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How the DOJ ruling could affect ebook prices

One unintended consequence might be increased consumer frustration

The proposed final judgment in the ebook case says that settling defendants may enter into contracts with ebook retailers that prevent the retailer from selling a settling defendant’s ebooks at a cumulative loss over the course of one year. What does that mean for the future of ebook prices?

Up to now you typically found the same (or very similar) ebook price from one vendor to the next. Yes, there are exceptions but it seems as though bots are constantly running to prevent a retailer from being at a pricing disadvantage for very long. Profit and loss was an afterthought, especially when it comes to a publisher’s entire list. Market share and offering the best price were all that mattered.

Bestsellers at a loss

In the future retailers need to keep a close eye on the overall profit or loss of a settling defendant’s entire list. It doesn’t mean they can’t sell certain titles at a loss; they just have to make up that loss with profitable sales of other titles from that settling defendant’s catalog.

Amazon will set the tone here and I’m sure we’ll continue seeing them offer the bestsellers at a loss. After all, Amazon is all about offering the lowest price and they certainly won’t want to damage that reputation in a highly visible area like bestselling books. Where it gets interesting is thinking about (a) how Amazon will price the rest of that settling defendant’s list and (b) what their competitors will do.

Higher long tail prices

In order to make up the bestseller losses retailers will have to turn a profit on the rest of a publisher’s catalog. But they’ll quickly run into scaling issues. For example, if you have a blockbuster that sells 10 or 100 times the volume of the next best-selling title from that publisher is the long tail long enough to bring the entire list’s performance to break-even?

How high do those long tail prices have to go to offset the accumulated loss of the blockbuster(s)? And do these price adjustments happen throughout the year so the loss doesn’t get too deep at any time or does the retailer suddenly jack all the publisher’s prices up in the last few months to avoid a cumulative loss?

Greater price discrepancy across retailers

How do the other retailers respond to this situation? It would be very easy to use bots and simply copy Amazon’s pricing and maybe that’s what happens for awhile. But since retailer volumes vary that could lead to one or more getting themselves into a cumulative loss situation that’s hard to recover from.

I think it’s more likely we’ll see larger price differences on individual titles across retailers. No longer will you be confident you paid the same price for that ebook from B&N that you would have paid at Amazon or Kobo. And the price differences are likely to be significant, particularly as retailers keep an eye on avoiding a cumulative loss for any settling defendant.

As prices vary from retailer to retailer I also think we’ll see more consumer outcry over content lock-in. Wouldn’t it stink to discover the hardware vendor you bought into is generally charging 20% or 30% more than what you’d pay for those same ebooks from another vendor? How angry will you be if you discover you have to pay twice the price for that ebook than you would have elsewhere? That’s not beyond the realm of possibilities as retailers focus on avoiding the cumulative loss.

The final judgement clearly has the potential to cause more disruption than it was originally intended to. And if my prediction of greater price variation across retailers comes true it’s only a matter of time before consumers revolt against platform lock-in. What seems like a victory for one retailer today could very well help tear down the walled garden they’re so carefully constructing.

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Comments: 6

  1. That is a very perceptive and interesting post.

    I imagine physical books as well as ebook prices are going to go up permanently after the ruling.

  2. Kevin O. McLaughlin

    A few thoughts here.

    Pre-agency, it was very rare for Amazon to offer ebooks at a loss. Recall that Amazon was getting 50% of list price back then, and putting most bestsellers at $9.99. They were only taking a loss on books which listed above $19.98, which very few ebooks did at the time. Yes, Amazon took some ebooks which were priced in the ridiculous $20+ range and took a small loss on them, but as a rule, they still made a small profit on most of their $9.99 bestsellers. The “Amazon was selling ebooks at a loss” meme is a fallacy put out by major publishers in defense of their alleged collusion.

    Amazon is, however, very good at spotting books priced lower than theirs and reacting in a timely manner. This process is largely automated. Other retailers will be hard pressed to be able to offer books more cheaply than Amazon. They will have to work very hard at maintaining their own prices low enough to match Amazon’s discounts. I’d like to think you’re right, and customer lock in will decrease. However, with the lack of competence currently shown by most of Amazon’s competitors, my suspicion is they are not positioned well to fight the coming price war, and will simply lose customers into Amazon’s infrastructure.

    Given that, what is the best publisher response? Kindle format is already dominant. It will likely become more so. It is essential to the idea of new retailers having a shot that they be able to offer ebooks in Kindle compatible formats, which means mobi, which means DRM free (only Amazon can sell ebooks for Kindle with DRM right now). Publisher insistence upon DRM is a cornerstone of Amazon retaining their walled garden. Without DRM, customers could easily batch convert their entire libraries with free software and move to another retailer if they chose; with DRM, customers are unlikely to ever move on to a new retailer once they’ve spend thousands of dollars on ebooks that can’t be read elsewhere without cracking the DRM. Without DRM, other retailers could sell mobi format files as well as ePub, and compete directly with Amazon for Kindle users.

    • Hi Kevin. Your assumption about how many titles Amazon sold at a loss pre-agency is wrong. I’ve been a Kindle owner since very early on and I used to marvel at the number of titles I bought and saw that were available for less than half digital list price. I don’t have the stats but it’s clear Amazon has sold a large number of titles at a loss since day one of the Kindle.

      I do agree with your point about Amazon’s superiority when it comes to knowledge and leadership. They do a lot of things extremely well. And you’re absolutely right about publishers having insisted on DRM and helping to put Amazon in their dominant position.

  3. Given the state of the accounting practices at the settling publishers (the only ones impacted by the settlement), do you really think it is likely that they will negotiate these types of contracts? What good would it do them? How much would it cost them to implement such a system. Never. Gonna. Happen.

    • They either go back to wholesale terms or adopt these modified agency terms. Wholesale takes publishers back to square one and they lose the protections that still exist in the modified agency model. Either you’re anticipating a third option here that I’m not seeing or you believe publishers will somehow view wholesale as more attractive now. I wouldn’t hold my breath on the latter, so do you figure publishers will develop a completely new model?

  4. Such negotiations , why are they doing such? it does cost them efforts and time which may be wasted. So far if ebook prices increases, I can still rely on those relevant sites that offers it free, one example is bookboon.com

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