Macmillan CEO John Sargent on the agency model

Macmillan CEO John Sargent on the agency model

The publisher Macmillan was thrust into the spotlight when Amazon stopped selling their books (both paperbooks and e-books) during a dispute about how books were going to be sold and priced.

Traditionally, publishers have been wholesalers.  They have produced the books, sold them to retailers, who then sold them to customers.

The publishers set a “list price”, which was the same everywhere.  The retailers then adjusted those prices, as they thought appropriate for their customers.  This created, among other things, a competition between the stores.  For example, a store might choose to have a “vampire sale” and give an extra ten percent off on all vampire books.  Stores might give a certain percent off on bestsellers.

There is a new model, which changes the relationships between publishers and retailers, retailers and readers…and publishers and readers.

I need to make a disclosure here as I talk more about this: I’m a former boookstore manager, so it’s reasonable to assume that I may be prejudiced in favor of the old model.  I probably have a deeper sense of what retailers do than the average reader.  However, in the digital world, I’m also (in a very minor way) a publisher.   I publish my own titles in the Kindle store, through Amazon’s Digital Text Platform.

There was a lot of controversy over the Macmillan/Amazon dispute.  I think my most active poll by far has been where I asked who was right, Amazon or Macmillan:

As I write this, there are close to 400 responses, and Macmillan has a 7% lead.

I want to commend Macmillan CEO John Sargent for making a public

statement

on the issue, and allowing comments on it.

The statement is clear and contains significant information.

I recommend that you read it, and comment on it, if you like.

I’m going to address some of the key points in this post.

1. The agency model will take effect at the end of March. I expect that we’ll see the impact of the changes when I do my Snapshot for March, although it may take until I do the Snapshot for May

2. It will affect all e-book retailers (who will cease being retailers and become sales agents).  This has been, I think, a common misperception.  There was an idea that this was only between Amazon and Macmillan.  It’s a really important point…Macmillan’s e-books will be the same price everywhere: Amazon, Barnes & Noble, Sony…it won’t matter where you buy them, the price will be the same.  That’s because you’ll actually be buying them from Macmillan directly, and the former retailers just process the sale.  This will, by the way, possibly help Sony at the retail level.  Between the three, their prices have tended to be higher on some books.  I’ve presumed that is because they don’t have a proprietary format, but probably pay a licensing fee of some kind to Adobe.   That’s a plus for you Sony EBR (e-book reader) users initially.  However, since Sony will make considerably less money on each title, that will be a negative over time.  Without the agency model, retailers pay fifty percent of the list price, and they get whatever they can based on the retail price they set.  They may even lose money.  Macmillan has been talking about how retailers will make more money…but that’s based on higher prices.  If your prices were higher initially, you don’t benefit from that as much.  Sony may have to seriously look at its EBR business.  The question is whether they should continue the e-book store…they might as well sell the EBRs going forward.

3. Sargent’s first numbered point is that the agency model eliminates “windowing” (releasing e-books considerably after a hardback is released).  This is one of the most interesting statements:

“Readers were clearly frustrated at the lack of availability of new titles, and the change to the agency model will solve this problem.”

My question on this one is, “Why?”

There’s nothing in the traditional publisher/retailer relationship which mandates windowing.  Lots of publishers were releasing books simultaneously under the old system.  Several publishers announced “windowing” or “staggering” (see this earlier post), but it was news when they did. 

Macmillan may see financial reasons not to delay releases under the agency model, but I don’t see the two as tied.  Macmillan told Amazon that they would face significant windowing if they did not adopt the agency model…that suggests that Macmillan can live with windowing.  If they chose to not window under the traditional model (as many other publishers do), they could.

The statement also says they are working to make more e-book versions available…that’s a great thing!  They’ve said they will make less money under the agency model, so presumably, the agency model does not financially enable these additional availabilities.  This also seems like it is conflating the agency model and the other elements of point 1.

4. Sargent’s second numbered point is on pricing, and that’s an important one.  Businesses don’t need to reveal this kind of information, and again, I commend Sargent for doing so.  He talks about how p-books (paperbooks) are priced.  He doesn’t mention retail prices in this paragraph.  For example, he mentions that prices for p-books range from $5.99 to $35 (mass market paperbacks to hardbacks).  Those are the list prices, set by the publisher.  They are sold at different prices.  For example, Winter Garden is published by St. Martin’s Press, which is part of Macmillan.  It’s on the New York Times Bestseller list.  The list price is $26.99, and Amazon is selling it for $15.97 (41% off).    If the e-book is sold at $12.99, that’s less than a three dollar difference. 

