Why Amazon may not be unhappy that ebook sales have reached a plateau
When Amazon founder Jeff Bezos went on the Daily Show in the US to promote the Kindle 2, he caused host Jon Stewart to reel when he said that the device cost $359, adding hastily, "but the books are only $9.99!" "You mean you have to pay for the books as well?" Stewart retorted.
Famously smart, Bezos had no chance of outwitting Stewart. He did turn out to be right about the pricing, however. Enthusiasts are willing to pay eye-watering sums for devices, as Apple has just demonstrated by successfully charging about £1,000 for a phone that many users will replace after two years. But they are cautious when it comes to paying for content. The $9.99 ebook price for New York Times hardcover bestsellers was highly popular, and authors whose publishers insisted on higher prices found themselves bombarded by one-star reviews from Amazon customers.
Ebook sales began to rise exponentially. It appeared to be a wonderful development for publishers: they were, to offer a rough example, selling $30 books to Amazon for $15, and then seeing Amazon take a hit of $5.01. But they were worried about the future. What if ebooks occupied 50-60% of the market, with Amazon holding a huge percentage of that share? The online giant would no longer be happy to take $5 hits on book sales, and would be in a position to demand much more favourable terms. Publishers' revenues would collapse.
Then came an apparent white knight: Steve Jobs, wanting to sell books on his iPads and iPhones. Apple's iTunes store operated under an "agency model", with suppliers setting prices and Apple taking 30% cuts. Jobs, quoted in a now-notorious passage from Walter Isaacson's biography of him, could see that publishers would welcome such an arrangement:
"So we told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway.'
"But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, 'You’re going to sign an agency contract or we're not going to give you the books.'"
This passage provided damning evidence for the US Justice Department when it sued Apple and five of the big six US publishers (Random House, not at that stage joined with Penguin, was the exception) for price-fixing. The publishers, who had raised their ebook prices and immediately seen a decline in sales, maintained their innocence but settled; Apple fought on and lost. In Europe, the European Commission ruled that four leading publishers and Apple had "engaged in a concerted practice" to raise the price of ebooks, and demanded that they modify their contracts.
Amazon appeared to have won a comprehensive victory in its battle with publishers for the control of ebook pricing. It was therefore a mystery to some of us that, when renegotiating its contracts, it entered into "Agency Lite" agreements, regaining the right to introduce discounting, but only to a certain extent, and continuing to receive commissions on publisher-set prices. (It did secure "most favoured nation" terms, under which it had to be informed of any favourable deal for a rival; the EC has since banned such clauses.)
The champion of cheap ebooks is now happily charging as much or sometimes more for them than it does for printed counterparts: current mass market bestsellers by Michael Connelly, Linwood Barclay and Robert Harris are £1 more in ebook than they are in paperback, for example. As prices have risen, sales have fallen. The company that wanted to turbo-charge ebook sales seems to be happy to let the market stagnate. Why?
You cannot ask publishers this question. Some of them, during the European price investigation, saw their offices raided and their computers impounded, and even wondered whether they faced imprisonment: they run a mile when you mention the issue. What follows is a couple of guesses.
The first is that Amazon is doing very nicely out of the revival of print book sales. The second, probably more important, is that it owns the cheap ebooks market - because its Kindle Direct Publishing (self-publishing) and Kindle Unlimited (subscription) services have little competition; because it takes huge market shares in price-promoted ebooks from the likes of Bookouture and Head of Zeus; and because titles from its own publishing imprints are starting to out-muscle conventional publishers' offerings in this cut-price area of the market. Agency Lite pricing gives Amazon guaranteed margins, while ceding a significant area of the market for Amazon to dominate. Win-win.