This is not a new topic, but it is something which is not always completely understood and it is a bit more complex than it appears on the surface.
The wholesale model is the one we are all familiar with in the book trade. Publishers sell books to retailers at a RRP less a discount, and the retailer determines the final selling price to the consumer. eBooks are handled in the same manner, they are provided to eBook retailers like Amazon at a publisher set RRP and a discount and Amazon pay the publisher for copies sold x RRP x discount.
Assuming a 50% discount, a $14.99 book gives the publisher $7.50. If the retailer sells for $14.99 they also get $7.50. If the retailer discounts to $11.99 it comes out of their share and they only make $4.50.
The above model has worked well for a long time, but then eBooks and Amazon came along. Amazon quickly dominated the eBook market based on their existing size, their Kindle device and their tactic of heavy discounting of key front list eBooks to $9.99.
This presented a number of concerns for publishers: Amazon was becoming very powerful and other retailers could not compete, Amazon was devaluing the view of what a new book should cost, and lastly there were fears that Amazon would, based on their monopoly, squeeze the publishers for better terms.
Assuming a 50% discount, a $14.99 book gives the publisher $7.50. Amazon discounts the book to $9.99, which comes out of their share and they only make $2.50.
When Apple entered the eBook market with the launch of the iPad and iBooks in April 2010 they brought with them their agency (app store) model. Under this model the publisher sets the price and Apple get 30% (agents’ commission) and the publishers get 70%.
All the major US publishers with the exception of Random House (almost a year later Random House Inc has now also moved onto the agency model) jumped at the opportunity to bring some competition into the market and take control of the eBook pricing and prevent the deep discounting.
So they moved onto an agency model across the board (Apple, Amazon, etc) and were able to set the price for their eBooks and create some competition.
The agency model
The agency model is not quite as simple as a 70/30 split (in favour of the publisher) and the publisher can set any price they choose.
Firstly the split is not necessarily 70/30, in the case of Amazon their royalty is 70% for price points between $2.99 and $9.99 and 35% for all other price points. This obviously changes the earnings scenario quite a bit. For example:
$14.99 book, the publisher gets $5.24 (35%); Amazon gets $9.74 (14.99 less 5.24).
$9.99 book, the publisher gets $6.99 (70%); Amazon gets $3.00 (9.99 less 6.99).
This above scenario however may not be the exact deal the big six publishers have negotiated with Amazon.
Moving onto the issue of setting the retail price, the agency agreements which publishers have entered into have various restrictions and/or price bands (linked to physical book pricing) which need to be adhered to. This has led to investigations in the US and a currently underway investigation by the OFT (Office of Fair Trading) in the UK to ensure no competition law has been breached.
Setting and managing the final eBook price to the consumer requires the skills and resources to be carefully watching the retail market in multiple territories and adjusting pricing accordingly. At this stage most publishers probably lack the skills and resources to handle this across a large list.
Where do the major publishers stand?
In the US the 6 major publishers (Random House, Hachette, HarperCollins, Penguin, Simon & Schuster and Macmillan) are all using the agency model.
In the UK Hachette, HarperCollins, Penguin, Simon & Schuster are using the agency model.
Where to next?
At the moment there are a lot of questions which will only be answered over time:
Will the agency model remain in place?
Most likely given the major publishers and retailers now utilizing it, however its structure could change.
When will the remaining major publishers switch to the agency model?
Possibly when the current investigations are concluded and they have managed to renegotiate all their existing agreements.
When will all publishers switch to the agency model?
When the major retailers offer then them the option. As you can imagine it is a large adjustment for the retailers and suddenly having thousands of publishers setting their own prices is probably not an ideal scenario. In short they are accommodating those they have to at the moment.
Are publishers able to set and manage the final retail price?
For most publishers probably not at the moment, but if the agency model prevails they will have to develop the skills and tools to handle this.