Agency pricing is “a term for a new way of setting e-book prices that came about as Apple prepared to introduce its iPad in 2010. Under the traditional ‘wholesale’ pricing model, publishers had long charged booksellers around half the cover price of a book, leaving booksellers to discount the books if they wanted.” Thus The Wall Street Journal in April 2102 when the battle over e-book pricing was thick and heavy. Under agency pricing the retailer is rewarded for making the sale by receiving a fee from the originator. The traditional wholesale pricing model differs fundamentally in that retailers actually buy the product from the publisher at a discounted price, and then sell it on to readers, usually at full price, but at a discounted price if they so choose. Under agency terms the bookstore doesn’t take ownership of the product, and thus doesn’t have the freedom to alter the price deal when making the final sale.

Now, one reason why agency terms make good sense in the e-book world is that with an e-book there isn’t really any thing which can be sold to a retailer. Over the years we had evolved a trade system where publishers sold their (printed) books at a discount to middlemen, either retailers or wholesalers. The retailers would sell the book to the customer at the full price, and bank the discount as their operating margin. Occasionally retailers might offer books at a discount, but rarely a discount greater than the one they had received from the publisher. After all you have to make some margin if you want to stay in business. Barnes & Noble, say, can order 100 copies of the hardback of The Girl on the Train, and here come cartons containing 100 books bang into their warehouses, along with an invoice which eventually they’ll have to pay. In theory bookstores are sharing the inventory-cost risk with publishers when they order and pay for stock of a physical book. (Of course, the fact that publishers allow them to return unsold stock for full credit mitigates that risk almost entirely.) But clearly e-books are different: B&N can’t order 100 copies of the The Girl on the Train e-book in the same way, nor would they want/need to. The sale is made by granting access to a file after they have got a customer, and a retailer has no need to hold any stock of e-book files — if such a concept had any real meaning. It seems entirely appropriate that e-books should be sold under different terms than p-books.

Prior to the “invention” of agency pricing, Amazon would buy e-books from publishers under the usual wholesale discount terms and set its own price, often selling Kindle books at considerably less than it paid the publisher for them. Book publishers had two contradictory fears about this pricing strategy. On the one hand they worried that book buyers would become conditioned to very low prices for books; on the other hand though they also feared that, having priced the competition out of the market, Amazon might eventually feel free to increase prices to whatever level it wanted. Publishers have always been the ones to fix the prices for their books: seeing Amazon grab that power from them did not sit well.

The agency model is based on the conceit that the publisher of a book is selling to the reader and, therefore, setting the price, and any agent facilitating that sale is being paid a commission from the publisher for doing so. One might argue that previously Amazon effectively wanted to license the ebooks in its Kindle program, control their content, and set their prices. From the book publishing industry point-of-view Amazon was behaving as if it wanted to be the publisher, not a distributor or seller. Amazon is such a dominant force in the book retail market, that any negotiation with publishers tends to feel rather one-sided: but publishers show no signs of being ready to become mere content providers rather than publishers. The “conspiracy” with Apple by the “big five/six” publishers, was in effect an attempt to set up another outlet big enough to counter the quasi-monopoly that the Kindle threatened to become. Under the agency pricing model which the publishers sought to implement publishers would probably have made less money, Amazon would have made more, and the customer would have had to pay a higher price (which is what precipitated the Department of Justice’s action). The hope of publishers was that raising the margins on e-books would encourage competition and encourage other e-book outlets to flourish and grow. This is not an altogether wicked thing to have done — the trouble was that it required the customer to pay more, not something you are allowed to “conspire” to do.

The revised arrangements for agency pricing appear to be working out, though the commentariat remains gob-smacked that publishers look like they have shot themselves in the foot now that we see declining unit sales of e-books. But do the mathematics guys: 70% of x compared with 50% of y: solve for various sales quantities.