The Evolution to Digital and a Brief History of E-Book Costs and Pricing

Digital Burnout!

Much has been tossed around of late RE new publishing models (think wholesale and agency), who should set the price of e-books (think publishers or retailers) and the "all shook up" transitioning, publishing landscape in general :)

It can get awfully confusing! So, to promote a better understanding of how we got to where we are today, a little history of digital publishing, including e-book models/pricing all the way up to the DOL investigation into the alleged price-fixing attributed to the big six publishers and the agency model is offered here.

This history is by no means complete --- but is heavy enough to hopefully be informative to many.

"Only time will tell where in the pricing spectrum--from best-selling $25-plus hardbacks at one end to 99-cent music downloads at the other--e-book prices will settle."

By Narasu Rebbapragada of PCWorld:

UPDATED: E-Book Prices Fuel Consumer Outrage

The Department of Justice is preparing to sue Apple and five major e-book publishers on charges that they worked together to push up e-book prices industry-wide.

UPDATE [March 8, 2012]: The Department of Justice said yesterday it plans to sue Apple and five of the largest e-book publishers in the US on charges that they acted together to push up the price of electronic books, the Wall Street Journal reports.

As discussed in this PCWorld investigative feature from last May, e-book publishers deeply resented large retailers like Amazon selling their e-books at deeply discounted rates under a "wholesale model." Apple introduced a new model--called the "agency" model--where the publisher sets the price of the e-book and the retailer sells it for that price, taking a 30 percent fee.

The Justice Department believes that Apple and the publishers may have colluded to keep the prices of all e-books high, which, if true, would be a violation of anti-trust laws. The publishers have denied the allegations of collusion, and believe that the switch to the agency model has enhanced competition by allowing more e-book publishers to survive.

Following is our investigative feature from last May describing how e-books are (over) priced.

An e-book that costs the same as a printed book doesn’t feel right. No trees died to make it. No heavy machinery ran to print it. No planes flew to ship it. You might need to buy one of those new $139 Barnes & Noble Nooks, announced this week, to be able to read it. So why should you have to spend as much as you would for a heavy hardcover book to own it?

Blame the latest phase of the digital content revolution, now more than ten years strong. As first happened with music, then movies, then print news, the book publishing industry is experiencing a shake-up of rules and roles. In particular, the changing relationship between the book publisher (the company that creates books) and the book retailer (the company that sells books) is causing a chain reaction of confusion, mistrust, and price hikes.The good news is that this phenomenon is inspiring enterprising startups to rethink aging models of book pricing.

The bad news is that it’s pissing people off.

Need proof? Look up Emma Donoghue’s Room: A Novel on Amazon. You can get a new hardcover copy for $14.49, while the downloadable Kindle edition costs slightly less at $11.99. Scroll a bit down the product page, and you’ll see that the average customer review out of 829 (at this writing) is a favorable 4.2 stars out of 5. People like the book.

On the Kindle Store page for the book, scroll some two-thirds of the way down to the “Tags Customers Associate with This Product” section, and you’ll notice that nine out of the top ten tags for this book have nothing to do with its page-turning storytelling. The book, last time I looked, had 105 tags for “too expensive for Kindle,” 85 tags for “9 99 boycott”, 65 tags for “overpriced-kindle-version,” and so on. People don’t like the price.

The 9 99 boycott tag, in particular, was created by Kindle e-book users to express their outrage that the prices of some e-books approach if not exceed the price of their hardcover versions. So far, 5892 Amazon users have tagged electronic Kindle books 36,704 times with the 9 99 boycott tag (here’s how to use the tag).

This reader revolt comes at a tipping point for the book industry. According to the Association of American Publishers, e-book sales reached $164.1 million for the months of January and February 2011, a 169.4 percent increase when compared with the same period in 2010. For the same period, sales of combined categories of print books fell 24.8 percent, with $441.7 million sold.

So while print book sales still exceed e-book sales in absolute dollars, we’re seeing their final glory days. The bankrupt Borders bookstore chain, closing 30 percent of its brick-and-mortar stores, has reported a $24.3 million loss for March. Barnes & Noble executive Marc Parrish said at the GigaOm Big Data conference that the book business was shifting to digital faster than the music, movie, and newspaper industries.

Amazon announced in January that Kindle books have overtaken paperback books as the most popular format on Amazon.com (not so much information on sales of The Kindle), and Forrester Research expects e-book consumers to spend nearly $3 billion on e-books in 2015.

Big book publishers are experiencing the shift to digital. “We've gone from a 90/10 physical and e-book split last year, to closer to 80/20, and expect that to increase again next year to 70/30,” says Maja Thomas, senior vice president of Hachette Digital at the Hachette Book Group, via e-mail while attending this week’s Book Expo. “It is too early to tell how the different paper formats will be affected--although I would expect most mass market buyers to migrate to e [e-books].”

