete with Amazon’s e-book pricing policies, and very little to do with the economics of publishing or free-market forces. Amazon arbitrarily selected a price for frontlist Kindle e-books, and that price continues to call the tune. While e-book sales are supplemental income today, that mix will shift, and ultimately, our P&L calculations may be far more reliant on e-book revenues than print sales. Between now and then, I believe we publishers have to wrest further control over price, or risk a situation where only blockbuster titles can be profitable.

Our licensing agreements have to provide some isolation from retailer pricing decisions. The cost of attracting consumers to a particular retailer ought to, as always, be borne by that retailer, not by its suppliers. Any price allowances we may grant ought to benefit our individual titles/imprints—as in co-op and placement fees—not function as across-the-board subsidies to keep (or make) a retailer competitive with another retailer.

What’s Ahead for Amazon and Apple?

I believe that Amazon’s and Apple’s e-book pricing models—where the retailer sets the terms, the retailer controls pricing, and one price fits all, at least for frontlist releases—will be destructive for everyone in the long run. They’re not in accord with the way a market economy works. They leave no room for variations in perceived value, production cost, potential market for a given title, or consumer demand. They leave no room for competition among producers.

What the major publishers are hoping to accomplish is to reassert the right to do what they, and we, have always done—establish the suggested retail price/wholesale pricing for each title. We have to look at our costs, estimate demand, look at the competitive marketplace, and set an optimal price for each title. The consumer market is better off with thousands of publishers competing with each other than it is with a handful of dominant retailers trying to wall off as big a piece of the market as possible.

Publishers are also much better off when the consumer understands that the price of a product is related in some way to the cost of production and value to the consumer. One-price-fits-all effectively divorces the consumer from those realities. We may be faced, as is the movie business, with a situation where only mass-market blockbusters and an occasional low-budget genre title can be profitable. But the book business is not just about entertainment.

In the long run? I don’t think Amazon can prevail. Having lost the first round to major publishers, it appears as I write that the giant retailer wants to use a divide-and-conquer approach with smaller publishers and to persist with its already fracturing business model.

Common Cause Options

That divide-and-conquer approach relies, of course, on Amazon being able to deal with each publisher one-on-one: These are our terms; if you want to do business with us, this is what you have to do. The time-honored solution for weaker parties in a transaction is to band together. They may band as a collective, a guild, or a producer’s cooperative, or they may band in a class action suit or through intermediaries such as distributors and wholesalers.

Since the book trade already has distributors and wholesalers, and since they are trying desperately to maintain a role for themselves, I think things will head in the direction of this last approach. Using a common term from the broadcasting biz, I believe distributors and wholesalers will morph into “syndicators.”

Amazon will hold onto what it can, while it can (three-year contracts, for instance). The company has to know that if it sticks to its current position it’ll be toast. Or Kindling. Its position in e-books going forward will be only as strong as the Kindle, and Kindle will be only as strong as the lineup of titles available in that format. What Amazon is looking at is a progressively smaller percentage of the e-book business, but (hopefully) of a thriving e-book business, so that dramatic market growth compensates for declining market share.

What might happen? Perhaps Amazon has no choice but to accept the iBookstore, the major publishers, and the major distributors as Amazon Merchants. That way, the suppliers control price while Amazon maintains selection, is able to offer multiple e-book formats with a minimum of fuss, and skims a percentage of all transactions. Amazon’s terms for smaller publishers will have to be comparable to the terms available to those publishers from distributors/wholesalers. If the deal looks alien, it won’t happen. That means, in all likelihood, that the agency model will prevail.

Improving Marketing Programs

Because I head the Marketing Programs focus group on the IBPA board of directors, I spend a good bit of my think time on how to keep those programs relevant in these rapidly changing times.

What role will BookExpo America and the other trade shows have going forward?

How do we provide effective marketing tools like catalog and brochure mailings in the age of email blasts, online catalogs, and ONIX-formatted title data feeds to booksellers, wholesalers, and catalogers?

What kinds of marketing programs are appropriate for today’s entry-level independent publisher?

How might marketing programs serve publishers of e-books, especially for titles that may be released only in electronic formats?

How can we offer programs that are relevant to a wide spectrum of our membership, from the smallest self-publishers to mid- and large-sized publishers?

That’s a lot of answers to seek.

My press joined PMA (now IBPA) about 10 years ago, back when the M stood for “marketing.” So I feel Marketing Programs is something of a sacred institutional trust, and I look forward to hearing from you about just what kinds of new marketing programs you think can be of value, and how we can help our existing programs adapt to changing times. Please, feel free to contact me at dave@passporter.com.