There is currently an interesting debate occurring between Mike Shatzkin and Paul Biba over the possible benefits of an agency pricing model in publishing. If you have not read each individual's blog recently, I recommend doing so. Both individuals make some interesting points. However, I ultimately agree with Mike and believe that the introduction of an agency model in pricing and distribution of ebooks is a net positive.
It goes without saying that any given business would prefer a highly competitive downstream market. A single downstream player that dominates the distribution of a product poses a significant threat to the long-term profitability of a business. While Amazon does not release any sales figures, it is widely known that it controls the ebook distribution market (with some estimating its market share today between 70-90%).
There are those who dismiss this concern (as it relates to the current pricing debate) by noting that publishers were actually earning more under the previous model (where Amazon subsidized consumers’ purchase of ebooks and sold the content at a loss). However, the subsidization of a product should never be seen as a permanent aspect of any relationship, especially when that subsidization is undertaken in order to gain and secure market share through increasingly strong network effects.
If one accepts the premise that a business should strive for a competitive downstream market in order to protect the long term viability of its business, the question then becomes how best to achieve this end. Creating a competitive downstream market for ebooks has been difficult for publishers, due in no small part to the fact that the ebook market is governed by the above mentioned network effects. Up to this point, publishers’ efforts have centered around creating file format standards that would promote competition across platforms and provide consumers the freedom to move purchased content from one device to another. While the logic of this strategy is sound, it has failed to seriously dent Amazon's position as market leader.
The success of this standards-based strategy rests, in large part, on publishers' collective ability to secure compatible downstream partners and to convince consumers to choose this new, more open platform. The benefit of the agency model is that it gives publishers an additional tool in their attempt to increase the degree of downstream competition. By making the final pricing decision (whether there be imposed price maximums or not), publishers can effectively eliminate a large company's ability to subsidize content in the pursuit of growth. This then allows smaller aggregators and even companies not previously in the ebook distribution business to enter and be viable. (Mike's example of ESPN selling relevant sports books to its established user base is but one possibility).
As I have discussed before, one of the goals of a standards-based strategy is a modularization of the downstream market. However, subsidization of content prevents this because losses at the distribution layer must be compensated for by profitably selling product or services elsewhere. Without true and full modularization, the growth of the platform is limited and the specialization that can lead to greater user experience is hindered. An agency model, however, facilitates modularization and allows new players to profitably enter the market and for all players to more effectively specialize. This, in turn, can fuel the growth of an open platform and counter the considerable network effects currently enjoyed by Amazon.