Did the Death of Agency Pricing for Ebooks Kill Nook?

Expert publishing blog opinions are solely those of the blogger and not necessarily endorsed by DBW.

Many pixels have been spilled of late on Barnes & Noble’s downward trajectory*. Needless to say, things aren’t going well right now for the largest bookstore chain in the U.S.

And I think the Department of Justice’s actions against Apple and the five largest U.S. publishers have something to do with it. There are a few factors at play: competition and profits.

Related: Barnes & Noble’s Disappointing Quarter

 

Competition

When many of the largest publishers were working with the ebook retailers under an agency pricing scheme, competition was somewhat leveled between the retailers. The latest best-sellers from large publishers would be the same price no matter where you went. Even if consumers didn’t know this (though I would wager many of them did), they weren’t being told the opposite.

Further, this pricing scheme made retail strategy a bit simpler for Amazon, Barnes & Noble and others. No need to build an apparatus to figure out what the optimal pricing would be for these titles or to do much in the way of monitoring the competition’s pricing.

When agency pricing went away, it forced B&N (and the others) to get in gear when it came to competing on price. And that means resources expended thinking about pricing and resources expended on monitoring and matching the competition. And even after all of that effort, you could still lose: Even with the best strategy and execution, there’s no assurance of beating the competition on price.

Amazon and Apple are no slouches here. Both companies have gotten aggressive on ebook pricing, forcing Barnes & Noble to consider doing so as well.

 

Profit

One of the things that retailers liked about agency pricing (even Amazon) was that it guaranteed them a profit on every ebook sold. If an agency book was $12.99, 30% of that would go to the retailer. With the current pricing schemes with retailers, they determine their own profit margin. If Penguin Random House sells Amazon a book at $12.99 and Amazon prices it at $14.99, it makes a $2.00 profit. However, if it prices the book at $9.99, it loses $3.00.

Some of the most popular titles are from large publishers who were on the agency pricing scheme. For instance, Fifty Shades of Grey was sold mostly as an agency-priced title at $9.99. For everyone one of those millions of sales of that book across retailers, the bookseller took home $3.00. Today, there is no guaranteed profit on book sales — it’s all about how the retailer prices each title.

Now, a lack of profit on each book doesn’t explain why both content and device sales are down at Nook, but it certainly helps explain why losses have accelerated at the division. In the last fiscal year, most of which involved most of the large publishers off of agency pricing, the company lost nearly $500 million — about $200 million more than the company lost in its previous fiscal year.

While the end of agency and Nook’s troubles could be coincidental, I think they’re linked. When Apple rocked the ebook market in 2010 with the launch of the iPad, it created a bit of market share for itself in the Amazon-dominated marketplace; but it also helped build Nook. With Agency pricing gone, Nook is again more vulnerable than it was back in those heady days in 2010.

 

 

* I hesitate to call it more than that because B&N is still a multi-billion dollar company with some incredible assets, etc. It’s not over yet. 

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6 thoughts on “Did the Death of Agency Pricing for Ebooks Kill Nook?

  1. Michael W. Perry

    B&N has a lot of problems, some of them self-inflicted. But the DOJ’s actions certainly haven’t helped them.

    Examine what the DOJ is doing and a consistent pattern emerges, Amazon is always the primary beneficiary. As the article notes, agency prices helps those in financial difficulties by guaranteeing a fixed profit. That’s B&N. Allowing popular ebooks to be sold well below costs benefits Amazon, who has thousands of other products that can be used to subsidize ebooks long enough to eliminate any effective competition.

    Similarly, attacking conversations held in restaurants as if that were a illegal conspiracy benefits Amazon at the expense of the major publishers. When in this dispute have we heard of what Amazon executives talked about over their lunches? When have we seen what their emails discussed? We haven’t and the DOJ has shown a marked hostility to such a revelation. That’s despite the fact that it is all to obvious that a single corporation is more likely to engage in plots to benefit itself than that the Big Six publishers, fierce competitors, would somehow find enough common ground for a criminal plot.

