Last updated 24 November
Members will know that the Society is campaigning for higher royalties on e-books. However, that is only one of the financial issues under debate: there is also the question of the terms on which publishers supply e-books to retailers. There has recently been much coverage in the trade press about publishers adopting the “agency model” in preference to leaving retailers, such as Amazon, to fix their own prices. The aim of this briefing note is to explain the difference between the two systems.
When e-books first became available, publishers sold them to retailers at an agreed discount and left retailers to decide the price at which e-books would be sold to consumers. Publishers became alarmed that e-books were being very heavily discounted – indeed often sold at a loss, in retailers’ battle for market share.
Under the agency model, which was introduced by American publishers and has now become widely adopted in both the USA and Britain, e-book prices are set by publishers, with the retailers acting as agents for the publishers. The retailer takes 30% commission and passes the remaining 70% to the publisher.
Let us assume a book with an RRP of £20; and the author being entitled to 25% of the publisher’s receipts on e-book sales:
On the traditional model, Amazon buys the e-book from the publisher at an agreed discount of, say, 50%, i.e. Amazon pays the publisher £10, of which 25% goes to the author, so the author's royalty account is credited with £2.50. Amazon may well choose to sell the e-book for less than £10 (i.e. at a loss to Amazon).
On the agency model, let’s say the publisher sets the e-book price at £10: the publisher receives £7 and the author is credited with £1.75. If the e-book price is set at £13, the publisher receives £9.10, out of which the author is paid £2.27.
Depending on the price set under the agency model, the author's royalty may well be lower than under the traditional resale arrangement. The argument in favour of the agency model is essentially that without it Amazon will sell e-books at deeply discounted prices, in order to increase its commanding dominance of the e-book market, with its competitors being forced to withdraw.
Our sister organisation the Authors Guild in New York has strongly supported the agency model, seeing it as necessary to keep Amazon from taking unshakeable control of the e-book market. Five of the Big Six publishers in the U.S. now sell e-books under the agency model through all the major distributors: Amazon, Apple, and Barnes & Noble. We understand that since it was introduced, Barnes & Noble's share of the e-book market has risen from being tiny to about 20%. Amazon's market share has gone down from about 90% to 60 or 70%.
In a note to literary agents Tom Weldon of Penguin wrote:
‘Our first and foremost concern is that we protect the value of our authors’ books, as well as the long-term health of this exciting new segment of the publishing industry. We believe that the agency model is more likely to provide authors with a just reward for their creative content, while establishing a fair price for the consumer… We understand that digital books are less expensive to produce than physical books, and that the benefit of this cost saving should be fairly allocated between readers, authors and publishers. With this in mind, we expect to price Penguin e-books below the list price of the comparable physical books, even though we will have to absorb the VAT that is levied on digital books.’
Some members may be concerned that if the pricing of e-books is left to publishers, the price may be pitched too high, proving counter-productive to sales and making pirated copies more attractive. We have made this concern clear to publishers. We have also suggested that it would be worth considering the pros and cons of holding back the publication of an e-book until a short while after the hardback is first published. Discussions on the best way to maximise e-book sales, and to ensure a wide and competitive range of e-book retailers, will continue.