The Future of the Book

Amazon eBook Pricing Battle Gets Ugly

By posted at 9:36 pm on January 31, 2010 12

Apple’s launch last week of the iPad has ushered in a new era of competition in the publishing industry as tech giants expand their footprint in the oldest of old media, books.

coverInterestingly, at least among serious readers and industry watchers, a skirmish on the margins has taken the spotlight. On Friday, Amazon unilaterally and without any explanatory public announcement, removed all books by publisher Macmillan from its virtual shelves. This included both ebook and paper editions and impacted books as varied as Hilary Mantel’s Wolf Hall and Atul Gawande’s The Checklist Manifesto.

At the heart of Amazon’s move was a dispute over pricing. Essentially, Amazon, with its massive footprint in the publishing industry, is continually trying to dictate terms to publishers in order to maximize profits. Macmillan, seeing Apple (and therefore competition for Amazon) on the horizon, decided to hold its ground and retaliated.

As a result, two models are now in play. Under Amazon’s current model, it utilizes its near monopoly position to take an extremely steep wholesalers’ discount (up to 70%) when it buys books from publishers, and it sets prices where it wants, often offering books at bargain prices in order to draw shoppers into Amazon while still eking out a profit.

The opposing model is the agency model that treats Amazon not as a wholesaler but merely a sales force. The publisher sets the prices, and Amazon takes a 30% commission of whatever that price is. As best I can tell, the push for the agency model only applies to ebooks. Apple is touting this model with the iBook offering on the new iPad, and MacMillan intends to extend these terms to all outlets that sell its ebooks. (For more on how all this works, check out Charles Stross’s informative piece.)

For Amazon, it’s clear why the current model is preferred. The only way it can differentiate (and lure new customers into its Kindle ecosystem) is based on price. If the agency model succeeds, technically any other player out there with the wherewithal could come along and sell ebooks on exactly the same terms that Amazon does.

This is probably good news for readers. In the long-term it will spur competition in the ebook and ereader space that will inevitably push away from DRM, closed ecosystems, and expensive hardware. In the short term, however, those readers demanding that ebooks be priced at $9.99 or less are going to be frustrated. If publishers can set pricing, they are going to set it higher than Amazon would (In a memo obtained by Publishers Lunch, Macmillan has said it aims to price its ebook new releases between $12.99 and $14.99). These higher prices could definitely slow the growth of the ebook market, something I suspect may mainstream publishers wouldn’t be too upset about. On the other hand, publishers would have the ability to adjust prices, and if lowering prices ends up increasing volume and maximizing profits, they’ll undoubtedly do it.

It’s worth noting as well how Amazon has responded to Macmillan in this case and how a pattern of behavior is emerging. We noted nearly a year ago, when dicussing both cutting its affiliates out of the Kindle ecosystem, that the threat that Amazon poses is one of control. In the emerging world of ebooks, where the books you own are not on your shelves but are digitally tethered to a big corporation, this is not just concern in principal. This was made clear last July when Amazon managed to remove from afar ebooks from its customers’ Kindles.

Amazon on Sunday proposed in a posting on the Kindle Community board that it had all been part of the effort to fight for cheaper ebooks. Readers, especially those who read ebooks, will have to decide whether cheap ebooks are worth the cost of Amazon’s quest for monopoly control.

[Image source: Julien Min GONG]





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12 Responses to “Amazon eBook Pricing Battle Gets Ugly”

  1. Hugh McGuire
    at 8:33 am on February 1, 2010

    Great article. Just one point of significance, Macmillan’s plans are to price between 5.99 and 14.99 (not 12.99 and 14.99). From Mac CEO John Sargent’s letter to the troops:

    “Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99.”

    See:
    http://www.publishersmarketplace.com/lunch/macmillan_30jan10.html

    Pricing is at the heart of the debate and we need to be sure that we get up in arms about the right things (whatever those things might be).

  2. C. Max Magee
    at 8:37 am on February 1, 2010

    That’s a good point, Hugh. I’ve edited the text to reflect that the $12.99 to $14.99 price point is for new releases.

  3. Laza
    at 9:21 am on February 1, 2010

    Having new books at $9.99 is definitely a big draw, it was for me. I’ll be disappointed when the prices go up. I’m assuming Amazon will have to allow higher prices eventually if they want to actually sell e-books. As long as the prices are less than the cost of the of the print book. $13 to $15 doesn’t seem too bad in comparison to a $25 hardback.