Hachette is referred to as a big-six book publisher, along with HarperCollins, Macmillan, Penguin Group, Random House, and Simon & Schuster. Its suspense imprint Mullholland will be producing many digital-only titles, and it is making illustrated children’s books available on the Barnes & Noble Nook Color.

Publishers Strong-Arm Retailers

The move to digital has traditional book publishers scared, which has resulted in a power struggle with book retailers for the right to price books. The score right now is “advantage book publisher,” but the consequence is that e-book prices don’t reflect the normal laws of supply and demand or the current costs of producing a digital book.

“The pricing is a little wonky right now,” says James L. McQuivey, Ph.D., vice president and principal analyst at Forrester Research, about e-books. It didn’t start that way. When e-books were new, retailers set their prices the way they wanted, but lower than print books--generally at $9.99 for new book releases.

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Amazon Should Lose the $9.99 Ebook Price War

Publishers have engaged in a battle with Amazon on pricing all eBooks at $9.99...and they are winning.

I think they should win! Why? Simply because the value of a book (a creation, if you will, from intellectual capital) has never been just about the manufacturing process...It has, more importantly, been about the "content" from the writers mind and imagination.

Traditional publishing has always tried to minimize content (as evidenced by the chump-change percentages offered to writers)...But, in fact, it has always been the true gold.

Faith Merino, writing for Vator.tv, reports on this issue (not always with my point of view) with a key timeline history of the publishers vs Amazon fight and future probabilities:

Why are publishers fighting Amazon's e-books?

A breakdown of traditional book publishers' uphill battle against cheap, digitized books.

Amazon’s war with publishers heated up last week with a passive-aggressive letter to customers posted on Amazon.co.uk informing them that the high prices of e-books have been set by publishers and Amazon will continue to fight them. Personally, I go back and forth on this issue. On the one hand, charging the same price (or more) for an e-book as a hardcover seems ludicrous, but at the same time, the publishing industry has long struggled to survive, as there is little if any money in books these days. So what is the real story?

Amazon’s letter to customers reads:

“Dear Customers, recently, you may have heard that a small group of UK publishers will require booksellers to adopt an ‘agency model’ for selling e-books. Under this model, publishers set the consumer price for each e-book and require any bookseller to sell at that price… We believe they will raise prices on e-books for consumers almost across the board. For a number of reasons, we think this is a damaging approach for readers, authors, booksellers and publishers alike.”

The letter ends with a simple statement about Amazon’s confidence in its customers’ buying power: “In any case, we expect UK customers to enjoy low prices on the vast majority of titles we sell, and if faced with a small group of higher-priced agency titles, they will then decide for themselves how much they are willing to pay for e-books, and vote with their purchases.”

The agency model that Amazon refers to was first proposed by Macmillan, which threatened to pull its books from Amazon if the online bookseller didn’t raise the prices of its $9.99 e-books. Amazon responded by pulling Macmillan’s books itself, but as other publishers rallied behind Macmillan (Hachette, HarperCollins, Simon & Schuster, and Penguin), Amazon has been left no other choice but to capitulate and let publishers set their own prices.

How it all started

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British Publishers Ink Deals with Apple

More intrigue in publishing with the iPad's coming-out party in England...Some previously committed publishers to Apple delayed final acceptance until the last minute! Talk about a last minute prom date...

Four big English publishers finally signed with the iPad agency pricing model and had ebooks in the Apple iBookStore today at the iPad overseas launch...

This report from TheBookSeller.com by Catherine Neilan:

Hachette UK, Penguin, HarperCollins and Pan Macmillan are the only British publishers to have inked deals with Apple, with e-books produced by all companies appearing on the iBookStore this morning (28th) and available to UK book buyers.

The four represent five of the original global publishers who signed with Apple before its US launch in April—only Simon & Schuster is currently missing. Between them, they account for roughly 36% of the UK books market.

Man Booker-winner Wolf Hall (Fourth Estate), David Mitchell's number one The Thousand Autumns of Jacob de Zoet (Sceptre) and Stephen Gately's The Tree of Seasons are available to buy with prices ranging from £11.99 to £9.99 for hardbacks and £6.99 to £3.99 for paperbacks.

Prices are in the main more expensive than the equivalent print versions available on Amazon.co.u. For example, the paperback of Wolf Hall is £3.60 on Amazon, but £6.99 on the iBookStore. Thousand Autumns... is £11.99 via Apple, but Amazon is charging £9.41 for the hardback.

However, readers can download more than 100 pages of Wolf Hall for free, with an option to buy it while reading the sample. Nearly 100 pages of Mitchell's novel can also be downloaded for free.

