Monday, April 16, 2012

The Agency Model Sucks

If you're a regular reader of my blog, no doubt you've heard about the Department of Justice filing suit against five of the Big 6 publishers for collusion. If you haven't read the complaint, you should.

Personally, I don't care if their alleged collusion was illegal or not. I've been known to break laws on occasion myself.

What I do care about is how authors are reacting to this news.

I won't point fingers, but a Google or Twitter search will show how many authors seem to think Amazon is bad, the agency model is good, and the poor Big 6 are getting the shaft.

Uh, no. That's just plain wrong.

I'm going to explain why the agency model in this particular case is indeed bad for authors. But first go read April L. Hamilton's terrific breakdown of arguments and statements erroneously defending the Big 6.

Before I begin, let's make sure we're all on the same page about what the agency model is. Here's a detailed explanation, but in a nutshell it is this: in a wholesale model, the one supplying the goods sells to a retailer at a predetermined price, then the retailer sells to consumers at whatever price they see fit.

In the agency model, the one supplying the goods gets to set the price for consumers, and then gives the retailer a set percentage (in this case 30%.)

It should be obvious that the one who sets the price has a great deal of power over the market.

The agency model by itself is not illegal. Retailers can choose to adopt any pricing structure with their suppliers as they see fit. And as I said before, I care less about the legality of this particular business relationship, and more about if it was good for authors.

And it wasn't, for this very big reason:

Under the Agency Model Authors Make Less Money

I've gone into this in detail before, but let me distill it.

Under the prior model, Amazon bought ebooks at a percentage of the recommended retail price. Then they priced them how they saw fit.

The recommended retail price for ebooks was often about half of the hardcover price. So a $25 recommended retail price meant Amazon paid $12.50 for the ebook.

According to most contracts, the author made 25% of the net price the publisher received. So at the above numbers, an author would make $3.12 NO MATTER WHAT PRICE AMAZON SOLD THE EBOOK FOR.

In other words, if Amazon wanted to sell the ebook for $9.99, the author still makes $3.12.

Sell it for $5.99? Author makes $3.12.

Sell it for 99 cents? Author makes $3.12.

So what happens when the agency model comes into play?

First of all, Amazon no longer controls the price. We all know that this is BAD, because Amazon became the giant billion dollar company it is today by ruthlessly gouging customers, forcing them to pay high mark-ups at unreasonable prices.

Oh, wait a sec... Amazon doesn't do that. In fact, Amazon works its butt off trying to keep prices low. That's why so many people shop there.

Now, I've got reams of data that show lower priced ebooks outsell higher priced ebooks. My higher-priced legacy novels are underselling my lower-priced self-pub novels by 1 to 5 or worse.

In other words:

With the wholesale model, authors made more money per unit and sold more units.

If you are an author defending the Big 6 and the agency model, repeat that in your head until it sinks in.

With the wholesale model, authors made more money per unit and sold more units.

Funny thing is, publishers also made more money under the wholesale model. But instead the Big 6 decided they wanted an agency model.

Authors still get 25% of net. But net has gotten lower in almost all cases.

With the wholesale model, net was $12.50. With the agency model, net is 17.5% of the list price set by the publisher.

So the publisher sells it for $12.99, the author makes $2.27.

Sell it for $9.99? Author makes $1.74.

Sell it for $5.99? Author makes $1.04.

Sell it for 99 cents? Author makes 17 cents.

The Big 6 don't like low priced ebooks. It hurts their paper sales, and paper is the model they hold distribution power over. So once the agency model became adopted, the Big 6 kept ebook prices high.

In other words:

With the agency model, authors made less money per unit, and sold fewer units.

Is this sinking in yet? The wholesale model was better for authors. It was also better for customers, who benefited from lower prices.

So why are some authors defending the Big 6 for taking food directly out of their mouths?

Could be ignorance. Could be Stockholm Syndrome. Could be they feel the need to defend the industry that made them rich or successful (though not all authors defending the agency model are rich or successful.)

The point is, no author should be on the Big 6's side here. Even those who fear that Amazon will someday become a huge monopoly that will destroy the world by offering low prices, excellent customer service, and a platform for authors to directly reach those customers.

Q: But Joe, aren't you benefiting from the agency model? After all, isn't that what KDP is?

