February 1st, 2010

Ebooks: Wholesale/Retail vs. Commission

I'm guessing that by now, most of you have heard of Amazon's little dustup with Macmillan, one of the world's largest book publishers. As long as Kindle was the only significant online retailer for ebooks, Macmillan accepted Amazon's sales terms, which set a ceiling of $9.99 on most ebook prices, at Amazon's option. But the instant Apple popped up as a second significant ebook retailer, Macmillan cut a better deal with Apple, and demanded that Amazon match Apple's terms, which include a higher price ceiling. Amazon responded by refusing to sell Macmillan's titles.

Amazon caved yesterday, and agreed to reinstate Macmillan's books at Macmillan's higher prices. People posting in the comments sections of some news sites seem puzzled that a more competitive market would raise prices for consumers, but that's just the way truly free markets work. Until Apple showed up with their iPad, Amazon had a monopsony relationship with ebook publishers, rather like WalMart has (still) a monopsony relationship with a multitude of small-to-middling goods manufacturers and wholesalers. In a competitive retail market, neither monopoly (one seller, many buyers) nor monopsony (one buyer, many sellers) dominate. There are lots of buyers and lots of sellers, and we quickly find out what the "real" price of a product is, as manufacturers and retailers jockey for the greatest market share among consumers.

That's not, however, what I find interesting about the recent conflict. Look closer, and you'll see two fundamentally different approaches to selling a product to consumers: Amazon is selling on the conventional wholesale/retail model, and Apple is selling on an agency model. Amazon wants to buy ebooks from publishers at a wholesale price and make money on the margin between that wholesale price and a retail price that it controls. This allows it to create occasional "loss leaders" to generate traffic, as conventional goods retailers have done as long as anyone remembers. Apple, by contrast, wants to sell ebooks at prices set by their publishers, and take a percentage of every sale.

Publishers like the agency model since it gives them more control over pricing, and does not train the public to expect all ebook prices to be $10 or less. How much better the agency model is for publishers and authors is unclear, and depends in part on how fungible you think books are, which is a very weird business that I'm still thinking about. It may also depend on how many players can participate on the publisher side. A B&M bookstore can only contain and manage so many physical books, and publishers play lots of dicey scarcity games to get more shelf space than their competitors. ("Stock our whole frontlist and we'll give you an extra 2 points' margin...") An online ebook store's capacity is essentially unlimited, and any number of publishers can play. If there are a million publishers and 999,900 of them sell products at lower prices than you do, your control of pricing is less than it was in the era when it was tough to get your books into stores and a relatively few large publishers dominated the market.

Nor does it end there. If you look even closer, Apple's model starts to look familiar in another sense: It starts to look like a publisher paying authors a royalty. The royalty rate is insanely high by historical standards (70% or thereabouts) but there are no atoms to push and protect. Without atoms getting in the way, being a publisher becomes an entirely different challenge, and the difference between conventional publishing and self-publishing implodes to the process of contracting for services you need with people who have the skills you don't have. As experience in that process becomes more common, being Macmillan gradually becomes less and less important. I wonder whether Macmillan understands that.

Most of all we need to remember: The ebook business is still in its infancy. Everything remains in play. The readers can only get better. People are doing weird things that seem to work, like giving away your older ebooks to develop a market for your newer ebooks. Lots more ideas will be tried, new technologies will appear, and older technologies will change and improve. Maybe Amazon's crazy action against Macmillan had to happen, just to show everybody that such things won't work. (Sure, it was obvious...in hindsight.)

Me, I'm with Apple...for now. Why? Because Apple's business model smells more like a free market than Amazon's--and more like a game I can compete in. That could change, and much of that decision will hinge on the nature of Apple's ebook DRM. (We don't know all the details yet.) Kindle's DRM is mandatory--whether I as a publisher want it or not. In a sense, its purpose is not to protect the publishers or the authors from piracy so much as to protect Amazon from a freer market, in which consumers can move their books from device to device at will. Apple could adopt that same strategy, leaving us with two paranoid and incompatible ebook retailers and readers. Hey, that's nothing that another five or six major ebook retailers couldn't fix, and they'll happen. Give 'em time.