Agency is dead, long live new agency

It's just two days since the Department of Justice threw the book business in the air, and many of us have yet to fully figure out where the different bits will land, and how many pieces there will be once they do.

So let's take this in stages.

Is agency dead?

It certainly looks untenable in a world where preventing retailers from discounting e-books is no longer permissible. But importantly the settlement agreements do not allow unfettered discounting. The agreement includes discounting restrictions allowing a "settling defendant to prevent a retailer selling its entire catalogue at a sustained loss". So Amazon, could sell some e-books at a loss, but not all.

Also, in the US a number of publishers remain on agency terms, including Random House and Sourcebooks, and agency itself has not been declared illegal just how it came into operation in the US.

The agreement explicitly states that even settling publishers can remain on agency if they wish.

"These provisions do not dictate a particular business model, such as agency or wholesale, but prohibit Settling Defendants from forbidding a retailer from competing on price and using some of its commission to offer consumers a better value, either through a promotion or a discount."

In the UK Hachette chief executive Tim Hely Hutchinson has assured authors that the publisher is continuing with its agency model arrangements. In a note sent to staff and authors, he clarified: "As I have communicated to many of you recently, our group has been trying to persuade competition authorities on both sides of the Atlantic of the merits of the pro-diversity agency model for e-book pricing. Nothing new has been decided outside the USA, so Hachette UK's agency model arrangements continue as they are."

But we also know that Hachette is one of four publishers who have offered a deal to the European Commission. It seems most likely that this deal will echo the US settlement, though perhaps not be as punitive. The Most Favoured Nation clause will likely disappear, and retailers will be allowed to discount - within limits.

So a modified version of agency is likely to emerge, and then a further modified version once the punishment period the three settling publishers in the US have agreed to passes.

But agency only works if a big rump of publishers are on it. This is why Penguin USA chief executive David Shanks got so upset with Random House (according to the DoJ) when it declined, at first, to move to agency. If Amazon can discount enough of the good e-books out there, then inevitably agency publishers will look expensive, and increasingly isolated, or they'll have to move downwards with Amazon. None of this is good.

I asked Mike Shatzkin for his view, since it looks to me like agency is shot. He wrote back:

"I think agency is mortally wounded, but I'm not sure. If I understand the legal implications correctly, only the three publishers that settled are affected immediately. Two others fight on and Random House isn't affected at all. On the other hand, any publisher continuing with agency (if I'm right and they're allowed to) would have to be aware of what Amazon (and other retailers) do with their pricing power and adjust what they're doing accordingly. I think we need to think through whether the three publishers who yielded (Hachette, Harper, S&S) combined have more titles that matter than Random House. If they do, perhaps the others will find agency untenable. If they don't, it shouldn't be much different than the year when Random stayed out."

We also need to think about what happens after the cooling off period, and what happens to those publishers who persist with agency now that it appears so tarnished. We might understand the nuances, but for the public agency will forever be remembered as the name given to the conspiracy to keep e-book prices high.

Apple uses agency for its app store, and no doubt will continue to use agency for the iBookstore. It seems to me that a hybrid model will emerge, that will be wholesale for some retailers, agency with discounts allowed for others, and strict agency for Apple, but without the MFN clause.

So agency is not dead. Except it is. The way agency was imagined as a moderating force against excessive and damaging discounts in the e-book world is most definitely dead. I find it highly unlikely that New Agency will ever be able to wrest this control back.

That may or may not be a good thing. We may be about to enter a more sophisticated environment with multiple retailers and multiple models.

Or Amazon could simply run the competitors off the road, and ultimately carve out the kind of deals it wants. Amazon certainly now has plenty of amunition when it next gets around the negotiating table.

So is Amazon now going to dominate?

That certainly seems to be the view of my former colleague Alison Flood at the Guardian who writes that the DoJ action "scares me, it really does".

While a modified agency exists, I don't feel as worried as Alison, though I am certainly beginning to understand the view that Amazon really has become a bad host, helping itself to everyone's lunch while shouting loudly about its cheap snacks. In it's letter to shareholder published today Jeff Bezos is unapologetic about how his Kindle Direct programme is knocking established players off their perch:

"Kindle Direct Publishing is good for readers because they get lower prices, but perhaps just as important, readers also get access to more diversity since authors that might have been rejected by establishment publishing channels now get their chance in the marketplace. You can get a pretty good window into this. Take a look at the Kindle best-seller list, and compare it to the New York Times best-seller list – which is more diverse? The Kindle list is chock-full of books from small presses and self-published authors, while the New York Times list is dominated by successful and established authors."

But might there be some tempering influences. I've not seen it mentioned since the DoJ announcement, but agency has worked. It always felt temporary to me, anyhow, and over the two years it has run, both Barnes & Noble and Kobo have emerged as significant players. It will now take some doing to shift them, though admittedly, as this piece on Digital Book World, makes plain Barnes & Noble is in a more fragile position than we might like.

But is Amazon going to aggressively price discount? Michael Cader at Publishers Lunch has helpfully crunched the numbers and figured out that if Amazon does begin to aggressively discount on those titles that will now be none-agency it might lose an additional $113m, while B&N, if it competes, could lose $30.5m.

But there is also Kobo, and the fact that it is now owned by a huge £25bn a year Japanese ecommerce company. I spoke to Kobo chief executive Mike Serbinis today and asked him whether he feared a race to the bottom as a result of the DoJ action. His response was revealing, indicating that he thinks the Rakuten deal will help mitigate against this threat. "We have a nuclear deterrent by having a strong balance sheet," he said.

So it is not all doom. Agency worked, it might survive in a more sophisticated form, and Amazon might be put off pushing the nuclear button by the fact that it does now have competition, in a way it didn't three years ago. Furthermore, retailers really do have a specialist skill when it comes to price and delivering offers to their customers: might we now realise that left alone they could become better competitors and stronger businesses.

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