Q: What Is the agency model in eBook pricing?
A: The agency model is when a reseller allows the publisher to set the price charged to its (the reseller’s) customers. The common agency model terms for eBooks have been that the publisher keeps 70% of the proceeds and the reseller earns a 30% commission. This is different from the traditional pricing model in the book publishing industry, where prices have been controlled by the reseller. In the traditional model, publishers sell their books to resellers at a discount of approximately 50% (legal and illegal discount variance is a topic for another day!). Resellers offer the books to consumers at whatever price they choose.
The “agency model” for eBook pricing is back in the news with a deal reached between Simon & Schuster (S&S) and Amazon (confirmed October 21, 2014), which S&S CEO Carolyn Reidy acknowledges is a “version” of the agency pricing model.
This is confusing to a lot of authors and readers and even publishing industry professionals because the agency model was huge news in 2010 when Apple made deals with the (then) five largest US publishers to use the agency model to set prices on eBooks sold on their brand new iPad. But as a result of that deal, the Department of Justice (DOJ) went after Apple and the five publishers with an antitrust lawsuit, charging the defendants with a “conspiracy” to raise eBook prices. Three of the publishers settled immediately and the other two folded quietly. Apple fought the lawsuit vigorously, lost, and ultimately “agreed” to a $450 million settlement. (Some of that money came to me in the form of a credit on Amazon.)
So why bring back the agency model now? Why would Amazon agree to this if Apple got sued over it – and lost? Why would Amazon not insist on setting their own prices? Bottom line, why was the agency pricing model for eBooks against the law back in 2010 but not now?
First of all, no matter what the industry, it is against the law for company executives to discuss market pricing amongst themselves. This is known as collusion. It is believed that when companies in the same industry get together to discuss what prices they are charging consumers, there is a good chance there will be a “wink-wink” agreement that raises the prices for consumers. That is exactly what happened. Amazon was forced to match terms and as a result all eBook prices went up. That’s why the DOJ called the defendants’ meetings in the Apple lawsuit a “conspiracy.”
Col lu sion. n. A non-competitive agreement between rivals that attempts to disrupt the market’s equilibrium. By collaborating with each other, rival firms look to alter the price of a good to their advantage. The parties may collectively choose to restrict the supply of a good, and/or agree to increase its price in order to maximize profits.
The defendants secretly and illegally discussed the fact that Amazon was dropping Ebook prices, even on bestsellers, to $9.99 and lower, sometimes at a loss (to incentivize sales of the Kindle eReader). One witness admitted that representatives of the five major houses and Apple met specifically discuss the “9.99 problem” because Amazon’s high discount strategy was (a) giving them too much eBook market share and (b) affecting prices publishers could get consumers to spend on other formats, particularly the hardcover, which has traditionally been a cash cow in publishing.
When I attended executive trade meetings as a publisher, the first item of business was a reminder that a discussion of retail prices was strictly off-limits. So what made the agency pricing model (as devised and rolled out by Apple) illegal back in 2010 was collusion, not the actual terms. Simon & Schuster working independently with Amazon is not illegal. Because those terms are public, it is quite probable that other publishers will sign similar deals with Amazon – and Apple and Nook and other eBook retailers. That won’t be illegal.
Note: This blog is not an assessment and judgment of whether Apple was trying to hurt consumers or whether Amazon’s size and strategies hurt traditional publishers. I’m simply defining the agency model and why it was successfully prosecuted by the DOJ.
Will the agency model raise prices for readers? I’m not sure there will be a huge impact on what consumers pay for eBooks.
Because there are so many independent publishers – small presses, self-publishing aggregators, and authors with their own publishing companies – there will be plenty of eBooks priced exactly as they are today. There will be an increase in the prices of eBooks, particularly in the first year of release, I suspect, from the larger publishers.
Mark – if I may – there is another important distinction between ‘agency’ and ‘traditional’ models of transaction
By implication in an ‘agency’ model all retailers must sell at the same price – which is the price set by the publisher – there is no competition between retailers.
In the ‘traditional’ model retailers can compete with discounts and special offers to try to gain market share .
After the DOJ hearings, at the direction of the judge, a ‘revised agency’ model was created that allowed limited price competition under complicated constraints
While this long negotiation between Amazon and the ‘big 5’ publishers goes on other retailers are forced to be wary of signing an ‘agency’ contract only to find that they have restricted their ability to compete when Amazon may ultimately have a contract that allows them to cut price.
That situation did exist for a while in the UK when one of the big 5 had a ‘traditional’ contract with Amazon and ‘agency’ contracts with all other retailers . Of course Amazon undercut the price of everything that publisher sold and gained huge market share as a result .
Tim – thank you for that additional insight – I need to read a little deeper. I’m not aware of the limited competition under constraints.
Mark – you are welcome
There is another complexity of ‘agency’ contracts which is rarely mentioned but is significant
The retailer, as agent, becomes obliged to gather sales taxes wherever an Ebook is sold, if the publisher has tax obligations in that state. In one instance I saw this gave rise to a table of 300,000 possible taxes for every single sale
A system might be able to cope with that but because the arrangement is new and unproven it seemed possible that the retailer could end up remitting the taxes gathered to the publisher and to the state or country – and that is scary
Agency agreements were an attempt to keep published prices of ebooks comparable with printed books – but they are a mechanism fraught with difficulty