Tuesday, March 30, 2010

Does Random House know something we don't?

by Michael

April 3 is right around the corner! For those of you who don’t pay attention to, well, any form of media, that’s the day that Apple’s iPad finally hits the stores. And, being the nerd that I am, I have to say I’m pretty excited. I love product launches, and Apple does them like no other. (I was very disappointed by the lack of excitement surrounding the launch of the Palm Pre when I went to purchase it on day one last year, but I digress.) I think our readers know how this relates to books, but in case you don’t, Apple is launching their iBookstore that day, as well. They’ll be offering books from all the major publishers, with one huge exception: Random House. When Steve Jobs announced the iPad back in January, he said that 5 of the 6 biggest publishers were onboard for the iBookstore. The absence of Random House was conspicuous, but they released a statement afterwards saying that they were working on an agreement with Apple. I’d assumed there’d be one in place by this point, but it looks like the iBookstore could very well launch without the largest trade publisher on board, as reported by the Financial Times. Honestly, I was really surprised. Until last week.

That’s when this article popped up on an iPhone fansite. It purported to show the working iBookstore, along with the prices. And the price for 27 of the 32 listed bestsellers that day? $9.99. The same price that publishers have been fighting against in the Kindle bookstore. I was thrown for a loop. The reasoning behind the to switch to the agency model was to take control of pricing and get rid of the expectation that ebooks cost $9.99. But here we were at that price again. Then, only two days later, a new screenshot showing most (but not all) of the bestsellers at $12.99. Color me confused. This pricing kerfuffle brought to mind this New York Times piece about publisher agreements with Apple. The piece suggests that Apple wanted the flexibility to drop prices for hot books that would be majorly discounted in print. As of today, it’s not at all clear what iBookstore pricing will be on April 3.

Thinking about the possibility of an ebook sold at $9.99 is troubling. In the agency model, retailers act as an “agent,” selling books at prices determined by publishers and collecting a percentage of each sale (30% in most cases). Authors are generally being offered a percentage of the net income from these sales—publishers are pushing for this to be 25%, so we’ll roll with that number for the purposes of this argument. In the agency model, with a book priced at $9.99, authors will earn $2.50 per book or less. Compared to the $3.75 they currently earn on a $25 hardcover (15% of list price), this is a dramatic reduction. Comparing this amount to what authors would earn under the current ebook market conditions is nearly as depressing. In the current sales scheme (the consignment model), a retailer is buying the book for about a 50% discount, then selling it at whatever price they like. Assuming the same $25 price list price for the ebook (which is pretty standard) and same 25% royalty for electronic books, the author receives a royalty of $3.13. (The question of why they would receive less than they do on the hardcover in this situation could be a blog post in itself.) If ebooks eventually make up 50% of the market (a number I believe is possible), that royalty arrangement will radically alter author compensation. That, obviously, concerns me. I’d really like to hear more directly and transparently from publishers on this issue. What effect will these arrangements with Apple and Amazon have on authors? It seems, from the Financial Times piece, that Random House may soon be having these conversations. But what about the other 5? Is it wrong of me to expect a little more openness? This makes me all the more impressed with John Sargent at Macmillan and his willingness to blog about their plans, admitting what they do and don’t know.

So, is there something in the Apple agreement that we don’t know about that Random House does? Or is it just, as Mike Shatzkin thinks, that Random House is trying to maximize their profits in the short term with the idea that they can jump on the bandwagon if the iBookstore takes off? We’re going to learn a lot more about all of this in the coming days.

On April 3, I’ll be picking up an iPad for myself (no willpower!), downloading the iBookstore, and most definitely tweeting about the experience. If I have important publishing observations, I’ll post them here, too. Looking forward to hearing what you all think about this.


  1. Thanks for this. Should be an interesting weekend, coming up.

  2. I'm curious to see what you think of the iPad so please post about your experience with it!

  3. Good info. I'm looking forward to your follow-up posts!

  4. I am planning on braving the Apple store on Friday as well but I am still somewhat on the fence about buying an iPad. Don't get me wrong--I want one! I'm just trying to weigh in where it falls under want vs. need. I definitely want to get my hands on one and play around with it. I love my iPhone and I relish the idea of a larger version for web browsing and eReading. But can I comfortably write my books on it, with the touch keyboard and/or attachment? The answer to that may be the deciding factor.

    I am looking forward to reading your tweets about it!

