Publishers throw the e-book business out the window

Book publishers have been crowing this week over having wrested control over e-book prices from Amazon. After a brief showdown with Macmillan Publishing, in which Amazon pulled all Macmillan hardcover and paperback titles from its physical-book store, the Kindle maker blinked and agreed to the publisher’s demand to raise the price of its e-books in the Kindle store from $9.99 each to $12.99-$14.99. Other leading publishers, led by Hachette Book Group and News Corp.’s HarperCollins unit, quickly said they would demand the same deal.

The publishers, of course, have long been concerned over Amazon’s strategy of pricing most new release e-books at $9.99 to spur sales of Kindle devices. Though publishers earn the same $12-$14 wholesale price from Kindle editions as they earn from hardcovers, they fretted that low prices on e-books would undercut sales of hardcovers, which typically sell for $20-$25 at retail. Eventually, they feared, the reduction in retail revenue would result in lower wholesale revenue as well. So long as Kindle owners made up the largest slice of the e-book market, however, the publishers had little choice but to go along.

Then last month, they were handed some new leverage with Amazon, thanks to Apple’s introduction of the iBook store for its new iPad tablet. Instead of paying publishers a flat wholesale price, Apple agreed to take a 30% commission on sales while letting publishers set the retail price of e-books. Most titles in the iBook store are expected to go for $12-$15 retail.

With the iPad posing a credible threat to the dominance of the Kindle, Macmillan and the other publishers were able to force Amazon to accept the same commission system, or risk losing access to their titles. So eager were the publishers to gain control over retail prices, in fact, they were willing to accept lower net wholesale revenue from Amazon to get it, as Hachette Book Group USA CEO David Young explained in a letter sent to literary agents last week:

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.

Another benefit to the new arrangement, according to Young, is that it will allow Hachette to release e-books day-and-date with their hardcover release, rather than delaying the e-book by a month or more as many publishers had been starting to do:

Another great benefit to our consumers is that we intend to release HBG e-books simultaneously with the hardcover (or first format print edition)….We believe that this new model is preferable to withholding books, and is in our authors’ and HBG’s best interest.

Actually, they’d be better off withholding books. Not only is the new e-book bargain–higher retail prices in exchange for  day-and-date release–unlikely to benefit consumers in the long run, it’s unlikely to benefit publishers, either.

The optimal way to maximize value and revenue across multiple distribution channels, as the movie studios have proved over the past four decades, is by sequential release through exclusive windows at progressively lower price points. Simultaneous release at multiple price points in multiple configurations, as the record companies have learned, simply invites substitution. Book publishers themselves, oddly enough, have long recognized this, which is why they window the hardcover and paperback releases.

Would consumers blanch at windowing the e-book? They might at first, but if prices were kept low enough it would eventually be seen as a reasonable trade-off. Publishers are even better positioned than the studios at this point to impose windows, in fact, because they don’t suffer from the same degree of piracy, particularly in their primary window, when piracy is most damaging because of its impact on subsequent windows. Digital piracy of hardcover books can occur, of course, but scanning a book page by page to put it on the Internet is a lot more labor-intensive than camcording a movie in theater.

To the consumer, moreover, the “value” of a piece of media content, in any particular configuraton, is not some fixed quantity reflected in a price. It’s always relative, and it changes according to a format’s utility and the consumer’s other options for accessing the same content. 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., and consumers stopped buying DVDs and started renting again, through Redbox, Netflix and other channel that offered a better value proposition.

The same erosion in the value proposition will also, inevitably, overtake hardcover books as consumers’ options for accessing print content increase. Simultaneous release, in fact, so long as there is any price differential between print and electronic, will only accelerate the process. The key is to make sure prices in each market reflect the actual value proposition to the consumer in that window and in that format.

On a broader level, a system in which the content owners control retail prices is likely to inhibit innovation, to the detriment of the consumers. In the history of the media business, most of the important innovations in consumer-facing business models have come from re-sellers, not content owners. From HBO in the 1970s, to video rental stores in the 80s, to Netflix in the 90s, to iTunes and Amazon in the last decade, new markets have been pioneered by retailers, not content owners, particularly those markets that involved leveraging new technology. In some cases, in fact, like the video rental store, the retail innovation came over the objections of the content owners.

The thing all those innovations have shared in common was the flexibility to set retail prices in response to actual consumer demand for the new product or service, rather than by reference to someone else’s business model. It’s precisely that flexibility the publishers have just destroyed.