Tony Parsons, Jeremy Clarkson, Chris Evans and Frankie Boyle are all among other authors appearing on the virtual bookshelf. Currently, Evans' memoir It's Not What You Think is number one.

Freelance writer Ben Johncock, who already owns an iPad, said: "There is a huge selection on here, with titles from all the genres - there is a really good sample of work available." He added: "I was a bit worred there would be nothing on here but there is actually quite a bit."

Read more at http://alturl.com/uomc

What’s So Hard To Understand About Random House’s Strategy?

Does Random House (RH) have the right approach to establishing digital content pricing, especially eBooks? RH is successfully moving the digital pricing needle from the retailer to the publisher...where it probably belongs and will be more beneficial to writers and other creative people...Just this bloggers opinion.

Mike Shatzkin, The Shatzkin Files, has his usual intelligent analysis on this subject:

Since Apple made its iPad announcement last January, five of the Big Six publishers have been featured participatants. That not only means they’re making content available for the iPad “form factor” (color and connectivity like the iPhone, screen size like the Kindle) but also that they’re buying into the new “agency model” for sales. As anybody who cares about this stuff already knows, under the agency model the control of pricing to the consumer moves from the retail point of contact to the publisher.

In return for that control, the publisher lowers the “established retail price” and, although the stated margin to the retailer is reduced from 50% to 30%, the effective margin rises because the retailer sells at that publisher price, not something substantially less. And the publishers going to agency are happily accepting less for each book sold to gain that pricing control and price stability across all retailers.

Random House has been prominent by its absence from the group. And some people, including some who are really well-informed about publishing, wonder “why?”

I wonder why they wonder.

Although it is certainly possible that iPad book sales will be startling right out of the box, that’s not really likely. Unlike the Kindle, which is purchased by consumers solely for the purpose of reading books, the iPad will attract customers for all manner of reasons and, actually, reading books would be pretty far down the list for most people. Although there are pockets of skeptics, I’m sure most publishing people accept that the iPad can grow into a very robust bookselling channel but it isn’t clear how long that will take or whether narrative text will be as much a beneficiary of the device as books that are more complex presentations of words and pictures.

In the short run, which from this seat looks like some months, if not a year, Kindle and Amazon are still likely to be the leader in ebook sales, and other established ereader platforms that are optimized for text (Nook, Sony Reader, the new ereader from Kobo) will remain important. By holding themselves out of the new channels, continuing the current policies of “wholesale” discounting, and allowing the retailers to set prices, Random House will be maximizing their short-term sales and profits. Assuming they maintain their publisher-established prices near their current levels (and why would they not?), Random House will collect more money for each ebook sold than their competitors do while the public will will pay less for each Random House ebook they buy than for comparable titles from other publishers.

That’s a pretty significant short term advantage. Why wonder why somebody would do that?

Of course, most publishers hope — if not believe — that the proliferation of new devices and platforms combined with the more widespread use of the agency model setting retail prices will disperse the ebook market among many more players. Will Apple or any other player hold it against Random that they were slow to make the change if they decide to join the party after it really gets going? My hunch is “no.”

And that may be Random House’s hunch too. They may be making a perfectly conscious and rational gamble that the sales they’ll lose in the short run by not being on the iPad will be more than compensated for by margin they’ll make through higher wholesale prices and greater sales through lower retail prices than any of their Big Six competition in the still-dominant Kindle channel.

And if Amazon is willing to retaliate against a publisher’s print business over dislike of their ebook policies, wouldn’t they also be likely to favor the books of a big publisher that cooperates with them when everybody else doesn’t? Couldn’t that add a further incremental edge to Random House in the short run while the iPad book-reading audience is still ramping up?

I have read nothing to tell me whether Apple would or wouldn’t accept Random House books on the wholesale model. (The other publishers embraced the agency model; they didn’t need to be talked into it.) If they do, Random House could persist with this strategy for a long time, even when they start putting books on the iPad. Even though their “listed” ebook prices would be considerably higher than their competitors’, the prices at which they’d be offered to the public could be lower.

If this all works the way the agency publishers envision, we’ll have a multi-platform, multi-retailer, price-stable ebook market before too long. If that happens, Amazon may tire of paying more for Random House books, whether they sell them for less or not, and the wholesale model with retail price reductions is not a palatable combination for publishers. But that’s not imminent and for the foreseeable future, all the Random House position means to them is more revenue per copy and lower prices to the consumer.

There is a school of thought that ebook consumers are very sensitive to price. Starting with the appearance of the agency model next week, ebook prices to the consumer for (usually author-) branded frontlist titles are going to rise. It will be interesting to see if the IDPF (International Digital Publishers Forum) reports of sales show any change in the trend line starting with the reports of sales in April.