Way to go, Steve Jobs. While people are playing Angry Birds on a $500 piece of silicon and glass, they'll probably not know how he helped destroy the book industry.

I really appreciate this analysis of a complex situation. Thanks.

While I certainly don't have enough experience in the industry to understand all of this, I can thank you, Nathan, as usual, for laying it out in a way that I at least understand it better.

If I'm mad at anyone, and I'm not really mad at anyone, but if I was, I would be made at anyone who sells any book for %0.99. I just think it's unfair to everyone to dilute the value of literature that way.

I suppose for people who like to read pulp, paying $0.99 for something that's really worth $0.99 must be nice, but in my opinion, good books are worth a lot more than that. And now the problem is that the average consumer expects e-books to be extremely cheap, and doesn't see any reasoning behind paying much more for them.

As a writer and a librarian I have never understood why the hard copy and the ebook aren't packaged. Buy a hard copy--meaning actual object int he world--and for a built in extra amount--automatically receive a digital version. It's a matter of repackaging not repricing. also solves the"I can't share this or get it signed by the author" complaint --both very valid ebook downsides.

In an effort to maintain business as usual publishers aren't adapting--and those who don't adapt die.


CJ

Thanks for a needed summation of the DOJ action and your unique view on how we got here. I'm for books in any format--the more the merrier.

Recently John Green was marveling on Twitter that people would email him to tell him they were pirating his books. I checked the price of THE FAULT IN OUR STARS on Amazon... $11. More expensive than the hardcover??!?

And he doesn't understand why people are emailing him? We're not flaunting the fact that we pirate. We're making him aware that we want to support amazing authors like him but we find it difficult when we just can't afford to. It sucks. Going to the library isn't an answer: we're still not paying. And people like me want to own stuff.

But it must be nice to be a rich, talented author and have a snobby attitude about the whole thing. "They're pirating my e-books? Whatever for!"

People like John Green are people publishers will listen to, but they don't listen or they don't care. It's sad.

(And for the record, I have never pirated a John Green book or emailed him about it.)

As someone who has switched entirely to self-publishing, I hope that the long-term result will be the elevation of indie publishing and the death of the publishing industry's death grip on literature.

Thanks so much for the breakdown here. I shudder when I think about how much I've spent on e-books since getting my Nook last year, especially considering I was always an I'll-wait-till-the-library-carries-it kind of girl. But at the end of the day, it's about convenience. People will always pay for it.

If people read the Steve Jobs bio they'll understand more about what he was trying to do with e-books. Which, basically, is the fundamental thought behind Apple: control over everything, from books to the entire web. Jobs, admittedly, wanted censorship, apps instead of links, and control over all pricing. The entire empire was based on a great deal of hype about nothing that couldn't be done or reproduced just as well. And the e-book issue is just something that's finally come to a head. It's been brewing for the last twenty years.

The publishers are gasping for air so hard that they have completely forgotten both commonsense and the need to innovate. Look at JK Rowling's new book - $19.99 is the Kindle list price. All that does is push people into a much easier rationalization of piracy.

I'm curious as to how the holdouts will play this. With the publishers that settled, their prices are going to come down. So, do the holdouts lower their prices - the very thing they were trying to avoid - or keep their prices high and blatantly alienate readers?

As for the "bundle an ebook with a hardcopy" idea that is often floated - there are too many of us that have no interest in the hardcopy. We need real innovation.

I've followed your blog for several years now, and have to thank you for this very clear and concise explanation of the events and circumstances surrounding the issue of agency model pricing. Personally, I am indebted to both Amazon and Apple for brewing the perfect ebook storm (Amazon for allowing authors to self-publish easily to Kindle and Apple for convincing trad publishers to keep ebook prices high) that provided me the opportunity to publish, to find readers, and to actually make a living doing what I love. At this new turn in the road, I am very interested to see how things will shake out.

Jaimie-

John Green (like all traditionally published authors) has no control over what publishers charge for his e-books. I would be flabbergasted too if people wrote to me and were like, "Oh hey! Stole your book!"

