By Jeffrey A. Trachtenberg 

When the world's largest publishers struck e-book distribution deals with Amazon.com Inc. over the past several months, they seemingly got what they wanted: the right to set the prices of their titles and avoid the steep discounts the online retail giant often applies.

But in the early going, that strategy doesn't appear to be paying off. Three big publishers that signed new pacts with Amazon-- Lagardere SCA's Hachette Book Group, News Corp's HarperCollins Publishers and CBS Corp.'s Simon & Schuster--reported declining e-book revenue in their latest reporting periods.

"The new business model for e-books is having a significant impact on what [the big] publishers report," said one publishing executive. "There's no question that publishers' net receipts have gone down."

A recent snapshot of e-book prices found that titles in the Kindle bookstore from the five biggest publishers cost, on average, $10.81, while all other 2015 e-books on the site had an average price of $4.95, according to industry researcher Codex Group LLC.

"Since book buyers expect the price of a Kindle e-book to be well under $9, once you get to over $10 consumers start to say, 'Let me think about that,'" said Codex CEO Peter Hildick-Smith.

In some cases e-books cost almost as much as the hardcover. Amazon is selling the hardcover edition of Jonathan Franzen's new novel "Purity" for $15.10--11 cents more than the $14.99 e-book price set by Macmillan Publishers, a unit of closely held Verlagsgruppe Georg von Holtzbrinck GmbH. The publisher declined to comment.

On Thursday morning, there wasn't a single title priced at $9.99 among the top 20 titles on the company's Kindle best-seller list. Last summer, Amazon offered the digital edition of James Patterson's thriller "Invisible" for the bargain price of $8.99. Mr. Patterson's newest tale of suspense, "Alert," went on sale Aug. 3 on Amazon for $14.99, a price set by Hachette, Mr. Patterson's publisher. The unit sales for Mr. Patterson's e-books weren't available.

The precise impact of the deals with Amazon, the dominant player in book sales, is still a matter of industry debate. The drop in sales could be partly due to a crop of lackluster new titles. But some publishing executives say higher e-book prices, resulting from the Amazon deals, are discouraging purchases.

Publishers succeeded in preventing Amazon from lowballing prices, but "unfortunately, it may be that consumers aren't happy with the higher prices," said Mike Shatzkin, chief executive of publishing consulting firm Idea Logical Co.

Hachette cited fewer hot titles and the implementation of its Amazon deal as reasons that e-books fell to 24% of its U.S. net trade sales in the first half of 2015, from 29% a year earlier. Declining e-book sales contributed to a 7.8% drop in revenue in the period.

The e-book woes of big publishers appear to be dragging down sales figures industrywide. For the first five months of 2015, publisher e-book revenue for adult, children's and young adult titles fell 10.4% to $583 million compared with the same time in 2014, according to the Association of American Publishers' monthly StatShot report, which collects sales data from 1,200 publishers in the U.S.

Simon & Schuster cut a new deal with Amazon last October. It was followed by Hachette, Macmillan and HarperCollins, which like The Wall Street Journal is owned by News Corp. Macmillan doesn't provide its financial results. The fifth of the major publishers, Penguin Random House, majority owned by Bertelsmann SE, has a deal with Amazon that went into effect Sept. 1.

Amazon declined to comment.

Pricing e-books is a Goldilocks problem for the book giants: For years they worried that consumer prices were too low, and now they are seeing the disadvantages of bumped-up prices. Publishers said the current pricing model involves some sacrifice but they felt it was worth it to keep Amazon in check. What's more, they have noticed a bump in sales of physical books that is possibly related to the higher price of digital books.

To figure out how to set prices, a team of data specialists at Macmillan's Manhattan offices in the Flat Iron building sifts through a database of 74 million transactions looking for trends. Amazon looms large in that decision-making: It accounted for 64% of the U.S. e-book market, by units sold, during the second quarter, according to Codex.

Before 2010, book publishers operated with a "wholesale" model for e-books in which they sold titles to retailers, which could discount as they saw fit. Amazon was willing to buy a title for $14.99 and sell it for $9.99, taking a loss to grab market share and encourage adoption of its Kindle e-reader.

Publishers worried that such discounting kept Apple Inc. and Google Inc. from emerging as competitors, as those companies might not want to lose money on e-books. If Amazon crowded out others, it would have greater leverage to extract better terms over time, they feared. So they switched to "agency" pricing in 2010 with the introduction of Apple's iPad. Under that system, they set the retail price, and collect 70% of each sale.

The Justice Department filed an antitrust suit in 2012 alleging Apple and five major publishers colluded to set higher prices. Apple, which denies wrongdoing, was found liable in a civil case and subsequently lost an appeal in June. Apple hasn't said whether it will appeal that ruling. The publishers settled, agreeing to let Amazon discount until new contracts went into effect.

The details of the new contracts, which publishers negotiated separately, haven't been disclosed, but once again they have the power to set retail prices. Amazon has said there are incentives for publishes to deliver lower prices.

Publisher e-book sales have been stagnating since 2013, when they fell 2.5%, according to Publishers Marketplace's analysis of AAP data. The next year they grew slightly, before 2015's sharp decline thus far.

One high-level publishing executive disputed that the Amazon pacts are contributing to the e-book sales decline. "This is a title-driven business," he said. "If you have a good book, price isn't an issue."

Amazon says e-book sales in its Kindle store--which encompasses a host of titles that aren't published by the five major houses--are up in 2015 in both units and revenue.

As publishers game out e-book pricing, the stakes are high for authors and agents. "I want my clients' books to be sold for as high a value as possible, but the important word is sold," said Richard Pine, an agent at Inkwell Management.

 

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(END) Dow Jones Newswires

September 03, 2015 15:29 ET (19:29 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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