    Companies have been able to sell music digitally at prices that seem acceptable to most people, so I don’t see why e-books need to be any more difficult of an endeavor than that.

  4. Hugh McGuire
    at 11:14 am on February 1, 2010

    I like the tack though: price your new release ebooks high, along with hardcovers; and then drop below paperback when the book is no longer a “new release.”

    This does a whole host of interesting things:

    -it implicitly explains to people that what you pay for when you buy books is not the paper & print, but the cultural value behind it

    -it addresses the famous cannibalizing worry, so that your margins on your ebook sales can be high enough, without pissing off your ebuyers

    -it lets cheapskates like me (who already have a backlog of dozens of books) wait till prices get reasonable before buying

    And if I interpret Macmillan’s stance, the problem is that in the current pricing scheme, Amazon is setting prices:
    a) so that Macmillan has no control over cashflows
    b) so that Macmillan’s had no ability to convey messages about the value of books

    As long as we see low backlist ebook prices, I think this is a win for readers, writers, and publishers; and certainly a loss for Amazon.

  5. Go MacMillan!
    at 1:00 pm on February 1, 2010

    While I heartily enjoy the low prices that Amazon charges for it’s books (real books that is, not e-books – I would never stoop that low), I also think that, like the CEO of MacMillan said, pricing needs to be so that it “allows those who create it and publish it to be fairly compensated.” I will readily pay a couple dollars more for an item (be it a book, DVD, etc.) if it is something that I really want! Amazon needs to understand that as long as their prices are competetive (they need not be rock bottom) they will continue to make huge profits. They offer one of the largest (if not THE largest) selection of books anywhere on the web and that is what will bring people back again and again (along with convenience and free shipping and…)!

  6. treena
    at 1:53 pm on February 1, 2010

    I find Macmillan’s position to be ill conceived.
    As an avid reader, who was recently introduce to e-readers I have made the switch and love it. E-books will never completely replace physical books, but i now have a place for them in my life.
    But they come with problems. The e versions often have formatting errors. There can be page breaks, tabs and spacings problems that don’t appear in the “hard” printed copy of their books. When they fix these and take ebooks seriously i will listen to their opinion about pricing.

  7. I’ll Just Let Someone Else Have the Privilege of Hosting My Impossibly-Long Want List, Thanks « Phil Christman
    at 3:50 pm on February 1, 2010

    […] sure that by the time I get around to really writing about the Amazon-Macmillan dustup, these two conditions will […]

  8. A BookieMonster roundup | BookieMonster
    at 5:30 pm on February 1, 2010

    […] publishers Macmillan have been engaged in a staring contest.  If you haven’t here’s a general roundup from The Millions, plus a great piece of opinion on the whole shemozzle from John Scalzi.  Shots are being fired […]

  9. Poornima
    at 5:44 pm on February 1, 2010

    As much as I appreciate artists being paid fairly for their work, what really bugs me is the implicit assurance Amazon seems to have promised its readers when it hawked the Kindle: “Look! Books as low as $9.99!” New ones at that!

    I feel badly for readers who bought the Kindle and who now see the prices go up slowly.

  10. Rhett
    at 12:01 pm on February 4, 2010

    Thanks for your post I am very interested in this price war. I am not sure if I am looking forward to the changes that will be made in the future of books digital or print versions.

  11. 13 Bucks: E-book Pricing Wars « SONYA CHUNG
    at 5:44 pm on February 5, 2010

    […] always so good at making sense of book business developments for us lay folk.  Here’s his take on the Amazon vs Macmillan e-book pricing […]

  12. Alistair
    at 9:55 am on May 4, 2010

    e-Books (in the UK anyway) are it seems to me very overpriced. I have seen on the Waterstones site for Sony readers – one of the few retailers in the UK to do e-Books – e-Books that are MORE expensive than the ‘real’ book!
    I have a lot of books. I mean a LOT of books and I will not be retrospectively purchasing e-versions of them.
    I don’t have to worry about DRM about the ‘format’ of my book being unsupported anymore, I can lend them to people, give them away, send them to 2nd hand book shops, etc., non of these things you can do with e-Books.
    The only way I will convert to some kind of reader is if (for example) I get a free or dirt cheap e-version when I buy a ‘real’ book – when I hit a critical mass of e-versions I may then be tempted – till then, no ho.

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