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Virtual Goods and Free Market Price Adjustments

Virtual Goods and Free Market Price Adjustments – February 1, 2010 4:26 AM (edited 1/31/10 11:26 PM)
Talraen (2373 posts) Doesn't Play with Others
Rating: Not Rated
This whole Amazon-Macmillan tizzy has made me think about the prices of virtual goods more than I usually would (read: at all). From the initial reports, it seemed that Amazon wanted to cap eBooks at $10, and publishers want more flexible pricing. The weird part is that the publishers would make significantly more per eBook on Amazon's model - in fact, Amazon sells most eBooks at a loss.

Let me repeat that: Amazon sells virtual goods at a loss.

So that struck me as, you know, a bit on the crazy side. Some bloggers said Amazon is trying to drive down book prices so they will eventually make a profit on eBooks (presumably once the Kindle has cornered the market in this hypothetical plan). That seems like as good an explanation as any to me, but it does serve to tell me how little I understand economics and such.

Tonight I read this blog by Tobias Buckell (linked from a Brandon Sanderson tweet) which basically laid out how the publishers are the ones looking out for the consumer, because even though they want to charge more for eBooks initially, they will go down in price over time. This is what prompted this post (and it only took four paragraphs to get there!)

While I don't think the writer is lying or anything, I have to say that I don't buy it. There is an inherent assumption that older things will eventually cost less, at least in the entertainment industry. I have railed hard against Nintendo for going against this very force. However, I don't know how well this will translate to virtual goods. See, virtual goods are just that - virtual. You don't have "stock" and there will never be a clearance sale (even if they call it that).

Now obviously, overstock isn't the only force driving down prices with time. Every industry is different - old DVDs, for instance, aren't necessarily any cheaper than new ones (and are actually more expensive at Wal-Mart). Books seem to operate the same way, in my experience. New releases are generally sold at a discount at first, then are sold at the cover price forevermore. Wheel of Time hardcovers cost as much now as they always have. In fact, the book industry's analog to prices dropping over time is the existence of paperbacks more than anything else.

So the question in my mind is whether there's enough incentive for those $15 eBook prices to come down. There won't be a cheaper edition to do it naturally, there won't be any extra stock - what's forcing the price down? Sure it's probably good business to drop your prices to increase sales, but I doubt Wheel of Time books, for example, will ever go down. Why would they? I suppose they'd have to compete with their own paperback versions, but then, isn't that the whole point of selling eBooks for less than $10 in the first place? Perhaps eBooks will end up being $15 while only a hardcover is in print or something.

But then, what do I know? As I mentioned above, not a whole lot. But I did see one other thing mentioned on this issue which I found interesting: any time the introduction of a new competitor into the marketplace (in this case, Apple) raises prices across the board, that sets off anti-trust alarm bells. Of course, in this case, Amazon is the monopoly (though given how horribly their nuclear option tactics with Macmillan failed, maybe being an online entertainment monopoly isn't all it's cracked up to be). The whole thing is ass backwards and bizarre.

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There is no Mythril Sword in Elfheim
Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 2:04 PM (edited 2/1/10 9:04 AM)
Cuzzdog (1522 posts) Head of Gamer Corner R&D
Rating: Not Rated
Just some of my own thoughts here. The eBook industry is a relatively new one. That means a lot of the infrastructure to support the industry isn't in place yet and isn't stream lined yet. That would be why Amazon is selling books at a loss at $10. Once all that's in place, the cost to produce an eBook will go down allowing the industry to sell the eBooks at lower prices while maintaining their profit margin. Then it would be up to the consumers to drive the prices down by not buying the books. The prices will drop on products that aren't selling anymore to convince the stragglers to pickup the book. Of course, since these are all new products we're not seeing those price drops yet.

I suppose the publishers are saying they're looking out for the consumer by charging higher prices to start with because they need the extra cash at the start to get all that expensive infrastructure in place. If Amazon forces the publishers to run with a too tight profit margin, the publishers won't be able to afford the infrastructure that they need to get in place to produce the eBooks for a much cheaper price down the line, or the tight profit margings could kill the industry all together before it gets a proper foot hold.

Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 2:08 PM (edited 2/1/10 9:08 AM)
Balerion (1224 posts) Elite Powergamer
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Typing from a phone, so I won't be touching on all my thoughts.

The main response though is that publishers are looking out for consumers, but only indirectly. Pricing isn't the issue, the issue is long term viability.

Find jen's news feed on facebook, she points to a good press release by Macmillan's CEO, but Mina's been singing this tune to me for over a year.

Having $10 eBooks eat sales off the plate of the $25 hardcover is bad for publishers, which will be bad for authors, which will be bad for readers.

They are much more concerned about long term market health than about immediate consumer concerns... but long term market health is in the readers' interest.

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I really think the three “!”s really captures the exuberance that Clair must have been feeling when he almost said it. -Cuzzo
Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 2:13 PM (edited 2/1/10 9:16 AM)
Talraen (2373 posts) Doesn't Play with Others
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Having thought about it a bit overnight, I really have no problem with eBooks costing $15 or even as much as $20 if the only available print edition is a hardcover. However, once the paperback is out, that's ridiculous. And I would bet the cost difference on every eBook I ever buy that the intention is for best-sellers to remain $15 forever. I fully expect to see the Fires of Heaven at $15 later this month, and I might not buy it if it is.

