In the deal that Amazon and Hachette Book Group finally reached Thursday after months of bitter negotiations, we don’t really know which side “won,” if one side did. But one survivor — perhaps surprisingly — was agency pricing for ebooks, the practice through which the publisher sets an ebook’s price and the retailer takes a commission.
Hachette said in a letter to authors and agents:
The new agreement delivers considerable benefits. It gives us full responsibility for the consumer prices of our ebooks. This approach, known as the Agency model, protects the value of our authors’ content, while allowing the publisher to change ebook prices dynamically to maximize sales.
That wasn’t a foregone conclusion. In 2010, Amazonwas vehemently opposed to agency pricing, though it ultimately capitulated. Agency pricing was at the heart of the of the Department of Justice’s lawsuit against Apple and book publishers in 2012, in which the DOJ accused Apple and the publishers of colluding to set ebook prices.
The DOJ never actually said that agency pricing was illegal; rather, it alleged that Apple and the publishers illegally conspired to adopt the model at the launch of the iBookstore in 2010.
. . . .
While we obviously don’t know all of the details that Amazon and Hachette agreed on, here are the things that Amazon publicly said about ebook pricing at various times during the negotiations:
- “A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book.” [Kindle Forums post attributed to “The Amazon Books team,” July 29, 2014]
- “This discussion is all about e-book pricing. The terms under which we trade will determine how good the prices are that we can offer consumers.” [Amazon exec Russ Grandinetti to the Wall Street Journal, July 1, 2014]
- At an ebook price of $9.99, “we believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30% — we did have a big problem with the price increases.” [Kindle Forums post, July 29, 2014]
- “While we believe 35% should go to the author and 35% to Hachette, the way this would actually work is that we would send 70% of the total revenue to Hachette, and they would decide how much to share with the author.” [Kindle Forums post, July 29, 2014]
Here is what we know about the deal announced Thursday:
- “We are pleased with this new agreement as it includes specific financial incentives for Hachette to deliver lower prices.” [Amazon’s David Naggar, press release] (This is the same thing that Amazon said about the deal itreached with Simon & Schuster in October.
- “Importantly, the percent of revenue on which Hachette authors’ ebook royalties are based will not decrease under this agreement.” [Hachette CEO Michael Pietsch, press release]
. . . .
Hachette said in its letter to authors that the percentage of revenue on which they take a cut won’t change. But since we know that Amazon is giving Hachette financial incentives to keep its ebook prices low, perhaps Hachette will be penalized with a smaller cut of the sale if it prices ebooks above that previously set ceiling, even if it passes on the same amount to authors that they would have gotten previously.
Link to the rest at GigaOm
Nobody who really knows is talking about the Amazon/Hachette deal, but it appears that Hachette will have the ability to prevent Amazon from doing at least some of the discounting of Hachette’s books that it does now.
Since Big Publishing has attempted to use ebook pricing to protect the sales of physical books in physical bookstores in the past, PG suspects it will continue to do so in the future. If this is the case, Hachette ebook prices on Amazon will be higher than Amazon would set those prices if the folks in Seattle had unfettered pricing discretion.
If PG’s suspicions are anywhere close to correct, it appears that indie authors will continue to be able to undercut the price of ebooks from Hachette while earning royalties from KDP that are much higher than Hachette authors receive.
PG says that indie authors are much smarter about pricing ebooks on Amazon that Big Publishing is, if for no other reason than indie authors are not concerned about anything other than selling the most ebooks possible. Like Amazon, indie authors don’t have any legacy sales channels to distract them from setting an optimum price for ebooks.
Trying to protect a legacy business with legacy margins is a classic mistake that established business organizations make when faced with a technology disruption that allows lower-priced competitors into a marketplace. Doing so allows the lower-priced competitors to survive and thrive. And eventually put the legacy model out of business.