What about the reader? I get the impression publishers care as little about readers as they do about writers - and that's saying something.

For David Gaughran's masterly summing up of the situation, go here: http://bit.ly/IRwuUp

The transition period could be a mess. E-book stores can't sell e-books without a contract. If those three publishers have to cancel their contracts with all of the e-book stores, it's going to be mid-2010 all over again, when only a few sellers had Agency titles, most of them didn't have all of the publishers, and it took even Amazon six months to get a Penguin contract in place.

Random House wasn't sued, and their Agency Model will continue on as before. The DoJ wasn't concerned about the Agency Model but rather how it came about.

The settling publishers are permitted to continue using Agency Model, but for two years they can't control retail prices other than having a contract clause forbidding sustained sales below cost. (And no Most Favored Nation clause for five years.)

The "no sustained sales below cost" clause could be bad news for mid-list authors. It says that the total discounts offered by the seller on the publisher's titles over the course of a year cannot exceed the seller's commissions on that publisher's titles over the course of the same year. So if Amazon chooses to lose $2 on each of the bazillion e-book copies of JK Rowling's The Casual Vacancy that they sell, they're going to have to make up that $2 bazillion with increased prices on Hachette's other e-book titles. And I can pretty much guarantee you that it won't be on other front-list titles.

Nathan-

I was speaking of influence not control. And as a writer and aspiring author, I would not be flabbergasted if someone wrote to me to say they stole my $11 e-book in this climate. I recognize there are valid opinions both ways though, and levels of empathy.

(Although it would be great if the world believed as I did, and I were running the world for that matter.)

Going off topic a bit, but it seems to me the answer to this problem would be to release ebooks with paperbacks instead of hardcovers. Hardcover sales stick, bookstores stay alive, and ebook prices drop. Customers would have to go through an adjustment period, of course, but considering there are millions of ebooks already available, I think even the most avid reader could manage to keep busy while waiting the few extra months for the latest Rowling, or whatever.

Great summary, Doug.

Just ordered my copy of J.W. for P. of the U.

You know, in paper.

I read this post and thought: Hmmmm, I need a coffee. And a nap.

@Robert -

I don't want paperbacks or hardcovers or anything physical at all. I just want a blasted e-book at an affordable price since I kicked out $180 for an e-reader without ads. And I don't think I'm alone, although I can't say I'm in the majority either.

As usual, your post makes the whole wargame clear. Thanks for this, as it cleared up some confusions from other posts attempting to do the same.

Jaimie-

The problem is everybody else wants something, too

Authors want to keep the power on in their homes and put food on their tables

Publishers want to add new wings to their Hamptons mansions

Jeff Bezos wants to sit behind his desk and laugh maniacally

Readers want affordable books.

Obviously there's some clashing going on.

The thing that bothers me about ebooks, that was not an issue with traditional books is the fact that they lock you into a device. This was an issue, with the ipod, until itunes plus.

I would prefer that they made all books available in all places for both devices, and the sales strategy became about the books rather than the device. The reason I have not adopted ebooks yet is because this big obnoxious rift.

Of course I realize this won't happen with the major players, and that it hasn't happened in the past, ie: apple ipad/iphone, etc. Fortunately the other devices have a foothold because of the agency model, maybe the market has been established enough that this is no longer an issue, especially if there is a limit to the amount of time a book can be sold at cost (For this to work, it can't be a balancing act with another book)

JWKing

This hurts my head. Maybe if you added a dragon in the middle of the story...

I'm watching way too many cartoons.

But thanks for trying to clarify this situation, Nathan. Happy Friday!

What's happening at the book launch tonight, Nathan? Can kids come?

Kids welcome! There will be some prizes, then I'll read a few chapters and answer some questions. Appetizers on hand.

Wow, I knew you went to the tech-y world but CNET? They're the best (I recently learned). Congratulations!

Great summation about books today, thanks.

Sheila

@JWKing/Anonymous:

Non-DRMed e-books can be read on anything.

