Publishers Try to Protect E-Book Prices from Apple, Amazon

HarperCollins (NWS) is in talks with Apple (AAPL) to make e-books available for a Tablet device that Apple is widely expected to launch on January 27, The Wall Street Journal reported Monday. Aren't other major publishers negotiating too? And considering the skyrocketing growth of the e-book market -- which jumped 200% in November, to $18.3 million, according to the Association of American Publishers -- shouldn't the big houses have made sure they could sell their wares on every available device, especially one that many observers think will be a game-changer in the manner of the iPod?It turns out that HarperCollins's plans are part of a larger story -- and now that Amazon (AMZN) has fired its own salvo, the battleground for e-books, and how to price them, just added a lot more blood.

Agency Model vs. Wholesale Model

The WSJ reporting only that HarperCollins was "expected to set the prices of the e-books, which would have added features, with Apple taking a percentage of sales." Maybe e-books would sell via iTunes, or maybe via some other new platform. Or maybe not. Details were few and far between, because, according to Publishers Marketplace's Michael Cader, Apple is negotiating confidentially with most or all of the six major publishers to make e-books available on a specific pricing and consignment model.

With the cat partly out of the bag, Cader describes what could be in play: changing basic selling terms from the wholesale model to an "agency model," under which the publisher retains possession of e-book files and pays a commission to any company authorized to sell them.

The point of this model: to alter the price landscape. The wholesale model has publishers setting the retail price, while sales partners can discount as they please. But under an agency model, the publisher sets the price, and no one -- not even a certain Seattle-based online retailer -- could discount it.

Publishers' talks with Apple are surrounded more by speculation than concrete fact, so it's unclear how this agency model might work in the long run. The Journal suggests that publishers could create "enhanced" e-books for the Apple Tablet, with added features that could "command higher retail prices for publishers than current e-books," with "new releases of enhanced e-books [selling] for $14.99 to $19.99."

Amazon Steps Into the Ring

Whatever happens, Amazon apparently is already reacting. Cader reports that Amazon executives are also meeting with publishers in New York this week, and "at least some publishers and agents are braced for significant pushback by the e-tailer, which has already told publishers that the two most important things to them are simultaneous e-book release of new titles and pricing."

Which is why the timing of Amazon's newest initiative -- upping the royalty rates for authors who self-publish e-books through its Kindle Digital Text Platform to an eye-popping 70% by June 30 -- is highly suspicious: a move that would appear to fire another shot across the bow, both on asserting its e-book market dominance and saying to publishers that their way is the only way.

The conditions of these new royalty rates tell the story. Self-published authors get the 70% rate as long as they ensure that their books are available in every conceivable format Amazon offers, including text-to-speech capabilities; can be sold "in all territories where the publisher or author holds the rights"; and, most tellingly, is priced between $2.99 and $9.99. So to get that shiny new royalty, "books must be offered at or below price parity with competition, including physical book prices," and in particular, the digital list price must be 20% below the lowest possible physical price.

With Apple, big publishers may have a chance to take control of one of the most important elements -- pricing -- to help shift the marketplace to terms more to their liking (and increase revenues as e-books grow in stature).

But even if Amazon's royalty move sounds like a defensive moment right now, the company isn't likely to stay on the ropes for long. It's determined to win the price war, to go toe-to-toe with Apple, and potentially to knock out publishers' idea of how to do business.
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