Guillaume Roels
The tumultuous contract negotiations between Amazon.com and the book publisher Hachette have recently received a lot of attention in the press (see, for instance, the article in Bloomberg Business Week or The Guardian). The controversy arose because Amazon has been dissuading customers from buying Hachette titles on its website, removing discounts from some books, or delaying shipments by as much as five weeks after it disagreed with Hachette on its proposed contractual terms.
The risk with the traditional contracting model, as perceived by book publishers, comes from the fact that the distributor is free to set the retail prices. This was not so much a problem in the traditional brick-and-mortar model, when the retail function was quite disconnected from the publishing function, but the concern has grown in importance with the emergence of e-books.
In particular, some e-tailers, such as Amazon, have been criticized for taking advantage of their right to set the books’ retail prices to price e-books at a much lower price than traditional books.
At the core of the issue lies the following question: How to set the right price? Based on value, costs, or market?
- Value. In that case, e-books should be priced at the same price as physical books. They may even be priced higher if customers value convenience, portability, etc.
- Costs. In that case, e-books much be priced at a lower price than physical books since no raw materials (e.g., paper) and printing process is involved.
- Market. On that dimension, there are several reasons for which Amazon may want to price e-books lower than traditional books:
- Price leadership: Given that customers’ search costs have considerably reduced with the advent of the Internet, e-tailing is much more price competitive than traditional retailing. There are fewer barriers to entry in the Internet, especially for selling information goods, and Amazon may set low prices to preempt new e-tailers from entering that market.
- Penetration pricing: Selling e-books is undoubtedly an area for growth for Amazon. Amazon may have priced e-books lower to speed up that market growth and acquire a large market share from the start.
- Cross-selling: Amazon is also selling Kindles, and many customers may opt not to buy a Kindle if the prices of e-books are high. This theory would in a way be the opposite of the razor-and-blades strategy (or the printer-and-cartridges strategy), where the durable good is sold at low price, but the consumables at sold at a higher price.
- Cross-selling (part 2): Amazon is also selling many unrelated products, but needs to drive traffic to its website. It may want to price lower the e-books as a category loss leader.
Of course, publishers are not happy with Amazon’s pricing tactics, because lowering the prices of e-books reduces the consumers’ reference point about what a book is worth, with potential implications on the physical (hard- or softcover) book market. Overall, the Internet is commoditizing the book business, in the same way as it has commoditized the music business and it is pretty clear that the revenue model will need to adapt to the change in content delivery model. If the publishers want to preserve their margins, so as to encourage new content development, they would ultimately need to find other sources of revenue and alternative content delivery models.
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