For DRMed e-books, two simple rules:
1) don't buy a Kindle
2) don't buy e-books from Amazon, B&N, or Apple

Adobe EPUB e-books, from e-book stores other than those three, can be read on just about anything except a Kindle.

I have DRMed e-books on my NOOK from Sony, Kobo, Google, Copia, and a number of other e-book stores.

Adobe EPUB is the universal DRMed format. Universal, that is, except for Kindle — Amazon went to some trouble to block that.

I think the two spectrums of this clash are the main problem. This is indicative of our culture: politics, socio-economics, education, I could go on.

The middle ground would suit most folks fine, all things being equal. $3-$5 ebooks (depending on length, quality, genre, author brand). $10-$15 trade paperbacks (of course, the mass paperbacks should be priced close to the ebook price), and $12-$20 for harbacks (coffe table/monstrous tomes/textbooks could be higher).

That hierarchal tier would seem to be reasonable, whichever pricing model is in place. At 50% ebook royalties and 18% print, the money would still flow to authors and publishers because people would have better choices. Better choices = more revenue. More revenue = a bigger pie to divide and an escalated economic.

Publishers need to see the light: the audience drives and determines price/value determination, not publishers, not authors. If they aren't careful, Amazon, Smashwords and the entire lot of self publishers (of which I am a part) will bury the industry in a 99 cent market by creating in the majority of customer's minds that that is the total worth of a book. Sad, I know. But it is the truth.

As a friend said, "who needs soap operas when we have the publishing world to keep us entertained!" Just reading about this gives me a headache, but you're succinct analysis makes it easier to understand. Thanks!

sounds so complicated

This sounds like a game of "Spin the Wheel for a Winner"

Seems things from the DOJ came about, not because of outrageous prices, though some politically savvy up and comer will use that to tout their "I'm with the people" facade. But it seems they were upset that the following happened (dramatized for effect):

Steve Jobs: Look here see, there's money to be made in this e-book-o-lution, see.
Big 6: Yeah, yeah, Jobsy. Yeah.
SJ: So here's the plan, see. Change from that wholesale model. I got a plan that has a better name, the Agency Model, see.
***Jobsy explains the workings of the Agency Model, distracting the Big 6 with a sexy half dressed vixen and a bare chested male model ***
Intern of one of the Big 6 holding a calculator: Uh, Jobsy, we're getting more money -
***Jobsy snaps his finger, grunt sporting black shades grabs intern to have a talk outside***
SJ: Any questions, see?
***vixen and male model strut back and forth, the Big 6 heads moving back and forth as if answering "No"***
SJ: Good. Yeah. All good, see.

So the Big 6 go from nail-biting cost competition because of low, low pricing by Amazon to higher pricing making less money while the readers end up having to pay more...uh who's the winner in the game of "Spin the Wheel for a Winner" in this situation?

Even after the DOJ suit is settled, fought, won or lost, who, in the end, will be the winner?

They gave publishers the ability to set their own prices and receive 70%. Publishers jumped at this and raised prices, but actually received less money per copy sold than in the wholesale model.

And this is where I get stuck. I don't understand how going from 50% (wholesale) to 70% (agency) royalty AND raising prices results in less money per copy under agency vs. wholesale. The math just doesn't add up for me - which, looking at your post, shows that the above description is a bit misleading.

Your example compares apple to oranges prices - i.e. wholesale is 50% of the hardcover price whereas agency is 70% of the ebook price. If you're going with that, then the price those percentages are based on doesn't increase, it drops dramatically (from the hardcover $24.99 to the ebook $12.99 in your example). I understand that the price is raised for the consumer, but effectively the publishers were getting paid off the hardcover price not the ebook price, which seems kinda wack-a-doodle no matter which way you look at it.

So the question for me becomes what does the new settlement actually do? If they have agency (70% of ebook price - same as now), but Amazon is allowed to discount ... um ... publishers make the same money they do now, right? The cut comes from Amazon's pocket. The only thing that changes is that Amazon decides where to cut prices to gain market share, consumer happiness and other things.

