The Publishing Industry at a Crossroads: The Agency Model is Dead, What Happens Next?

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With the US Department of Justice and the European Commission decisions regarding the so-called "agency model", the case is in fact Apple vs. Amazon, "a kind of capitalist Super Bowl" for the publishing industry, as pointed out by Roger Tagholm in a recent article in Publishing Perspectives.  What will happen next is anyone's guess, though several UK publishers are reportedly unhappy, with one going so far as saying that “We are now in a very dangerous situation, thanks to the carelessness of the major publishers.”

Consumers hate price collusion (which is what the agency model looked like) and politicians have obliged. Readers are convinced that ebooks should be cheap, after all production and distribution costs are near zero. The high prices charged by publishers for ebooks were always viewed with suspicion, if not with contempt. And the low prices of indies - self-published books - comforted readers in the opinion that traditional publishers were out to scalp them. Hence the downward spiral of prices on Amazon and other platforms.

In principle, with the agency model gone, prices for traditionally published ebooks should now drop across the whole range, leaving less space for self-published indies to fight with their weapon of choice: low prices and going temporarily free.

How far can prices drop without hurting the business of traditional publishers? That is what panics them: no one knows how far this price game can go without turning the whole house into a shambles. 

On the face of it, indies look like they have the upper hand. As one indie author commented in the Publishing Perspective article, “with a digital product, the marginal cost of producing one more copy is close to zero which means they can be priced extremely aggressively.” 

I take issue with that. It sounds like good economics (and I should know, I’m an economist) but in fact it isn’t.

The question is far more complex. One needs to consider the whole production and distribution chain. It is true that with the digital revolution, Amazon (and others) are able to take care of distribution at very low costs, so low that they are almost invisible (as long as you don’t ask them to distribute a super complex e-book with lots of illustrations etc – then you’ll find an extra charge eating in your royalties). That is the one, single big advantage resulting from the digital revolution. No doubt about it. 

However the rest is largely unchanged, let me explain.

For an indie, production costs are minimal and could be even close to zero only under some very special (and rare) circumstances: 
(1) you need to be well-off or living on your pension and writing for the fun of it, not needing to price in the cost of your own efforts or the maintenance/cost of running your computer; 
(2) you’re such a remarkably talented indie that you don’t need to spend any money on any editing or proof-reading or on marketing to help book discovery, which is patently absurd;
(3) you’ve sold so many copies right off the bat that you’ve paid back your initial costs of production/distribution/marketing and now you can engage in vicious price cutting to your heart’s content and without feeling hurt. 

Is this a likely situation? For some indie best sellers, may be. For most, this is not the case. And for a newbie who needs to earn a living, the situation does not present itself in this way at all, especially considering the extra marketing efforts required of him/her to enable book discovery. Believe me, with no marketing, your e-book, no matter how good, is going to be dead, gathering internet dust on its virtual shelf.

Publishers have huge upfront costs that they can’t avoid if they want to maintain their presence on the market and their reputation as quality book gatekeepers. 

Now, certainly they could economize and cut back on some of these costs. Perhaps they could negotiate better terms with brick and mortar book stores (but of course these are fast disappearing - even big Barnes and Noble is set to soon close down some 200 stores in the US). They could try their hand at playing the online game and try to turn the digital revolution to their advantage the way Amazon has done. It's a little late in the game, but still...If they set their mind to it, there’s a lot to learn from the way Amazon runs its business. 

For example, Bookish has (finally!) been set up by Simon and Shuster, Hachette and Penguin to try and make some of the digital features work for them, in particular to help in book discovery. A website that could solve book discovery would truly help in removing the one stumbling block in book marketing. Unfortunately for Bookish, the book data base is far too small (250,000 volumes to date) to make the website of real use in book discovery as I found out when I tried it and looked for a book that I might want to read – I typed in the search box some classics that I like as a guide for them to decide what titles to offer me and they didn't come up! Yet, I had picked some really standard books like Tolstoy's War and Peace...All they have are their own contemporary titles. Fair enough, but not good enough. Often one doesn't remember a contemporary title: I imagine that most people are like me, they can remember their classics more easily. And even if that's not the case, surely the classics should be used in any search system supposed to uncover the kind of book you like to read?

So, for publishers, the threat of having to keep ebook prices too low for comfort looms large, given the sharp competition from indies who are free from the cost strictures publishers labor under. Meanwhile, Amazon doesn’t care…or does it?Amazon has at its (virtual) fingertips an astounding amount of data regarding consumer preferences, and I'm betting that they have only begun exploiting that data and that much more is yet to come.

And that's yet another reason that explains the growing discomfort of traditional publishers...

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