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Mark Coker on the Agency Model

Regarding today’s big publishing story (every day it seems like there’s another one) in which Apple and Big 6 publishers are potentially getting slapped with a Department of Justice lawsuit, Mark Coker comments on Tech Crunch:

Prices might actually rise if Agency was abandoned. Under agency, publishers earn 70% of the list price as their cut, and the retailer gets 30%. Under wholesale, the publisher sells the book to the retailer for $X, usually at 50% of the list price, and the retailer usually marks up from there. Let’s take example of a book where the publisher wants to net $7.00 from each sale. If they set the price as agency, the list price to the consumer under agency is $10.00. If they’re selling under wholesale, the suggested list price given to the consumer will likely be $14.00. Unless the retailer discounts the book 30% or more, the consumer will pay more for the book than they would have for the agency book. If the retailer is not feeling the pressure of competition (ie they’ve put all their competitors out of business by selling books below cost in the past), the retailer can now charge $14.00 and earn a nice spread of $7.00 at the consumer’s expense. Also, if the retailer has put all it’s retail competition out of business, or severely hobbled its competition, then that single retailer has the power to extort better spreads from the publishers.

Yes, I think agency is a good idea. It forces retailers to compete on customer experience (quality of discovery and matching tools, community, purchase experience, library features) rather than price (predatory pricing from deep-pocketed competitors is the strategy to win here, at the expense of all other retailers and potential startup competitors. Predatory pricing leads to fewer bookstores, less choice, less competition and higher prices). Agency allows customers and the marketplace to hold the publisher accountable for their pricing decisions. If a publisher prices too high, the marketplace finds equally good quality content at lower prices. We’re already seeing this at Smashwords. We’re agency. Our authors set the prices. Their prices average under $5.00. $2.99 is a real sweet spot. They price there because it’s in their best interest to do so.

It’s a fallacy to blame high ebook prices on the agency model. Blame the publisher who set the price.