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Thursday, December 15, 2011

Agency Pricing Illegal?

Currently, the agreement between Apple and the traditional publishers, known as "agency pricing," is under investigation in the European Union and in the United States for being an illegal and unfair business practice. In both of these investigations, they are examining whether the agreements these businesses made violate anti-trust laws.

Before we get into why that may be true, first my savvy readers need to be aware of what agency pricing is. In the traditional pricing model for books, a publisher sells a book to a retailer at wholesale cost. The retailer is then free to price the book to sell at whatever price they wish. The publisher will have a "suggested retail price," but the bookstore is under no obligation to sell it for that amount. They can sell them for a dollar, if they wanted to, and eat the cost. But the need to make enough money to keep the doors open usually prevent that in any widespread manner.

Agency pricing changes it from being a wholesale distribution model to a leasing model. An "agent" (and thus, "agency" pricing) leases the book to the retailer, and in so doing, retains control over that book, including what the price will be. Being that the "agent" is the publisher, it means the publisher sets the price on what the book will sell for, not the retailer.

In a way, it is similar to the consignment model. An author or publisher puts books on a bookstore shelf, but doesn't get paid for them right away. Therefore, the bookstore doesn't own them, and can't change the price without the author's permission. Once a book sells, then the bookstore keeps their share and passes the author or publisher's share to them.

Most ebooks are sold that way. I put up an ebook on Amazon, and Amazon doesn't pay me anything for doing that. They don't buy several copies of my ebook from me. Then, when it sells, they keep their share, and I get my share. But I own the file sitting on Amazon's servers, and can decide to pull it at any time, change the price, or update it without needing to get Amazon's permission first.

This actually makes some sense when you think about it. Ownership would be if Amazon bought the book from me. I couldn't then tell Amazon what price to charge or to take it down. In such a scenario, Amazon and I would enter into a contract, much like a publisher, where they would pay me an amount for the rights to sell X number of books. Let's just say, 10 books. Once ten sales had hit, they could buy the right to sell another 10 copies from me, and pay me cash. Ownership happens at the point of the cash transaction.

And like regular books, Amazon wouldn't have the right to the content, only the container.  That's what a copyright is for. The author owns the content of a book. You can't change it, copy it, or modify it. But when you buy a book, you own the paper and ink that the content is printed upon and with. In an ebook, the container is the file itself. In many retail transactions when you buy an ebook, you download it onto your computer or reader, and you have the file. Only you can delete it. You own the file, but lease the content.

That has changed some with Kindle, since the files reside on a cloud, and if Amazon decides to pull a title, it will get deleted off your Kindle as well. This is because the agency model of publishing has confused the leasing of digital content with the digital container it resides in.

In effect, the agency pricing model is nothing more than consignment selling model, but with one important difference as it is being practiced now. When you buy a book on consignment, the customer owns the container, but not the content. In agency pricing, the buyer owns neither the container or the content.

So, why is the agency pricing model potentially illegal if it is not much different from consignment? Here's why. The big difference is bookstores, as a whole, have rarely operated primarily, if at all, on the consignment model. They may agree to put a few books from a local author on consignment, but by and large, they purchase all the books that go on their shelves. And likewise, Amazon usually purchases one or more copies of physical books to put in their warehouse before selling them.

But ebooks are the first type of book gaining widespread sales and delivery on this model. Why does that matter?

On the surface, what Apple and the publishers agreed to doesn't seem to involve price fixing. After all, they didn't get together and and decide all books they publish between 195 and 200 pages will sell for X. Price fixing was evident in earlier times, because retail establishments, in order to avoid a price war with a competitor and so lose money, they would both agree to charge a specific price, usually much higher than was justified. The important thing to understand about this is it kept prices artificially inflated by reducing competition and discounting, and thereby circumvented the ability of the free market to keep prices at a fair level.

So, on the surface, it doesn't appear that the publishers did this. But publishing is a different business than selling gas or other products. Both gas stations are selling the same basic product. No matter which station I go to in most all cases, my car will run just as well on one's station's gas as another's. And whether it is Exxon or BP, my car will work. Doesn't matter the company that produced it, or which station I go to get it. However, while I can get Stephen King's latest book at any retail outlet, there is only one publisher that publishes that book. And guess what happens if that one source sets the price? It is price fixing, because it in effect reduces competition and keeps the price artificially high. That one product will sell for the same price no matter where I go to buy it.

If that same book was published by more than one publisher, then competition would enter into the equation. But if that one publisher sets the price, and it is the only source to get that book, that means there is no competition. It in effect becomes a system to circumvent the competition of the marketplace and is price fixing.

The collusion aspect of this is it took all the publishers operating together to force Amazon and other bookstore outlets to go with this model. Amazon could have held out with one or two publishers agreeing not to sell to them their titles, but when they all threatened to hold back their books, Amazon had no choice but to cave if it wanted to keep from losing money. Without the agreement between the parties, they wouldn't have had the clout to force Amazon away from their prior consignment/wholesale hybrid model and into agency pricing.

But the key to this as to whether it violates anti-trust laws is did the move by these parties reduce or eliminate competition in the market place. Well, yeah. It was one of the primary reasons Apple sought out this agreement with the publishers, was to try to straightjacket Amazon into pricing their books the same as what customers would find in the iBookstore, and cause Apple hardware customers to be happy to buy from Apple instead of Amazon or some other discount store.

Because of that, I predict these lawsuits will break up this agreement and return pricing control to the retailers, and that either the hybrid model Amazon was using will become standard, or something along the lines of buying a certain number of copies from the publisher that can be sold before paying for more, equating to buying wholesale.

What may get lost in all this, however, is the right of the buyer to own the container that the content comes in just as they do with a paperback. There should be no difference.

What do you think? Is this price fixing and illegal?

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