After taking a year to consider its options and observe how e-book retailers were faring with the agency model, Random House today announced it was committing itself to that model, the last of the Big Six publishers to do so. The most significant aspect of this move is that Amazon is aboard. Last year when the pricing standard was adopted by the other five major houses, a bitter war broke out between Amazon and Macmillan.  There will be no such event in this instance, as Random and Amazon have worked out an agreement.

To place this news in context, last year we wrote the following story, Random Goes Rogue:

Random House will go against the recent rush by its Big Six buddies to the “agency” e-book retail model recently introduced by Apple.

Apple’s approach is for publishers to retain control over the list price, rather than allowing the list price to be pegged by the e-tailer, as is currently employed by Amazon. It also allows publishers flexibility in timing release of e-books – delaying them rather than releasing them simultaneously with publication of hardcover editions.

The move to the Apple model by three major houses spearheaded by Macmillan was the cause of a controversy that triggered removal of Macmillan’s buy buttons by Amazon for a week, at the end of which the e-book retailing landscape was altered, possibly forever. (For background see Apple Promoting a New (and Radical!) Model for Selling E-Books? and Publishing’s Weekend War: 48 Hours that Changed an Industry.)

Random’s decision is based on two approaches to e-book publishing that are at odds with the philosophy of at least three of its fellow publishers. A RH spokesperson voiced the opinion that publishers “have no real experience at setting retail prices.” That explains why Random held back from embracing Apple’s iPad tablet. The other reason is timing of e-book releases. “Our current policy is we release e-books at the same time as physical books,” she said. “I haven’t been convinced that it’s good for the author or consumer to delay the release.”

You can read details here: Random House sides with Amazon, e-book readers on pricing

Random’s press release is reprinted in full below.

STATEMENT FROM RANDOM HOUSE, INC. REGARDING ITS U.S. E-BOOK SALES MODEL

“Random House, Inc. is adopting the agency model for e-book sales in the United States effective March 1, 2011. Going forward, Random House will set consumer prices for the e-books we publish, and we will provide retailers with a commission for each sale. There are no changes to our terms of sale for physical books.

“The agency model guarantees a higher margin for retailers than did our previous sales terms. We are making this change both as an investment in the successful digital transition of our existing partners and in order to give us the opportunity to forge new retail relationships.

“We are looking forward to continuing to work with all our retail partners – both digital and physical — on our joint mission to connect our authors with as many readers as possible, in whatever format they prefer.”

Richard Curtis

Remember the shooting war a year ago January when Amazon dimmed the Buy Buttons on Macmillan books over the issue of the agency etail business model? To refresh your memory read Publishing’s Weekend War: 48 Hours That Changed an Industry

A lot of authors were caught in the crossfire.  But the CEO’s of both companies have presented them with a gift to make it up to them.  In his letter accompanying Macmillan’s semi-annual royalty statements CEO John Sargent informs authors and agents that Macmillan and Amazon have jointly created an “Amazon Kindle Outage Adjustment” compensating them for royalties they would have received had the trade war not suspended business.  Sargent explains how the adjustment was calculated:

“…You may also see an item toward the bottom of your statement called Amazon Kindle Outage Adjustment. Most of these adjustments were processed last royalty period but some are being finalized now. We believe it was not fair that authors should suffer from the Amazon buy button takedown imposed on us for a week last year when we switched over to the agency model. So we estimated as best we could what Kindle sales would have been for that week and processed the royalties on those sales as if they had happened. Amazon felt the same way and graciously split the cost with us. Interestingly, from what we could discover, almost all non-Kindle Amazon sales migrated to other outlets.”

We agree that it is a gracious gesture on the part of both industry leaders and though there may still be some bruised feelings and lost revenue, we wanted to give credit where it is due for the good will.

There was another gift from Sargent in his covering letter which you may read in its entirety here.

Richard Curtis

Dear Authors, Illustrators and Agents,

As you all know, there has been tremendous growth and change in the digital book market over the last year, The purpose of this note is to explain two favorable adjustments we have made to your earnings on e-book sales during the past royalty period in light of the events of last year.

On April 1st 2010, Macmillan adopted the agency model for selling our e-books and, in doing so, we accomplished two extremely important goals to help ensure that the publishing business remains healthy for both you and us. The first, and most important one, was to create a level playing field for electronic book distribution. Amazon had been providing the e-book versions of new release hardcovers at $9.99, considerably under Amazon’s cost, making it very difficult for anyone else to prosper or even enter the market. Since we moved to the agency model, Apple has entered the market, Barnes and Noble has increased its investment in the business, and independent booksellers, working with Google, are now selling your books competitively in the electronic book market. Second, by successfully setting the price on the e-book versions of first release hardcovers above $9.99. We have been able to prove that the consumer does in fact place a value higher than $9.99 on first release electronic books.

