It’s been a hairy few days, starting with Amazon firing a broadside at Macmillan (I like Charlie Stross’ summary the best) then, within 72 hours, backing down. The ensuing conversation (mostly on Twitter) has been very interesting.
Early on I remarked “The 21st-century marketplace is being reinvented in real time right now” which I think is obviously true. A lot of the crowd was expressing fury that anyone would charge $14.99 for a bag of bits and yes, that does seem a little steep. Later on I followed up with “The actual price isn't important. What matters is how it's set. $14.99 seems high, but pricing being an Amazon fiat is WRONG” and that got surprising push-back.
So here’s what I think. In a sanely-functioning market for books, the following should all be true:
Any publisher should be able to charge whatever they want for any individual work. For example, at some point J.K. Rowling is going to write another book, and there’ll be a certain number of people who are prepared to pay silly amounts of money to read it on Day 1. So why shouldn’t the publisher and J.K. launch it at an insanely high price, which then drifts down? Maybe toss in a few bonus features for early buyers?
And then at some later point, let’s suppose a few years go by and J.K. does something newsworthy like marry Arnold Schwarzenegger or die; why not put on a quick $2.50-off-the-whole-Rowling-list sale to capitalize on the news while it’s fresh?
The retailer (for example, Amazon or Apple) should be able to sell the work for whatever price they please, including at a loss. Smart retailers use counter-intuitive pricing all the time to maximize their bottom line across their product mix.
Publishers and retailers should be able to explore a bunch of different pricing mechanisms, including the kind of agency structure Macmillan wants, a variety of volume discounts, promotional gimmicks, and exclusivity.
Hypothetical example: Suppose, next year, you want to read Lady Gaga’s unexpectedly-bestselling Practical Semiotics, you gotta buy a B&N Nook; it might make sense for B&N to pay Lady G a cool ten million or more for that kind of deal.
Competition over data formats should be discouraged. EPUB is plenty good enough for an overwhelmingly high proportion of the books that anyone wants to buy, and if there’s a piece of work for which EPUB falls short, it’d probably be better on paper, anyhow.
Some may not know that I spent quite a few years toiling in the publishing-technology mines, and I’m pretty sure that I’m right about this. The way I see it, anyone who is peddling a proprietary book format is under suspicion of trying to establish monopoly lock-in.
This is important, because of the next important possibility:
The market should allow authors to bypass intermediaries, host their own EPUB files, and sell ’em straight to their readers. I’m not going to insult the intelligence of my readers with an explanation of why this is a good idea.
Anyhow, based on these principles, Amazon’s attempt to assert that they decree both the retail price and publisher’s cut was clearly out of bounds, and I’m glad that’s over with.
Macmillan’s attempt to assert that they will sell only for $14.99 and only allow 30% markup seems silly to me, but not damaging to the market, because other publishers can compete creatively. To be specific, 70% of $14.99 is $10.49 — if I were Macmillan, I’d wholesale at $10.49, let the retailers charge what they please, offer them volume discounts, and see if anyone were prepared to offer big bucks for an exclusive or some other promotional win.
And if $14.99 really is too much for a well-reviewed brand-new work by a hot author, well, the marketplace will expose that quickly and brutally. But I think we ought to be able to try out lots of silly ideas to find which ones work.
Contributions
Comment feed for ongoing:
From: Leonardo Brondani Schenkel (Jan 31 2010, at 23:54)
I agree with all your points, but I'm a little bit confused about this one: “The retailer (for example, Amazon or Apple) should be able to sell the work for whatever price they please, including at a loss.” Isn't selling at a loss dumping, and isn't it against the law in most countries since it is anti-competitive? (I know it happens all the time, but still.) If you could elaborate a bit more on that I would love to read it.
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From: Christopher Mahan (Feb 01 2010, at 00:15)
I argued something similar I recall about 10 years ago, in the year 2000, about movies and the general bad quality thereof:
Since movie theaters charge the same $7 (at the time) for a great flick with Deniro and Kidman as for a dooser with bad, not-funny actors, the way movies are rated is with artificial and game-able critics rankings and by counting gross profits.
Now, you can tell good movies because they cost $19.99 at target/Walmart for DVD, are aren't in the five dollar bin. Note that this is a generalization, because I have found "The Good, the Bad and the Ugly" in the $5 bin at Wallmart once, and Zulu (with Michael Caine) for $3.99 at Borders sometimes last fall, and they are both spectacular films.
There's a reason why books in the bookstore have prices from near-zero to hundreds: because of what people are willing to pay for the content.
It could be that when books where first made available through mass printing in mid-millenia Europe, they were all priced at or near the same price. Can someone answer that?
