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Digital Digest: The Changing Economics of E-books

Given the near-religious 
atmosphere that attends the launch of each new Apple product, one could be forgiven last spring for expecting the iPad to radically transform the way we consume digital media. But the coming of the “Jesus Tablet,” as the device was known in some optimistic circles before its January unveiling, was only the outward sign of a more profound structural shift that was taking place behind the scenes. When the iPad finally hit stores on April 3, five of the so-called “Big Six” publishers—which collectively account for 60 percent of the books sold in the United States—had committed to a new business model designed to break Amazon’s dominance of the e-book market.

Under the previous arrangement, the supply chain for e-books essentially mirrored that of printed publications, with retailers acquiring titles according to a wholesale discount schedule—usually half the list price for new hardcovers—and then setting their own prices for consumers. Amazon, for instance, might pay a publisher $13 for the Kindle edition of a book listed at $26 in hardback, then offer the title to its own customers as a $9.99 loss leader. This willingness to patiently lose money allowed Amazon, in less than three years, to scoop up an estimated 90 percent of the e-book market, and prompted increasingly panicked speculation from publishers that the value of their wares could be permanently reduced in the public mind.

Apple’s entry into the fray gave publishers the leverage they needed to force a marketwide shift from a wholesale to an “agency” model of e-book retailing. Under the new scheme, the “Agency Five”—Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster—ostensibly offer their titles for sale directly to the public, setting prices themselves and paying electronic intermediaries such as Amazon and Apple a 30 percent agent’s commission. (Perseus, the largest distributor of indie books, is also on board.) This means that a new release priced at $12.99 in Apple’s iBookstore now nets its publisher only $9.09—a deal that looks worse on its face but that publishers say will let traditional bookstores (still the industry’s primary source of income) remain competitive and allow them to do away with “windowed” (i.e., delayed) e-book releases. “We’re willing to accept lower returns for e-book sales as we control the value of our product—books, and content in general,” wrote Hachette Book Group CEO David Young in a letter to literary agencies. “We’re taking the long view on e-book pricing, and this new model helps protect the long-term viability of the book marketplace.”

But the long view is still unclear. At a meeting of the American Booksellers Association, Random House president of sales Madeline McIntosh (who also has worked for Amazon) cited pricing concerns as the reason behind her company’s decision to stay away from the agency model, saying that publishers “have no real experience at setting retail prices.” And Apple, despite the initial success of the iPad—which sold over a million units in its first month of availability (compare that number with the approximately four million Kindles currently in use)—may have no intention of bolstering e-book prices in the long term. An anonymous source told the New York Times that provisions inserted into the iBookstore contract allow the company to offer deep discounts on best-sellers, while others are suggesting that next spring, once the present agreement expires, Apple could be in a position to negotiate for even more stringent price limits.

Less clear still is what authors can expect from the switch. The transition to an agency model—which, depending upon the expert you ask, either will or will not squeeze publishers’ margins, erode royalties, and deepen the divide between blockbusters and midlisters—has coincided with attempts to lock in an industry standard for electronic royalties. Earlier this year, the Authors Guild warned its members that the rate now on offer from major publishers, 25 percent of net receipts, will likely “prove to be a low water mark,” and suggested that authors hold out for something closer to a 50–50 split. The latest data from the Association of American Publishers shows e-books making up 3.31 percent of total sales in 2009—a share more than twice that of the previous year. As this number climbs—the certainty of which is about the only thing industry insiders agree on at this point—it will become more and more difficult for writers to follow the guild’s advice.                   

Adrian Versteegh is the editorial director of Anamesa. He lives in New York City.

“The transition to an agency model—which, depending upon the expert you ask, either will or will not squeeze publishers’ margins, erode royalties, and deepen the divide between blockbusters and midlisters—has coincided with attempts to lock in an industry standard for electronic royalties.”

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