    --Jen, a fellow nerdy cat person :)

  5. To be honest, I'm really afraid that 'real' books are going to disappear one day. I don't know if I could live without them! It's just not the same reading electronically ... :(

  6. Very interesting insight! Thanks for the blog. No matter how you look at it, the iPad may be a huge game-changer in a lot of ways!

  7. I have a strong feeling that Random House is taking a long look at the math and history. Sure, it might seem like a great idea to love Apple in order to spite Amazon, but they both have exceptionally questionable histories when it comes to dealing with content providers.

    The digital sales platforms of both Apple (for audio books, movies, music, and television shows) and Amazon (for eBooks) are predicated on the concept of consumer lock-in. Apple did not remove DRM (and thus open their ecosystem up to competing devices) until they had established an overwhelming marketshare not just in the digital music, but in all music sales. For the other items that Apple sells – audio books (via Amazon's Audible) and digital video – their lack of being a clear cut market leader has kept those products wrapped in DRM schemes that are incompatible with players not produced by Apple. Apple doesn't release control over any market until there is no other viable alternative.

    This is why Amazon sells DRM-free MP3s at prices below iTunes, and does so with the recording industry's explicit approval. The Big Four record labels wanted so desperately to gain a bargaining position against Apple that they were willing to give Amazon a whole slew of concessions that they would never give Apple. The results, while decent, have only been enough to arrange for some minor concessions – essentially variable pricing.

    When the discussion turns to eBooks, the story is almost the same, albeit with the names reversed. This time, the publishers are turning to Apple to free them from the control Amazon has gained over the US eBook market. In this instance, publishers are getting some concessions – variable pricing being the big one – but they're dealing with a shrewd negotiator. eBooks sold on the iPad are wrapped in Apple's Fairplay DRM, meaning that users are still locked into the device. And Apple, which saw sales plummet on variable priced music, has language in the agreement which allows for Apple to compete on price with Amazon's whole sale scheme while maintaining their agency model profits. (http://www.nytimes.com/2010/02/18/technology/18apple.html?ref=books)

    Perhaps Bertlesman, which controls a large part of Sony BMG (one of the Big Four record labels) as well as completely owning Random House, learned from history instead of repeating it. Choose your cliché – spiting noses, robbing Peter, frying pans and fire – I prefer to think that everyone but Random House just swapped out the Devil the know, for the Devil they don't.

  8. Thanks for all the comments!

    Jen - I will definitely tweet to help another nerdy cat person. And if I had any gadget willpower, I'd wait, too. But I don't.

    AA - I'm not worried about books going anywhere. In fact, I think the era of digital publishing will be a renaissance for beautifully produced books.

    P. Bradley Robb - It's amusing how much this is like Amazon-Apple music fight. The only issue I take is regarding Apple's agency prices competing with Amazon's wholesale prices: when a publisher goes agency, it goes agency across the board. So the price will be the same everywhere on a per-book basis. However, with RH not in the iBookstore, their books on Kindle are going to look very appealing -- especially if there really is a Kindle app for the iPad.

    - Michael

  9. Hi Michael,

    Hopefully they go agency across the board. In the end, that seems to be the better solution. However, from what I heard, everyone except Macmillan is still using the wholesale system with Amazon.

    Putting the pieces together, I'm reminded of a "throwaway" statement that Steve Jobs said to Walt Mossberg after the iPad unveiling. He said "the prices will be the same." At the time, everyone seemed to take that as a price increase at Amazon, but after Motoko's article about Apple's ability to alter eBook prices, I'm wondering if Apple won't drop their prices to match Amazon's. (http://kara.allthingsd.com/20100128/boomtowns-apple-ipad-day-starring-walt-mossberg-plus-a-steve-jobs-cameo/)

    I think the first battle shouldn't have been prices, but interoperability. That's the only way to defeat lockin, by not making customers choose between platform and purchased content. When DRM is involved, the price of a book isn't merely the list, but also the cost of the old device, the new device, and all of the content purchased for the old device. With the Amazon Kindle App, that makes the iPad almost more valuable to Amazon than Apple when it comes to eBooks.

  10. Consumers drive prices, not publishers or retailers. I suspect prices will go down, or more consumers will buy used or borrow books. I think the $9.99 price point is still too high for electronic books. An electronic book should never cost more than a mass market paperback regardless of when the eBook is released. Of course, publishers can try asking for more.

    I cannot fanthom what publishers were thinking when they wanted to raise prices during a recession. Were they expecting demand to remain constant? There is still an on-going backlash on the amazon kindle forum due to prices going up.

