E-book VAT: the other side of the story

In his recent blog, 'Amazon's VAT Windfall', Anthony McGowan expressed concern that the Bezos behemoth had not changed e-book prices following the recent VAT cut, and were set to profit to the tune of millions as a result. He and I have been arguing on Twitter, very politely I might add, about this as I think he's got it wrong.

Where I do agree with Anthony is regarding Amazon's monopoly when it comes to e-books. They won't share figures, so the numbers can't be confirmed, but I would be amazed if there is any publisher in the UK who doesn't receive 90% or more of their e-book turnover from Amazon. And for some it will be close to 100%. That is a monopoly, pure and simple.

But are they ignoring the VAT cut and pocketing the difference? In Anthony's blog he said he had checked and “the prices don't seem to have come down at all”. I had a look moments after reading his blog and the Kindle charts were full of books at odd prices – £2.07, £3.29, £0.83 – which certainly strike me as ex-VAT. Sure, there were still lots at 99p price points, and I assume Anthony viewed those as evidence of Amazon shenanigans, but there is a perfectly logical explanation for this.

Publishers tend to sell books to Amazon in one of two different ways, using a wholesale or agency model. With the wholesale model, the publisher sets a wholesale price for the e-book – usually an amount that, once VAT is added, results in a .99 RRP – and then sells to Amazon at that price minus any agreed discount. Now that VAT has been scrapped, those 99p prices have dropped by 20%, and that seems to have happened pretty much straight away.

The other prevalent model is the agency model, where publishers set an RRP – again, nearly always a 99p price point – and the retailer sells at that price and deducts a commission. Here the publisher has determined the selling price, in much the same way as they do with RRPs on printed books. Looking through those Kindle charts, I suspect many of the books that have not changed prices are sold on this model.

My take when I first heard about the VAT cut being brought forward was not that Amazon would make a mint, instead I saw it as an opportunity for publishers. Right now, publishers across the UK are deciding what to do with their e-book pricing. Should they reflect the VAT cut so that all e-books are now 20% cheaper than they were? Or do they carry on with a pricing policy that keeps those 99p price points?

If they go with the former, then readers get a 20% saving, which was Rishi Sunak's intention. If they go with the latter, they increase e-book revenue by 20% and authors will see their royalties go up.

But which is the right thing to do?

Most of our bookshops are closed and the big chains are, it seems, not paying their bills as promptly as they once were. Publishers are facing a big drop in income and this will have a knock-on effect for authors in the next batch of royalty statements. Anecdotally, e-book sales are on the rise during lockdown. If a publisher's duty is to support its authors, and its own business, then here is a chance to boost one area of turnover when others are taking a beating. It could be argued as the right thing to do.

But the point of the VAT cut was to make digital reading cheaper for consumers. Surely if we don't ensure e-books are 20% cheaper then we are ripping off readers? And that is a reasonable point but, to be frank, will readers know, or care? The difference between wholesale and agency models means that there is no consistency in e-book pricing at the moment, anyway. And most publishers play around with prices regularly, with promotional offers, so a snapshot of the Kindle charts at any given time will see prices ranging from free to over a tenner.

How can anyone tell if a £3.99 e-book today is actually an old £4.99 e-book minus the VAT or one that has always been £3.99 and the publisher is pocketing the difference? Spoiler: they can't.

My experience of the book world during lockdown is that readers want to support publishers and authors, and I don't think many of them will give a shit if the VAT cut is passed on or not. Most of them won't even notice. It will be interesting to see what the pricing in the Kindle chart looks like a few weeks from now.