Early last year, one of the big-six U. S. publishing houses, Macmillan, pushed back against the growing power of Amazon. At the time, Amazon had near total control of the electronic book market and was pricing e-books at a loss in order to maintain its market dominance and keep potential competitors on the margins.
Fearful of being at the mercy of a single buyer, Macmillan decided to level the playing field for other retailers. It declared that it would determine the retail prices for its e-books and pay booksellers a 30 percent commission on each sale.
Apple, which was just entering the e-book business with its iPad, quickly agreed to Macmillan’s terms. But Amazon balked. It removed the buy button from every Macmillan title on its web site. The showdown lasted a few days and then Amazon relented, agreeing to the new pricing structure. Since then, every major U. S. publisher has adopted Macmillan’s pricing policy.
With publishers now in control of e-book pricing, the market has become far more diverse and competitive. Amazon’s share of e-book sales has dropped to 61 percent, as competing retailers, including independent bookstores, entered the field. More retailers means more opportunities for publishers to distribute a much wider variety of books and ensures that even niche books can find one way or another to reach their audience.
Variety is not the only benefit for book buyers. While one immediate effect of Macmillan’s move was that some e-books, which Amazon had been selling at a loss, increased in cost from $9.99 to $12.99, there is strong empirical evidence from Germany, France, and many other countries that publisher-driven pricing will actually lead to lower book prices over the coming years.
The Track Record in Europe
In March, the Swiss parliament ended a failed four-year experiment when it reinstated a law that allows publishers to set the prices of both their printed and electronic books, so that, no matter where a book is sold — a bookstore, supermarket or Amazon — the price is the same.
When the law was lifted in 2007, free market theorists expected that giving retailers free rein to set prices would benefit book buyers. But book prices actually rose over the next four years, while many bookstores closed and publishers increasingly struggled to invest in new authors.
Switzerland is one of more than a dozen European countries, along with Japan, Mexico and Argentina, that have laws mandating fixed book prices.
The thinking behind these laws is that a large number of well-stocked bookstores is necessary to support the publication of a wide variety of books, which in turn is essential to a country’s cultural and civic life. Bookstores incur substantial costs providing services that promote books and generate demand for them, such as hosting author readings, employing well-read staff, and maintaining an extensive inventory for browsing. Fixed prices allow bookstores to recoup these costs.
In the absence of fixed prices, discounters, including Amazon and big supermarket chains, can “free ride” on these services, benefitting from the increased demand for books, but not sharing the costs. Bookstores then lose market share and revenue, and decline in number. Without a dense network of stores promoting a wide range of titles, consumers gravitate more toward bestsellers, harming smaller print-run books, many of which no longer find enough readers to justify publishing. As big retailers gain market power, they use it to demand extra discounts from publishers, particularly on bestsellers. This erodes the ability of publishers to invest in new authors and forces them to raise prices on non-bestsellers, further reducing the variety of books published and sold.
Consider the United Kingdom, which overturned its long-standing fixed price book policy in 1995. Since then book prices have soared. According to indices maintained by the Office for National Statistics, book prices rose 49.6 percent between 1995 and 2007, while all consumer prices increased 27.6 percent. Meanwhile, the share of the retail price of a book flowing to publishers has dwindled as large retailers, including Amazon’s UK division, have claimed more of the revenue for themselves.
The U. K. book industry now looks more and more like that of the United States. Independent bookstores have lost ground, falling to less than 10 percent of the market, as book sales are increasingly dominated by Amazon and superstores like Tesco and Wal-Mart-owned Asda. As a 2008 analysis concluded, “The defense of the Net Book Agreement from the 1950s to its demise in 1995 was that without it there would be fewer stockholding bookshops, higher prices and fewer new titles. The evidence presented here tends to validate all three predictions.”
Meanwhile, in Germany, which has had fixed prices since the 19th century, the cost of books has fallen steadily in comparison with other goods over the last decade. The country’s network of publishers and bookstores remains robust. Germany is home to about 4,000 bookstores, more than exist in the United States, which has four times the population. German publishers also put out about twice as many titles, relative to population, as their U. S. counterparts.
Recently three French economists produced a study comparing 12 European countries, some with fixed price laws and some without, and concluded, “Over the past decade, the growth rate of book prices is weaker in countries with fixed prices than in countries with free prices” and “the increase of new titles is stronger in the countries which have a fixed price.”
E-Books Now, Printed Books Next?
Back in the United States, there have begun to be a few murmurs in the publishing industry about extending the new e-book pricing model to printed books.
Printed books present a more complex set of issues, but if implemented prudently, a commission-based pricing system could help to reverse decades of consolidation, which has left Amazon and a handful of big-box retailers in control of the book industry.
It would also ensure that the many services independent bookstores provide — the events, the expertise, and the aisles for browsing and conversing, all of which greatly benefit readers, authors, publishers and communities — cease to be potentially lethal financial liabilities and instead become competitive advantages.
More:
- As we document in a new white paper for the specialty toy industry, manufacturers across many sectors are exerting greater control over the pricing of their products to prevent a few big retailers from monopolizing distribution and undermining the long-term viability of their industries.
- In a 2007 decision, the U. S. Supreme Court concluded that manufacturer-mandated retail pricing can foster competition and provide consumer benefits. The ruling reversed a decades-old precedent that had prohibited manufacturers from setting retail prices.
