Agency Model? The Real Danger for Authors

On March 1, 2011, Random House, the last holdout against the Agency Model for pricing ebooksbooks, caved. Random House joined other publishers by paying a standard fee of 30% out of author royalties to the distributor(s) of its e-books. The Agency Model for pricing e-book fees was signed onto last year when Apple debuted it’s iPad, and Apple began charging 30% for distribution of e-books via its iBookstore. Barnes & Noble and Amazon to some degree, followed Apple’s lead regarding ebook distribution fees. Where the ebookstores disagree most now is on pricing e-books.

Print books by tradition are sold by wholesaling them to retail stores who then can price the books at the retail price they choose. Ebook pricing is quite different. E-books aren’t sold by wholesaling a limited number of copies. Instead, ebookstores are setting retail price categories for e-books. Amazon and Barnes & Noble have set a maximum retail price of $9.99 for their e-books and encourage authors to publish for even less than that.

Apple, on the contrary, has encouraged a minimum retail price (the DOJ’s alleged Agency Model price-fixing) for its e-books by allowing publishers and authors to set their own prices. Apple’s e-book prices can be above Amazon’s $9.99 minimum and Apple charges the same 30% fee for higher-priced ebooks. All ebookstores encourage authors to publish at particular prices by the way each store sets their fees for distribution of e-books.

The Agency Model – what is it?

The Agency Model would have had all retail sellers of e-books taking a standard cut of 30 percent. Google, however, didn’t agree with that amount. Google’s One Pass services said it would charge only ten percent. Google claimed 10% covers all its costs in serving digital content. Google fixed its minimum cost per “copy” of an ebook title at an even lower than Amazon did! How, you might ask will Google make money? The answer is: as it always does, by advertising. Google ads are a lucrative business for both the sellers and the hosts of those ads.

Apple and the publishers who signed onto it claim the Agency Model is the superior way of pricing ebooks. The Agency Model allows publishers and authors to charge what they choose for their ebooks. But what about the pricing of used e-books? Can you resell them? Apparently not. Like music, sharing of digitally downloaded books isn’t allowed. Digital books appear to be “leased” from the distributor. You buy the right to read the book and maybe make multiple copies for personal use.

This means far less freedom for book lovers. That includes libraries, some of which have had to buy the print copy of an ebook before they could loan out an ebook version to a patron for the library’s typical two-week or one-month book-borrowing period. I like reading e-books. Some have a lot of nice features that print books don’t have. But personally, I just can’t quite warm up to a world where librarians can’t buy new ebooks from publishers and readers can’t browse and pay less money for used e-books!

There is an even more disconcerting change taking place because of the ebook world. The book as an “object of art” is vanishing. Just as with MP3s, there is no physical object representing the book in digital form. The only limitation to the e-book is the programming needed to display it on an eReader. That isn’t insignificant, but unlike mp3s, e-books appear to have the potential to equal or even surpass print books in quality. E-books could possibly replace print books altogether.

Because of the invention of ebooks, books are becoming “virtual”:  they will someday be as vaporous as a holograph of a painting. Of e-books one could echo Helen Mirren’s Prospera, “Now my charms are all o’erthrown, And what strength I have’s thine own,…” Indeed, I wonder if the book industry, like the music industry, isn’t going to “pay” dearly by creating a leased digital product that cannot ever drop in price.

Is Agency-Model pricing bad for authors?

This is your real question isn’t it? I would say “No,” not for the short-term. As a writer, you have no vested interest in the used book market: used-books bookstores may keep your reputation alive, but you don’t make any royalties from them.

Moreover, traditional publishing provides authors with 10% royalties and often discounts books to retailers at 50 percent. Hence the lower cost of e-books when the publisher only needs to give a distributor 30 percent of the retail price of a book. If you are a self-publisher it is even better. Because of Apple, you get to keep 70% of the price for your book.