Joe sez: Absolutely. When I self-publish, I can set my own prices. I'm able to find that sweet spot in pricing to maximize profits. I love the agency model. It's terrific if you are the content creator.

But I don't want an archaic, inefficient industry controlling the prices of the books I've written to further their own Machiavellian agenda. It's absurd that I'm the one who wrote the book, and I get 17.5% of list price, while the company setting my list price is getting 52.5%. Even worse, that company setting this list price is NOT PRICING TO MAXIMIZE REVENUE. They are PRICING TO PROTECT THEIR STRANGLEHOLD ON THE INDUSTRY which is HURTING MY INCOME.

Q: But Joe, if the Big 6 are no longer allowed to use the agency model, Amazon might also take the agency model away from self-pubbed authors.

Joe sez: I'd be happy to go into a wholesale arrangement with Amazon. As you can see by the numbers above, a wholesale arrangement can also be beneficial to authors.

Q: But Joe, what if Amazon cuts author royalties and raises ebook prices?

Joe sez: Amazon has a clear history of trying to lower prices, not raise them. Right now the Big 6 legacy publishers are the ones who want high prices.

As for Amazon lowering my royalties, as long as there is competition I doubt that will happen.

Q: But Joe, if all the Big 6 ebooks are priced low, no one will buy yours anymore.

Joe sez: I disagree. I believe I'll sell even more ebooks and make more money than I am now if all prices drop.

First of all, lower ebook prices encourage buying across the board. Low prices fuel impulse buys. People are looser with their wallets and buy more then they normally would when prices are low.

Second of all, lower ebook prices allow the entire market to grow, as higher prices are a barrier to entry for many. When we have $49 ereaders and all NYT bestsellers are $2.99, more people will adopt the technology and buy the media.

Third, we're entering a global marketplace that will have an infinite, inexhaustible customer base. We'll never run out of readers to sell to.

Fourth, at low prices, there is no competition between ebooks. Instead of spending $19.99 on the new JK Rowling, if her latest was $3.99 a reader could buy that along with five of my titles.

In the comments, some keep insisting that once legacy ebook prices drop, indie sales will drop because of competition. Here's how I see it:

Ebooks aren't cars, where the buyer purchases one that will last for years. People who read books tend to read more than one.

If you read for pleasure, and ebooks become cheaper, I predict you'll buy more. This isn't about competing.

If a customer has a $25 book budget for the month and the choice is between my new hardcover and Patterson's, that's competing for dollars.

If we're both $3.99, the reader will get both. As a species we buy in bulk and hoard, even if we never use what we buy. That's how we're wired. And if prices came down unilaterally, I predict sales will go up unilaterally because the overall pie will get bigger--because more readers will enter the market--and those readers in the market will be able to buy more with their money.

Think about your own buying habits. Or think about what stores do. When you need toothpaste, and a tube is $4.99 or two for $5.99, which do you buy? Think about the bargain DVD section at Best Buy, where every movie is $2.99. If there is more than one you're interested in, do you get both? Contrast that to the new releases, which are $19.99. If there is more than one you want you have to think about it before buying both. At the lower price, you don't think.

Now think about going to the store to buy a refrigerator and expecting to pay $1000. You're thrilled to see a model you like for $399. Do you leave the store with $601 in your pocket, or do you keep shopping because you feel you saved money and can now spend some of it?

Lower prices will be better for everyone.

Q: But Joe, it isn't a question of money. It is a question of time. If people load up their Kindles on free or cheap ebooks, they'll never have time to read them all, which means they won't buy more.

Joe sez: People are already loading up their Kindles. That hasn't precluded buying more ebooks. Readers have always had To Be Read piles. But now they're cheaper to acquire, and portable.

Q: But Joe, Amazon is the devil and wants to eat my children.

Joe sez: I simply don't understand why authors are afraid of Amazon.

Amazon wants to lower ebook prices. The Big 6 want to raise them.

Amazon has given authors more opportunity than ever before in history, allowing them to make money. The Big 6 has "nurtured" thousands of my peers into depression and poverty.

Those who fear what will happen when Amazon rules the publishing world should instead fear the cartel that currently controls the publishing world: the Big 6. Forcing the agency model has hurt authors and consumers, and that's a damn poor business model and not one I want to align myself with.

You shouldn't worry about being eaten by a lion tomorrow when there is currently a pit viper biting you in the ass. And if you're defending the pit viper, you're an idiot.