Random House vs. Apple's iPad: Stall Tactics Only Hurt Authors, Sales

Last Updated Mar 25, 2010 3:21 PM EDT

UPDATE: My BNet colleague Erik Sherman has another take on why Random House doesn't want to be on the iPad -- it will show authors too much pricing information.


The world's highest grossing publishing company probably won't be on the iPad iBookstore at launch. Random House is protesting Apple's financial agreement, something that will just hurt its sales and its thousands of authors. Worse, Apple will end up winning in the end anyway.

The problem is Apple's 30 percent cut upfront -- a standard for its Apple Store -- is the opposite of the consignment-based publishing industry. Random House fears it will upend the whole system.

Apple Insider has a neat synopsis :

The concern is over Apple's adoption of the "agency model," which allows the company serving the content to take a cut of sales. Apple has employed the same 70-30 split to great success with its App Store for software on the iPhone and iPod touch.

Under the traditional business model, resellers have bought books from publishers at discount prices, and then marked them up to make a profit through sales. But Apple's approach would have the publishers set the prices paid by consumers -- something Random House executives are concerned could lead to considerably lower prices, and thus lower profits.

Random House says it is being cautious for the sake of the content creators. Says Financial Times:

Markus Dohle, Random House chief executive, did not exclude the possibility of reaching a deal before the iPad goes on sale on April 3, but said he was treading carefully, as Apple's pricing regime could erode established publishing practices.

Until now, old-fashioned bookshops and internet retailers such as Amazon have bought books from publishers at discount trade prices, then marked them up to profit through sales to readers.

But, building on a pricing model established for existing gadgets, Apple wants publishers to set the prices paid by iBookstore users - and to give a 30 per cent share of resulting sales to the computer company.

Mr Dohle said the iPad and iBookstore spelled "changes, in particular for our stakeholders", which would require the publisher to consult further with its authors and their agents.

As an author, I totally respect Random House consulting with the content creators and their representatives. As a media critic, I totally believe Random House is rearranging the deck chairs on the Titanic. It is delaying the inevitable and, despite a massive book catalog, doesn't have much leverage.

Here's why having any time off the iPad iBookstore would do more harm than good:

  • Everyone else already agreed: To quote FT, "Random House's five big rivals - Macmillan, Simon & Schuster, Hachette, Harper-Collins and Penguin - are understood to have signed up to iBookstore, the retail website where e-books will be sold for the iPad." This was all but confirmed during the iPad announcement in January. The Random House "stakeholders" will be watching their colleges' content sell on the biggest device of the year.
  • Amazon isn't going to provide additional leverage: As my BNet colleague Erik Sherman noted in previous posts, the 30 percent cut Apple takes is a better deal than the 65 percent cut Amazon gets on the regular from Kindle book sales. Worse, both Apple and Amazon are reportedly pushing the "most favored nation" clause, meaning publishers could have to give the Apple the same large cut as Amazon. As Sherman said, "If publishers sign with Apple and then cave in to Amazon, they will have to turn around and give the same terms to Apple." The reverse is true, too.
  • No one else has a comparable reader: The Kindle will no doubt be an amazing e-reader one day, but not in 2010, and we're still not sure how customers will embrace the universal Kindle reader software. The now-classic Sony Reader is trying to gain the same respect as the upstarts, while the Barnes & Noble nook hasn't distinguished itself enough from the Kindle to gain traction. The Courier sounds great, but Microsoft will barely confirm it exists. When it comes to e-readers of the moment, the iPad is that machine.
  • e-Books are Random House's biggest growth area: Random House just reported flat 2009 earnings -- which is pretty good for a media company during the worst year of the recession. As reported by Daily Finance, only one area actually had impressive growth:

In the midst of this overall flatness, Random House singled out "triple-digit" increases in e-book sales at its main divisions in the U.K., Germany, and Canada: easily the fastest-growing segment but one representing only about 2% of total revenues.

Two percent isn't much, but these 2009 numbers are pre-iPad, pre-Kindle upgrade, and pre-anything else that can happen in the next nine months. More importantly, Random House CEO Markus Dohle pointed out the three themes of 2010:

He also singled out the "three most important priorities" for the coming year: being the "best sales and service partner for each and every customer in our marketplace," investing in new and established authors, and embracing the digital transition, calling e-publishing "an opportunity to increase access to our books and to the universe of readers."

Blocking Random House titles from appearing on the iPad is totally against all three of these priorities, so Apple will have no problem calling its bluff.

As it is, Random House is between a rock and a hard place. It has two choices:
  • Acquiesce to Apple's terms: Conform to the "agency model", as other Apple-distributed brands do, and risk having less money available for the authors -- and, more importantly, for itself.
  • Stay off the iBookstore: Focus on the Kindle, nook, Sony Reader and other e-readers, and definitely have less money available for the authors -- and, more importantly, for itself.
Analysts estimate Apple will sell at least four million iPads in nine months. If the average owner bought just a couple books from Random House's extensive catalog, the sales numbers would justify supporting the iPad. Fair or not, it's hard to imagine affiliated content creators or shareholders standing idly by while Random House decides whether or not to take the deal -- especially when the winds aren't going to change anytime soon.