Macmillan's 'agency model' victory over Amazon = publisher pricing power?

The past couple weeks have been ripe with speculation over the new pricing model for e-books originally proposed by Apple: the “agency model.” The model would essentially give publishers power over the pricing of e-books instead of retailers like Amazon — a dream for publishers.

Well, the agency model could be more than a dream soon. Last month, publisher Macmillan demanded power over pricing in their dealings with Amazon, leading the key-market retailer to pull nearly all Macmillan titles from their store. But a few days later, Amazon reneged on their position, announcing that they would yield pricing power to the publisher — setting a ground-breaking precedent in the e-book retailer-publisher relationship. A week later, Hachette USA followed suit.

Summed up by IdeaLogical’s  Mike Shatzkin, the agency model lets publishers sell directly to consumers with retailers acting as more of a cut-taking conduit.

“The ‘agency’ model is based on the idea that the publisher is selling to the consumer and, therefore, setting the price, and any ‘agent,’ which would usually be a retailer but wouldn’t have to be, that creates that sale would get a ‘commission’ from the publisher for doing so.”

This model would set a new standard for book pricing, giving more power to e-book publishers than in the current physical-book supply chain. Success would also provide a powerful incentive for publishers to promote the e-book market, particularly larger publishers that own the most titles (i.e. Random House, HarperCollins, Hachette Book Group, Simon & Schuster, Penguin, and Macmillan).

It remains unclear, however, how all this would work in reality. Would publishers keep and serve e-book files? What will the not-Amazon retailers do? How will smaller publishers with less leverage fit into the market? And most importantly for consumers, what will determine the price of an e-book?

For now, speculation reigns. Pricing power is a powerful weapon, but the model’s success ultimately rests with consumers, who must decide what an e-book is worth and whether publishers’ expectation of value matches it.