The long term ramifications of both these changes are enormous. What was previously a digital business with only one real player (who was getting dangerously close to a monopolistic position, fueled by aggressive pricing) is now a much healthier marketplace where many can compete and distribute your books at prices determined by the market.

All of this is the context for answering the question I’m sure is on your mind: What about my royalties?

Your enclosed statement includes e-book royalties if we sold an e-book of your work during the May 1 through October 31 royalty period. Almost every contract we had in effect during this royalty period sets an escalating royalty (10%/12.5%/15%) based on the list price of the book. Under the agency model, the list price is the end price to the consumer, so your contractual earned royalties would therefore be the number of e-books sold multiplied by the list price of the e-book and then multiplied by the royalty rate.

Meanwhile, the publishing industry standard for electronic book royalty rates has clearly settled 25% of net receipts, which is the rate that we now offer in our publishing contracts for new books. This rate produces higher royalty earnings than the list price based rate.

We have therefore made the decision for this royalty period to increase your royalty to 25% of net receipts. We are presenting this adjustment in your attached royalty statement by first backing out your contractual electronic book royalty earnings (so you can see what they were) and then adding in the new higher royalty earnings according to new agency model calculation. We have only made this adjustment if it works in your favor (which is almost universally the case).

If you have not previously signed an amendment adjusting your contractual royalty on e-books to 25% of net receipts and you would like us to continue making this adjustment in future royalty periods, we need you to amend your contracts with us… [Contact information deleted here]

In addition to the favorable royalty recalculation mentioned above, you may also see an item toward the bottom of your statement called Amazon Kindle Outage Adjustment. Most of these adjustments were processed last royalty period but some are being finalized now. We believe it was not fair that authors should suffer from the Amazon buy button takedown imposed on us for a week last year when we switched over to the agency model. So we estimated as best we could what Kindle sales would have been for that week and processed the royalties on those sales as if they had happened. Amazon felt the same way and graciously split the cost with us. Interestingly, from what we could discover, almost all non-Kindle Amazon sales migrated to other outlets.

It is hard to see into next month never mind next year. Our business is in the midst of an enormous transformation. But do know that we are in this together and that our interests are aligned. We at Macmillan will keep working for a piracy-free, competition-friendly digital marketplace for your works, while supporting the bricks and mortar retailers for the ink-and-paper books that we all cherish. It is, as always, a great delight to be your publisher.

I hope this letter has been helpful. If you have questions about your statements please contact our Royalty Accounting Department.

All best,

John Sargent

According to top Penguin executives, writes Wall Street Journal‘s Jeffrey Trachtenberg, the company has reached a detente with Amazon to conclude a price war that lasted about a month. The behemoth retailer, responding negatively to the agreement Penguin reached with competitor Apple, had turned off the Buy buttons on Penguin titles. The dispute centers on the fact that Apple’s business model is vastly different from Amazon’s, putting the latter at a competitive disadvantage. (For background, read Are We Capitulated Yet? Amazon Turns its Guns on Penguin.)

As part of the settlement, writes Publishers Lunch’s Michael Cader, Amazon “presumably” will switch to the same model as Apple, but if experience is any guide, in all likelihood that will result in higher e-book prices that may dampen customer enthusiasm. Penguin presumably understands that and is willing to trade curtailed sales for greater control over the way its books are sold through third parties.

RC

Do you think there’s enough confusion and acrimony surrounding the “agency” e-book retail model (see Apple Promoting a New (and Radical) Business Model for Selling E-Books?). If you don’t, there’s a new issue heading your way that should satisfy your hunger for controversy.

Michael Cader, influential founder of online book trade newsletter Publishers Lunch, has asked who is responsible for collecting and paying sales taxes on e-book sales?

If you didn’t know that such taxes are payable you’re not alone.  Under the system in effect until the “agency” model was introduced, retailers were responsible for collecting any sales taxes that might be charged on e-book sales. However, under the Apple model, retailers become in effect agents for the publishers, placing the burden of collection and reporting on the publishers’ shoulders. It’s a burden that could seriously hobble a lot of publishers when they have to fill out tax forms in dozens of state venues.

Apple has authorized a number of companies like Scribd, LibreDigital and Ingram to serve as authorized “aggregators” who will in effect process publisher content and deliver it to Apple for a fee or commission. Will collection of sales taxes be part of their services? The answer is murky. “So far,” says Cader, “the aggregators we have spoken to have different understandings of what obligations if any they have in tax reporting and collection.”

