A New Form of Price Gouging?

We are all familiar with traditional price gouging where a retailer “prices goods or commodities much higher than is considered reasonable or fair.” It is something we often accuse petrol stations of before long weekends and there have been allegations made against some retailers after Hurricane Sandy in the US.

But there is a new form of price gouging which is occurring in the eBook world and it is escaping notice because consumers are not the ones being gouged, it is eBook retailers.

Amazon is the dominant retailer when it comes to eBooks. They have about 65% of the US market and some estimates have them at 90% of the UK market. In Australia they are estimated to have 65-75% of the market (Apple has 12-22%, Kobo 10-16%). They have won this market share through aggressive (some would say predatory) pricing of eBooks. Amazon prices all the eBooks they sell at $9.95 or less, regardless of the price they pay the publishers. For many titles they make a loss.

This pricing strategy began to undermine hardcover sales in the US. When Apple launched the iPad in 2010 the major publishers all moved to the Agency Pricing model. Under traditional Wholesale Pricing a publisher sets a retail price, the retailer gets a discount (usually 40-50%) and can sell the book for whatever price they wish: below cost, above retail. Under Agency Pricing the publisher becomes the retailer and the retailer becomes an agent for the publisher. The publisher sets the price and the retailer (now agent) cannot change the price. Under Agency Pricing the discount to the retailer is usually 30%.

Agency Pricing stopped Amazon from discounting. Because publishers under Agency Pricing were now keeping 70% of the sell price, eBooks were priced less than the print book equivalent. The price indifference for the publisher was usually $25 for the hardback and $14.99 for the eBook. However only the Big Six adopted Agency Pricing (Penguin, Hachette, Simon & Schuster, Harper Collins, Macmillan and Random House). All other publishers continued to distribute eBooks to retailers using Wholesale Pricing and Amazon continued to discount these books to $9.95 or less.

So where’s the gouge you ask? Readers seem to be getting a fair go. Major publications are available as eBooks for 40% cheaper than the print version, sometimes even less if the publisher drops their price even more. And eBooks not on Agency Pricing are $9.99 from Amazon and other retailers like Google and Kobo who have pockets deep enough to match them.

But smaller retailers cannot afford to match these prices. Smaller retailers can’t even afford to sell at cost (cost would be the eBook cost + any DRM fee + any credit card fee + any vendor fee). Some smaller retailers can discount up to 20 or 25% but that doesn’t really get you close to some of Amazon’s discounts which can be over 65%. Some publishers on Wholesale Pricing do reduce their eBook prices. Others price their eBooks at parity with the current print edition. And this is where the gouge comes.

All retailers pay about the same amount back to the publisher depending on their terms of trade. So there is no motivation for a non-Agency, parity pricing publisher to change what they’re doing. Amazon, and other retailers who can, discounts the eBook to a price that sells and the publisher makes the same amount as they would on the print book.

Eg. New Release:

Trade Paperback $29.99 Publisher gets 60% $17.99

eBook $29.99 Publisher gets 60% $17.99

Retailer sells eBook $29.99 Publisher gets $17.99 Retailer gets $12

Retailer sells eBook $9.99 Publisher gets $17.99 Retailer gets $8

No amount of goodwill or customer loyalty is going to see a retailer sell an eBook at $29.99 versus $9.99. So Amazon, who already sells the majority of eBooks, will sell the majority of this eBook. The publisher is happy because they still make $17.99 a book regardless of format. But the smaller retailer loses out, they have no hope and Amazon continues its utter market dominance.

Amazon can’t continue to make a loss like the one above forever, although they have been for the last two years. In their last quarterly results they lost $274 million. Some pundits have put this down to investment in their new devices but devices are on a yearly cycle and have to be updated every year. What is really driving their losses is their deep discounting. Amazon’s long game is to takeover the whole market or at least have market control. Then they will either raise their prices or demand better terms from publishers. The question is how long they can last?

This form of price gouging, where the small retailer is gouged in ordered to preserve a publisher’s return, only helps to speed up the process. What boggles my mind is I know publishers don’t want a dominant Amazon yet some of them continue to sell books in a way that leads in only one direction: a book world with only Amazon.

The book industry in Australia and worldwide is in a period of transition from print to digital. In Australia eBooks currently take up about 10% of the book market which has grown from 4% a year ago. In the US the market is at 25-30% and appears to have plateaued this year. This change in the market needs to be managed by both publishers and traditional booksellers. But a short term sales strategy that leads to a market imbalance in the long term is not the way forward. There are publishers using non-Agency Pricing that still drop their eBook prices to 40-50% of the print book price. Amazon and others still discount these further but the gap is not as wide as with the parity eBook pricers.

We are all running business here and the bottom line is always important but you have to look at the market short term as well as long term. If you disadvantage one retail channel over another you risk wiping it out especially when there is an aggressive player in the market. To sell the most amount of books you need a diverse retail market both physical and digital. You don’t get diversity with a retailer who has 75%+ market share. Then again the same thing happened with supermarkets and books in the UK and almost happened here with the Discount Department Stores so I’m afraid I am not terribly optimistic on this one.

[It is also worth noting that under the Competition and Consumers Act in Australia “Suppliers may withhold supplies of goods to a company that engages in ‘loss leader selling’”.]

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