Digital Reseller Agreements: Wholesale vs. Agency

DIGITAL RESELLER AGREEMENTS: WHOLESALE VS. AGENCY

IN THE BEGINNING,* THERE WAS WHOLESALE

*IN THE BEGINNING OF DIGITAL BOOK SELLING

PART I

Wholesale Model: How it Works

Standard model used in print publishing

Trade discounts apply when the goods are sold on wholesale or business-to-business terms

Bookseller purchases the book at a reduced price (retail price minus the trade discount), then sells it to the consumer

Trade discount is the potential margin for the bookseller

Retailer in effect ‘owns’ the goods in their store

Wholesale Model: What it means for digital retailersRetailer can apply a discount to the price

Different retailers can set different prices

Pay publishers royalties based on the list price, rather than the discounted sale price

ENTER APPLE.

The App Store ModelApp publisher sets the price

Apple gets 30%, and the publisher gets 70%

Apple brought this model to the iBookstore, and created the Agency model in digital book selling

The Agency ModelGoods are sold directly to the consumer by the publisher, and the retailer takes a commission on the sale

Retailer provides a service to the publisher, but never owns the goods

Deals with commissions rather than discounts

And then it spread…The big five publishers signed agency agreements with Apple, which then prompted Amazon, Kobo, Barnes and Noble and other retailers to follow suit and renegotiate agency contracts

Publishers provide a lower list price under agency, because the retailers were not allowed to apply a discount to the LP on site

Most smaller publishers retained wholesale arrangements

Agency Model: What it means for retailers

Retailers cannot apply a discount to the price of the book

Prices must match across different retail sites

Pay publishers 70% royalty on list price

70% IS BETTER THAN 50%, RIGHT?

Not always.Under the wholesale model, there are two prices: the (higher) Digital List Price submitted by the publisher, and the (discounted) Digital Sale Price offered by the retailer

With a wholesale contract, the publisher typically gets 50 - 60% of the sale on the DLP

Under agency, the publisher submits one (lower) price, and they get 70% on that sale

2 MINUTES OF MATH

Wholesale Digital List Price: $24.99 Discounted Digital Sale Price: $12.99 Wholesale Sales Percentage Split: 50% 24.99*0.5 = $12.50 !

Agency Digital List Price: $9.99 Agency Sales Percentage Split: 70% 9.99*0.7 = $7.00

For example…

Under the wholesale model, no matter what the discounted sale price is, the publisher gets paid their 50% percent on the list price provided in the metadata.

KDP and KWL give authors agency rates (70%), as long as they keep their list prices below $9.99 USD/CAD

Self-Publishing Platforms

THE DOJ SUIT

PART II

U.S. vs. Apple, Inc. et al

Civil anti-trust lawsuit launched in the U.S. against Apple, along with Hachette Book Group, HarperCollins, Macmillan, Penguin Group, and Simon and Schuster

Alleged that executives at the 5 publishing houses conspired with Apple to raise prices, and then forced Amazon to match them

Judge Denise Cote rules that Apple violated antitrust lawAppoints an external monitor, Michael Bromwich to ensure Apple doesn’t enter into any further collusion

Publishers have to renegotiate contracts with Apple, Amazon and other retailers

All publishers settled out of court with specific agreements

payback.In March 2014, Amazon started issuing refunds to American customers who purchased books at agency prices between April 1, 2010 and May 21, 2012

Apple, Google, Sony, Barnes & Noble are also issuing refunds or store credits, and Kobo is expected to begin issuing refunds in the near future as well

Agency LitePost-settlement, publishers have switched to the agency lite model

Uses the agency model, but prevents publishers from dictating sale prices

Requires a variable pricing model

Booksellers can discount up to 30%

Banned the “most favoured nation” clause, which protected the retailer from the impact of other retailers’ pricing decisions within that nation

THE CANADIAN CONNECTION

PART III

On February 7, 2014, the Canadian Competition Bureau announced a settlement with Hachette, HarperCollins, Macmillan and Simon and Schuster to end agency pricing in Canada

Deal is intended to lower prices on digital books by allowing discounting and preventing price-matching

Settlement is the result of an 18-month investigation by the Bureau into conduct that they suspected reduced competition for ebooks in Canada

sez….Kobo filed an objection to the Competition Tribunal in March 2014

Stated that they would suffer “significant unrecoverable losses” if the restrictions on discounting were removed

Alleged that Amazon would gain a monopoly on the supply of eBooks in Canada

Indigo joined Kobo in making the complaint, pointing to the exit of Sony from the US ebook market and Nook’s falling sales as a result of the ruling in the US case

To be continued…Kobo was granted a stay on March 18th, 2014, pushing back the agreement’s scheduled implementation until after their challenge is heard by the Tribunal