Interviews with Digital Media Thought Leaders
Selling e-Books as Agent
Podcast Audio | Posted by Phil Leigh on February 17, 2010
Phil Leigh
Amazon’s grudging agreement to act as agent when selling Macmillan e-books next month has important implications.
An agent is a business partner. However, Macmillan’s partnership notion is not fifty-fifty. The publisher concludes that they contribute more than twice the value of Amazon by taking 70% of the sales price for themselves and leaving only 30% for the online merchant.
There could hardly be a better example of irony considering that the 167-year-old publisher never found enough time to develop an e-book business on its own. Instead, 14-year-old Amazon.com invented the Kindle. To date Amazon has done more than any single business to launch the entire e-book industry, yet it gets the short end of the stick.
An agency business model has at least two important consequences. First, it restricts price competition. Second, it characteristically results in a sales force composed of numerous small factors. This concentrates power in the company providing the underlying product since a single agent is powerless to successfully challenge parent company policies.
Consider the auto insurance industry. Consumers don’t normally get a better deal from one State Farm agent to another. Agents of a given carrier are not permitted to compete on price. They can only compete on nebulous points like “service” and “relationships”. That’s why they normally get much of their business from neighbors and also why there’s likely a State Farm office in your neighborhood.
Regrettably, consumers must pay elevated rates in order to support all those offices. Moreover, when agents are as numerous as gas stations, the chances that any single one can offer uniquely valued products are about as slim as the chances that a neighborhood gas station can negotiate with OPEC. That’s about slim as chances can get.
Having compelled Amazon to meet its terms on e-books one ponders whether the publishing industry might also extend the agency model to hard-cover and paperback books as well. Having learned they can set e-book retail prices publishers may not go so far as to forfeit their souls in order to also set physical book prices, but they’ll certainly give it long and serious consideration. As a consequence Amazon’s entire book business could be marginalized.
Such is a sad state of affairs, especially when applied to Digital Media. Despite their denials, publishers save considerable money on e-books and Internet distribution. Consider physical books. When sold by online merchants, there’s no need to print, ship and distribute such books until the buyer rings the cash register. As a result, online merchants require far less inventory and seldom return many copies to publishers for refund whereas terrestrial stores return as much as half of their shipments as unsold merchandise for credit on the next order.
As Digital Media, e-books are even more economical because there is no physical production, distribution, and inventorying. Furthermore, return allowances are vanishingly small and have almost no associated costs.
Instead of seeking to control retail prices, publishers could get incremental revenue by marketing new titles that would otherwise never see the light of day without the lower break-even volumes enabled by e-books. For example, the script for the regularly popular Christmas movie, “It’s a Wonderful Life” was based upon a short story that publishers turned down. Ultimately the author distributed it himself as an enclosure to his Christmas cards. However, e-book economics might have encouraged a reputable publisher to give it a try.
In an almost contradictory irony the single most innovative Digital Media company is enabling book publishers to turn back the clock. For now Apple is satisfied acting as agent for e-books because availability of the content promotes sales of the recently introduced iPad. When they hit the market next month the units will sell for prices ranging from $500 to $830 and we estimate gross profit margins at 45%. In short, a single iPad sale compensates for a lot of missed revenue on unfairly thin e-book margins.
Nonetheless, as Oscar Wilde put it, “Life is never fair, and perhaps for most of us it is a good thing that it is not.”
Apple will not always be satisfied to let publishers set prices. First, history records repeated contract disagreements between Apple and the record labels. Second, once they get iPad demand to “cross the chasm” into mass market acceptance, they may seek to change publisher contracts. For example, unconfirmed reports suggest that Apple is currently asking the TV show producers to lower consumer prices at iTunes. Third, although Apple will act as agent in the iBookstore, it will keep all the customer information. When publishers don’t know who is buying they’re denied a one-on-one relationship with the customer. Apple keeps the data to use itself for powerfully effective behaviorally targeted ads promoting related merchandise.
Finally, Amazon and Apple are not only at war but simultaneously invading each others territory. Future Kindles will look more like the iPad and Apple will take-on characteristics of an online merchant. Perhaps, one is marching South for Vicksburg while the other marches North to Gettysburg. Whatever the stars in their courses hold for the future, they’ll be meeting a foe unlike those previously vanquished.
Categories: Podcast Audio
Tags: Amazon.com, Apple, Books, ebooks, Future-of-Books, Macmillan Publishing, Publishing Industry
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First, I am not speaking on behalf of my company, Macmillan. This is a personal observation, having been in the book business for nearly 40 years.
The threat represented by Amazon’s pricing of ebooks is a long term assault on the economics that allows publishers to invest in books from new and relatively unknown authors. Given the “one off” risk of the business, where there are essentially no economies of scale, the “hits” in hardcover underwrite many of the less successful books that inevitably get published. Further, the agency model is intrinsically neutral; there are many examples in commerce where the agency model works well–car dealerships, for example. Last, Amazon’s profit on the Kindle is driving its ebook pricing strategy. They have entered the hardware business, like Apple, and even more importantly, books in general, represent a modest part of their overall retail business. I do agree, however, that original ebooks have the potential to expose new authors in various formats to the public in an economic way and publishers may be missing an opportuinity by not having a “farm team” of their own.
First, I suspect that auto dealers are not agents because they actually purchase the cars and resell them instead of merely collecting a commission.
Second, even if auto dealers were agents, I suspect that most consumers don’t like them. Buying cars is stressful as the “agents” seek to expand their thin allowable profits by pushing nearly useless products and overpriced services. Once owned, automobile repair work and replacement parts are overpriced.
Third, Macmillan had nearly 170 years to launch an e-book business. Nonetheless, it failed to do so until an outside force created a market that Macmillan could not ignore. This is the most condemning point. Macmillan demonstrated no innovation. If the publisher really wanted to serve authors and consumers while simultaneously creating incremental revenues it would have adopted the lower break-even volumes of ebook economics to launch new authors.
For example, when I read book reviews posted at Amazon.com by ordinary people or comments to articles in the online New York Times, I realize that there are masses of eloquent writers. Many are as skilled, or more skilled, than the reviewers, writers, and authors admitted to the fraternities and sororities of the publishing industry.
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