Does agency pricing mean higher e-book prices? That depends

The term “agency pricing” may not be familiar to those outside the book industry, but it has become a serious issue with the Justice Department’s antitrust case against Apple (s aapl) and five major book publishers for colluding on prices as a defensive move against Amazon (s amzn). One of the key factors in that case will likely be whether consumers have been harmed by this model — for example, whether they are paying higher prices for e-books as a result, a topic that my PaidContent colleague Laura Owen and I debated recently. On Friday, independent distributor Smashwords revealed some internal numbers that show e-book prices have actually gone down as a result of the agency model. So does that mean the federal case is irrelevant?
Just to recap, “agency pricing” is a model that the major book publishers and Apple worked out when Apple was about to launch the iPad. Since the company was playing catch-up to some extent with Amazon’s Kindle — at least in the e-reader department — it came up with a way of getting the major publishing houses on its side: instead of the wholesale-pricing approach that existed prior to Apple’s entry into the market, which gave retailers (including Amazon) the ability to set book prices wherever they wanted, the agency model would allow publishers to set the price. That deal is what the Justice Department is investigating.

Are prices higher with the agency model? Smashwords says no

Mark Coker, the co-founder and CEO of Smashwords, says that as part of a filing the company made to the DoJ (even though it is not a party to the antitrust case) he got his engineering team to look at all of the internal data on Smashwords’ titles in Apple’s iBookstore, and compare prices going back to October of 2010. The number of books that users of the service have published has climbed from about 2,000 to almost 100,000 in that period, Coker notes, and yet the average price has actually declined. Not only are more publishers and authors setting the price of their books at zero, but even when the free books are excluded the average price has gone down:

Coker notes that this average number is also very close to the average price that consumers have paid for Smashwords’ books at Barnes & Noble, which was $3.16 — and he argues that the iBookstore average number proves that “authors and publishers, left to their own free will, are pricing their books lower in this highly competitive market.” In a post on Google+, Tim O’Reilly, founder and CEO of O’Reilly Media, says that the DoJ needs to realize that “concentration of power is now in the hands of retailers, especially Amazon [and] letting publishers set the price is increasing competition, not decreasing it.”
That’s an argument the major publishers are probably very pleased to hear, since it could help their case substantially. But is it true?

Big publishers still seem wedded to higher prices

I don’t have any comprehensive data (hopefully the Justice Department will come up with some), but I think the story might be quite different for the major publishers than it is for an independent distributor or self-publishing platform like Smashwords. Although Yankee Group said that e-book prices fell last year, they only dropped marginally to about $8.19 from $9.23 — and that’s over the past three years. And a Wall Street Journal piece looking at the industry noted that when it comes to newer titles, e-book prices are still in many cases actually higher than the printed version, which isn’t subject to the agency model (although that could be because retailers like Amazon are willing to take a loss on print).
In my debate with Laura, I argued that the agency-pricing model was bad in part because it allows the major publishers to maintain artificially high prices for their books, which is not only bad for book readers, but is arguably bad for the industry as a whole over the longer term — since it is an attempt to hold back the waves, King Canute-style, instead of trying to adapt to the changes that are going on in the marketplace. Agency pricing to me seems to be as much about protecting profit margins and market share for printed books as it is about anything specifically to do with e-books.
I do think both Laura and Smashwords’ Coker make a good point about the model when it comes to small and independent publishers, however: there is an argument to be made that giving the publisher (which in many cases means the author, as more become self-publishers) the ability to control pricing is better for them — and Coker’s data suggests that it doesn’t mean prices are artificially high. But Smashwords is only looking at a sample of the smallest part of the market. I still think agency pricing for the major publishers is a bad deal for just about everyone involved, and that is what the antitrust case is about.
Post and thumbnail images courtesy of Flickr users Marcus Hansson and Mike Licht