Agent 86 to the Rescue?

Posted on January 22, 2012

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One of these days, I hope one of the big corporate book publishers will get smart. But right now they are in a position to say, “Well, you run a dinky little literary press that bleeds money and we’ve cleared over $150 million in profit this past year. Should we really listen to you?” I could counter with some sort of David and Goliath comment, but maybe I’ll order a box set of all five seasons of Get Smart from Amazon (since I no longer have the option to stream it from Megauploads.com — which I would never do anyways) and drown my Cassandra-like miseries in a laugh-fest. Maybe I’ll envision myself as some sort of bumbling publishing Maxwell Smart, miraculously landing on my feet after foiling yet another plot by the big corporate publishing KAOS.

Dream on…

One thing that sticks in the craw of major publishers is retailers selling their books below list price. (They also hate used book sales, too, and the textbook industry has found a neat way around that, too.) Amazon has been a major transgressor. (As well as Barnes & Noble, Borders and other chains and big boxes.) Nothing is so galling to the big publishers as Amazon slashing prices and creating loss leaders to increase traffic and sales. So far, that tactic has worked for Amazon (among others). But those retailers who discount and use loss-leader tactics don’t have many fans with independent booksellers, where the publisher’s suggested retail price is tantamount to the word of God.

The general model for the sales of physical print books is that the publisher acquires the book, edits it, designs it and then has a printer print a certain quantity. These copies are warehoused. Most major corporate publishers have their own in-house distribution services (which they sell off excess capability to other, smaller publishers). Or publishers contract out to distributors to warehouse their books and fulfill orders to the trade (i.e., process orders from bookstores). In this chain, the distributor is known as the “middle man,” taking their cut. What few people know outside the book business is that bookselling is one trade where one does not have to buy one’s inventory. In this model, bookstores “buy” books from the publisher’s distributor on consignment — they do not have to pay for the books until they are sold. Whatever doesn’t sell gets returned back to the distributor/publisher. These copies are called returns. It’s estimated that the industry average is about 30% of the books printed end up as returns. (Incredibly wasteful, and of course the consumer pays for this waste since the cost of the returns is built into the price of the book.)

Now, enter the ebook. One thing that distinguishes an ebook from a physical printed book is the very fact that an inventory is not needed. All you need is a master file to duplicate, or serve from the cloud, and some point-of-sale (POS) software for the retailer so that the retailer, and publisher, can track sales. No worries no more on returns. (That’s good.) This also means that, technically, a middle man (distributor) is not needed since copies don’t need to be inventoried.

Now, for ebooks, inventorying means that the title is (or, can be) listed in a database. It doesn’t need shelf space. It means retailers can deal direct with the publisher.

Meanwhile…

When ebooks started to be seen as commercially viable, Amazon took a closer look. The company saw gold in them thar hills. And, taking Apple’s cue, they knew the tons of cash resided in keeping ebook sales tied to them. Voilà, the Kindle. And Amazon starting dumping ebooks at incredibly low prices, well below publishers’ suggested retail prices. Publishers felt that Amazon was undercutting them and ruining the market. But Amazon was being shrewd. First, and foremost, they were creating demand. One of the cardinal principles of economics is the law of supply and demand. If the demand is low, price also follows suit (to create demand). If no one wants ebooks, make them cheap enough and people will want them. Makes sense, especially when many major corporate publishers started selling ebooks at, near or above their hardcover prices. No wonder no one wanted ebooks. But dedicated book buyers/readers (like genre readers such as romance) flocked to Amazon’s reduced rates.

Amazon’s undercutting galled the major corporates, who were/are leery of Amazon’s domination of the ebook (and book) market. They sought a way to undermine Amazon’s advantage. They also felt adrift in a sea where physical distribution no longer matters. So, they cozyed up to the devil they felt they could trust — Apple. And they came up with the agency model to sell books. In this model, the retailer works as an agent selling books to the consumer. The agent pays a percentage of the retail price to the publisher for every copy sold, usually 70%. (Now compare this to the old-world physical distribution model where the retailer pays the distributor/publisher usually about 60% of the retail price and can sell at whatever price the retailer wants. Of course, Amazon and B&N have negotiated sweeter — to them — discounts.) In this new model, warehousing and distribution costs become server costs and conversion fees. There are no manufacturing (printing) costs for a solely ebook edition.

So, the retailer in the new eworld gets a 30% cut instead of a 40% cut. Publishers win there. Publishers also win by flattening distribution costs. Last, publishers max things out by requiring that any retailer (read: Apple) cannot sell the book for any price other than the suggested retail price. No more loss-leading dumps. The publishers say, “It’s our price or no stock.” When suppliers mandate a fixed retail price and these prices seem fairly equivalent among all of the major suppliers, governments get concerned about price-fixing and monopolies. Already states’ attorney generals for Connecticut and Texas, not to mention the European Union, are investigating the legality and fairness of this part of the agency model.

What the major corporate publishers have decided is to go to bed with Apple to spite Amazon. I am not saying that Amazon is the poor sap here. I don’t feel sorry for Amazon at all. Neither do I feel that Apple is the be-all and end-all. I’m generally wary of sleeping with corporate giants. They tend to roll over and crush us little peons.

What I’m looking for in this is some sort of big-picture, long-term plan/model that benefits (primarily) the reader (the book buyer). What I’m seeing are mainly narrow-minded efforts that look to the short-term and are fundamentally keyed to maintaining corporate profit and share price. No one here is blameless: Amazon slashed prices to create demand (a good for the consumer) but with the long-term goal of hooking customers solely to their “system” and then bleeding them dry.

The rigid pricing structure that adheres to a fixed, non-alterable and non-negotiable retail price is anti-competitive and anti-consumer (no wonder Apple and the Big 5 Publishers love it).

Yes, I might be a David. I don’t want to sleep with giants. All I want is to get as many readers for the writers I publish as possible because I think they are damned good books, and books that can change lives. I’m going to hammer this point day-in and day-out: If you want to get people to read (more), give them good product at a fair (reasonable) price. Treat your customers like they are the only show in town (not you). Now, if you’ll pardon me, a call’s coming in on my shoe phone…

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