I suggest that this one-price-fits-all sales strategy is due to the public's unfamiliarity with a particular format as well as inability to accurately set a price-to-value ratio to the purchase.
I think the same thing happened with iTunes: people were not able to value a music download through existing means, and that created uncertainly. Jobs made it simple: all songs are $0.99. This removed the "what is this really worth" question, and people started buying.
Likewise with the electronic documents: not having to worry about the price but just having to worry about what content to get removes a decision variable, and the public feels more comfortable buying.
Eventually, though, people will increasingly wonder why "Catch-22", "The Catcher in the Rye" and "Fahrenheit 451" are $9.99 (or $14.99), the same amount as "J2EE Web Services" or "Apache 1.3 For Dummies".
As an aside, "The Catcher in the Rye" can be purchased for $2.00 (used) at amazon.com. Add the 3.99 shipping, that is still only 5.99.
Amazon was perhaps banking on this period of "uncertainty" to last longer so they could lock-in profits with their proprietary reader, but it seems to me 2010 will see a lot of people wondering why they should pay $7 and change to get "The adventures of Sherlock Holmes" from Amazon (http://www.amazon.com/Adventures-Sherlock-Holmes-ebook/dp/B002BA4LWK/ref=tmm_kin_title_0?ie=UTF8&m=AG56TWVU5XWC2) when they can get the exact same text from Project Gutenberg (http://www.gutenberg.org/etext/1661) in the EPUB DRM-free e-reader format, which can be read (after conversion) by the Kindle, or natively by Google Android, iPhone (and I assume iPad--when it comes out) regular PCs, and Sony's E-readers.
It is entirely possible that the very-near ubiquitous availability of e-readers of great quality will usher a rediscovery of public-domain classics and great literary works; works such as The Last of the Mohicans, Huckleberry Finn, The Kama Sutra, and A Tale of Two Cities; the last barrier to their greater appreciation having finally fallen, namely the price of printing and distribution of cardboard and paper.
Pricing drama indeed.
(note to Tim: feel free to drop or minify the urls)
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From: Ivan Zuzak (Feb 01 2010, at 00:36)
Your first point on setting the price insanely high and then cutting it back reminds me of another post on Dynamic pricing of digital goods - http://informationarchitects.jp/dynamic-pricing-for-digital-goods/
If you already haven't, definitely give it a read.
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From: Anonymous of /prog/ (Feb 01 2010, at 04:26)
Leonardo: AFAIK, dumping is only an international thing. For example, a country selling massive amounts of a certain product or raw material at a loss in order to corner the market would be dumping, and if this were to look dangerous foreign countries would likely put up high tariffs to block it.
As a Canadian I remember a controversy a while ago where the US started tariffing lumber because Canada was supposedly giving too much subvention to its companies.
If Amazon decides to sell books at a loss, it may be an attempt to become a monopoly (in which case there are antitrust laws, cf. the Microsoft case), but it's not really dumping.
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From: Joining Dots (Feb 01 2010, at 05:49)
Here's an alternative approach to launch pricing. On day 1, offer at the lowest possible price without it being a loss, but for 24 hours only. After which it will never again be offered at that price (or at least not for 12 months). It is highly likely that many people will buy the book regardless of need or want knowing they'll pay double if not triple the price by waiting to read reviews. You'll get added sales by those who catch on that they can resell the book (paper version, at least) for more than they paid because it will still be less than the price of a new copy from day 2 - 365. I'd wager more profit can be made from a discounted price than an inflated price on day 1.
Have seen this trick work in virtual world economies selling digital goods, a bit more detail can be found here: http://www.joiningdots.net/blog/2009/09/marketing-lessons-from-second-life-to.html
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From: Robert Young (Feb 01 2010, at 06:28)
>> The market should allow authors to bypass intermediaries
There are a number of points, but time is short right now. So, one will have to do.
While laudable, only the copyright holder gets that right, and is almost always not the author.
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From: Seth Gordon (Feb 01 2010, at 08:01)
Aside from the international-trade issue mentioned upthread, dumping is (at least in US law as I understand it) forbidden when someone who already has a monopoly uses dumping to prevent competitors from getting a foothold. But if a company in a competitive market decides to sell some of its goods at a loss, they’re free to do so. (E.g., a grocery store might sell some items at a loss to get people in the door, in the hope that those customers will also buy products that the store makes a profit on.)
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From: Nico (Feb 01 2010, at 08:43)
Amen. Prices should be dictated by the market. That means that sellers (whether they be direct-to-reader sellers, publishers, or retailers) should be free to set whatever prices they like. One nice result of such an approach is that it allows prices to differ by book, which is very good because some books really are worth more than others (either because of their entertainment value, their educational value, the intrinsic value of the knowledge they impart, or any number of other reasons).
