New book $25 retail. Shipped on consignment (!!) which means the retailer didn’t pay till it sold. AND, if it sold, they kept 50%. And, that’s a paper book which likely cost $3 or more to print and ship. So, the publisher got a max of $$9.50 and had to pay the author. If the books didn’t sell, they got ‘remaindered’ and the publisher had to take them back (pay the shipping) or the $25 book was sold for $6 or less in the bookstore. VERY inefficient. And, the author had to wait 18 months to get paid (and was often cheated at that).

The digital model has no printing, no shipping, no leftovers (often as high as 30% of a run for a hit book and 95% for a stiff). Sales are transparent and the author and publisher can get paid right away.

So, if Amazon or Apple take $3 on a $10 book, the publisher is getting $7 and can lower overhead dramatically in the bargain (trucks, warehouses, etc.). Not much different than the print model. Just faster and easier for everyone.

That is why you saw a price drop below 10.94. A 10.99 price would have placed Apple at a disadvantage. A 9.99 price would have kept to its X.99 business model. Amazon went to 10.94, Hence, Apple went to 9.99.

3) Which is why I said semantically incorrect. Anytime a retailer can discount but pays the same wholesale price, it is hard to call the model agency. The distributor is just suggesting the price, and the retailer chooses or declines to accept the price. That is wholesale in 99.9% of the retail world.

In summary, I find it hard to believe Apple would exit its contract early, a contract which gave it no risk against a wholesale model–because of the MFN, it always received a 70% cut (and thus profit). What I see is the old contract is working as it intended, and the price matches are not some new play by Apple but the old contract clauses kicking in to allow Apple to price match.

Then again, Apple has never really pretended to be an ereader.

Scott Nicholson

2) You’re right that the MFN clause meant Apple could drop its prices to match others. However, as I wrote here yesterday (http://paidcontent.org/2012/09/11/the-price-drops-begin-what-do-harpercollins-ebooks-cost-now/) what actually happened yesterday was that Apple first priced two bestsellers at $9.99, and Amazon dropped *its* prices to match later in the day. There’s no reason for Apple to pre-emptively drop prices under the old contract.

3) “Nor do Apple and publishers have to make wholesale contracts. This is semantically incorrect. Agency allowed the distributor to set the final price and keep that price firm.” — Agency means that the publisher sets the price and the retailer takes a commission. Agency pricing has been effectively declared legal and can continue now as long as the publisher doesn’t restrict discounting. Call the new model “agency lite” (as Michael Cader is calling it) or whatever, but it’s not exactly wholesale; Judge Cote distinguishes between the two in her acceptance of the final settlement.

She writes, “The Government and critics of the settlement dispute whether the decree effectively disallows agency pricing and therefore dictates a particular business model. The Court states no opinion on this issue as it is largely semantic and irrelevant to the disposition of this matter. The terms of the decree speak for themselves: they disallow restrictions on retail discounting for two years subject to certain limited exceptions.” (p. 16) Later she writes “In other words, even through the relief in the decree is both well-tethered to the Complaint and narrow, it may nonetheless effectively end agency pricing for e-books” (p. 29) — but not necessarily.

The important part of continuing this limited type of agency for publishers is that they still pay retailers a commission and can negotiate with retailers “a commitment from an e-book retailer that a retailer’s aggregate expenditure on discounts and promotions of the Settling Defendant’s ebooks will not exceed the retailer’s aggregate commission under an agency agreement in which the publisher sets the ebook price and the retailer is compensated through a commission.”

Do you have evidence of this? That they have a new contract ready does not mean they are operating under it yet. The settlement dictated 7 days from acceptance of the settlement. That has yet to pass, and if Apple is not operating under the new contract, that 7 days may get stayed by a court action–Kohn has filed a motion for just this, and Apple has hinted that it may do the same, probably in an emergency motion to the Second Circuit.

“Apple couldn’t cut prices before, only the publisher could.”

Incorrect. Remember the MFN clause? That gave Apple the right to match any other retailer’s price, which is a price cut made by Apple. Apple appears to be doing just this, which if it is still operating under its old contract, it has every right to do and without risk of selling below cost. What Apple could not do was unilaterally cut prices on agency titles without the the reason of price-matching.

“Nor do Apple and publishers have to make wholesale contracts.”

This is semantically incorrect. Agency allowed the distributor to set the final price and keep that price firm. If the retailer is paying a set price at the wholesale level and has the ability to discount, it is a wholesale model, else anything with an MSRP would be considered agency pricing.

Apple couldn’t cut prices before, only the publisher could. The settlement allows Apple (and other retailers) to discount as much as they want (though publishers have the option to negotiate the condition that the retailer does not sell the publisher’s entire line for less than the entire commission it receives). Nor do Apple and publishers have to make wholesale contracts.

Write this article again in a month when Apple is operating on a wholesale contract like Amazon.