However, book pricing, like all pricing, is a matter of supply and demand. Usually, as demand for a good goes up and supply stays the same, the price for the good will go up. But ebook distributors offer an infinite supply of their goods. It costs ebookstores nothing to keep and distribute an infinite number of copies of an e-book, yet they charge publishers and authors the same 30% for each copy sold.

As a result of agency model fees, the price of your e-book can never go up even as demand increases. Nor can it go down. You make the same amount (i.e., 70% of retail price) on the “margin,” i.e., on the last unit sold, as you did on the first unit sold. The marginal unit cost of zero is why a minimal price needs to be set for all e-books. Publishers and authors need to recoup their ebook production costs even if their ebooks do not sell more than the average number of copies, or most will never publish a second e-book. This is a waste of creative talent. Many other countries support their  writers’ efforts by using fixed book price agreements.

Because ebooks have an approximately-infinite supply, successful ebook authors could offset the standard agency price model by selling their ebook at a discounted price through non-agency venues or even via their own websites. But Apple does not want publishers or authors to be able to sell against its iBookstore pricing; it doesn’t allow short-term sales at lower prices for its e-books. Nor does it share most of its customer data with publishers. Amazon and other big ebookstores have adopted this practice too. Only Google demurred. With the advent of its One Pass Service, Google promised to share customer data with publishers.

What’s really bad about Agency-Model pricing

For published authors not sharing customer data may not seem like a big deal. Presently a published author of a print book can’t get access to information about buyers of their book from their publisher. So Apple’s arrangement is not very different. Apple will give publishers and authors data only from customers who have “opted in” to give consent for their information to be shared. Amazon and Barnes & Noble certainly aren’t sharing customer data either.

In the print book world too, only bookstores have access to information about who buys print books. As a result, a published author does not have the data to market an ensuing book to the audience for their first book. I’ve always thought publishers were extremely short-sighted not to understand that a mailing list of customers is a prime marketing tool in the hands of an author! Amazon, Apple, and other ebookstores also actively discourage authors from using their websites and their own customer data to sell their books.

Cross-selling,” i.e., selling an additional product to people you have previously sold something to, is much easier to do than starting from scratch. Publishers and bookstores instead, rely on their own reputations to sell books, rather than on their authors’ “sweat equity”. The downside is that if an author switches publishers, the the new publisher has to start marketing that author from scratch all over again.

Apple, however, understands the immense potential for profit from cross-selling the titles of future e-books via its iBookstore. Apple and the publishers of subscription magazines and newspapers have been battling over that very issue for the past couple of years. Each has vied for possession of the names and addresses of of the customers who buy e-newspaper or e-magazine subscriptions. These publishers understand that Apple’s monopoly over customer data useful for cross-selling would make Apple more powerful than they are.

If you are a book publisher or the self-publisher of an e-book, you should be just as concerned about your customer data as magazine and newspaper publishers are!

Apple is now facing a lawsuit for use of mobile phone app personal data. Apps are how Apple publishes e-magazine and e-newspaper subscriptions. Apple’s grab for customer data appears to be driven by greed as well as shortsightedness. Apple’s platform for books, the iBookstore, would enable Apple to collect revenues from advertising, both general and “targeted” (i.e., recommendations to readers about similar books).

Publishers and authors of e-books, on the other hand, will be left with no such opportunities to make more money from their e-books  other than the Agency-model royalty – unless – authors litter the pages of their e-books with ads or resort to accepting product placement in their e-books. I shudder to think of it!

Right now e-books seem like the icing on the cake for publishers and self-publishers alike. In the future, however, e-books are likely to be an authors’ bread and butter. In the new world of digital publishing, authors now bear much of the burden for promoting their own book(s). If authors don’t take care, Apple, Amazon, and Barnes & Noble will be eating their cake and the icing while authors again get the leftover crumbs.

NOTE: For my opinion about why a minimum price needs to be set for ebooks, please see “The Apple Conundrum” by Nancy K. Humphreys at Huffington Post.

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