The Price of E-book Progress

There’s probably a PhD in economics to be had by anyone who can explain the unusual pricing dynamics of the e-book market. Despite increased retail competition, with Barnes & Noble (BKS), Sony (SNE), Google (GOOG) and now Apple (AAPL) joining market leader Amazon (AMZN), consumer prices are going up. Publishers’ profits, meanwhile, despite wider distribution of e-books than ever before, are going down.

Under the new pricing arrangement struck between Amazon and Macmillan Publishing, for instance, retail prices for Macmillan e-books will go from $9.99 to $12.99 and up. At the same time, Amazon will no longer pay Macmillan a wholesale price of $12-$15 per e-book but instead will act as a sales agent for the publisher, taking a 30 percent commission on each sale. That nets out to less money for Macmillan than under the old model.

Other publishers, led by Hachette and HarperCollins (NWS), now say they want the same deal.

In a letter sent to literary agents last week, Hachette Book Group USA CEO David Young said the new model is all about the “long-term viability” of the book market:

It’s important to note that we are not looking to the agency model as a way to make more money on e-books. In fact, we make less on each e-book sale under the new model; the author will continue to be fairly compensated and our e-book agents will make money on every digital sale. We’re willing to accept lower return for e-book sales as we control the value of our product — books, and content in general. We’re taking the long view on e-book pricing, and this new model helps protect the long term viability of the book marketplace.

Unfortunately, the publishers seem to have learned nothing from the experiences of the music and movie industries about the arbitrary valuation of goods in a digital marketplace. When technology gives consumers choices in how to consume content, they get a powerful vote on its value.

When the DVD format was first introduced, for instance, it offered consumers an attractive value proposition: For a reasonable premium over the cost of VHS rental, they could enjoy a higher quality experience and eliminate the return trip to video store.

As technology advanced, however, consumer expectations for what they should be able to do with digital content changed. The limitations of the DVD format — particularly the lack of (legal) means to get content off the disc and onto a hard drive on another device — became more problematic. The old value proposition no longer held.

Rather than respond by adjusting the DVD sell-through value proposition, however, the studios kept raising prices, even introducing a new format (Blu-ray) that carries higher prices still. Consumers’ response has been to stop buying DVDs and to shift their money to renting again, this time from Redbox (CSTR) and Netflix (NFLX). The studios are now scrambling to try to protect DVD sales by squelching Redbox.

Book publishers are in danger of making a similar mistake. Fixing prices in the e-book market to try to protect their margins from hardcover sales may work for a while. But as technology empowers consumers, and their expectations for how they should be able to access and use book content inevitably changes, the current value proposition of a hardcover book will erode anyway, just as it did for DVDs.

Failing to respond to that dynamic could lead publishers into the same confused and desperate straights in which the studios now find themselves.

Question of the week

How do you think consumers will respond to higher e-book prices?
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Paul Sweeting

Principal Concurrent Media Strategies

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