Options in the Price War Over Books

Last week Amazon.com, Walmart.com, and Target.com embarked in an online price war over the pre-sale of new hardcover, bestselling books. While the retail price for these books is typically $25–35, all three of these retailers are selling them for between $8.98 and $9.00.

Since publishers generally sell these books to retailers at a 40–50% discount, these three retailers are selling these books at a significant loss—$3.50 to 8.50 per sale. Obviously, they are doing this to drive traffic to their stores, hoping that consumers will buy enough other items to offset their loss on these titles.

In my opinion, this strategy will prove damaging to publishers, authors, booksellers, mass retailers, and ultimately consumers.

• Publishers. For right now, publishers are getting paid an amount equal to the customary discount for hardcover books. But no one in the industry I have spoken with expects this to last for long. Amazon, Walmart, and Target are systematically conditioning consumers to expect these lower prices. Eventually, these retailers will be in the position to force publishers to lower their retail prices.
• Authors. If retail prices collapse, it will mean that royalties and advances will also fall. You don’t have to be a mathematician to figure out that 10–15% of $9.00 is dramatically less than the same percentage of $25–35. Most authors have a difficult enough time making a living now. This will lower the income of all authors and force many to get out of the business altogether.
• Booksellers. How can booksellers—who don’t carry blenders, throw-rugs, and groceries—compete with big box or online retailers who are willing to sell books at below-cost prices? Booksellers count on these same bestsellers to bring customers to their stores. Most are willing to discount the books and accept lower margins, but few are in a position to actually lose money on every sale. It is not a sustainable model.
• Mass retailers. Ultimately, this focus on driving down the price of the best our industry has to offer will hurt everyone, even the mass retailers who started it. When publishers are forced to further reduce titles, or new authors just don’t have the same incentive to succeed, the pipeline of new book titles will dry up. Where will the next crop of new authors come from? Who will be the bestsellers of tomorrow? The mass retailers have had the luxury of being able to skim the cream off the publishing milk pail without investing in the process that creates the milk in the first place. In my opinion, they are about to kill the cow.
• Consumers. Yes, lower prices are good for consumers—in the short run. But they are not good in the long run if authors and publishers are no longer willing to assume the risk of creating and producing the kind of quality and selection consumers currently enjoy.

The American Booksellers Association has recently objected to these pricing practices as well. On Thursday, October 23, 2009, they sent a letter to the Department of Justice, calling for an investigation. While I agree with their articulation of the problem, I disagree with their solution. I do not believe that asking the government to solve the problem is helpful. I think this will only lead to more red-tape, additional cost, and a raft of unintended consequences.

Instead, I think that the publishers themselves need to find the courage to act in everyone’s long-term interests. As the content providers, they have all the power they need to stop these pricing practices.

Here are at least three strategic alternatives. At Thomas Nelson, we have not decided on any of them, but we are currently discussing all of them:

1. Establish a minimum advertised price (MAP) for frontlist titles. According to anti-trust legislation, it is illegal for publishers to dictate the ultimate price at which a reseller sells a product. Moreover, publishers cannot act in concert with one another to establish fixed prices or discounts. But any publisher can act unilaterally to establish a minimum advertised price. Using the MAP model, Amazon, et. al., could sell their books for any price they want, but they could not advertise a price that is below the minimum.
2. Stage the channel rollout of certain frontlist titles. The movie industry does this now. Major movies are first released to theaters, then cable, then DVD. Some people are willing to pay a premium to see it in a theater now rather than wait for the DVD later. In the publishing industry, we already do this with book formats. We typically release the bigger books in hardcover first, then trade paper, then mass paperback. We could do the same thing with specific sales channels.
3. Delay the publication of eBooks. This is a tough one for me personally, because I believe in the future of eBooks. (I have a Kindle 2 and a large eBook library myself.) However, I do not agree with Amazon’s aggressive pricing model, which kicked off this price war to begin with. I think the worst thing that could possibly happen is for consumers to think that no book should sell for more than $9.99. Therefore, I think Amazon needs to either raise the price of eBooks to more closely mirror the hardcover or trade paper prices, or we as publishers should delay the release of eBooks and think of them more as a digital mass market product. Some publishers are already doing this.

I am sure there are other alternatives. However, I wanted to get these three on the table and see what others have to offer. In any event, I think these three strategies beat the two options we have now, which is (a) to do nothing and hope this resolves itself or (b) to bring the government in to solve the problem.

I think it is important that we have this conversation now in our industry before it is too late and we have even fewer options.