Friday, April 2, 2010

Amazon's strategic blunder - what were they (not) thinking?

It's been fascinating following the debate raging in the US about ebook pricing and business models, particularly the argy bargy over the so-called agency model, and the tug of war between Amazon and Apple for publisher allegiance.

In my humble view things are going from bad to worse.

I cannot understand the thinking behind Amazon's embrace of the agency model of ebook supply. Oh sure, I can understand how it got there, albeit reluctantly. It capitulated to Macmillan's threat to not do business with it unless it adopted the business model advanced by Apple that allows publishers, not retailers, to control the price to the consumer. And capitulate Amazon did, quickly and publicly.

But imagine if Amazon had just been a little bit more savvy and less arrogant. The entire publishing and author community had been up in arms for months about Amazon's pricing of popular trade ebooks at $9.99 or lower, as it believed that price point to be a dangerously low precedent. It had the potential to set consumer price expectations at levels insufficient to allow the emerging ebook industry to become economically viable for all parties.

If Amazon, in the face of this rather fierce resistance, had sat down and twigged its pricing policy just a bit, perhaps even in dialogue with publishers, it could have avoided the mess it's now found itself in, of having to adopt under pressure a business model that was invented by Apple and runs entirely counter to Amazon's whole discount, value for money, consumer-friendly proposition.

It's been left to Apple to shoehorn publishers, bang some sense into them, and come up with a pricing model or template that now seems to have informed the whole industry, an industry which was all over the place in pricing philosophies prior to this. Apple's template is this:

Print edition under $22.00 = $9.99 or less
$22.01-$24.00 = $10.99 or less
$24.01-$25.00 = $11.99 or less
$25.01-$27.50 = $12.99 or less
$27.51-$30.00 = $14.99 or less
$30.01-$35.00 = $16.99 or less
$35.01-$40.00 = $19.99 or less

It's roughly a 50% discount off the print edition price. Was that beyond the wit of Amazon to come up with, and sell to publishers as the way that both parties should price? And could not Amazon, in return for publishers lowering their ebook RRP's to these levels, have agreed to accept a lower discount than the 50% they previously demanded - to, say, 30%? This would have preserved the wholesale model, where the retailer, not the publisher sets the ultimate price to the consumer, as it should be. Retailers know consumer dynamics intimately. Publishers don't. Retailers need the freedom to construct promotions and special offers around price, and all parties, including consumers, benefit from these. Publishers are hopeless at this sort of stuff.

Amazon stuffed up, lost control, and are now scurrying around like a dog with its tail between its legs. It's not a pretty sight. They utterly misread the anger in the publishing and author community.

What a strategic blunder.

However I'm amazed that serious commentators on publishing matters in the US have not come out and condemned the agency model for the profound abomination that it really is. It breaches some fairly fundamental, age old distribution and retail practices, as well as being essentially anti-consumer. I can't see it being sustainable over the medium to longer term. It's a ball and chain ankle bracelet which the trade should not have acquiesced to.

1 comment:

Des Maddalena said...

You're quite right Peter, the eBook industry is about to emerge big time. Baby boomers in this country and other western countries are well educated have the technology in the desk top and lap top computers and the interest to write and still like reading. I think there's going to be large numbers of people all wanting to write and the eBook format is the ideal outlet for their enthusiasm. All we need it to get the market distribution mechanism fixed so that its easy quick and profitable for all concerned and it will take off.