    It’s also revealing that, of all the tablet makers, the DOJ went after Apple, the only one in a strong enough financial position to give Amazon real competition in the ebook. The real key to the DOJ’s action, I suspect lies in two sets of numbers: 90/0 and 70/20. The former set is the ebook market shares of Amazon and Apple when the iPad was first released and Apple’s allegedly crimes were committed. The latter set is their current market shares. While still market dominating, what Amazon has lost has been what Apple has gained. That, one can suspect, is what has the DOJ’s lawyers all hot and bothered. Amazon is getting competition.

    Ponder for a moment the sheer insanity, from the perspective of keeping markets healthy and competitive, of a DOJ that does nothing about a company that owns 90% of a market while pursing in court a company that grows a 0% market share to a still modest 20%. Transport these lawyers back to the robber baron error and they wouldn’t be going after the barons. They’d be taking their smaller competitors to court.

    Note too a startling inconsistency in what the DOJ is doing. Agency pricing, they would have us believe, is a great evil in the ebook market, yet they’ve done nothing about the app market, where agency pricing is the norm. Why is that? Could it be that Amazon is not a significant competitor in the app market and shows little interest in becoming one. Amazon benefits in some ways from ending agency pricing for ebooks. It doesn’t benefit from ending it for apps.

    I’d love to see Apple’s executives get mad enough about all this to exploit a major advantage it has over Amazon. Amazon, in its urge to dominate, has created free ebook reader apps for virtually every platform, including Macs and PCs. Apple only has apps for iDevices and, soon but belatedly, the latest version of the Mac OS X.

    Apple could turn the DOJ’s claims on their head by heavily discounting ebooks, in part as a way to sell more iPads. The cost of an iPad would subsidize those book sales like it already subsidizes apps that Apple ships with iPads (and in the OS X world, with Macs).

    Amazon can’t do that. If Amazon beats Apple’s below cost price, it has no must-have product that readers have to buy to take advantage of that lower prices. Yes, readers might buy a Kindle Fire, but they don’t have to. They can buy an iPad and benefit from both Apple and Amazon’s below-cost pricing.

    Run some estimates of what that would mean and you’ll find that Apple, by slashing ebook prices, could drive Amazon into the ground. For each dollar Apple loses (subsidized by increased iPad sales), Amazon would lose perhaps $10, with little chance of subsidies from other products except perhaps from Kindle devices whose price is already cut to the bone. Amazon’s price cutting would actually encourage iPad sales.

    Unfortunately, such a move unlikely. I don’t get any sense that Apple executives want to win with ebooks like they want to win in the music and video markets. But if they did acquire a bit of backbone, it’d certain be a rough sort of justice. Amazon would be done in by the same ruthless price cutting that it intended to use to destroy its competitors.

    And if that happened, B&N might pick up a few droppings from the table. Hurting Amazon would probably, in the long run, make it easier for B&N to stay competitive. Right now it’s in danger of being seen as the company with the third most popular product and that’s a tough game to play.

    Reply
  2. Theresa M. Moore

    While I agree with most of what you said, you are forgetting one thing. The authors of the content. The publishers must also pay the authors a royalty on their work, and if they decide to capitulate to Amazon and sell the ebooks for the lowest price the authors will not get paid. If the authors don’t get paid, they will stop trying to offer content to the publishers and do it themselves. Amazon often deeply discounts the prices of the e-books without regard to how the content providers will cover the costs of production (including author payouts) because it does not care if it makes a profit on the sale in the short run. It is looking forward to the day that it can lean back on its penthouse balcony and watch the sun set while sipping a maitai without the interference of those pesky competitors, while the authors continue to enrich it further. Sorry, I got off that bus a long time ago, and I’m still doing fine.

    Reply
    1. J. R. Tomlin

      I hope you aren’t stupid enough to sign a contract for Net. Otherwise, it doesn’t matter what Amazon sells the books for, both publisher AND content provider gets paid. If you signed a bad contract, don’t blame Amazon for it.

      Reply
  3. William Ockham

    Wow, you are in serious denial. Let’s move beyond your conspiracy theory fantasies and look at the facts:

    1. Apple and five of the big six publishers engaged in an illegal price-fixing conspiracy. That’s not my opinion. That’s not the DoJ’s opinion. The federal judge in the case, whose job is to decide what the facts are, looked at the evidence and decided that. And let’s face it, it wasn’t even a close call. Apple sent the publishers a price sheet listing the \maximum\ retail prices for specific ebook titles and showing them how much the retail prices would go up. Lo and behold, in very short order, the specific titles were listed at those exact prices at all retailers. That is literally the textbook definition of an illegal price-fixing conspiracy. Under U.S. law, that’s called a \per se\ violation. That just means there is no excuse, ever, under any circumstances, for doing something that blatantly obvious and incredibly stupid.

