Sunday, September 16, 2012

Zombie Agency

The US Department of Justice's Settlement Agreement that attempted to bring to an end the dismal practice of pricing ebooks on an 'Agency' (or price control) model had one major flaw: it stunned the practice but didn't kill it. 

Because US competition law does not outlaw resale price maintenance, as in Australia, agency pricing of the sort we saw for ebooks is not illegal. Hence the main thrust of the DOJ action focused on publishers' 'collusion' to raise prices, not on the agency model itself.

Thus the Settlement required the participating publishers to back away from the Agency model, and allow retailer discounting, for only two years. And during that time retailers could only discount up to break-even point over the course of a year. Their discounting ability was artificially constrained.

So this has led to a quite extraordinary response from one of the three settling publishers, HarperCollins, and the expectation in the industry is that Hachette and Simon and Shuster will follow. They are actually INCREASING their ebook prices, having been freed from their Apple-led agency agreements, in order to ensure that the resumption of retailer discounting won't actually deliver lower prices to consumers. In other words these publishers are deliberately confounding the DOJ's intent to revitalise pro-consumer competition. 

While tossing aside the 'pricing bands' that Apple demanded (which effectively pushed ebook prices down to around 50% of the hardback price - they were formerly much higher), the publishers are retaining the 30% 'commission' (rather than reverting to the status quo anti which was 50%). Therefore retailers who want to resume discounting only have 30% to play with, and off an aggressively increased price. 

I find this price-hike behaviour utterly reprehensible. It is an arrogant and deeply cynical response to a genuine concern by the DOJ for the wrong being done to consumers. It retains the pro-producer, anti-consumer bias, which is why agency pricing was wrong in the first place.

This piece by industry consultant and commentator Mike Shatzkin summarises, uncritically, the state of publisher thinking. But it is an absence of thinking, a condition which is about as wrong-headed as it is possible to get. By what twisted processes of logic do businesses come up with these sorts of defensive, timid, protectionist postures? Where is the wisdom, the strategic intelligence, the clarity of thought, the conceptual cut-through, in fact the basic integrity? Where's the leadership? 

Why can't publishers price ebooks fairly and professionally - according to the wealth of consumer data and feedback that now abounds in the ebook space - and extend a clean, wholesale, discount of 30% to retailers one and all, and watch what happens? What could they possibly fear?

Well, this is the nub: this is what happens to an industry in the grip of an existential fear - a fear of the new, the emerging, the unknown, commonly called the future.

The simple and finally inescapable fact is that only by embracing the rupture as it slouches towards Bethlehem waiting to born will the publishing industry as we currently know it survive.



Anonymous said...

The reason publishers can't "price ebooks fairly and professionally" is because Amazon is using predatory pricing to grab market share and obtain market dominance. Agency pricing (which has not been challenged with the ACCC in Australia) enabled competition in the eBook market. If you've got a better plan to foster retail competition in the eBook market I'm all ears but wholesale pricing is not it.

Peter Donoughue said...

Your assertions about Amazon are merely assertions. In fact the DOJ examined them in depth and found them unsustainable. They concluded that Amazon't ebook business as a whole was 'consistently profitable' and found 'persuasive evidence lacking' that Amazon intended to revert to higher pricing once it wiped out its competitors. It called these charges 'speculative' (p.38 of Judge Cote's Opinion & Order 6 Sept 2012).

Re the ACCC, I can only conclude that they've got more pressing concerns than the rather small ebook business in Australia, and that there've been no complaints from consumer groups.

If publishers priced to market and extended a maximum 30% discount to resellers, including Amazon, then the wholesale model would certainly be the way to restore vigorous competition.