(I wonder if Amazon could have gotten into anti-trust trouble over their price setting scheme. It wouldn't have qualified as "price fixing" in the anti-trust sense because it wouldn't have been the result of collusion across vendors. But whatever. I'm glad it's all working out. If Amazon had won this round then the publishers could have gotten together to build their own e-reader and formats; messy, but if they ultimately won, better.)
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From: Paul Clapham (Feb 01 2010, at 08:44)
I've always wondered why the book manufacturers print the retail price on their (hard-copy) books. In no other industry that I know of does the manufacturer produce a product with the retail price printed right on the product.
It's even worse here in Canada where they print the price in both US$ and CAD$, and then when the exchange rate changes, consumers deduce they are being ripped off. I can't see why the manufacturers persist with this dysfunctional system.
As you can see, I'm not a fan of manufacturers setting retail prices. Let the retailers do that. Sure, let the manufacturers work with the retailers on promotional things (like new Harry Potter books or seasonal books or whatever), that's the same as what happens in other industries, but let the retailers set the retail prices. They're the ones who know how to do that.
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From: David Megginson (Feb 01 2010, at 08:46)
Tim: great post. The market is sometimes slow to react, but in the end, it's usually smarter than the people who try to regulate it (even when we don't what it tells us, e.g. "your mortgages are junk and your real estate is overvalued").
Leonardo: talking about "dumping" is code for "let's try to get votes by starting a protectionist trade war", just like talking about "security" is code for "let's try to get votes by scaring people and taking away their rights."
Seriously, if you had a fruit stand, and still had 20 unsold bunches of (very) ripe bananas at the end of the day, would you sell them for under cost to get back at least some of your investment, or would you just let them rot? Books and music often have an expiry date, too, even digital versions (since you're trying to recover the cost of writing/recording and editing/mixing).
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From: Sophie (Feb 01 2010, at 08:48)
This wouldn’t apply in France, where publishers set a book’s price. Then retailers can sell the book at any price, but if they sell it cheaper, the rebate cannot exceed 5%.
This to protect the industry and encourage reading (by saying that books are not merchandise, and are more noble than food or clothes I suppose). It has certainly allowed small bookshops to survive the fight against big retailers, and has apparently also protected small publishers.
There’s a recommandation to extend this law to digital books.
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From: Andrew (Feb 01 2010, at 08:55)
"A bag of bits" - really?. Have you ever tried to write a book for profit? It's harder than you think, as you might be finding out soon.
Why do so many supposedly smart people willfully ignore the difference between content creation and content distribution? Nobody questions the airlines when they set different prices for the exact same seat, yet somehow we think it's OK to expect book and music publishers to do that?
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From: Leonardo Brondani Schenkel (Feb 02 2010, at 00:38)
Well, my reservation against it is probably I'm from another background. I'm from Brazil and there it is against the law to sell at a loss. The reasoning behind it is to allow competition because otherwise the richest player can force the others out of the market by taking losses the other ones cannot, and then establish itself as a monopoly.
Actually I'm lying a bit and the law is not *that* strict; you can certainly sell bananas (to stick to the previous example) that were going to go bad, or even give them away, because it has to be proven that the product is being sold for less than its cost by a company with more resources just to hurt its competitors. It's not easy to enforce this in practice, that's for sure, and I don't remember any recent case, but it's still illegal nonetheless.
In a second thought, I got confused in my previous post and I meant antitrust, not antidumping. I thought this kind of protection was more or less present in all capitalist countries but I'm probably mistaken. That's why I was surprised about Tim's point, since I think this is bad in the long run since a company like Amazon can sell for a loss for the time it is necessary in order to destroy all the competition and then it is free to charge how much it wants. In order for prices to keep low we have to be sure there is a competition, at least that's my understanding but other people may think otherwise.
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From: JulesLt (Feb 02 2010, at 01:51)
Agreed on all points - let the market decide on the price, not Amazon - there are few authors I'd pay $14.99 for, but let the possibility exist - there are small niches where it impossible to make a return through volume sales.
Having read Stross's piece though, I can see why Amazon are concerned. To an author, a publisher may add some value - at the very least, investment capital, editing and marketing skills.
That value still exists in an open, 'e'-world - those skills are still required, regardless of whether it's the author doing it all, or a publisher.
The other side of the equation is the distribution and retail space. Amazon's model worked phenomenally well for physical goods - because they cut out most of the costs, and passed the savings onto the customer, and making small margins on massive volume sales.
