Upheavals in ebook retail

The past week has been an interesting one, with Apple losing a court battle in America over ebook price fixing, Barnes & Noble letting go its chief executive, and Barnes & Noble announcing (negative) changes to its ereader lineup. My take on all this follows.

The Apple case made lots of headlines. The company was, together with five of the six largest book publishers in the world, accused of collusion to fix the prices of ebooks. Most of the publishers settled. Apple fought in the courts, and this week the sole judge’s decision went against them. It is probable that Apple will appeal; less probable that they will win an appeal.

What Apple and the publishers sought to do was create a commercial environment in which there was a floor below which the publishers’ ebook prices could not be lowered. This was a direct response to the deep discounting Amazon was employing three years ago, just before the launch of Apple’s iPad.

The American court decision says that this was illegal collusion to fix prices. In rendering this decision, the court has forced those publishers and Apple to do business in ebooks using wholesale pricing: the publisher sells the item to retailers at a “list” price less the retailer’s discount, and each retailer may then sell that item at whatever price they choose.

In reality, for ebooks, retailers typically pay their suppliers some time (set by contract) after sales happen. The supplier receives the list price minus the retailer’s discount which is also set by the contract between the supplier and the retailer.

In simple terms, if the list price is $10 and the discount is 30 percent, the supplier receives $7. If the retailer chooses to sell the item for less than $7, the retailer takes the loss on the sale This is what Amazon was doing: selectively deep-discounting certain books to drive sales and traffic, and absorbing the cost of that.

Amazon did not sell every ebook at deep discounts; it chose some which were typically very popular or getting a lot of press, and did the deep discounting for a period of time. I assume that Amazon saw sufficient purchases of other items along with the discounted ones, so that they mostly made up for the loss on the deep-discounted item.

The other benefit to Amazon is that people buying ebooks tend to stay with one or two vendors. Apple, Amazon, B&N, and Kobo all sell ebooks that are mostly “locked” to those companies ereaders via DRM (Digital Rights Management) software, which helps the companies lock in customers. You cannot move your ebook bought on Apple to a Kobo reader, for example.

(I should note here for accuracy sake that it is technically possible to remove DRM from an ebook, but most consumers do not know how.)

So does the court decision in the Apple case change anything? Not really. We will probably see Amazon selling ebooks from the biggest publishers at slightly lower prices than have been the norm in the past few years, and we might see more price competition among ebook vendors.

Barnes & Noble

The departure of William Lynch from B&N was a surprise. Lynch had a long record of running successful online retail operations, but while B&N has enjoyed some moderate success selling ebooks within the US market, it has failed to expand much beyond the country’s borders, while competitors Amazon, Apple, and Kobo have all become global sellers.

Along with Lynch’s departure came news that B&N will discontinue its Nook color tablets. The company also started discounting its monochrome reading devices quite deeply, suggesting they are trying to reduce inventory. They said they will “co-brand” color tablets with undisclosed “third-party manufacturers of consumer electronics products.”

The Nook color tablets were failing anyway, and during the first three months of this year they were not even ranked among the top five in the US. There is not much money in the monochrome reading device market (multifunction color tablets are supplanting them).

So B&N looks like it will be left with only the reading “apps” it offers consumers for their Apple, Android, and Windows 8 tablets. I am not at all sure this represents a viable market. As consumers become more aware that the ebooks they purchase from B&N come with proprietary DRM software, they are bound to worry that if B&N decides to stop selling ebooks, they will no longer have access to most or all of the books they purchased.

Quite what will happen to B&N the high street bookseller remains an open question. The company is bleeding money, has been looking for and failing to find a buyer, and is diverting increasing amounts of store space to non-book products. The (more profitable) education division has been separated from the traditional book stores. How long they can remain a viable high street retailer (3 years? 5 years? more?)is an open question. Almost all physical retail store chains are feeling the impact of online retailers; the low-margin book business is feeling it more than most.

An interesting week, indeed.

Leave a Reply

Your email address will not be published. Required fields are marked *