I have been thinking a lot lately about e-books. Basically, I want to read the new Michael Lewis book, The Big Short, but I want to read it on my Kindle. The book is currently the top seller on Amazon but only in hard back. Its publisher (W. W. Norton & Company) has to date not made it available as an e-book. I am clearly not the only disappointed Kindle owner. Currently, over half of the nearly 100 reviews of the book give it only one star. While a number of those raise substantive complaints about the book, the vast majority are Kindle owners griping about not being able to buy a digital copy.
With that background, I found an article in the New York Times on Amazon’s ongoing negotiations (or pissing match) with publishers on e-book pricing very interesting (Amazon Threatens Publishers as Apple Looms, Mar 18). The background here is that publishers have not been pleased with Amazon’s cut-rate pricing of their wares and appear to have found a friend in Apple who promises publishers greater control of how their books will be priced. This will be done by having Apples act as merely an agent who takes a cut of the retail price but does not actually set it.
Five of the country’s six largest publishers — Macmillan, Simon & Schuster, Hachette, HarperCollins and Penguin — have already reached deals with Apple to sell their books through its iBookstore, which will be featured on the iPad. (The holdout is Random House.) Under those agreements, the publishers will set consumer prices for each book, and Apple will serve as an agent and take a 30 percent commission. E-book editions of most newly released adult general fiction and nonfiction will cost $12.99 to $14.99.
Amazon has agreed in principle that the major publishers would be able to set prices in its Kindle store as well. But it is also demanding that they lock into three-year contracts and guarantee that no other competitor will get lower prices or better terms.
Apple, for its part, is requiring that publishers not permit other retailers to sell any e-books for less than what is listed in the iBookstore. So the publishers have sought to renegotiate agreements they have with Amazon under which they sold books to it at wholesale, allowing Amazon to set the consumer price.
So this is one those stories that will likely lead to a slew of supply chain contracting papers. It’s an interesting problem. As I see it, if there were only e-books, whether they were sold under wholesale price only contracts or agency contracts wouldn’t matter very much. If the retailers costs of listing the title and fulfilling electronic orders were very small (which it presumably is), then the publisher could sell through Amazon and Apple under an agency contract and set retail prices to maximize total profits. The retailers get a slice that is big enough to keep them happy. Setting a wholesale price would also work. It is pretty easy to show that if the retailers are sufficiently close to interchangeable in consumers’ eyes, the supplier would pick a wholesale price that doesn’t maximize total profits but gets pretty close. Add in a few other sellers, and the system would do even better.
The hard part in modeling this is that aren’t just e-books. Publishers still care about hardback sales. That makes it much harder to think about how to model the choices involved. It is not a straightforward question of margin. Amazon is currently selling the hardback of The Big Short for $15.37 — fully 45% off its cover price. If Norton can make money when that is the retail price, it can presumably make money on a ten dollar e-book. (See here for a discussion of e-book costs.) The bigger issue is that Norton needs the hard copy volume of a big seller like The Big Short to support the cost of its physical distribution system.
One wonders if this can be fixed contractually. Why have only e-books under agency agreements? Why not have physical books sold that way as well? Why have one type of contract for all titles? When studios introduced revenue sharing contracts for video stores renting tapes, the stores actually had to choose on a title-by-title basis whether they would pay a high wholesale price for a tape and keep all the revenue or whether they would pay a low upfront price a share the revenue stream. Could something like that work here? Why should a blockbuster and a small title be managed the same way?
Finally, of course, there is the issue of publishers not wanting to be beholden to Amazon. Amazon currently has 90% of the e-book market and I can appreciate that publishers would like to diversify their customers. I am not sure how that can be modeled but it obviously matters.