Friday, April 6, 2012

In Part I of this article, I talked about the cost of producing e-books as well as the initial domination of the market by Amazon.

To continue our story, in 2010 Apple released the iPad. Much of it's initial marketing included use as an e-reader, so it's launch also saw the launch of the iBookstore. Because Apple had never sold books before, both Apple and publishers were starting with a clean slate. Apple decided that it wanted to follow a marketing model called agency, and not wholesale sell-through. In an agency model, the publisher would decide the list price on the iBookstore, and Apple would take a 30% commission on each sale. After the struggles publishers were having with Amazon, they essentially jumped for joy, said yes please, and Apple became their knight in shining digital armor.

I'll stop here and outline some other players in our tale. The traditional publishers I keep referencing are a set of six conglomerations, who when combined constitute most of the books sold in the United States. Those six are: Hachette, HarperCollins, Penguin Group, Random House, Simon & Shuster, and McMillan. In February 2010 McMillan takes one for the team, and tells Amazon that it has a choice. Either it can enter into the same agency agreement that McMillan just signed with Apple, or it can face a windowing of McMillan e-book titles. This would mean that e-books would become a version of a paperback, and would be available after the hardcover print version of a book had already been on the market a while.

I should also mention that moving to an agency model was not likely to cost Amazon money on the e-books it was selling. Because Amazon was paying McMillan more than $9.99 for the e-books it was selling, Amazon was taking a loss. By raising the price, Amazon instead gained a 30% profit. While Amazon felt that low e-book prices were the key to selling its Kindle, and that the market would not bear prices higher than $9.99, McMillan felt that such low prices would cause a create deal of long term harm to it's ability to publish new books. Perhaps the key piece of the agency model was that Amazon lost the ability to set the prices on the products it was selling. Instead, the prices consumers paid for their books were set by the publishers.

Amazon had a snit fit at this ultimatum, and pulled all McMillan titles, both digital and print, from it's 'shelves.' You could still find these titles from Amazon affiliates in the used bookstores, but not directly from Amazon itself. This is not the first or only time Amazon has pulled books from it's inventory, simply the largest in the book market that I know of. Amazon then posted a snippy note on their site about why a significant portion of it's inventory had disappeared overnight. McMillan stood it's ground, and by the end of the week, Amazon was selling McMillan titles on the agency model at the higher price. Soon, the other five large publishers, as well as a number of smaller publishers, forced Amazon into the agency model with less fanfare. Other retailers like Barnes and Noble followed, again with little fanfare. Prices for new release bestselling e-books rose across the web, to an average of between $13 and $16 in the United States. There was a lot of grumbling from consumers, but the e-revolution continued unchecked. 2011, which was completely under the agency model rather than the traditional wholesale model, was the biggest year yet for e-book sales.

However, the fight over e-book pricing is hardly over. In December of 2011, the Department of Justice of the United States announced that it would be investigating the agency model because they suspected that it broke anti-trust laws.


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