Oct 152010

Amazon UK today made an announcement on its UK forums, apologizing to customers for higher prices by some publishers, who have insisted upon an “agency” pricing model. Under the agency model (described in further detail here), publishers set the final sale price of an e-book, and the retailer (like Amazon, B&N, or Apple) collects a cut, usually 30%. Under the retail model, which print books are all sold under and some e-books are still sold under, the publisher sets a “list price,” charges the retailer some percentage of that price (usually around 50%), and the retailer is then free to sell the book for the price they choose: at the list price, at some discount, even at a loss if they want.

When switching to the agency model, publishers almost universally raised prices on e-books across the board: Amazon had sold new releases at $9.99 (often taking a loss, paying publishers about $13 for e-books with a $26 “list price”), and backlist (older) titles around $6.39. Those prices have increased to about $12.99 and $7.99, respectively, increases of around 30%. (Note: 5 of the 6 largest publishers in the U.S., with the exception of Random House, embraced the agency model when Apple’s iBook Store opened in April as a way to break Amazon’s dominance of the e-book market).

Was this just a business decision to maximize revenue? A campaign to humble Amazon, as publishers were fearful it was gaining too much power in the book-selling (especially the e-book-selling) world? Or a way to slow down the adoption of e-books and keep people buying printed books, which is, after all, what large print publishers are best at? I’ll let you decide.

In any event, how did the agency model work out for publishers? According to Amazon, not so well:

Unsurprisingly, when prices went up on agency-priced books, sales immediately shifted away from agency publishers and towards the rest of our store. In fact, since agency prices went into effect on some e-books in the US, unit sales of books priced under the agency model have slowed to nearly half the rate of growth of the rest of Kindle book sales. This is a significant difference, as the growth of the total Kindle business has been substantial – up to the end of September, we’ve sold more than three times as many Kindle books in 2010 as we did up to the end of September in 2009. And in the US, Kindle editions now outsell hardcover editions, even while our hardcover business is growing.

So, the growth of agency model books are less than half the growth of non-agency-model books. (Since e-books are growing so rapidly, an outright decrease in sales would be a true disaster — imagine two boats on a fast-moving river, one going with the current, and the other fighting it and being dragged more slowly along.) While some have hypothesized that publishers are intentionally shifting those sales away from Amazon and to Apple, I have serious doubts that many Kindle users are willing to buy a $499 iPad and change their reading preferences if they consider a book overpriced on Amazon — just to read the book for the same price on the iPad’s eyestrain-inducing LCD screen. No, I think they just find another book to buy instead. And, as the most recent sales figures show, e-book sales took a dip when the agency model was announced, but continue to show strong growth since then. So Amazon Kindle readers are buying e-books, just not as many e-books from agency model publishers as they used to.

Will this mean the upcoming end of the agency model? Do large print publishers even care if their e-book sales decrease, or only what happens to their print sales, which are still 91% of their total sales? (Note: August 2010 hardcover print sales are down 24.4% from August 2009, trade paperback sales are down 18.3%, and mass-market paperback sales are down 21.9%; so much for “protecting print sales.”) I think what publishers miss is that, once a reader switches to an e-book reader, they prefer the e-reading experience strongly enough to pretty much stop buying printed books (I know I’ve stopped buying print books, and a quick perusal of the Amazon forums will assure you I’m not alone). Further, they’re pretty much only going to buy e-books from the e-book store associated with their device — it’s just too convenient to get Amazon e-books on a Kindle in 60 seconds, not have to break DRM or convert files, have your e-books backed up for you, Amazon syncs your place in your books across reading devices, and Amazon already has Kindle users’ credit card info. Once a user buys a Kindle, the vast majority would never even consider the iBook Store, or any other e-book retailer. Why, when Amazon has the largest selection, all the benefits I described above, and the agency model ironically guarantees that, while Amazon can’t beat other retailers on price, neither can anyone else offer e-books cheaper anywhere else?

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