Iffy Business

Posted on 15/04/2012 by


Apple burningThe US Department of Justice acting against publishers and Apple working under an Agency model seems iffy. Can you count something as price-fixing, if that <em>is</em> the industry standard costing (though not yet discussing publisher inefficiencies in acting in the digital environment), and this, versus an otherwise predatory pricing scheme?

The joke of this legal action is—and perhaps, this may yet be a saving grace for the publishers involved—that while ebook prices are up (to the consumer), the publisher’s profits (on each ebook copy sold) are actually down. That’s because Amazon was classically involved in predatory pricing under the previous Wholesaler model. Amazon was making around a $5 loss on every e-copy they sold, in order to cement their Kindle platform. That is perfectly understood. Amazon bought under a fixed price of $15 (which went straight to the publisher), but under-charged consumers (“damaging” the overall market). Under Agency, where the publisher <em>continues</em> to charge $15, it is now straight to the consumer, the <em>publishers</em> lose $5 to Apple/Amazon/etc, acting only as their agents.

Is that a defence? That they have always charged the same, and are losing more money now. Is “price-fixing” only concerned with the price to the consumer? The DOJ seems to be looking only at the price to consumers, and not the underlying economics of the holistic picture…

However, even given this loss (a likely defence), there is still an issue here, regarding the ‘favoured nation’ clauses made with distributors (eg: Apple), made to guarantee them (both) a benchmark figure from which to negotiate sales deals, via the public consciousness of relative ebook worth (and that’s one of the prevailing fears in book publishing, that the consumer may lose their understanding of a e/book’s cost, on the back of Amazonian predatory pricing! But, did consumers ever really “get” that? —Or indeed, is it the consumer’s role to make the act of cognitive dissonance for them?) That is, publishers want to set a resistant price for ebooks in the public mind-share, to buffer their business against discounting.

Because their profit margin is still important. Whilst publishers are making less per copy sold, their overall profits are up (see recent earnings calls). That’s because, under Agency, per copy they may be making less than under the (predatory) Wholesale charges—a wholesaler figure originally designed to match the publisher’s share of profit for a print copy to a bricks and mortar store… however… that is <em>per copy.</em>

Traditional print has never been about “per copy,” not with the absurd levels of almost 50% returns from the bookshop, to the publisher, in return for cost; for the minuscule 6 months (at best!) of shelf life for a title, etc.

So their profits show that a $5 loss per copy—<em>selling-through</em> on each transaction, in fact translates to ~$2.50 over the balance of losing one whole copy of each print pair delivered.

This would seem to be a problem with their accounting (ha! “Problem”), where they accurately report profits, but not fully accounting for the defrayment of costs. If they were hoping to show this in comparison evidence to price-fixing allegations, perhaps it would do them better to be upfront, and to work their figures to “break even” with their profits from the last years of print, to more accurately price ebooks at points like $12-10 for the first 6 months, $9-10 the next year, and stepping it down over the long tail to a bottom of $3 indefinitely.

Whilst this would only be “breaking even” (traditionally, not a very popular business move) the likelihood is that a more attractive price point would attract more buyers (ironically, as Amazon has already learnt in its predation.) Thereby—using their own history of pricing at $15 to consumer (Agency) and to wholesaler (Wholesale), combined with matching profits based on sell-through—publishers would be able to control pricing, and still claim “innocence” (on the balance of acting as a responsible, business-aware company.)

Overall, neither side seem to be arguing a fair fight, it is true that Amazon is no one’s friend! But then, those “poor” publishers are actually doing better than they were before electronic publishing, via an obfuscation of their business practices.

Perhaps the real issue is, that both these activities suggest that the players are betting on what they consider to be a limited field. That is, Amazon is trying to snatch the market from the publishers, but the publishers themselves are focussed on an ever shrinking group of readers (shrinking in transitioning to ebooks), whilst if, playing together, perhaps they could grow the market for everyone?

Posted in: Icky Theory, Paul