Stay tuned for more about this matter, which is certainly going to heat up.

The only certain things in life are death and taxes.  Unless the this matter is addressed cleanly and expeditiously, death is going to begin to look like a viable alternative for publishers.

Richard Curtis

Early in March John Sargent, CEO of Macmillan, issued a policy statement setting the course of his company and its component imprints such as St. Martins Press, Picador, Farrar Straus & Giroux, and Tor Books. He promised more such statements from time to time, and last week posted on the Macmillan website the second of them in which he boiled down to four the questions raised by people commenting on his initial blog.

As we approach Passover we wondered if these were the same four questions traditionally asked by children concerning the meaning of the holiday, which celebrates God’s rescue of the Israelites from Egypt. We thus posted this picture of Charlton Heston as Moses before we realized that the four questions raised by Macmillan’s correspondents were different from those posed at the Seder table. We decided to leave the picture up, however, as we are hopeful that “with a mighty arm and outstretched hand” Sargent will lead his company to the promised land and perhaps drag some Big Six publishing colleagues with him.

The questions are:

1) What is the difference between a “hardcover” and “paperback” e book?

2) Will retailers have flexibility to price books at a discount?

3) How can we trust Macmillan to carry out its pricing pledge?

4) Will we be re-pricing e books that have a $14.00 digital list price while there is a mass market paperback edition available?

For the answers, click here. All together now: “On all other nights…”

Sargent promises more commentary soon, “including author royalties…”

We welcome his outreach, look forward keenly to more of his enlightening clarifications, and thank him for his initiative and leadership.

Richard Curtis

Answers to some questions from the comments

Hi out there. I have been reading through the traffic from my last post on e-book pricing and the agency model. Rather than answer you all individually, I’ll take a shot at answering four questions that encompass the general nature of the responses.

1) What is the difference between a “hardcover” and “paperback” e book? In truth…nothing. It is simply a matter of timing.

In traditional publishing we had three formats, each at a different price. They were targeted at specific channels of distribution and were released at different times. There was some discounting by retailers, but historically not much. Then discounting became more aggressive and the channels of distribution for the formats began to blur. Currently some books never appear in paperback, some books only appear in paperback, and some books are in the market simultaneously in hardcover and both paperback formats (at three different price points). The digital edition (in almost all cases at present) doesn’t change in format over time – there is no difference in what is actually being sold. So, how should the digital edition be priced?

Some argue it should be almost free as there is little physical cost of delivery. But the physical cost of the book has never been the greatest component of cost. The authors who create the work need their rightful compensation, and they need editors. The marketing and publicity are no cheaper. And given that the ink on paper aspects of the business are still here, publishers still need warehouses, infrastructure, and all the other legacy costs of the business. Digital sales as a whole are not incremental (though some of them may be).

Some argue it should be the same price as the hardcover. After all the real value is in the ideas and the words, not in the artifact that sits on the shelf. But certainly that artifact is of some value, and the digital edition is more ephemeral than a printed book.

Some argue the digital edition should be tethered to the physical book and should be priced under whatever the cheapest available format that is currently available for sale.This has a solid feeling logic behind it, but I’m not sure it makes sense in the long run given there is no differential in format (if there are three formats availble, why wouldn’t the right price be a bit cheaper than the wieghted average of the available formats)?

In the end, an e book will be priced to reflect the value consumers put on it. We believe at first release an e book is worth more and people will pay more for it. Over time it will become worth less as demand tapers. However, some digital books will retain their value over time just like print books. Some will increase their value over time (many physical books are now only available as trade paperbacks, after they have been out in the cheaper mass market formats). So our digital pricing will vary to reflect the value of the book at the time. But in general, our plan is to price books below ten dollars after there initial sales demand slows (usually within a year).

A very long way of saying, there is no hardcover or paperback e book, but the digital edition will change in price over time to reflect its value to the reader as best we can determine it.

2) Will retailers have flexibility to price books at a discount? No, the sale price will be fixed by Macmillan. Retailers will promote and market books, but we will control the price for the book.

3) How can we trust Macmillan to carry out its pricing pledge? An interesting question in that we have never made a pricing pledge. Historically, e book pricing has been driven by a number of factors, and it may well have appeared to be inconsistent. We never promised to price books in a certain way and have actually never controlled retail prices before now. And many of our decisions on list prices were driven more by our Amazon relationship than by our relationship with consumers. Looking forward, it will be a very fast moving world. I have told you our intent on e book pricing. I cannot guarantee or pledge what price we will be charging in the future. Personally I doubt that typical prices for general interest digital books will break out over $15.00. I also believe the majority of digital books will be priced below $10.00, as most Macmillan books are now and will be on day one of the agency model.