This is good for consumers, publisher's bottom line is not hurt. The only thing is the fear that it will hasten the adoption of ebooks over print, the side of the business that publishers (as you note) are trying to preserve. But isn't that genie already out of the bottle? I'm just saying, I think we've passed that tipping point a while back.

@Angela Brown:

Who's the winner? The winners were the e-bookstores, who started making money on e-books instead of losing it. Amazon was fine with losing money on e-books because they can make it up on batteries and TV sets. Most e-bookstores, including B&N, didn't have that option.

Amazon was threatening to drive B&N out of the e-book business, because B&N already was sucking its bookstore business dry to pay for NOOK device development. B&N has still been losing money (and personally I think that's their own fault), but at least they're still in the game.

@Susan Kaye Quinn:

See my posting just above; who gets hurt by changing back is the bookstores who aren't Amazon, and can't withstand selling e-books at zero or negative profit for years at a time.

When the Agency Model went into effect, it was estimated that Amazon had 90% of the e-book market. Now it's estimated they've "only" got 60%. If Amazon is allowed to pound B&N and Kobo into the ground by making them run continuous losses, Amazon will be back at 90% and climbing.

As for publishers having charged e-book wholesale based on the hardcover, it's not that crazy. From the publisher's point of view, they're not selling paper, they're selling content. And the content in an e-book is the same as in a hardcover (for narrative works like novels).

Those two points were exactly what brought the publishers to institute the Agency Model in the first place: to give non-Amazon e-bookstores a chance, and to restore what they thought was a reasonable price level for book content (*cough* big royalty advances *cough*).

Since then, the price level for book content has been seriously undermined by independents selling e-books at $0.99 to $2.99, so that part didn't work out so well.

The agency deal was not the best way to combat Amazon, and it's not the solution that a real conspiracy would have developed. It was Apple's solution, and the publishers jumped on it like drowning people lunging for a life preserver.

There are a number of possible responses publishers could have taken to Amazon's behavior in 2010. They could have raised their wholesale prices on e-book licenses, which would have forced Amazon to either lose more money or raise e-book prices. Alternatively, they could have refused to release e-books of top titles, or delayed e-book release until months after the hardcover release.

The problem was that antitrust law prohibits publishers from coordinating to come up with a solution to the problem. If one publisher raised prices, and the other publishers did not follow suit, and Amazon quit discounting that publisher's titles, it would be at a disadvantage.

Similarly, if one publisher took its frontlist titles off of the Kindle, and the other publishers did not, that publisher would have deprived itself and its authors of access to the Kindle audience, and opened itself up to further retaliation from Amazon. The publishers were facing a sort of prisoner's dilemma.

Apple's deal wasn't great, but publishers who were considering it had reason to believe the rest of the industry would follow suit (which is why the government believes the adoption of agency was illegal collusion). If the Apple deal hadn't happened, Amazon would have pushed BN out of the e-book market.

Susan,

The wholesale price of a book is about half of the suggested retail price. That means that a hardcover book with an SRP of $25 will sell for $12.50 at wholesale.

Booksellers buy the book at wholesale and discount it to whatever price they want. In the pre-ebook days, Amazon, BN and Borders would discount new hardcovers 40% across the board, and a lot of indies who couldn't operate at those margins went out of business.

With e-books, Amazon bought the e-licenses for the same wholesale price it paid for hardcovers: $12-13, but then it marked them down to $9.99 and ate the difference as a loss.

Publishers were concerned because this kind of pricing could kill off all the bookstores who need to sell books at some kind of profit to stay solvent.

Under the agency model, publishers sell books for $11.99-$14.99, and pay a commission of 30% to Amazon. So instead of getting $12 for a wholesale e-book license, they get $9 for a $12.99 e-book after Amazon takes its 30%.

Something nobody has mentioned, probably because it really won't amount to anything...

