Should the government sue over ebook prices?

They’re about to.  Matthew Yglesias recounts the story here.  I’m a big fan of Matthew Yglesias, but I think he’s leaving out a large part of the story here, which is that the collusion between Apple and the major publisher results in higher ebook prices for you and me.

I haven’t been following this very closely, since I’m late to the ebook game, but as I understand it, the original ebook pricing model was based on the traditional hardcopy model.  The publisher sells the book to the retailer (say, Amazon) at a substantial discount off the suggested retail price (say, 40%), and the retailer is then allowed to charge whatever it wants.  If it’s a popular book, the retailer might even want to sell it at a loss to get people to come to its site.  This sets up price competition between sites, which is great for the reading public.

The problem for traditional publishers is that this price war encouraged people to buy ebooks instead of hardcovers.  And when Apple came along and wanted to start its own ebook store for the iPad, it didn’t want to get into a price war with Amazon.  The result of the discussions between Apple and the major publishers was an agreement to implement what is referred to as the agency model.  In this model, the publisher gets to set whatever price it wants for an ebook.  The retailer (Apple or whoever) gets a standard percentage of that price (it turns out to be 30%).  And the publishers can’t use the wholesale model for other sellers.

The result is that there is no price competition among ebook sellers.  And ebook prices are set high enough that they won’t have a significant impact on hardcopy sales.

In the ebook world, I am a publisher with a very limited list of titles.  As you’ve noticed, I get to set the prices for those books.  If I then reduce the price of Summit, say, on Barnes & Noble, according to the standard contract I had to agree to, Amazon is entitled to automatically lower itsprice to match the lower price; and it will.  There are no royalties.  I get 70% of the sales revenue; Amazon (or Barnes & Noble) gets 30%.

This works fine for me as an author/publisher with no hardcopy inventory and pricing to worry about.  The wholesale model would have worked for me just as well.  But in general, I don’t see how the agency model benefits readers.  If the publishers have a problem with ebooks cannibalizing sales of their hardcopy books, the obvious solution for them is to delay the publication of a book in ebook format, in just the way they have always delayed the release of paperbacks, in just the way studios delay the release of movies on DVDs.  Publishers do drop ebook prices as hardcover books are released in cheaper formats, so reader may be able to get a book more cheaply by waiting.  But the reader will never be able to shop around for a better deal.  This is apparently what got the attention of the Justice Department.

I can see one way in which the publishers’ deal with Apple is a good thing: it ensures that Amazon will not be able to use its ebook pricing power to drive all other ebook sellers out of business.  But Amazon already has a huge share of the market without having to cut ebook prices.  Instead of selling ebooks at a loss, they’re selling Kindles at a loss.

From a legal perspective, I have no idea how strong the government’s case is against the publishers and Apple.  Readers can buy a discounted print edition of a book if one is available; no one is forcing them to buy the ebook.  And authors can bypass the major publishers and set their own prices for their ebooks, as I’m doing.  But on the face of it, the publishers’ agreement with Apple just isn’t a good deal for those of us who like to read ebooks.

2 thoughts on “Should the government sue over ebook prices?

  1. Pingback: Did J. K. Rowling just transform book publishing? | richard bowker

  2. Pingback: Lower prices coming on ebooks | richard bowker

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