EDIT: Note I said "intention." I think (hope, really) that consumers are smart enough not to pay double the paperback price for eBooks, and the prices will come down naturally.

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There is no Mythril Sword in Elfheim
Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 3:15 PM (edited 2/1/10 10:15 AM)
Balerion (1224 posts) Elite Powergamer
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From the Macmillan CEO's statement:

Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digital media businesses). The price will be set the price for each book individually. Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time.



They don't want to screw people out of paperback pricing, they just don't want to lose money in the one stage of a book's life where it's liable to be profitable for everyone involved.

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I really think the three “!”s really captures the exuberance that Clair must have been feeling when he almost said it. -Cuzzo
Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 3:19 PM (edited 2/1/10 10:20 AM)
Talraen (2373 posts) Doesn't Play with Others
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Like I said, we'll find out very quickly if they mean it, since the next WoT eBook comes out in two weeks or so. I'll believe it when I see it.

EDIT: To put it another way, with the apparently razor-thin profit margins the industry has, it seems naive to think that "flexible pricing" will consistently mean "lower pricing."

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There is no Mythril Sword in Elfheim
Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 3:39 PM (edited 2/1/10 10:39 AM)
Balerion (1224 posts) Elite Powergamer
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You do realize that they want to sell books, right?

I don't know that they'll always be cheaper than the print edition, but I think your fears that they'll be $15 when the book is available in paperback are groundless. They're offering Amazon the same pricing contract they use for print books, why would they bother making eBooks more expensive? Especially when the print one reaches a mass market point there's absolutely no reason to do so, except to try to strangle ebook sales. And there isn't a publisher out there who isn't desperate to make ebook sales work, they just don't want them to destroy print sales either. I think they're needlessly worried about that last point, but then I'm not the CEO of a major publisher.

I also think that given the problems they're going through with Amazon right now that whatever happens in two weeks will not necessarily be indicative of long term strategy.



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I really think the three “!”s really captures the exuberance that Clair must have been feeling when he almost said it. -Cuzzo
Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 3:59 PM (edited 2/1/10 10:59 AM)
Talraen (2373 posts) Doesn't Play with Others
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Balerion wrote...
They're offering Amazon the same pricing contract they use for print books

Are you sure about this? My understanding is that they are doing the exact opposite. None of the coverage I've read has gone into it in detail, but I imagine they buy print books for wholesale prices, then sell them at whatever price they want - which is precisely how they've historically sold eBooks. (Well, they don't actually "buy" the eBooks, but they send the publisher approximately half the list price, which I'm assuming is at or near wholesale price.) Now I do know how the new, agency model they're moving to works: the publisher sets the price, and they get a set percentage (70% in this case) and the retailer (Amazon) gets the rest. And I've never heard anything that implies that's even remotely like their print pricing contract.

In any case I don't think they're trying to destroy eBooks or anything, nor do I think they will. If consumers flatly reject the over-$10 price scheme, they'll certainly lower the prices, and if they don't, then there isn't a problem. Now I thought it was directly stated that the higher price point was for both hardcovers and best sellers, but looking back, it appears that is not the case, so maybe there's no issue here. But I think that they can get away with selling popular books for $15, and they know it. And that's what I'm afraid of.

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There is no Mythril Sword in Elfheim
Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 4:07 PM (edited 2/1/10 11:07 AM)
Balerion (1224 posts) Elite Powergamer
Rating: Not Rated
What generally happens in a publishing contract is this:

Publisher's set the general retail price.

Publisher sells the book to the retailer at a 50% discount (roughly, this changes by retailer, book, and edition).

Retailer is then welcome to sell it for as much as they want as long as it is above that 50% amount, they're not legally allowed to sell at a loss.


What's been fucked up about Amazon's $9.99 pricing is that they have been selling at a loss, which they can't do forever. So publishers are worried that Amazon's going to say "Hey, everyone's used to $9.99, therefore we're going to keep that price point, but you should sell to us at $5, to stick with standard contracts", which would utterly fuck the publishers. Plus, obviously, there worried about people paying $10 at a time when the print version is costing $25.

A lot of this is just fear of change - they see what's happening to newspapers and are utterly freaked out that their day is coming as well. But at the same time they're torn between a desire to move to a digital format because it's another channel for sales.

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I really think the three “!”s really captures the exuberance that Clair must have been feeling when he almost said it. -Cuzzo
Re: Virtual Goods and Free Market Price Adjustments – February 1, 2010 4:12 PM (edited 2/1/10 11:12 AM)
Talraen (2373 posts) Doesn't Play with Others
Rating: Not Rated
Yeah but the key difference in the new method from Amazon's perspective is that they can't set the price at all, and as a result have no competitive advantage whatsoever. Which might be good for the publishing industry, but it might also kill the dedicated eBook reader entirely when you may as well have an iPad that also does all kinds of other shit. (You know, if you're a pessimist. Wink)

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There is no Mythril Sword in Elfheim
Re: Virtual Goods and Free Market Price Adjustments – February 3, 2010 6:17 PM (edited 2/3/10 1:17 PM)
chaoscat (452 posts) Ambassador of Good Will
Rating: Not Rated
Well, I don't know a whole lot about how the publishing industry works, or a whole lot about virtual goods, but I do know this about economics: you sell at a loss to kill your competition. I can see why publishers would be worried about that.

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Why in the world is your title "Ambassador of Good Will"? Is it some attempt at the Guiness Record for Irony?
--Balerion
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