That’s really key!  The e-books are not going to be seen as a huge savings over the p-books if it is based on the price the reader actually pays.  Readers (well, let’s say consumers…a lot of books are bought at gifts) aren’t going to say, “The hardback list price is $26.99 and the e-book price list price is $12.99.  Therefore, I’ll definitely buy the e-book…even though the price I pay is actually only a few dollars difference.”

People will care about the price they would pay, not about how discounted that price is.

The agency model will make the sales price of e-books and p-books much, much closer.

Many people perceive that the e-book is worth less to them, since they can’t resell it or give it away.  I don’t have that opinion myself, but many consumers do.

Here’s the real question:

If the agency model makes sense for e-books, why doesn’t it make sense for hardbacks?

Why doesn’t Macmillan make Amazon sell hardbacks for the list price?

I find that a very unlikely scenario.  How would it benefit them for Amazon to almost double the price of the best sellers? 

Let’s look at the prices mentioned:

“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.”

Is that $28 the retail or the list price?  That makes a big difference.  I find 93 Macmillan hardback books published in the last thirty days in the Amazon store:

Recent Macmillan hardbacks at Amazon

Looking at those, though, many are more than $50, so I’m going to do this with St. Martin’s:

Recent St. Martin’s hardback books at Amazon

I get 19 of those.  Of those, none retail for over $20 currently.  Only one of those lists for under $20.  Here are the list prices:

List Price Count
 $   27.99 1
 $   26.99 5
 $   25.99 5
 $   24.99 5
 $   22.99 2
 $   14.99 1

He states that New York Times Bestsellers will be $12.99 or lower.  The ones that are $12.99 will be $3 higher than they generally are now (at Amazon and Barnes & Noble), although we don’t know how much lower the others will be, and how many will be at which price.

E-books which have a new paperback edition equivalent will be priced from $6.99 to $9.99.

Sargent points out that the price differential between the e-book and the p-book will be lower at lower prices, which is the current situation.

5. If a paperback edition is not released, the e-book price will still be lowered at some point.

6. Sargent states that the majority of Macmillan e-book prices will still be below the ten dollar price point.  Why?  Only about a third of the e-book business is comprised of books that have recent hardcover releases.

The volume is in the backlist.

Interesting!  Two thirds of the e-book sales are backlist?  However, that’s where the difference between e-books and p-books will be the smallest, right, since the prices are lower?  The profit per unit may be lower as well, of course.

Sargent also says:

“In short, we will continue to do what we have always done: provide the reader with a vast selection of great books over a wide range of prices.”

This makes it sound like business as usual.  It’s not…this is very different.  Publishers have not provided readers with a range of sale prices. They didn’t provide sale prices at all…retailers did that. They did set different list prices, and those affect the sale price, of course.  On an individual title, there will be fewer price options…since the price will be the same everywhere.

Again, I want to commend John Sargent for making the statement…it’s brave, and helpful.  He makes it clear that he only speaks for Macmillan: again, that’s a good thing to say, and not necessary. 

What do you think about the Sargent statement?  Let me repeat that I recommend you read it, rather than just go by my interpretation of it.  But I think Mr. Sargent for giving us something to interpret, and I look forward to seeing other comments, which he indicates he will make.  In particular, he’ll address illustrated books at display technology evolves.

Feel free to comment on this post…I’d be interested to hear what you have to say.

This post by Bufo Calvin originally appeared in the I Love My Kindle blog.  If you are reading this blog for free and would like to support it, just click here and then shop at Amazon.

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7 Responses to “Macmillan CEO John Sargent on the agency model”

  1. lp Says:

    I hope I’m wrong, but my general impression is that this will result in a significant increase in e-book prices (for MacMillan and other “agency” publishers at least). “New release” prices are clearly going up.

    Despite the reassurances that “backlist” titles will be less, I’m not sure that I believe that prices will go below $9.99. Perhaps this is purely a fluke and limited to certain authors I like to read, but I seem to have noticed a trend where only “trade” paperbacks are released (at higher prices), not mass market paperbacks, even for authors where mass market paperbacks were common. I also noticed that “backlist” e-book titles went up in 12/08 or so, and have generally continued up. Again, it’s possible that this is merely an artifact of the authors I read.

