Zola Books wants to partner with independent booksellers

Jeremy Greenfield of Digital Book World writes about Zola Books, a new eBook retailer that launched in beta shortly before this year's BEA. The company has raised $1.3 million from investors and plans to open its eBookstore to consumers on September 19th. Zola is offering eBook partnerships to American Booksellers Association members that have been selling eBooks through Google Books, but it's not clear whether Zola is under official consideration to replace Google by the ABA.

One ABA member, Katie Fransen of One More Page Books in Arlington, VA, said that the ABA eBook program was much too expensive. The ABA charged a monthly fee of around $200/month to program and maintain the store's website, and to act as a go-between with Google. Fransen, whose store has signed up for Zola's beta program, said that Google offered a very small percentage on sales to its independent bookstore partners. Zola, on the other hand, pays publishers 70% of each sale, and then splits the remaining 30% equally with its partners (Zola pays the 4% credit card transaction fee out of its share of the 30%.) It's a great deal for publishers, but it's significantly less than what most bookstores make on print sales. (Also, it's unclear what the business model truly is--Greenfield writes that Zola gives independent booksellers that run their own online stores 60% of the net proceeds from every sale, which, if net proceeds are measured after the publisher's share, would be a slightly better deal for booksellers.)

To date, Zola has signed up 48 bookstores for its beta test, and half of them have committed to use Zola when it launches in September, although the article says that the number of participating bookstores continues to change.

Who's winning and losing due to the shift to eBooks?

In my last post, I wrote that eBooks aren't expanding the market for books in general. However, even if eBooks are, overall, simply shifting money from one bucket to another, there are definite winners and losers:

Winners:

• Amazon: The company sells the most popular eReaders and more eBooks than anyone else in the U.S. (although a lot of those sales are unprofitable.) Amazon's dominance in the eBook market scared five of the six biggest publishers into (according to the U.S. Justice Department and more than 30 states) illegal price-fixing in order to take away Amazon's price advantage.
• Barnes & Noble: In the U.S., the bookseller is Amazon's only serious competitor for both eBooks and eReaders. Barnes and Noble has between 25% and 30% of the U.S. eBook market.
• Kobo: The company is Amazon's primary eBook and eReader competitor outside the U.S. It's recovered from the failure of Borders and Borders' licensees (at least, outside the U.S.) Now that it's owned by Rakuten, it has both the financial resources it needs and a natural advantage in Asia.
• Major publishers: Even though eBooks are shifting money around rather than increasing overall sales, publishers are earning more money on each sale, because eBooks have no printing, binding, shipping, warehousing or return processing costs.
• Self-publishers: eBooks have opened up the market to both writers who couldn't find publishers or agents, and writers who've been previously published but didn't earn much money. Royalty rates on self-published eBooks are much higher than those from major publishers, so writers can sell fewer copies at lower prices and still make more money.
• Consumers: Even though the Big 6 publishers have raised the prices of their eBooks under agency pricing, in most cases their eBooks are still less expensive than print. Self-published eBooks are dramatically less expensive than equivalent print titles. In addition, eReaders and tablets are far more convenient for consumers than carrying around multiple print books.

Losers:

• Independent booksellers: Few independent booksellers have successful online eBook businesses, and none of them have the same ease of ordering and delivery that Amazon and Barnes & Noble have. The American Booksellers Association inadvertently tied itself to the "albatross" of eRetailers, Google. which has since given notice that it plans to cancel its distribution agreements with independent booksellers. Whether independents will ever have a significant share of the U.S. eBook business depends almost entirely on who the ABA decides to partner with next.
• Small publishers: Small publishers that are still focused on print are tied very directly to the fate of retail booksellers. They need shelf space in order to build awareness and sales of their books.

Too early to tell:

• Apple: With no more than 10% of the U.S. eBook market and even less internationally, Apple's jump into the eBook business has largely been a bust, plus it's become entangled in Federal, state and private price-fixing lawsuits. Competitors such as Kobo are gaining share more quickly in international markets. Apple may ultimately decide that eBooks are more of a problem than they're worth, and settle for taking 30% of sales from other booksellers.
• Sony: At one time, Sony was the undisputed leader in the eReader market, but a series of missteps have left it an also-ran, even in its original strongholds of Japan and the U.S. Sony can turn things around by aggressively pursuing partnerships with booksellers outside the U.S. and Canada.

