Pricing strategies in the e-book market

The Russian Presidential Academy of National Economy and Public Administration

Faculty of Economic and Social Sciences

E-BOOK MARKET

Pricing strategies in the e-book market

Tretyakova Sofya    3rd year student

2012

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Introduction

This term paper is aimed at providing a descriptive analysis of the newly developed e-book market.

Due to the novelty of the market, we consider it necessary to evaluate the main patterns, players, and strategies that have been observed so far, both in the US, where the market is more developed, and in the EU and Russia, where the market is still in an initial phase. In both cases, the main feature which is going to be in the focus of our attention is the pricing arrangement in place between publishers and retailers (wholesale model vs. agency model). Each of these models implies different competition concerns (predation vs. collusion) but a common aspect is that, to be able to deal with these behaviors from the European standpoint, a higher degree of harmonization in countries’ policies is necessary. Indeed, one of the motivations of this study comes from the fact that the  European  Commission  and  several  National Competition Authorities are now carrying out an investigation concerning price fixing on the part of e- books’ publishers after the adoption/undertaking of the agency pricing model.

The term paper is organized as follows: in Part 1, a brief description of the e-book, its development over time, and the supporting devices are provided. Part 2 analyses the main players in the industry -publishers and retailers. Part 3 and 4 deal with the pricing models generally applied in the e-book market -wholesale model and agency model- and the competitive concerns arising from them.

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1. Background information

We begin with a brief look at what an e-book is. Following Gardiner, Eileen and Ronald G. Musto, it is a book-length publication in the digital form, consisting of a text, images, or both, and produced on, published through, and readable on computers or other electronic devices[1]. It must be noted that some books are born digital, i.e. there is no equivalent printed version.

E-books are often read on specialized hardware devices called e-readers or e-book devices. Additionally, personal computers and some mobile phones can also be used to read e- books.

1.1 Development over time

We can now pass on to the history of the e-book market. The origin of e-books can be traced to the beginning of the 70´s, when Michael S. Hart, a student of the University of Illinois, started the Project Gutenberg with the objective of making works of literature available in the electronic format for free. Project Gutenberg grew and became an organization that, nowadays, offers over 36.000[2] free e-books that can be read on many devices.

Due to the limited use of the Internet, and even computers, early e-books were mainly written for specialty areas and a limited audience (i.e. technical manuals for hardware, manufacturing techniques, etc).

The general availability of the Internet in the early 90´s made transferring electronic files, including e-books, much easier. As a result, there emerged and proliferated many e-book formats, some supported by major software companies such as Adobe with its PDF format, and others by independent and open-source programmers. These formats gave rise to the development of multiple devices, most of them specializing in only one format, and thereby fragmenting the e-book market.

How this market has evolved around the world is, by no means, equivalent. In the United States, the success of e-books started mainly in public libraries, which began providing them for free in 1998 through their websites and associated services, though they were not downloadable. Later on, in 2003, libraries began offering free downloadable popular fiction and non-fiction e-books to the public. This trend has continuously grown over time, with 66% of public libraries offering this service in that country.

In Europe, even today “selling e-books can be a challenge”, as was stated by Cristina Mussinelli, a digital publishing consultant at the Italian Publishers Association. Apparently, European consumers have been slower than their American counterparts to adopt e-readers. Though in 2010 Europe experienced a 20% growth in e-commerce book sales, the e-book market share in some continental countries is still only 1%. However, the recently growing adoption of the iPad is expected to foster e-books penetration.  In any case, until recently, they seemed to be mostly popular with early adopters.

A fundamental problem faced when assessing the state of a European-level e-book market is that there is no central entity collecting information which makes it difficult to conduct any comparative analysis.

It should be noted that in the rest of the world, with the noticeable exception of Japan, the scope and penetration of e-books is really limited.[3]

The most fundamental milestones of the e-book market development are presented in table 1 below.

Table 1

1.2 Devices: e-readers

An e-reader is a portable electronic device that is designed primarily for the purpose of reading digital books and periodicals. E-readers differ according to several features. Apart from the formats that the device may support, e-readers vary depending on different attributes such as those related to the screen (type, size, pixels, touch screen, and shades), weight, operating system, and other characteristics associated with the functionality of the device (connectivity, text-to-speech, dictionary integration and/or organization, internal storage, card reader slot, replaceable battery, web browser, library compatibility, USB peripherals and user controls).

Apart from that, there is an essential feature that buyers tend to take into consideration when deciding which device they may acquire and that relates to the number of authors or genres they will be able to read. In other words, the number of titles the e-reader will be able to include. This way, competing e-readers manufacturers (such as Sony, Barnes & Noble, Amazon, etc) try to attract buyers emphasizing the large number of titles in their e-book collection. For instance, Amazon’s Kindle Book store currently boasts over 865,000 e-books available for download, while Sony e-book reader product pages boast over 2 million titles in its reader Store.

Regarding the timeline of  these devices, it is important to point out that appearance of electronic ink (e-ink) may be considered a milestone. Until then, one could find the following devices: Rocket eBook (NuvoMedia, 1996), SoftBook reader (SoftBook Press, 1998), Millennium reader (Librius, 1998), Everybook (1999), LunchBook (1999), Franklin Ebookman (2000) and Cytale (2000). E-ink, which enables reading in bright sunlight and has a low battery consumption, brought about a number of devices incorporating new features such as USB peripherals, card reader slots, touch  screens or WiFi connectivity. Among this group of e-readers one can find iLiad (Philips, 2006), Reader (Sony, 2006), HanLin (JinKe Electronic Company), STAReBOOK (2007), Cybook Gen3 (Booken, 2009), FLEPia (Fujitsu, 2009) and Kindle[4] (Amazon, 2007).

