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Pricing to Fail: Case Studies in Dumb Pricing - Despite Big-Name Bestsellers, Agency Model House of Cards May Already Be in Danger

|Includes: Apple Inc. (AAPL), AMZN

By Stephen Windwalker, Editor of Kindle Nation Daily
Originally posted 7.19.2010

I did a fresh price check over the weekend on Amazon's (NASDAQ:AMZN) overall Kindle catalog and the composition of the 100 top paid bestsellers list in the Kindle Store, after 17 days' experience with major structural changes in pricing and royalties for the Kindle's Digital Text Platform (DTP), and the data is beginning to suggest that we may see the collapse of the big book publishers' "agency model" before it is time to renegotiate contracts early in 2011.

First, interesting trends at both ends of the Kindle Store pricing spectrum:

  • Amazon has mandated that indie publishers must price ebooks between $2.99 and $9.99 to qualify for generous 70 percent toyalties, and the overall percentage of titles in this price range continues to increase very gradually but steadily: from 56.96% on May 22 to 57.22% on June 14 to 57.32% on June 26 to 57.66% on July 18.
  • All of this migration has come from a relative decline in ebook titles priced at $10 and up, from 19.16% on May 22 to 18.82% on June 14 to 18.52% on June 26 to 18.09% on July 18.
  • Not surprisingly, the fastest growing price point in the Kindle Store is for ebooks priced at $2.99. As a percentage of the whole this segment has grown by 11.06% since June 26 and by 15.56% since May 22.
  • Any expected decline in the percentage of titles priced at under $2.99 has yet to occur, as that subset has grown from 23.88% on May 22 to 23.96% on June 14 to 24.16% on June 26 to 24.24% on July 18.

As for the composition of the 100 top paid bestsellers list in the Kindle Store, there is one shift that could be dramatic if it holds over the next few weeks. I commented in our last price-check post that Kindle readers are showing an increasing willingness to pay up to $12.99 for new full-length books by established bestselling authors, and this time the number of Top 100 jumped from 24 to 30 since June 26, including 19 in the top 50. Meanwhile, the number of Top 100 bestsellers priced below $2.99 fell from 13 to 7 as many of the authors and publishers of popular low-priced ebooks raised their prices to $2.99 and above to take advantage of the new 70 percent royalty option. (As to why more authors and publishers haven't conformed yet to the $2.99 minimum price in order to qualify for the 70 percent royalty, there are some interesting issues that we'll try to address in a separate post at Kindle Nation Daily  in the next day or two).

However, Kindle readers continue to reject agency model new releases (and other ebooks) priced above $12.99. Although the number of Top 100 titles in the $13-and-up range grew from 2 to 3 since June 26, the far more significant tell is that there were zero $13-and-up titles among the top 74 bestsellers.

Even if significant numbers of Kindle readers are willing to hold their noses and pay $11.99 and $12.99 for big-name authors, the fact that the relative number of Kindle Store ebooks in all of the $10-and-up price ranges is declining steadily and significantly suggests that the agency model publishers are seeing exactly what Jeff Bezos says Amazon is seeing. Referring to a decline in market share for agency model publishers, Bezos said in a article at the end of June that Amazon has already seen a significant "share shift from one group of publishers to this other group of publishers."

Since May 22, the relative decline in $10-and-up listings as a portion of the whole is dramatic:

  • the percentage of titles priced from $10 to $12.99 has fallen 4.70%; 
  • the percentage of titles priced from $13 to $14.99 has fallen 4.12%; and 
  • the percentage of titles priced at $15 and up has fallen 5.82%.

When five of the Big Six publishers unveiled their campaign to push back against Amazon's mastery of the ebook domain early this year with the launch of the agency model scheme to fix or mandate prices, they clearly saw Apple (NASDAQ:AAPL) as the white knight that would allow them to rearrange the ebook pricing battlefield to their liking.

But now Apple is beset with a growing number of problems of its own, and we may even be seeing signs that Steve Jobs' company doesn't quite have the focus or attention span to sustain, for the long haul, its iBooks leap into the world of bookselling: among the "Top Free Apps" for the iPad, the iBooks App has sunk like a stone from #1 to the #8-#10 range in the past week. And, of course, once the serious readers among new iPad owners respond to Apple's heavy marketing that they should download the iBooks app, they quickly discover that finding the books they want to read there can be a frustrating challenge. Indeed, there are increasing signs that -- on the iPad, at least -- the Kindle Store with its 642,000-plus ebook titles may already be #1 in actual iPad ebook transactions and dollars transacted, ahead of iBooks with fewer than 100,000 titles (including as many as half of them free public domain listings).

If iBooks can't even outsell Kindle Store ebooks on the iPad, it wouldn't require a recall, a mass shipment of new cases, or even a public "iBooksFail" pronouncement. But we might see an iBooks shuffle into back-burner status in six months or so when it will be time to negotiate new contracts with the agency model publishers.

Of course, even in the extremely unlikely event that Jeff Bezos were to back up his broadbrush pronouncements with the public disclosure of sales figures, the agency model publishers are likely to be the last to know how much ebook market share they are losing to titles in the sub-$10 price range, since the greatest growth there appears to be coming from indie publishers and established as well as emerging direct-to-Kindle authors who appear not to be on the "big" publishers' radar.

Click here to see underlying statistical analysis as of July 18, 2010. Here's a price breakdown of the 642,616 book titles in the Kindle Store as of 7 a.m. EDT on July 18, 2010:

Disclosure: Long AMZN