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.
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.
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.