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 The last of the fair trade laws was repealed in 1975.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.

EPUB's developer takes sides in the Justice Department's eBook price-fixing case

I just returned from Book Expo America in New York City. While I was there, I attended the International Digital Publishing Forum's Digital Book 2012 Conference. On the first day of the event, the IDPF apparently took sides against the Justice Department's eBook price-fixing case, and it did so in a particularly cowardly and damaging way.

First, I'll briefly describe the charter of the IDPF--it's the organization that develops the specifications for the EPUB format (the current version is EPUB 3.0.) I’m a member of two large, well-recognized international technical standards organizations: The Society of Motion Picture and Television Engineers, and the Audio Engineering Society. Despite the many political and legal battles that the movie, television and recording industries have found themselves in over the years, to my knowledge, neither group has ever taken a position on legislation, litigation or political issues. Standards organizations maintain their credibility by taking a neutral stance on everything except the technical standards that they accept and manage. That's what made the IDPF's actions on Monday so surprising.

At the start of one of the morning sessions, a panel discussion that included Madeline McIntosh from Random House (the only Big 6 publisher not charged by the Justice Department,) Bill McCoy, the Executive Director of the IDPF, told the audience that questions about the Justice Department's case, agency pricing and related topics would be off limits. That made perfect sense, and suggested that the IDPF was going to take a "hands off" approach.

However, after lunch, McCoy introduced Paul Aiken of the Authors Guild. Aiken took the stage and launched into an unscheduled 30-minute-long screed against Amazon and the Justice Department's case. I've written extensively about the Authors Guild's position--suffice it to say that Aiken added nothing new and did no better a job than other Authors Guild representatives of explaining how higher eBook prices from the Big 6 are good for consumers, or under what grounds the five publishers in the original case were justified in taking allegedly illegal action in order to prevent what they saw as Amazon establishing a monopoly in eBooks. There was no subsequent presentation of any alternative points of view, and McCoy led the audience to believe that the IDPF concurred with the Authors Guild’s position.

I confronted McCoy after Aiken's presentation to find out why the IDPF had chosen to take sides and refused to allow any discussion of other viewpoints, but he brushed me off and refused to answer any questions until the conference ended. In any event, should Mr. McCoy not believe it beneath him to respond to an industry analyst and blogger, I’d be happy to update this post with his response.

If Mr. McCoy does respond, here are the questions that he should answer—the same questions that I tried to ask him on Monday:

* Why was Mr. Aiken added to the schedule at the last minute?

* Did Mr. McCoy know that Mr. Aiken was going to talk about Amazon and the Justice Department?

* If Mr. McCoy didn't know about what Mr. Aiken was going to say, was misled by or didn't agree with Mr. Aiken, why didn't he make it clear at the end of his presentation that the opinion presented was that of the Authors Guild and not the IDPF?

* If Mr. McCoy did know, at least in general terms, what Mr. Aiken was going to say, why didn’t he give supporters of the Justice Department’s case an equal opportunity to present their side of the story to the conference’s attendees?

In short, the IDPF's role shifted last Monday from a standards-setting body to an industry advocacy organization, thanks to an exceptionally poor decision by Bill McCoy or his board. Companies that don't agree with the IDPF's position are even less likely to adopt or support EPUB than they were before Monday, which will result in further marginalization of the EPUB format, which is already a shambles due to incompatible extensions and DRM schemes that make it impossible to read supposedly "EPUB-compatible" documents on supposedly "EPUB-compatible" devices.