Swiss book price-fixing: can it work?

Where old business models prove inadequate on account of new technologies and old IP laws, the usual answer these days is to call for new business models (whatever, and however effective they may or may not be).  There is however another solution, though admittedly one which may be of limited and diminishing applicability, depending on the technology -- state control of the market.

In March of this year the Swiss Parliament adopted new legislation to fix book prices. This law, which also applies to online book sales, requires the publisher or importer to set the final retail price of books that it publishes in, or imports into, Switzerland, compelling retailers to resell the books at the fixed price.

Following the passage of this law the Swiss Competition Commission decided to suspend its investigation of whether distributors and marketers of French-language books in Switzerland held a dominant position and, if so, whether they had set their prices at an excessively high level (Secretariat of the Competition Commission opened a preliminary investigation in 2007 into the French-language book market in Switzerland to see whether the retail price differences observed between books sold in Switzerland and those sold in France (between 25% and 35% at that time) were caused by anticompetitive activity).

On March 13 2008 the commission decided to open an investigation into distributors of French-language books operating in Switzerland. Distributors obtain exclusive rights to publishers' books and therefore any given book can be purchased only from its respective distributor or marketer in Switzerland. In view of this exclusivity, the commission considered that there were indications that the distributors of French-language books might hold, on an individual basis, a dominant position on the Swiss market, and that the level of prices charged for distribution services might be regarded as abusive pursuant to Article 7(2) of the cartel act. Subsequently, the commission widened its investigation to include Swiss recommended public prices set by distributors, in order to examine whether such practices (as well as the juxtaposition of vertical agreements between distributors and booksellers) could be regarded as illegal within the meaning of Article 5 of the cartel act.

The purpose of the new law is to promote the variety and quality of books, which are considered as cultural assets. Accordingly the publisher or importer has the right to determine the final retail price of the books that it publishes or imports. While booksellers are compelled to sell books at the final retail price they can still offer a general discount of up to 5% on the final retail price, as well as dropping prices for sales to public libraries, bulk sales and sales by book clubs. The law applies to the sale of books on the Internet (but not to digital books).

It will be curious to see how the controlled market for books fares in the era of e-books, downward-spiralling copyright protection and the accelerated closure of traditional book shops. If it works and keeps prices up, I suspect that this will make it more profitable for people to seek to circumvent it.  If it doesn't work and prices fall anyway, it may as well not have been implemented in the first place. Another interesting issue is the impact of this law on current and future contracts struck by authors with their Swiss publishers. But let's wait and see ...

Source: "New legislation introduced to allow publishers to fix book prices" by Silvio Venturi or Pascal Favre (Tavernier Tschanz), International Law Office, 5 May 2011

E-books and the Challenge of Price

The Apple announcement of the iPad tablet has raised the question whether the hardware portion of the e-book market will be dominated by a dedicated reader or a multi-purpose device with e-book functionality. In addition to Apple, the sheer diversity of entrants into the e-book space, ranging from device manufacturers such as Sony, online purveyors such as Amazon, and book retailers such as Barnes & Noble, indicates the extent, to which the e-book platform is viewed, correctly or incorrectly, as a likely staple of how people will receive and read books and other contents in the near future.

No matter who wins, however, there still remains the question of how the e-book platform will impact on the traditional stakeholders in the publishing business, i.e., authors and publishers.The view is often taken the e-book is inherently a less costly production and distribution platform than the traditional book. The reason would at first glance appear to be obvious: with no printing, storage or shipping costs, the cost of an e-book must surely be set for a downward trajectory, with the result that books will become less expensive for publishers and therefore for consumers. This is supposedly true, even after one factors in the initial outlay for the reader device.

In truth, however, the situation is not so clear, as explained by Motoko Rich of the New York Times in a article that appeared on March 1 entitled "Math of Publishing Meets the e-Book". Rich notes that, while it appears that e-book titles will cost less their traditional counterpart, "... publishers also say consumers exaggerate the savings and [more importantly--NJW] have developed unrealistic expectations about how low the prices of e-books can go." Against this background, Rich goes on to consider the cost implications of producing and distributing an e-book and reaches some interesting conclusions.

As described by Rich, in order to understand the cost structure for the publisher, let's use a hardback book at a retail price of $26.00 as our baseline. The bookseller will pay the publisher half of that amount-$13. From that sum, the publisher pays $3.25 for print, storage and shipping (including returns). Printing and production functions such as cover design, typesetting and copy-editing, costs the publisher another 80 cents. Marketing will amount to a $1.00 or so, going up or down depending upon the title. Economies of scale on a per unit of book basis will also kick-in.

Let's not forget the author, of course. Assuming a royalty rate of 15%, the publisher must expend another $3.90. If an advance to the author has also been agreed-upon, there is a front-end outlay that may, or may not, be recouped against against royalties. This brings the net amount for the publisher to $4.05. From that the publisher still has to pay for office space and utilities. Based on the foregoing, it is easy to see why, for the traditional retail publishing business, blockbusters are crucial for financial success.

Will it always have a price?

And what about e-books? According to Rich, using the reported agreement with Apple, the following price scenario applies. The publishers will fix the price (although there have been some tension on this point), and the e-book retail platform then serves as an agent, with a commission of 30% per sale. Using a $12.99 baseline price (though there is no firm notion of what the price point range will be), the publisher is left with $9.09, from which he has costs of approximately 50 cents for file conversion and digital typesetting, plus an additional 78 cents. The author's royalty will a matter of negotiation, of source. Rich posits a 25% royalty on either gross revenue or the consumer price. All of this leaves the publisher with an amount in the realm of $4.56 to $5.54, to which overhead and related expenses must then be covered.

This looks like a good deal with the publisher. Not so fast though. C0ntrary to my impression, Rich suggests that publishers recoup costs and make material profits in the paperback segment of the book business. That argues in favor of a mixed model, where both the traditional book
industry and the e-book business will co-exist. However, if the price for the e-book product is similar to the price of a paperback book, the result may be that the paperback industry is severely hurt, eroding the profit potential for the traditional book industry. Whether the hardback market will itself then survive is a question.

Based on the foregoing, we can think of a number of less than socially desirable outcomes in an e-book world. First, there may well be a "e-book reader/computer tablet" divide between the haves and have-nots of the hardware device. Second, it remains to be seen whether the e-book space will allow for the kind of marketing and distribution that allow the traditional book business to introduce authors as well as provide the socio/tactile experience that only takes place in a bricks and mortar bookstore. If the traditional book business shrivels, the combined upshot may be fewer with the resources and access to books, and less choice for those lucky enough to have both the resources and ready access to book contents.

This may be nothing compared with the e-book divide

One thing is clear--we are only in the infancy of the e-book world, with consequences both benign and malign, socially beneficial and socially harmful, intended and unintended, before us.