Explaining the Agency Model for E-Book Pricing in Layman's Language

By Noel Griese
Anvil Brokers/Anvil Publishers, Inc.
Re-published with permission from Southern Review of Books

June 2010 Edition

We ran two articles in the last issue of the Southern Review of Books about the new agency model for pricing ebooks, developed at blitzkrieg speed by the Book Industry Study Group (BISG).

The articles produced a counterblitz of questions to the Southern Review, so let’s revisit the agency model to explain what led to it and how it works.

Amazon in the months preceding the development of the model had been scaring the bejeezus out of the major publishers by buying ebooks from publishers for about $13 and then selling them for $9.99 for reading on its Kindle ebook device. Amazon was taking a loss on each book in order to gain market share and encourage sales of the Kindle.

By the end of 2009, Amazon accounted for an estimated 80 percent of all ebook sales, and $9.99 seemed to be established as the most popular price for an ebook.

Publishers panicked. David Young, the chairman and CEO. of Hachette Book Group USA, said, “The big concern – and it’s a massive concern – is the $9.99 pricing point. If it’s allowed to take hold in the consumer’s mind that a book is worth 10 bucks, to my mind it’s game over for this business.”

As an alternative, some of the major publishers decided to push for an “agency model” for e-books. Under such a model, the publisher would be considered the seller, and an online vendor like Amazon would act as an “agent,” in exchange for a 30 percent commission.

That way, the publishers would be able to set the retail price themselves, presumably at a higher level than the $9.99 favored by Amazon.

Under the system that frightened the publishers, Amazon paid the publishers $13.00 for each e-book. Under the new system, publishers will receive 70 percent of the retail price of an ebook. To net $13 per book, the publishers will have to set a price of about $18.50 per ebook, well above the $9.99 norm for electronic books. That price is so far above the norm that it will probably discourage sales – even sales to Apple’s iPad device, where the pricing model is designed to be more favorable to publishers.

The irony here is that, through the agency model, publishers have forced Amazon to (a) pay them less per book and (b) will sell fewer of their books.