Grasping At Straws: Large Book Publishers Likely Collude to Jack Up ebook Prices

So, a lawsuit has been filed against Apple and five major book publishers over their alleged collusion to force a shift to an agency pricing model that has caused the cost of new ebooks to jump, sometimes as much as 50%.  I find myself in the unusual position of both agreeing with the lawsuit and agreeing with the publishers. Here’s why:

The gist of the problem stems from Amazon’s ebook pricing structure, which the online retailer set the price point for new, best selling ebooks at $9.99.  The major publishers balked at this, claiming it was unprofitable to sell ebooks at that price and that it undermined sales of hardcover books. 

So a few of them got into bed with Apple and the ibookstore and effectively forced Amazon to change to the agency pricing model or lose access to their catalogs, what some people estimate as being 85% of the most popular, best selling authors.  That’s nothing to sneeze at if you’re a book seller.

As a consequence, ebook pricing for this material has jumped to $15 or so, a 50% bump.  In fact, the publishers have been pretty upfront in their belief that ebook pricing has to be determined in a matter in which it correlates with physical printed editions so as not to rob Peter to pay Paul, as it were.

From the publishers point of view, I get it.  It’s their product, they should be able to sell it for whatever they like.  They have long-standing legacy businesses based on physical print products through which they’ve made oodles of money over the years.  Willfully undermining that business probably isn’t the best idea.  And if Amazon won’t play ball on pricing, then they have every right to pull their material and go with a platform that will.  Whether that’s wise or not, I’ll get to in a bit, but they are in business to make money and how they go about doing that is their own business.

I also agree with the premise of the lawsuit, however. Undoubtedly, collusion amongst the major players took place in forcing this shift to higher pricing.  Apple willingly helped out because they are trying to eat into Amazon’s Kindle business.  Five companies controlling 85% of the most popular material colluding together to force a major price shift upward across the industry really deserves some sort of legal smackdown.  Just one of these companies going this route wouldn’t compel the systemic change, nor would two or even three.  It had to be a critical mass of best selling material to generate enough leverage to pull this off, and that means five publishing giants, ostensibly in competition with one another, yet all agreeing to an effort to drive prices up industry-wide.  If that’s not collusion, then I don’t know what is.

Ultimately, though, this is a pointless discussion.  Much like the music industry before it, publishing’s content pricing structure is built around two things:  one is the actual physical costs of production- printing, shipping, etc- and two is the costs of the publishers themselves, the middlemen, as it were, who manage the  production, distribution, marketing, et al.  The real long term problem for the industry is that both of those principle costs are shortly going to be significantly smaller, if not non existant.

The key issue I see is tying the ebook to the print product.  The music industry tried to do it unsuccessfully with digital music and cd’s.  The news business has tried umpteen variations of tying the print product to the digital, some spectacularly unsuccessful.  The reality is that physical and digital products can’t be truly conjoined because the root cost structure is so vastly divergent.

Are paperback books profitable?  Of course they are or else they wouldn’t make them.  So how is it that an ebook, with almost zero costs of replication and distribution, according to the publishers, isn’t, even at their hated $10 price point, which is still in excess of the average cost of a paperback?  It strains credibility to believe so. 

The problem here isn’t that the ebooks aren’t profitable, I have to believe they would be even at far less than $10, its that they serve to undermine the profitability of the physical print products that make up their long standing business.  The legacy businesses have built their pricing structures around large, somewhat inefficient processes based on a soon-to-obsolete model.  No matter the price collusion today, the changes brought to the industry by digital advancements can’t be stopped.  Locking in pricing on the industry’s future to prop up its expensive and inefficient past is a path doomed to failure.

The barriers to entry in the ebook market are negligible, especially when compared to the barriers to entry to the print book market.  Nothing in the world can stop competitors without the massive infrastructure costs from selling ebooks at half, a third or less of the agency model and still find profitability.  Even currently controlling that previously mentioned 85% of popular material, this pricing structure will put them at a major, potentially catastrophic long-term competitive disadvantage.

So call this what it really is, a protectionist effort to prop up business models that worked well yesterday but have little, if any tomorrow.  Oh yeah, they also very likely had to illegally collude to even get this far.  Not a good sign for the future prospects of the giant legacy publishers.

Published in: on August 19, 2011 at 11:40 am  Leave a Comment  
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