The cost of delivering an electronic book to a device is significantly lower than that of a physical book. That’s clear. Then why is it that publishers insist on pricing eBooks the same as their physical counterparts, especially at launch? That’s probably the question behind the ongoing anti-trust case* against Apple’s use of the agency model. Apple decided to price eBooks at 30% + (the publishers price). In contrast, Amazon priced eBooks at $9.99 where ever it had control of the price.
The funny thing is, Apple used the Amazon approach to pricing for iTunes where it was first in the market.
This same question is at the heart of so many other existing business models?
Why is it not cheaper to reserve a ticket online with an aggregator versus purchasing it directly from the airline, online and offline?
Why is it not cheaper to buy a ticket with a movie tickets aggregator – why is a convenience fee necessary? What is convenience but a choice?
Why can’t it be more cost-effective to buy certain products online than in retail?
In maturing markets, costs don’t determine price. Profit does. Incumbents believe that consumers won’t mind paying for convenience, or for an exclusive, or perhaps for choosing to reserve a ticket on an aggregator where they can compare prices. Perhaps these are profit-making avenues that the incumbents fear losing control of. Perhaps it also helps dampen the popularity of these avenues and keep them in check.
On the other hand, the pioneer of a market – the one who’s trying to change existing consumer behavior, they believe that pricing attractively will convince consumers to change their existing habits. Within four years Amazon were able to achieve parity in sales of eBooks to their physical counterparts**.
Excerpt from “Steve Jobs”, Walter Isaacson.
Books were an obvious target, since Amazon’s Kindle had shown there was an appetite for electronic books. Apple created an iBooks Store, which sold electronic books the way the iTunes Store sold songs. There was, however, a slight difference in the business model. For the iTunes Store, Jobs had insisted that all songs be sold at one inexpensive price, initially 99 cents. Amazon’s Jeff Bezos had tried to take a similar approach with ebooks, insisting on selling them for at most $9.99. Jobs came in and offered publishers what he had refused to offer record companies: They could set any price they wanted for their wares in the iBooks Store, and Apple would take 30%. Initially that meant prices were higher than on Amazon. Why would people pay Apple more? “That won’t be the case,” Jobs answered, when Walt Mossberg asked him that question at the iPad launch event. “The price will be the same.” He was right.
The day after the iPad launch, Jobs described to me his thinking on books: Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that—they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, “We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.” But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you the books.” Jobs acknowledged that he was trying to have it both ways when it came to music and books. He had refused to offer the music companies the agency model and allow them to set their own prices. Why? Because he didn’t have to. But with books he did. “We were not the first people in the books business,” he said.
“Given the situation that existed, what was best for us was to do this akido move and end up with the agency model. And we pulled it off.”