Publishers warned on ebook prices

Physical books are priced according to a different scheme to electronic titles

Five US publishers are being threatened with legal action over the way they set prices for electronic books,reports the Wall Street Journal.

The US Department of Justice (DoJ) said the five had conspired to raise the prices of ebooks.

Also included in the legal threat is electronics firm Apple because of its role in the way ebooks are priced.

The threat comes as the publishers negotiate with the DoJ about the pricing model for electronic books.

The five publishers are Simon and Schuster, Hachette, the US arm of Penguin, Macmillan and HarperCollins Inc.

Business model

The row has blown up because electronic books are sold according to a different formula from that which governs the sales of physical books.

For most physical books publishers set a wholesale price, often about half the cover price, and then let a retailer decide how much they actually want to charge for the title.

This model was initially adopted for ebooks but has since been changed for what is known as an agency model.

Under this scheme, publishers set the price of a book and the agent selling it gets a 30% cut. This model was adopted by publishers largely at the prompting of the late Steve Jobs,said the Wall Street Journal(WSJ).

The shift to agency pricing was also seen as a protective measure to head off attempts by Amazon to corner the market in ebooks. It had been aggressively cutting prices to win customers over to its Kindle ebook reader.

The WSJ added that the change prompted the DoJ to start investigating because it meant that, generally, ebooks became more expensive.

Over the past few months the DoJ has been quizzing publishers and Apple to find out why prices have risen. The legal threat comes as publishers try to convince the government body that agency pricing will promote rather than hinder competition.

The European Commission is also investigating the same five publishers and Apple over ebook prices.

Benedict Evans, an analyst at Enders Analysis, said the DoJ investigation was prompted by confusion about how much it costs to print, market and sell a book.

"The perception is that publishers are saving a fortune because they are not physically printing a book," he said. Actually, said Mr Evans, printing costs were a small fraction of the total outlay required to produce a book.

"All the costs are the people in the publisher's HQ and the writer's mortgage," he said, adding that these had not changed significantly with the rise of ebooks.

The move to agency pricing could mean that publishers made less from each book because of the percentage they handed over to the agents selling their titles, he said.

The DoJ dictating lower ebook prices might have unforeseen consequences, said Mr Evans.

"It comes down to what kind of books you want to continue to be available," he said. "There are constraints on book production outside of which some types of title will not appear."