Are E-Books Fairly Priced? — Part 1

Are E-Books Fairly Priced? — Part 1

Struggles over the sale and distribution of digital books are wreaking havoc on the publishing industry, and amid all the confusion, one question continually surfaces: Are e-books fairly priced?

“Are E-Books Fairly Priced?” is a two-part article looking at battles over e-book pricing within the publishing industry. Part 1 examines how marketplaces initially set prices of e-books, and how publishers reasserted their power through an agreement with Apple.

The current price of most digital books ranges between $11 and $15, but discount book retailers offer print copies at similar prices, sparking intense debate among publishers, authors, retailers, and consumers. The price parity creates questions in consumers’ minds: why is a digital copy as much as a paperback, or even hardcover, copy of a book?

Additionally, retailers like Amazon are increasingly at odds with publishers as the e-publishing industry heats up, and pricing has emerged as one of the key fronts of control. But who’s really winning in the battle over e-books? And why is an e-book $15, anyway?

How It Got This Way

E-book prices were initially set by retailers. Amazon pioneered e-book sales with its first Kindle e-readers in 2007, setting the price for most titles at $10 per book and taking a profit loss to sell more Kindles.

Amazon’s low price, when compared to hardcover and paperback prices ranging between $15 and $30, frightened publishers, and many publicly commented that Amazon was devaluing literature.

“If it’s allowed to take hold in the consumer’s mind that a book is worth ten bucks,” said David Young, chairman and CEO of Hachette Book Group, to The New Yorker in 2009, “to my mind it’s game over for this business.”

The print publishing industry, deeply entrenched in traditional methods of distribution, showed strong reluctance to change. But from 2002 through 2008, annual sales for printed books grew just 1.6 per cent, and profit margins were shrinking on traditional book sales.

Meanwhile, e-book sales were soaring, increasing by 170 percent in 2009 alone thanks in large part to the Kindle, leaving publishers searching for a way to make digital books profitable.

Sensing a Shift, Publishers Strike Back

Frustrated publishers saw a chance to take back control of pricing when Apple, gearing up for the first iPad tablet release, approached them later that year to discuss content agreements for the new device.

To compete with Amazon, Apple offered publishers a deal, dubbed the “agency pricing model.” The new model included a higher $15 price for consumers in the iBooks store, and a 30 percent cut paid to Apple on all e-books. Publishers would actually make less money per title, but the overall value of digital books would remain relatively close to print books, and the move took pricing power away from Amazon.

Publishers jumped at the chance to regain control of digital sales with the new pricing system, and with the iPad set for launch, major publishers like Macmillan and Penguin threatened to pull their digital titles from Amazon if the retailer didn’t switch to the new model.

Amazon, unhappy about the new proposal, said on its website it felt forced “to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books.”

Since then, $15 has become the new industry benchmark, but publishers still complain that’s barely enough to cover digital distribution costs, authors report making less money, and consumers feel they’re paying more.

Pricing is especially confusing to readers, since they assume the cost of selling a digital download is lower than a print version, yet book publishers often price the digital versions only a few dollars below the hard-cover price.

But e-reader sales are soaring, and while consumers keep complaining about the price of e-books, they continue making purchases. Does that give publishers and retailers the right to keep raising prices?

It’s true some costs like paper, printing, binding and distribution are lower on a digital title, but their allocated overhead only amounts to about $4 per book. Publishers must still pay author royalties — typically around 15 percent of the sale price, marketing costs, and the salaries of their editors and a sales staff, marking only a slight difference in expenditure.

Still, Apple and five U.S. publishers now face federal investigations and a class action lawsuit over alleged price-fixing as a result of the agency model forced upon Amazon, in part due to statements Apple co-founder and CEO Steve Jobs made to his biographer, Walter Isaacson.

“We told the publishers ‘We’ll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.’ But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books,’” Jobs said.

The agency pricing model changed the digital publishing game for good, perhaps to consumers’ detriment. Amazon wasn’t ready to wave the white flag yet, and set its sights on regaining some control over the e-book marketplace.

“Are E-Books Fairly Priced?” — Part 2 looks at what steps retailers like Amazon are taking to reassert control over pricing — and how they plan to grow their power in the digital publishing landscape in the future.

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