Publishing/Writing: Insights, News, Intrigue

04/04/2012

Looks Like the Agency Model May Survive DOJ as a Valid Business Model


The Right Decision on Agency Model ?

Signs emanating from news sources point to the agency model (backed by the big six publishing houses) being judged a valid business model by The Department of Justice.

With one alteration — Apple must drop its MFN (most favored nation) designation. MFN status meant Apple could not be undersold by other retailers.

What does this mean?

To me it means that all the best content, known authors, bestsellers, etc. will probably be available only through sites employing the agency model. Why? Simply because authors/creators can make more money with the 70%/30% revenue split — and at a price set by the author/publisher not a third-party retailer.

This also means that all the best new content, authors, bestsellers, etc. will probably leave Amazon with its cheapo book model, unless they make some changes.

That some of its titles in iBooks are uncompetitive probably won’t worry Apple much. It cares a hell of a lot more about upholding agency terms and MFN with magazine and newspaper publishers, where the market structure is totally different. 

What tomorrow may look like:

    For quality content go to Apple iBooks and other agency model sites.

    For lesser, second-rate, cheapo content go to Amazon.

More details here by  at Digital Book World:

Breaking Down the Apple-DoJ-Agency Five Saga and Its Ramifications

What could the actions of the Department of Justice mean for e-books? Here’s a breakdown with some scenarios as I understand the situation. 

Apple’s Agency Model

Publishers selling through Apple can only do so through an agency agreement (a uniform 70%/30% revenue split across all categories and digital products). That is true for all assets – games, music, video, movies, etc. – sold through Apple.

Based on the recent news reporting, the DoJ might accept agency as a valid business model. In an interview with the Wall Street Journal, Sharis Pozen, the top antitrust official at the Department of Justice states “we don’t pick the business model”, and is focusing its efforts on a settlement under which Apple drops the “most favored nation” clause form contracts according to a report by Reuters.

This means Apple’s business model for iTunes – including iBooks – may remain largely untouched. Apple does not have to worry about price-matching, does not need buyers or merchandisers to come up with the right price, and does not need to change its technical or e-commerce infrastructure. 

Most Favored Nation

To be competitive under its retail model, Apple originally insisted on a Most Favored Nation (MFN) clause to make sure its goods (and its processes for pricing these, where the publisher set the retail price) were competitive (i.e. Apple would not be undercut on the same goods in the marketplace).

Being forced by the DoJ to drop the Most Favored Nation (MFN) clause means that Apple could no longer insist that the retail price agreed between Apple and publisher is the lowest in the market at all times. 

Agency and the Big Six (Penguin, Macmillan, Hachette, Simon & Schuster, Random House and HarperCollins)

The big-six publishers (except Random House, which followed the “agency five” to this business model one year later) had agency agreements in place with Apple when iBooks launched and more importantly were able to force these agency agreements (RH included) on Amazon, too. Due to their market position and the popularity of their books (and authors), the big-six publishers prevailed in negotiations with Amazon (remember the outcry by authors and customers when Macmillan books disappeared from Amazon? Amazon caved inside of 3 days.)

It is likely that nothing will change for the big six if Apple is forced to drop MFN. It will be agency terms as normal with all retailers be they Apple, Amazon, BN, Google, Kobo or others. This is probably a very happy outcome for the big six.

However, at the same time, the big six are less constrained when doing short-terms promotions and will only be able to do these promotions selectively, i.e. only in certain channels and on certain titles. Regardless, I think the big six would be very happy with this outcome. 

Agency and the Second Tier

Many publishers in the “2nd tier” (all those outside big six – this in no way refers to quality of the output, it is just a reflection of size and market-share) have agency agreements with Apple, but wholesale agreements with Amazon, because Amazon had the upper hand in negotiations along the lines of “you are not willing to sell on wholesale terms? O.K. we will not sell your books” and swoosh these publishers would have lost the potential of selling to 60% to 70% of the now very large e-book market (as much as 50% of the total market for many titles).

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2 Comments »

  1. John, I agree that it’s possible agency pricing will remain after the DOJ is done.

    As an indie, I am really *hoping* this is the case, because agency pricing is allowing publishers to overprice their ebooks, and the longer that goes on, the better things will be for indie writers. 😉 If the $3-6 pricing window starts being filled by ebooks from major publishers that retailers have discounted, those publishers might start selling more ebooks, and that would be bad for independent writers.

    Where I see a flaw in your analysis is in your conclusions around Amazon.

    Amazon has already consented to having agency in order to get books from big publishers. What makes you think they will suddenly reverse that decision? If agency pricing is kept, then basically nothing at all will change, with the exception of those publishers stuck between agency and wholesale pricing (who should, as you mention, see substantial benefits). Amazon’s unlikely to become a place for “lesser, second-rate, cheapo content”, because it will continue to have all the books all the other sites do.

    As far as Apple goes – I think iBooks was an expensive mistake for them. They want *content* for their devices – but most of their profit comes from the devices, not the content. Amazon is the other way around, basically giving away devices at or around cost to get people to buy content. They’re opposite models, but would partner brilliantly. Apple could squash Amazon’s ebookstore like a bug if they wanted – the difference in size between the two companies is an order of magnitude. Apple is the Goliath to Amazon’s David. But Apple doesn’t seem very interested in having to maintain a competitive ebookstore; iBooks isn’t used by most iOS users.

    Statistically, only about half of iPad users read books on the device. But 3/4 of those readers use the Kindle app. The answer should be pretty obvious: Apple could partner with Amazon, make Kindle the flagship ebook app for their devices. Apple gets the content they need for their devices. Amazon pays for the customer service costs of delivering that content, and has a rep for doing so very well. Amazon gets the ebook sales they desire. Win-win.

    All that said, I’m not so sure agency will survive. I’m hopeful (see the above), but not so sure. I suspect that the DOJ is going to see issues with retailers being unable to set their own prices – that is the central issue at stake here, is the inability for a retailer to set the pricing on the goods they sell. That’s the core of the alleged collusion, and is the element most likely to be dismantled. We’ll see. As I said, I rather hope you’re right.

    Comment by Kevin McLaughlin (@KOMcLaughlin) — 04/05/2012 @ 10:35 am | Reply

  2. A new update re: it sounding like agency pricing would be allowed – the latest news is, sounds very much like that is NOT what is happening. Here’s hoping the WSJ is wrong here and publishers find a way to continue keeping their ebook prices high:

    http://online.wsj.com/article_email/SB10001424052702304072004577324122956385282-lMyQjAxMTAyMDAwNDEwNDQyWj.html?mod=wsj_share_email

    Some key snippets:
    “Publishers who sign on to the settlement would likely have to allow market leader Amazon.com Inc. resume discounting their e-books”

    And most key:
    “In talks with the Justice Department, some publishers have proposed keeping the agency pricing adopted with Apple but scrapping the provision—known as the “most favored nation” clause—that prevented them from giving other book sellers such as Amazon a better deal.

    The Justice Department has said publishers must go further, according to people familiar with the talks. The government believes that publishers were able to impose the agency model on the industry only through an illegal conspiracy between rivals, those people said.

    According to the people with knowledge of the case, the Justice Department has insisted on a “cooling-off” period before publishers would be allowed to resume the arrangement. It has argued that the waiting period would allow publishers and booksellers to resume a one-to-one relationship, free of the taint of collusion.

    The length of such a cooling-off period is one subject of the talks.”

    Comment by Kevin McLaughlin (@KOMcLaughlin) — 04/05/2012 @ 2:53 pm | Reply


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