    If the “paperback” e-book prices are keyed to the “trade paperback” prices, then even “backlist” titles will be higher than offered in the past. As a former reader of mass market paperbacks (for recreational reading), I find this very disappointing. It will also mean that I will continue to buy fewer books by authors I used to read.

    • bufocalvin Says:

      Thanks for writing, lp!

      That’s an excellent observation on the “trade paper” only trend. I don’t have the stats to prove that, but it doesn’t seem unreasonable.

      As to backlist prices rising, that’s a reasonable consequence of downward pressure on new book prices. A lot of people don’t seem to go through that thought process. Let’s say publishers used to plan on 100 buckunits (a made up money scale) for the hardback release. Then, let’s say that e-books cut into that volume…that not all e-book sales are sales that otherwise wouldn’t exist. Downward price pressure has the publishers making 80 buckunits instead of 100. Let’s even say they make an extra 5 buckunits for the e-book sales. Do the publishers just walk away from that lost 15 buckunits? Nope. They make it up by raising the prices on other things. They could make it up on volume, hypothetically, but on the hardback side, that would be a huge increase.

      Your observation about buying “fewer book by authors I used to read” is important. Either you’ll find new authors, read less…or the authors you read will leave the major publishers. It might be a combination of those, of course.

      Interesting times!

  2. Sally Says:

    I hope – for the sake of authors with traditional publishers – that this agency change doesn’t create such a big gulf between the prices and availability of trad pubs and the indie pubs that sales really drop for the former. I can easily see that happening and they’d have no one to blame but themselves.

    I know I have found myself reading more indie pubs than I had ever read before I got my Kindle – and they’re GREAT! I’m less and less interested about what’s on the NYT best sellers list. I have a friend (a NYT bestseller) who’s third book in a trilogy came out last month. I had pre-ordered the first two (pre-Kindle, for me), but this one isn’t available for the Kindle, which is what I buy now. I’m sure it will be eventually (although there’s no release date mentioned) but honestly I find so many other books I’m enjoying, I’m not in any hurry. Now that’s sad!

    If/when my friend’s book is finally released on a Kindle, she is going to have to compete with other indie publications and I find myself wondering how that will go for her. As much as I love her, and wish her well, I have to say that I’m happy to see the competition because I think its good for readers. When she first got signed and was part of such a big publishing group we were all real happy for her. Now, being part of a trad pub and therefore not being allowed to release her book when she wants and for how much she wants may end up being a bad thing.

    Sargent’s got a plan, trying to save his business and empire. But I think he’s miscalculated the competition.

    • bufocalvin Says:

      Thanks for writing, Sally!

      I completely empathize with the authors. For a long time, the only way to get your book to people, really, was to get accepted by a tradpub. How exciting when it finally happened, after maybe hundreds of rejections in some cases! Now, that’s increasingly not the way. Many authors would just as soon write, and having nothing to do with the business end. They may find out, though, that they have to take a more active role, or at least, make one big decision.

      People with Kindles say they read more….so maybe it won’t hurt old sales as much, if most of the sales are ones that wouldn’t have happened otherwise…

  3. Cathy Says:

    What publishers don’t seem to realize is that for print books, the publisher only gets paid the first time the book is sold. The publisher does not get paid when someone checks out a book from the library (other than the first time it’s checked out), trades it in, donates it, gives it away, etc. For ebooks, the publisher gets paid for each reader. Sure, if my husband had a Kindle, he could share my account with me and read my books, but we have different tastes. I suspect the vast majority of ebook “copies” are only read by one person. Yes, that might change, but it’s not the case now. In theory, publishers will “make up in bulk” if they sell ebooks for less because they are getting paid more per reader. And it should be enough less to make up for the fact that I can get a few dollars in trade at the used book store for the print book.

    • bufocalvin Says:

      Thanks for writing, Cathy!

      Interesting ideas. In my house, we do take advantage of the multiple device licenses…but I can’t say that it means we buy fewer books. We typically wouldn’t have bought two copies…we would have read sequentially instead of simultaneously.

      One could argue that the fact that I’ll read a book that we got for my Significant Other (SO) might mean I don’t buy a different book I would have bought otherwise (since I already have something to read). It’s a complicated calculation…when you gave a paperbook to a friend, would that person have actually bought the book otherwise? I think this may be worth exploring further in a post…thanks!

  4. Penguin settles with DoJ over Agency Model « I Love My Kindle Says:

    […] Macmillan CEO John Sargent on the agency model […]

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