I was not happy when I first came across this clause in an ebook retail contract, so my initial reaction was relief when it came under the same black cloud as The Agency Model, as one of the bad-boys of price fixing.
However, now I’m not so sure that I’ll be glad to see it go.
It occurs in contracts where the publisher sets a suggested retail price for the retailer to base their own price on. The retailer may sell at the suggested retail price (srp) – and a lot do, or they may offer their customers discounts – it’s up to them.
The most favoured nations clause is in the contract between the publisher and the retailer, and by signing it, the publisher agrees not to give a title a lower srp at another retailer than the one he gives for that book to this retailer. This sounds fair enough – the price (srp) is the price, and don’t confuse things by setting different prices in different shops, even your own website bookshop.
But some contracts take it further. In order to put this into practice, the retailer asks the publisher to agree that the book may not go on sale anywhere at a lower price than their price. This gives the retailer the right to trawl the web, to see if the book goes on sale anywhere in the world at a lower price, then drop their own price to match it.
This is good for the retailer, because it gives them the right to match any special offer or price promotion or local price set to suit a poorer country. This undercuts the effect of any retailer’s special promotion which is intended to attract customers. It gives Amazon the right to never allow itself to be ‘undersold’; it gives any other retailer with that clause in their contract the right to price-match Amazon. Which is why publishers fear it triggers a “race to the bottom”.
It is not good for publishers because it takes all control over pricing completely out of their hands. Publishers cannot favour their own websites with special offers, because those offers will be discovered and matched. They can’t do exclusive short-term promotions with particular retailers, perhaps in conjunction with a local radio interview, or newspaper extract, because that special limited offer will immediately be replicated all over the world. What you do for one, you have to make available to all. Perhaps it means publishers will come up with more creative marketing offers than price promotions, as they had to in the days of the net book agreement!
So why am I now better disposed towards the dreaded Most Favoured Nation clause?
Well there are a lot of dangers to ebook publishing, and admittedly one of them is the race to the bottom in pricing (exacerbated by many factors). But what I see as a greater danger is the over-dominance of one retailer. The Most Favoured Nation clause works for smaller retailers as well as large, so it gives them the chance to price-match the strategic discounting used by a big retailer trying to undercut them. By allowing all the retailers to compete on the same terms, the publisher frees them to compete on price with the big ones.
The problem is, dropping the price is an expensive pursuit because someone has to pay for that discount in lost revenue. Under most contracts the retailer will have to pay the publisher the same amount (the wholesale price), regardless of how much they sell it for. It takes nerves of steel to drop the price close to, and perhaps even below that wholesale price – and only certain retailers can afford to do that for long.
So the ‘race to the bottom’ it provokes is not good for small retailers, but at least the favoured nations clause permits them to run in that race, rather than being left on the starting line with their wares priced out of the market.
So the reason I favour the Favoured Nations is because it’s the lesser of two evils: although it’s bad, it’s not as bad as the alternative – life without bookshops.