4) Will we be re-pricing e books that have a $14.00 digital list price while there is a mass market paperback edition available? Yes! To a customer price of $9.99 or below.

John Sargent

More next week, including author royalties…

Thanks for listening and writing in your concerns.

When the publishers of #1 bestselling hardcover Game Change windowed the e-book edition rather than issue it simultaneously, Kindle owners protested by deliberately downgrading the book in their Amazon reviews. Their action, which fell somewhere between populist revolt and temper tantrum, elicited an editorial by Publishers Lunch’s Michael Cader urging publishers to do a better job educating the public. “Publishing people who care about these pricing discussions need to get in the online forums and start issuing press releases and find other ways to address readers honestly about price,” he said. We agreed with him.

We’ve changed our minds.

What made us change our minds was the confrontation between Cablevision and ABC over how much the cable provider should pay ABC to carry its programs. Held as hostage was the Academy Awards, one of the most watched shows on the annual television calendar.

The reaction of subscribers was identical to that of Kindle owners deprived of Game Change. They didn’t understand the issues, nor did they give a damn who was in the wrong. They wanted their Academy Awards, and they wanted them now. Senator John Kerry, chairman of the Senate Commerce Subcommittee on Communications, Technology, and the Internet, said this about the blackout: “When pulling a signal becomes the nuclear option in negotiation, it inflicts collateral damage on consumers who pay their bills and have done nothing wrong. Someone needs to be speaking up for them in this dispute and those like them, and make no mistake, this is the latest example of consumers getting caught in the middle because the high stakes incentives created in these negotiations are not working for the average customer who just expects their programming to be there when they want it.”

Fortunately for the average customer, the dispute was settled in time. (Actually about 18 minutes late, occasioning the wry observation by New York Magazine‘s blogger that subscribers blessedly missed the egg laid by co-hosts Steve Martin and Alec Baldwin.)

The moral of Cablevision vs. ABC as far as the publishing industry is concerned is that consumers have no patience for such arcane issues as windowing, loss leader pricing or agency business models. They expect their book when they hit Download and they want it at a reasonable price. Educational initiatives are a waste of time. We need to get our pricing act together. Though there is no Academy Awards show to bring us to the brink of catastrophe, the e-book industry will not realize its full potential until we provide our products reliably and at prices that makes sense to customers.

Richard Curtis

John Sargent, admiral of the Macmillan fleet, has charted the course of his company to meet the challenges of modern publishing, traditional and digital. In a memo to Macmillan authors, their agents, and their readers, Sargent spelled out a host of initiatives and policies. “It has become clear to me,” he says, “that there is far too little accurate information available in this time of unprecedented change. The issues we all face together are complex, and no news story or 140-character snippet can adequately address them.”

Some of the content of his message had been explicitly announced in the last turbulent months, other policies are fully articulated for the first time. You may read the announcement in its entirety here, but in essence:

• Starting at the end of March, we will move from the “retail model” of selling e-books (publishers sell to retailers, who then sell to readers at a price that the retailer determines) to the “agency model” (publishers set the price, and retailers take a commission on the sale to readers). We will make this change with all our e-book retailers simultaneously.
• All the new adult trade books for which we have the rights to publish in e-book format will be available at the first release of the printed book. We will no longer delay the publication of e-books (read: no windowing).
• We will price our e-books at a wide variety of prices. In the ink-on-paper world we publish new books in different formats (hardcover, trade paperback, and mass market paperback) at prices that generally range from $35.00 to $5.99. In the digital world we will price each book individually as we do today. Generally e-book editions of hardcover new releases will be priced between $14.99 and $12.99; a few books will be priced higher and lower. This is a tremendous discount from the price of the printed hardcover books, which generally range from $28.00 to $24.00. E-book editions of New York Times hardcover bestsellers will be priced at $12.99 or lower while they are on the printed list. E-book editions of paperback new releases will be generally priced between $9.99 and $6.99.
• For physical books, the majority of new release hardcovers are published in cheaper paperback versions over time. We will mirror this price reduction in the digital world.
• There has been a lot of concern from e-book readers that $9.99 books will no longer be available. Most Macmillan e-books will still be priced below ten dollars.

Sargent says he has not addressed illustrated books or books for young children, nor the long-term or author royalty consequences of the change. He will save those and other topics for future posts. But he does state categorically that “these changes will apply to every e-book retailer with whom we do business.”

RC