ebooks

All the recent commotion over the agency model vs the wholesale model in ebook retailing reminded me of something: my very first pocket calculator. I got my first full-time job in September of 1974, and whereas fixing Xerox machines wasn’t riches, it paid me more than washing dishes at the local hospital. In short order I got my first credit card, my first new car, and a number of other things that had been waiting for my wallet to fatten up a little.

One of these was a pocket calculator. The device itself has been gone for decades, but I’m pretty sure it was a TI SR-50, with an SRP of $149.95. I shopped around for the best price, since $150 was a lot of money back then. However, everybody who sold the SR-50 was selling it for $149.95. I bought it at a camera store downtown, and only a little research told me that it was covered under the Fair Trade laws, meaning that all retailers sold it for the same price, set by the manufacturer. I grumbled a little, but wow! I had a calculator! I gave it no further thought.

Between 1931 and 1975, a significant chunk of retailing in the United States was basically on the agency model. Books, cameras, appliances, some foods, wine and liquors, and certain other things were sold for the price the manufacturer chose. This is one reason prices were often printed right on the goods. Retailer margins were open to discussion, but in a lot of industries, the margin was 40% or pretty close to it. The Fair Trade laws were enacted during the Depression to protect local one-off retailers from being driven out of business by much larger chain stores, during a time of reduced demand and thin profits. How well this worked is disputed, but by 1975 the laws had become so unpopular with the public and so difficult to enforce that they were repealed by an act of Congress.

I grant that Fair Trade was not a clear win for the little guys. Some of my readings suggest that the Fair Trade laws accelerated the dominance of retail chains because chain retailers could build bigger stores and shelve a greater variety of goods, even if their prices were the same as prices in smaller, one-off stores. House brands were invented largely to evade the Fair Trade laws, since the retailer was considered the manufacturer for legal purposes and could set prices in stores as desired. This gave another advantage to large chains, since only large chains had the resources to establish house brands.

Fair Trade retailing as I understand it rested on two big assumptions:

• Manufacturers compete on price.
• Retailers compete on things like customer service and selection.

Shazam! Those are the same two assumptions underlying the agency model in publishing, and I don’t think it matters whether we’re talking print or digital. So I think it’s fair to look at what happened after 1975, when Fair Trade went away:

1. Discounting allowed consumer prices to go down.
2. Both the chains as a whole and individual chain retail stores got bigger.
3. Smaller, independent stores vanished in droves.
4. Small retailing became specialty retailing. This was certainly true of bookstores. Of the two bookstores I could easily reach on my bike in the 1960s, one became a card shop that carried a few books, and the other became a specialty bookstore carrying Christian/Catholic books only.
5. Small retailers dealing in used goods hung on longer–think used bookstores and used record stores. The Doctrine of First Sale allowed used goods retailers to set their own prices even on Fair Trade goods.
6. Manufacturer consolidation went into high gear. One reason, I think, was monopsony, which is the power big retailers have to dictate prices to suppliers. Smaller manufacturers who could not meet retailer price expectations merged with larger manufacturers, became importers, or went under.

In the ebook publishing/retailing world, #5 does not apply, as there’s no unambiguously legal used market. Most of the other consequences in the list above are things that I predict an agency model would work against:

1. Retail prices will rise–though perhaps not as much as some fear.
2. It will be easier to mount and maintain a new online retailer against competition by enormous retailers like Amazon.
3. Given the above, with the consequence of more players in the retail market, monopsonistic pressures on cover prices will be greatly reduced.
4. Absent Amazon’s monopsony, smaller publishers have a better chance of competing with much larger publishers, given small publishers’ advantages of lower fixed costs vs larger publishers.
5. The presence of a larger number of smaller publishers will keep downward pressure on prices, since that’s their primary way to compete. Macmillan has to keep ebook prices up to protect its print hardcover line. Ten thousand small ebook publishers have no hardcover lines to protect. $10? No problem. $5? The new $10. Even within the agency model, small press will train consumers to expect ebooks to sell for $10 or less.

There’s another consequence that I don’t think has any precedent in the Fair Trade phenomenon: Larger numbers of retailers and publishers will reduce the power of very large retailers or publishers to “silo” the business with proprietary file standards and DRM.

There are problems with such an agency-based business model (and wildcards; Pottermore, anybody?) but overall I think those problems are more solvable than the collapse of book retailing into Amazon, Amazon, and more Amazon. So my vote goes with agency retailing. I’ve just told you why. (Polite) discussion always welcome.

Reports are pouring in this morning that the Department of Justice is preparing antitrust action against the Big Five publishers (Simon & Schuster, Hachette, Penguin, Macmillan, and Harper Collins) and Apple for conspiring to raise ebooks prices. (It’s a little ironic that I read it in today’s print Wall Street Journal, which I generally read before turning this damned thing on.)

The problem is in part the agency model, which allows publishers to set a price for books, and give retailers like Apple and Amazon a cut. Publishers are afraid of ebooks eating their hardcover lines, of course, but were absolutely terrified that Amazon’s loss-leader pricing of bestsellers at $9.99 would train customers to think that ebooks were worth $10 and no more. Publishers have experimented with windowed release, which holds back the ebook edition until the hardcover has a chance to generate its bigger bucks, but as best I know that’s not widely done. Agency pricing, however, has stuck.

Here’s an agency example, of a hardcover I read recently: Steven Pinker’s The Better Angels of Our Nature has a cover price of $40. (Publishing seems to be responding to the recent shortage of ‘9’ digits by rolling prices up a penny, at least on hardcovers.) All of the ebook stores that I’ve checked are selling the ebook version for $19.99. In an agency arrangement, publishers set both prices. The sales agent (that is, the retailer) gets 30% of the set price. In this case, that would be $6. The publisher gets the rest, here $14.

Why 30%? It’s arbitrary, and simply the number that Apple gave publishers when it changed its bookstore from the wholesale model to the agency model. Apple’s retail contract had a twist, which is really what’s getting them into trouble today: The “most-favored-nation” (MFN) clause, which specifies that publishers may not give other retailers better terms than they gave Apple. Much byzantine legal reasoning online, but here’s a short summary.

TGIANAL, but this still puzzles me a little, and I think we’ll learn more in coming days. MFN clauses have been litigated and are not themselves illegal. The sense is that, if anything, they tend to drive prices down. The current legal action from Justice seems to turn on whether the Big Five colluded on agency pricing (with Apple’s help) to force Amazon to accept the same terms that Apple got. The idea is that the parties named in the suit intended their actions to raise prices, a use of MFN that is in fact illegal. If that sounds like a hard thing to prove (rather than just allege) well, duhh.

As I’ve said earlier, I favor agency pricing, because it allows small, very small, and microscopic publishers to undercut the Big Five in a major way and maybe eke out a marginal living. You can bet that you won’t see 99c ebooks from Macmillan. Much of my puzzlement arises in wondering to what extent ebook publishing will be affected by things like the Robinson-Patman Act, which was created to prevent predatory pricing, though is not widely enforced these days. When the retailer’s role in selling ebooks is basically database management (or when the retailer becomes the publisher or even the author) predatory pricing is not an issue–but odder things have happened in the legal world before.

As always with complex legal issues involving enormous players with cavernous pockets, almost anything could happen. I think the case will either be settled before going to court, or else will be decided narrowly. Publishers may be stripped of their ability to demand that retailers accept the agency model, or any given given agency percentage. I think Amazon would love to retain agency pricing, and just negotiate a lower number.

As I’ve said many times: We’re still in the Cambian era of ebooks (the Pre-Cambrian Era ended with the arrival of the Kindle) and there’s still a whole mess of evolving to do.