None of these judgments are set in stone: Barnes & Noble's partnership with Microsoft could help it build an international business, or its slowly-sinking retail bookstores could bring down the entire enterprise. Major publishers could fail to transition to digital-first strategies and end up with costs that are much too high for their revenues. Independent booksellers could find the right partner and become a viable competitor for eBook and eReader sales. Small publishers could start producing far more eBooks and become more visible in online eBookstores. Apple's rumored new "iPad mini" could be the perfect tablet for reading eBooks and could drive sales of many more titles.

Is agency or wholesale pricing better? It depends on who's asking the question

As part of the ongoing discussion about the U.S. Justice Department's eBook price-fixing case, there's been a lot of back-and-forth about which pricing model, agency (where publishers set retail prices) or wholesale (where retailers set their own prices), is better. I'll cut to the chase: Agency is better for publishers and some retailers (who either can't or won't compete on price,) while wholesale is better for other retailers (those who are willing and able to compete on price) and consumers. Agency allows publishers to eliminate discounting--they authorize every reseller to sell their eBooks at the same price. If a publisher wants to make more money, it simply raises its prices, and those price increases are passed directly onto consumers.

Under wholesale pricing, publishers sell their eBooks to resellers, who have the right to resell them at any price they choose. They can change prices and respond to consumer demand without getting permission from publishers. Without wholesale pricing, there would be no discount resellers in the U.S. Barnes & Noble would have to compete with independent booksellers solely on selection, not price. 

Publishers, or for that matter, any vendors of products or services, don't seek to control retail prices in order to make them lower for consumers--they do it to maintain or increase prices. Decades ago, the term "fair trade" referred not to helping improve income and conditions for producers in developing countries, but to a policy of requiring all resellers to sell the same product at the same price (also called "price maintenance".) The first statute allowing manufacturers to force everyone to sell at the same minimum price went into effect in 1931 in California. Here's a quote from Wikipedia: " (Fair trade laws) were ostensibly intended to protect small businesses to some degree from the competition of the very large chain stores during a time when small businesses were suffering. Many people objected to this on the grounds that if the manufacturers could set the price, consumers would have to pay more even at large discount stores." The last of the fair trade laws was repealed in 1975.

My parents ran a small store that discounted its merchandise. They couldn't sell Sony electronics or Seiko watches, because both companies refused to sell to discounters. So, they instead sold Panasonic electronics and Citizen watches, helping both companies to establish a foothold in the U.S. The fair trade laws kept consumer prices high and created a price umbrella under which competitors could enter the market at lower prices.

That demonstrates a fundamental flaw in the publishers' thinking about agency pricing: In the short run, it bolsters the price of their eBooks, but in the long run, it attracts substitute titles into the market that are sold at lower prices. Experience shows that book buyers are very price-sensitive--that's how Barnes & Noble and Borders killed most independent booksellers, and how Amazon built such a big eBook market share. We're already seeing the effect with the growth of self-publishers who are selling their eBooks at dramatically lower prices than the Big 6.

Price maintenance is a strategy that rarely works in the long run. Resellers figure out ways to get around it, consumers pressure their legislators to outlaw the practice, or the courts intervene.

The problem isn't agency pricing, it's Most Favored Nation clauses

PaidContent writes about a letter written by American Booksellers Association president Oren Teicher, protesting the proposed eBook price-fixing settlement between the U.S. Justice Department and Hachette, Harper Collins and Simon & Schuster. In his letter, Teicher writes that the publishers shouldn't be prohibited from using Agency pricing, saying that the loss of the agency model would “significantly discourage new entry, and will lead to the departure from the market of a sizable number of the independent bookstores that are currently selling e-books." In an earlier letter to the Justice Department, Barnes & Noble made a similar request, with similar arguments.

The problem with these arguments is, as Jane Litte wrote on the "Dear Author" blog, that agency pricing is meaningless without Most Favored Nation (MFN) clauses in place with all the major book resellers. Apple's MFN clause requires publishers to insure that Apple can always sell their eBooks at a price no higher than the lowest price offered by any other reseller. The combination of Agency pricing and MFN is necessary in order to make this work.

As Teicher's letter points out, the Justice Department doesn't claim that Agency pricing is illegal. In fact, the settlement with the three publishers expressly permits Agency pricing with some restrictions. What it forbids, for five years, are MFN clauses. So what, exactly, is Teicher asking for? It sounds as though he wants the publishers to be able to implement Agency pricing with no exceptions. No reseller would have the ability to discount for sales or special events. Resellers couldn't negotiate with the publishers--the entire pricing scheme would be "take it or leave it." In other words, he wants industry-wide MFN in practice, without individual MFN clauses.

In any event, given that the ABA has lost its eBook eCommerce partner (Google) and hasn't come up with a replacement, Mr. Teicher's arguments are largely moot.