The question is what they add in a digital-only space. There are some definite things, like reputation - they are the first site people turn to for books & recommendations - and payment services.
But those are things that are a lot easier to tackle than trying to compete with their physical infrastructure. To a degree, their physical delivery side becomes the 'drag' that bricks-and-mortar was to traditional retailers.
And Google, Apple and ebay all have them already. And if I ran Facebook or Twitter, I'd be looking at how I could become a sales channel for producers, rather than just a marketing channel.
Of course, the big problem in this picture right now is DRM. The question is whether the executives of the companies behind the publishers will realise that, as with iTunes, DRM hands power to the firm with the DRM scheme.
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From: Robert Young (Feb 02 2010, at 07:54)
@David (who said):
Tim: great post. The market is sometimes slow to react, but in the end, it's usually smarter than the people who try to regulate it (even when we don't what it tells us, e.g. "your mortgages are junk and your real estate is overvalued").
>> It was human Banksters who made the decisions which crashed the financial system, not some abstract Mr. Market. Said market was hardly the Free Market with Invisible Hand of Adam Smith. In fact, the players were closing monitoring each other, if not outright colluding. The notion that regulation (rules explicitly made by humans) is ipso facto inferior to Mr. Market is nothing more than zealotry. There is no Mr. Market, only actors who more often than not act in concert.
Leonardo: talking about "dumping" is code for "let's try to get votes by starting a protectionist trade war", just like talking about "security" is code for "let's try to get votes by scaring people and taking away their rights."
>> Dumping, as the Japanese said in the 1960's is the result of war; economics is war, as one famous Japanese industrialist/politician said at the time. Google should find who it was; I'm not making it up. Dumping is a way for industrialists in autocratic economies to exploit labor, by sending production out of the domestic economy, where incomes can't support the true level of production due to income inequality. China is the current example.
Seriously, if you had a fruit stand, and still had 20 unsold bunches of (very) ripe bananas at the end of the day, would you sell them for under cost to get back at least some of your investment, or would you just let them rot? Books and music often have an expiry date, too, even digital versions (since you're trying to recover the cost of writing/recording and editing/mixing).
>> Again, the actual owner of the cited items, not the bananas, is not the producer. It is the copyright holder, who 99.44% of the time is not the producer. Publishing, generally, is about the furthest from any kind of Free Market, where producers and consumers meet to exchange. Applying Adam Smith notions will fail.
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From: carlos (Feb 02 2010, at 13:36)
"J.K. does something newsworthy like [...] die; why not put on a quick $2.50-off-the-whole-Rowling-list sale to capitalize on the news while it’s fresh?"
The opposite is more likely. In the weeks following Oliver Postgate's death in 2008 the price of a Bagpuss DVD increased from about £3 to about £10 (and now it's back to £3):
http://www.amazon.co.uk/Bagpuss-Complete-DVD-Emily-Firmin/dp/B00004YVDL
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From: David (Feb 02 2010, at 13:41)
I've said much the same myself. A few years ago when I learned how WalMart conducted business with the manufacturers it buys from, I vowed to never shop there again. The idea that a retailer has the temerity to tell a producer what it will pay for its products- take it or leave it - is upside down.
The market needs to shake this out itself. I don't know what the reasonable price for an electronic Stephen King book is. I do know, however, that if the publisher is using modern workflows, there's a negligible cost to producing the eBook. (This isn't true of the back catalog but that's another issue altogether.) The price of production, storage and transportation is next to nothing once the dead tree version is produced.
However, one can easily argue that an eBook, as it stands now, has less value than a physical book. I cannot resell it, I cannot lend it to a friend, and I cannot even be certain it will remain readable in the future. (All the books I bought for my Palm - all gone.) So the manufacturer better offer the eBook buyer a substantial discount off the dead tree price to offset these value subtracted issues.
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From: Kaleberg (Feb 04 2010, at 17:54)
It's fun to watch these market battles knowing that the wins and losses today will have long range effects. Amazon and B&N got big by aggressive pricing. Macmillan, like most producers, wants to control pricing. They'll make more money that way. That's why France allows its book producers to control pricing.
It's all being restructured. Movie prices, for example, are set by the movie producers, but DVD prices are set by DVD retailers. It looks like a similar split is in the works for books. Paper books will have prices set by the retailers, but electronic books will have prices set by the producers. Electronic books will cost more than paper books into the mid-range future, especially when you consider that paper books can be resold. That will slow their adoption.
So, what do I read on my e-reader, an old Palm TX? I read the public domain. If someone wanted to sell me something more commercial or up to date, I'd buy it, but only if it costs less than a paper book. After all, my TX reader has a tiny screen and mediocre font.
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