If the proposed settlement is approved, the first things to die are the contracts with Apple (7 days after approval). This is interesting because Apple's contracts with the publishers reputedly contain a maximum e-book pricing table for titles that are also available in print.

The table is a bit complex, but for most titles available in hardcover but not softcover, e-book pricing is limited to around 1/2 of the hardcover price. You might have noticed that most hardcover fiction has gone up from $25.99 to $27.99... might that have been related to the e-book price cap being $12.99 and $14.99 at those respective hardcover prices?

Conceivably, the settling publishers could raise their e-book prices as soon as the Apple contracts are dead, even before voiding the Most Favored Nation clauses with other e-book sellers. Remember that before the Agency Model hit, e-books were list-priced the same as hardcovers. It could happen again. I doubt it, but it could.

It's also possible that freed of Apple's pricing tyranny, hardcovers could slip back down to $25.99. I'll be on the lookout for flying pigs.

The other thing nobody's talked about: prior to the Agency Model, all three of the settling publishing houses, plus Macmillan, had announced plans to "window" e-book releases to be later than the hardcover releases (probably about six months later, but they didn't say). Now that could happen.

Susan - I'm not sure, but I think publishers were originally selling their e-books to retailers for the same price as hardcover. They dropped their price for Apple, which meant they made less overall.

Nathan - this is a great summary! I could be wrong, but when I see the confusing settlement, I see a lobbiest war. A tug of war between the Amazon and Apple/publisher lobbies.

It's interesting that anyone opposes this DOJ lawsuit. I know they think they are supporting the publishing industry, but they are supporting a "solution" which is unethical and illegal.

There were other solutions that were legal and didn't bilk readers (collectively) out of millions.

There is a reason several States are also suing these publishers.

Why I support the DOJ suit:

1. Collusion is ILLEGAL. And for good reason. It is opening a very dangerous door to give a pass on corporate collusion just because you happen to agree with their goals.

2. Amazon cornered the market not because it has deep pockets, and can discount, but because it's innovative and came out with things first. An innovative creative company should not be punished in a capitalistic society.

I wonder if Amazon is considering suing the publishers. It lost millions over this.

3. Do you know who has really deep pockets? APPLE. Apple could easily compete with discounting. It choose to go another route, because it didn't have the customer base. Imho, that is cheating.

There were other solutions, other paths that could have been explored.

4. In order to create fake conditions that would hamper Amazon so that other companies could catch up, this collusion cost customers (collectively) millions.

5. It also cost writers money. Publishers, in choosing to make less money, also made their authors less money, something that has never been mentioned in any article I've read about this. Certainly Turow from the Author's guild never mentioned it.

I think writers should consider sueing publishers over their losses.

Okay, so those are my thoughts. Thanks Nathan for the great summary and the interesting discussion!

Oh, also, Nathan, the book launch last night was terrific! Great food spread, lots of really nice people and a fun discussion. The chapters you read were really funny, too. It was great fun - thanks! :)

Joe Konrath and Barry Eisler had some great points about the DOJ lawsuit:

http://jakonrath.blogspot.com/2012/03/barry-joe-scott-turow.html

Thanks for your hardwork at keeping us informed, Nathan.

Perhaps a bit of poetic justice and self-correction is upon the publishing industry. I think we can all agree its needed for several reasons.

As a constant reader, I will never give up my hard-print books - electronics devices and the sand & pool don't mix. I can read for hours at a stretch but holding a device isn't as comfortable as a paperback, not to mention my eyes prefer to read on paper over the screen. I buy 80 paper/20 E and don't see it changing.

As an emerging writer, super low cost books (.99) are disheartening. Several months of time, heart and soul go into writing great stories.

But, at the same time, how much does it cost to produce an Ebook? I think the net profit ratios for hard-print should apply to Ebooks, with a bare minimum of $2.99.

Thanks for your hardwork at keeping us informed, Nathan.

Perhaps a bit of poetic justice and self-correction is upon the publishing industry. I think we can all agree its needed for several reasons.