    The agency model benefits the retailer, not the author or publisher since they have very little control over consumer demand. Sure, the publisher can raise the price and watch the demand plummet. The publisher can offset the plummet by throwing marketing dollars at the book, but how many books will ever receive decent marketing expenditure?

    And Apple is not the savior of publishing. Cost reduction will help save publishing; there is just too much overhead. And anyone can make an eBook. It's not rocket science, so authors' royalities should be at least 50% of eBook sales.

  11. Amazon's contract gives publishers a fixed amount per book and Amazon the right to set prices. If Amazon want to sell books at a loss *to them*, they can, but the publisher gets paid the same regardless.

    Apple's contract is that they'll pay publishers a percentage of the revenue ... and, the bit that publishers apart from Random House all seemed to not notice: they reserve the right to 'price competitively'.

    In other words, Apple will be matching Amazon's price. But not at a loss.

    The Amazon deal is better for publishers. Amazon also have a real interest in selling traditional books.

  12. I'm curious, both Anon 12:27 and PBR, where you've heard that publishers are sticking with wholesale at Amazon (aside from Random House). Every retailer aside from Amazon would be at a tremendous disadvantage, otherwise.

    - Michael

  13. I would add to the discussion that you (and pretty much the rest of the world) is thinking of an eBook like it is a hardcover, when they should be thinking of it like it is a paperback.

    If you wrap your head around the idea that eBooks are more 'disposable' (for lack of a better term) to consumers and more like standard paperbacks, not trades or hardcovers, the pricing structure makes a ton more sense.

    Plus, the market sets the price. The consumer expectation is already that an eBook should cost less than a physical book and in the end it is what people are willing to pay that will set the prices for eBooks. From a purely consumer standpoint, $9.99 seems pretty reasonable for a book with no physical copy.

    As for purchasing the iPad on day one -- history says that is a mistake. Apple had 2 revisions of the iPhone in the first two years. I am dying to get my hands on an iPad, but I'm going to end up waiting a year and buying the 'improved' first revisision. I don't have the patience to wait for the actual 'retail' version which will come out two years from now with all the bug fixes in place.

  14. -Michael

    I haven't had a publish confirm it, merely basing things off of industry reports. From various sources, Macmillan is the only publisher to "successfully" make the shift from wholesale to agency at Amazon. HarperCollins and Hatchette have talked about it, but I haven't seen any official statements either way. Penguin, Simon and Schuster, and of course Random House, have all been rather quiet on the subject.

    I'm as in the dark as you are about if or when these changes will take place - maybe we'll see a sudden shift in prices and revenue models this weekend. I think a flurry of news stories will likely crop up next week when the iBookstore goes live and we have actual prices to compare.

    Slight tangent, but it relates to your post's conclusion. How do you feel about the iBooks app not being installed by default on the iPad nor available for the iPhone/iPod Touch?

  15. With things being up in the air, I won't claim to know things I don't, but my understanding is that the big 5 are going agency as of tomorrow. They've made deals with Apple and Kobo, and it would be nuts to have one model one place and another somewhere else (and is probably illegal under some old anti-trust law). Here's the Kobo blog about it: http://blog.kobobooks.com/2010/03/29/countdown-to-agency-and-party-like-its-9-99/

    I think it's disappointing that the iBooks app isn't preinstalled on the iPad, and even more disappointing that it's not coming to the iPhone (and I can't quite figure out why these two things are true -- any ideas?). While I'm going to give the store a try, I'll probably wind up using another ebook app to buy and read books if that's the case. I may even stick with the Kindle format, as I can read that on my computer, phone, iPad, Kindle...anywhere, basically. I may hate the DRM and proprietary format, but at least I don't have to worry about the book being on only one device.

    - Michael

  16. -Michael

    That Kobo article is interesting, and it really raises some interesting points in the comment section. Kind of makes me excited about tomorrow. Because I really can't see Amazon not putting up at least a superficial fight - the loss of loss leaders means they'll be turning a profit, but the data I have on the $10 psychological barrier could be damning for all involved.

    Love it or hate it, this is the most exciting time to be in publishing. If only we could figure out how to turn excitement into rent payments.

    My only reasoning iBooks is that Apple forcing market segmentation. They did something similar with the iPhone and iPod Touch and the email app. Email was an app used to differentiate the iPhone from its phoneless brother. Apple seems to be doing the same thing with the iPad - "Want to read books? Gotta buy an iPad then." Like email, they'll likely roll the app down to the bottom of the ecosystem when the iPad 2.0 comes out next year.