In addition to e-readers, there are several devices that are able to display text on the screen. In this sense, apart from tablet computers, some portable multimedia players and smartphones include a text viewer, which enables the user to turn them into suitable e-book viewers (Cowon D2, Samsung Omnia, etc.). Furthermore, there are certain operating systems that make cell phones useable for reading e-books (e.g. PalmOS based devices and phones). Regarding tablet computers, Apple’s iPad (as well as iPhone and iPod Touch) is increasingly acquiring an e-reader status through a large variety of e-reader applications. However, compared to tablet computers, e-readers are characterized by a better readability of their screens, particularly, in bright sunlight, and a longer battery life, which is achieved by using electronic paper technology to display content. Therefore, any device that is able to display text on the screen can act as an e-book reader, but without the advantages of the e-paper technology.

An important issue to consider now is competition between Amazon and Apple. Amazon is an e-book retailer and an e-reader manufacturer (Kindle) which has a strong presence in the market of digital books. On the other hand, one of Apple’s products is becoming a tough competitor for Kindle though not being an e-reader itself: it is iPad. The main difference between the two is that iPad is a multi-purpose device while Kindle is a dedicated e-reader, aimed at displaying e-books for reading. Prices of both devices differ, with Kindle being cheaper than iPad. As regards the latter, it offers a wide range of applications: movies (including HD), TV, pictures, web browsing, games, among others. Additionally, its screen, which is touchable, is larger than Kindle’s and some of its functions include Bluetooth, WiFi and 3G. With reference to Kindle, it is more focused on reading, more compact, thinner and lighter than iPad, has a life battery of 2 weeks with wireless off and 1 week with wireless on (as opposed to iPad, that offers a battery life of 10 hours), is readable in direct sunlight, and also includes WiFi and 3G.

As for e-books which are the main sources for these devices, it should be said that iPad’s iBooks Store, the website where e-books for iPad can be purchased, is partnered  with Penguin, HarperCollins, Simon & Schuster, MacMillan, and Hachette, some of the most important e-book publishers. With respect to Kindle Store, it has cheaper prices on e-books from non-agency model publishers, whereas the same price as in iPad’s iBooks Store will be found when books belong to publishers on the agency model (see more about models below). In other words, Kindle generally has lower prices (except for agency model books, for which it has the same price as iPad).

In addition, Kindle Store has almost 900,000 titles whilst iBooks has around 200,000.

2. Main players in the e-book market

There are two main players in the e-book market which: publishers (upstream market) and retailers (downstream market). Below comes a description of the major activities carried out by these agents.

2.1. Publishers (wholesale market)

Traditionally, publishers’ main activity used to be the distribution of printed works (books, newspapers, magazines, etc.) as a way of disseminating culture/literature or information. Nevertheless, the Internet and the advent of digital information systems have expanded the scope of their business. Indeed, apart from the distribution of printed stuff, publishers have included in their supply various electronic resources, such as e-books and electronic versions of periodicals as well as micropublishing[5], among others.

Publishing involves different stages which precede distribution of the work. Firstly, there is a development phase which is followed by acquisition, when books, newspapers, magazines and other kinds of works are purchased by the publisher. At the next stage, works are copy-edited and graphically designed. This is followed by work production and printing. And finally, marketing strategies are designed in order to distribute the finished product[6].

2.2. Retailers

Retailers are those in charge of supplying digital books to final consumers. Among them, we can find commercial booksellers and e-book websites intended to sell content for particular devices. On the other hand, retailers are also those who publish free content or archive copies of out-of-copyright works.

Apart  from  supplying  e-books,  some  retailers have established  another  business:  the manufacturing and sale of e-reader devices, which allowed to offer a set of complement products. Originally, some of the retailers that supplied both e-books and an e- readers, sold the former which could be read only at their own device. By this technological tying, Amazon, for instance, used to sell e-books that would be read only at its Kindle e-reader (no other e-reader supported its specific format[7]). Interestingly, this has now changed. Indeed, some retailers/manufacturers have brought out a set of applications which allow to display their e-books on devices that are different from their own ones and which did not previously support the format in question[8]. This is the case of Amazon, which has launched several free applications that enable Apple’s iPod, iPhone and iPad, Android devices, Blackberry and PCs to display the same e-books as Kindle does. Naturally, this allowed Amazon to sell electronic books to a wider range of devices’ users. However, an important point that has to be borne in mind here is that these applications cover devices that do not directly compete with e-readers, that is, devices that are not e- readers themselves. This strategy has been used by some other  e-book and e-reader providers such as Barnes & Noble and Sony[9], who also offer free applications for mobile phones as well as for other intended e-readers (iPad, Android and PCs)[10].

3. Pricing models and competitive concerns

There are two broadly used pricing models in the e-book industry: the wholesale model and the agency model. These differ mainly in who sets the final price (retailer or publisher), and more broadly, the scope that each participant enjoys to decide on strategic marketing               variables               (discounts,               bundling,               etc.).               These differential features have implications in the strategic behavior of the involved agents and, consequently, give rise to different competition concerns.

It must also be stressed that the particular pricing model comes up from direct negotiations between the retailer and the publisher.

3.1. The wholesale model

Traditionally, paper books have been priced under the wholesale model. When e-books emerged, they were initially priced in the same way. It must be noted that this model used to be applied to other digital contents, such as songs. The wholesale model mainly consists in the publisher selling an e-book to a retailer at a Recommended Retail Price (RRP) or list price (of which the author is entitled with a given percentage, say, 25%, as a royalty) minus a discount. The retailer has complete power to decide over the final price for the e-book, as well as over other marketing strategic variables such as bundling, discount policies, etc. Along with a higher degree of control over the product’s sales conditions, this model implies inventory risk for the retailer, though when it comes to digital content, inventory risk is not very relevant.