    2. The DoJ went after Apple because Apple broke the law. There’s no need to look for some secret ulterior motive. Apple broke the law. It’s really that simple. No other tablet maker orchestrated the conspiracy. Apple did that.

    3. It’s not against the law to have a dominant share of a market. You keep frothing on and on about Amazon’s dominance in the ebook market, but you haven’t made a single credible point that they’ve done anything illegal. If pricing some goods below cost was illegal, every grocery store and big box retailer in the country would be out of business.

    4. The case wasn’t about agency pricing. The case was about the collusion, not the pricing mechanism. Apple and their publisher codefendants broke the law by colluding. And then had the unmitigated gall to go into federal court and lie to a federal judge about it.

    Inventing wild conspiracy theories about Amazon and the DoJ seems to be all the rage in some publishing circles, but there is a very simple explanation that is right in front of your face. There are laws in this country and occasionally the DoJ musters enough courage to enforce them. That’s all that happened here. A few big companies got together and broke the law in an effort to strike back at competitor who is disrupting their business model. In the process, they ripped off the consumers of their own products. You can call that \competition\, but the law says otherwise. In this case, it’s not the law that’s the ass.

    Reply
  4. Dick Hartzell

    To me the real intrigue behind the failure of B&N’s Nook hardware is B&N’s ultimately ill-advised venture into tablets. They beat Amazon to market with the first full-color tablet and believed, not without reason, that they could motivate both publishers and content suppliers to generate book-like apps, especially for children, that would carve out an unassailable market niche and attract more and more customers to the Nook platform.

    But as with the interactive CD-ROMs of the ’90s, book-like apps have been slow to find an audience, and hardcore readers seem inclined to stick with lower-priced E-Ink e-readers. Along the way Amazon realized that selling color tablets was the perfect way to deliver nonbook content like its movies and music and give its customers a mobile device for buying all of Amazon’s nonbook stuff. It didn’t take long for B&N to notice that its proprietary app store was short on content while Amazon cleverly invited Google Marketplace (now Google Play) app developers to submit their Android apps to *its* app store. In short, B&N was perpetually short on nonbook content for its Nook tablet(s) and forced to hustle to make third-party deals (e.g., with Netflix to stream movies). Meanwhile, despite B&N’s ridiculously high investments in hardware (and its favorable reviews from tech websites plus feverish TV advertising), the average consumer failed to buy into the idea that the bookseller was a tech company. (It didn’t help that its average consumer was female and thus not preoccupied with tech.)

    Meanwhile, the lousy economy has kept consumers who read — whether physical books or ebooks — inclined to buy online from Amazon, where prices tend to be lower and browsability higher. And since the pre-2008 economy shows no signs of returning, Amazon will remain the beneficiary of tight pocketbooks and B&N, both on the store side and the ecommerce side, will scramble for a shrinking customer base of readers who don’t shop primarily on price.

    In the end, being first to market with a color tablet did nothing for B&N but demand a crippling investment in hardware design, manufacturing, and marketing — one that only grew once Amazon decided, as anyone knew it would, to start competing in this space. You need bottomless pockets and inexhaustible shareholder patience to go up against Jeff Bezos, and it didn’t take long for B&N to run out of both.

    Postscript: Len Riggio gets all the blame here. He’s been B&N’s puppetmaster since \retiring\ from the company, and he’s the guy who nudged out his brother, Steve, as CEO to replace him with the tech savvier William Lynch. Len didn’t understand tech but figured Lynch did, so he gave Lynch enough rope to hang himself. Now Len no longer seems interested in taking B&N private, which was probably the only way the company could successfully reinvent itself without the constant stress of quarterly earnings reports. Since Len is regarded on Wall Street as a canny investor, the withdrawal of his buyout offer is a tacit admission that the business he built — then entrusted to William Lynch — is in ruins.

    Reply
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