You may have noticed the term “agency model” cropping up in industry news and blogs lately. But just what is the agency model and what does it have to do with the US Department of Justice’s (DOJ) lawsuit, filed April 11th, against Apple and five of the Big Six publishing houses? The case has the book industry buzzing, but why does everyone seem to care so much about the seemingly uninteresting question of how to price an ebook?
The Cast of Characters
- Amazon: Mustache twirling menace to book publishers everywhere… or price-lowering, healthily competitive company?
- The Big 6 Publishers (minus Random House): Lawless scoundrels who want to put a competitor (Amazon) out of business… or ragtag group of heroes banding together to save the book publishing industry?
- Apple: The ringleader of the Big 6 gang… or the rebel alliance’s last hope against Amazon’s empire?
Some Things You Might Be Wondering
What is the agency model? It’s a pricing system for books. Publishers set the price of the books, and distributors, like Amazon or Apple, get a fee from the publishers on every book sold (about 30%).
What’s all the fuss about? It’s all about Agency Model vs. Wholesale Model: The wholesale model is another way of pricing books—traditionally, it’s been used for print books. In this model, the publisher sells books to the distributor at a set price (usually 50% of retail) and the distributor sells the books to the public at whatever price the distributor likes.
Why it matters: The short answer is: ebooks. The same models could (and sometimes do) apply to print books (and iTunes apps, etc.), but right now the fastest growing corner of the publishing world is occupied by ebooks. That’s why everyone’s so interested in how those electronic texts are priced.
Amazon controls 70% of the market share for ebook sales and wants to employ the wholesale model for the ebooks they sell. Theoretically, they would pay publishers a set price (usually half the retail price of the ebook) and then sell the ebook for whatever amount they like. Amazon can even (if it so chooses) sell the ebook for less than they paid the publisher for it. The retail giant is unique in bookselling circles because of its ability to deeply discount, even to the point where it loses money. By doing this, Amazon gets customer loyalty, increases customer awareness, and those same customers may buy other items from Amazon at the same time that they are buying ebooks. One of the biggest boosters behind Amazon’s ebook juggernaut is its control of the most popular ebook delivery method: the Kindle. By gaining control not just over ebooks but the way people read them, Amazon increases its market-share even further.
Who else is involved? Apple wants to sell ebooks (as do Barnes & Noble, SONY, and Google, but because Apple is the retailer being sued by the Department of Justice, we’ll focus on them.) Apple uses the agency system (letting publishers set their own prices) and publishers keep about 70% of the profit (rather than the 50% split they make with the wholesale model). Publishers obviously want to make a larger profit and in 2010 the Big 6 (minus Random House) decided that they’d only do business with Amazon if Amazon adopted the agency model. Amazon liked the wholesale model and, (stunningly!), had no wish to make less money. (Though that loss wouldn’t have been as substantial as it seemed, due to commitments to promotional spending that Amazon requires of publishers.) However, several publishers (most notably Macmillan) refused to do business with Amazon until it adopted the agency model. Amazon stopped selling Macmillan books, but after losing business eventually agreed to sell books via the agency model.
Who’s affected by the lawsuit (otherwise known as “The Big Brouhaha”)? The DOJ claims that consumers lose out under this system. The suit alleges that Apple and the Big 6 (minus Random House) colluded to artificially increase the price of ebooks by letting publishers set the prices. At this point Hachette, HarperCollins, and Simon & Schuster have settled with the DOJ. Apple, Macmillan, and Penguin plan to fight the charges of collusion.
Both Sides of the Story
What Amazon says: The publishers are breaking the law by keeping Amazon from competing price-wise with other retailers. This lack of competition hurts the consumer by resulting in higher prices.
What the publishers say: Publishers assert that Amazon was devaluing their product by pricing it so low under the old (wholesale) system. They don’t claim to have anything against the wholesale system, per se. Print books are still sold under the wholesale system and publishers still make money under either model. The wholesale model became an issue for ebooks because of the extent to which Amazon was able to discount a digital text while publishers were trying to sell print copies of the same title—copies that, necessarily, cost a good deal more. The Agency model, they claim, was born as an effort to save print book sales from wholesale ebook discounts with which they simply could not compete.
What’s really at stake? Publishers fear that Amazon will become the only place from which to buy books (both print and digital). Amazon can afford to greatly discount books, bringing them customers and more of the market share until it drives its competitors out of business. At that point, since Amazon would have no competitors in the book-selling market, they could raise their prices at will, hurting customers who may have benefitted in the short-run from low prices. Furthermore, there is a fear that brick-and-mortar bookstores (which can’t compete with Amazon’s prices) will close a “show room” for books, thus further narrowing the venues where consumers can see and learn about new reading materials.
Obviously, the question is not whether people will still buy books in the future (of course they will) or whether the Big 6 or Amazon or Apple will disappear off the face of the earth (that seems unlikely). The question is: Who will sell us these books (both print and digital) in the future? Will we buy them all online? And at what price? Maybe we’ll finally have the answers to these questions as the DOJ case proceeds and we see whether Apple and the remaining publishers from the Big 6 will be convicted for collusion.
A link to the DOJ indictment: http://fortunebrainstormtech.files.wordpress.com/2012/04/041112-us-v-apple-complaint1.pdf
Another good breakdown of the situation: http://paidcontent.org/2012/04/11/everything-you-need-to-know-about-e-book-doj-lawsuit-in-one-post/