As a constant reader, I will never give up my hard-print books - electronics devices and the sand & pool don't mix. I can read for hours at a stretch but holding a device isn't as comfortable as a paperback, not to mention my eyes prefer to read on paper over the screen. I buy 80 paper/20 E and don't see it changing.

As an emerging writer, super low cost books (.99) are disheartening. Several months of time, heart and soul go into writing great stories.

But, at the same time, how much does it cost to produce an Ebook? I think the net profit ratios for hard-print should apply to Ebooks, with a bare minimum of $2.99.

I thought I'd just break in to say congratulations on your book release which is my favorite kind of comment to write! :)

Haha are you reading The Book Thief?! I am such a stalker. Sorry.

Napster changed the music industry. Those music tycoons refused to change and therfore bled millions. Then Itunes came along and the bleeding stopped. Well, it wasn't as bad as it could have been.

Books are not going to go away, but ebooks are here to stay and they're going to become more popular and soon easier to create and therefore should become cheaper.

If publishers do not adapt quick enough, they will get hit harder than the music industry.

You cannot sit by and a act like nothing should change. Change will happen either with you guiding it your way or without you.

In many ways the ebook pricing allegations of the DOJ against the big publishing houses is very indicative and a representation of the traditional publishing houses unwillingness to change. Since the advent of ebooks, the big publishing houses have, in my opinion, chosen an ostrich like position. What the DOJ and many fail to mention is that the big publishing houses are doing very little in the way of increasing author royalties when it comes to ebooks. Publishers do make more on ebooks with very little overhead. Ebooks for their most successful authors are cash cows in many respects. There's been a significant amount of discourse in RWA circles as many big name authors chose to publish their backlists in ebook format without the big publishers. Very interesting time in the publishing world to bare witness to as power shifts more and more into the hands of authors.

Great article!

Maggie Mae Gallagher

anon-

Ha - that photo was from 2008 I believe. That was my original Kindle.

The Department of Justice actually told the publishing houses that they don’t have to lower their eBook prices. They simply are not allowed to break the law by colluding together to set the same high prices. There was quite a bit of evidence that representatives of the publishing houses named in the lawsuit met together to decide on the prices and that Apple agreed to sell eBooks at those prices. In telling the publishing houses that they do not have to sell books at low prices, the DOJ warned them that, if they set high prices, it better not involve any collusion.

There is a myth that Amazon’s average eBook price is extremely low. That’s not true. The average price of Amazon’s eBooks turns out to be $6.49, according to one study. In addition, Amazon originally wanted to sell the eBooks from the big publishing houses at $9.99 each, but the big publishing houses refused such “low” prices. Also, there’s a law that, when retailers discount items, they must pay a certain overall amount to the companies whose items they’re discounting. Amazon went above and beyound that – they offered to make up the difference on every single $9.99 eBook and give that difference to the publishers.

Amazon understands the digital age really well. They know how to utilize algorithms to figure out what readers want, what books are selling, what passages readers are highlighting in their Kindle books, etc. While traditional publishers are trying to defend the old-fashioned way of doing things, Amazon’s using modern technology. In addition to successfully selling eBooks, Amazon has also opened up a program for movie scripts with short-term options and generous payments to authors. While the publishing industry expends an awful lot of energy bashing Amazon, Amazon’s just moving ahead changing the way in which things are done. Every publishing house is welcome to hire tech experts to develop a more modern way of selling eBooks – that’s not against the law. Eventually, they probably will do that, but only after fighting change tooth and nail and blaming Amazon for their failures and frustrations.

Jeff Bezos has also started a company for space exploration; and that company, “Blue Origin,” has already located the Apollo 11 rocket engines on the ocean floor: Jeff Bezos Plans to Recover Apollo 11 Rocket Engines from Ocean Floor. He’s an innovator, and that is very threatening to businesses that don’t want to modernize but want to continue making the huge amounts of money they made in an earlier era of technology. I doubt the horse and buggy businesses welcomed the automobile industry with open arms.