Earlier this week, the Department of Justice announced it was suing five publishers plus Apple for colluding over e-book pricing, in response to Amazon's pricing of bestselling e-books for $9.99.
Debates raged about whether this was a good or a bad thing for e-book publishers, readers and authors. Read the arguments, see if you're persuaded, and let us know what you think in the comments!
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The e-book market has continued to grow while sales of paper books have declined, and the suit the United States Department of Justice brought against five of the six biggest corporate publishers in America--Random House was excluded--will advance that trend.
It's going to make things even more difficult for those who have based their business models on the production, distribution, and sale of paper books, but it could well be a boon to smaller publishers, authors, and--most importantly of all--readers.
The suit alleges the publishers involved colluded, and that their actions were in violation of the Sherman anti-trust act. To "collude" means "to act together with secret understanding, especially with evil or harmful intent." The DOJ's suit builds a compelling case that, through a combination of phone calls, e-mails, and secret meetings in the wine cellars of upscale Manhattan restaurants, five of the six big publishers (Macmillan, HarperCollins, Hachette, Penguin, and Simon & Schuster) arranged agreements with Apple to enter into agency-model publishing, wherein retailers act as retail agents (and take 30% of every sale).
From the DOJ's press statement: 'We allege that CEOs of the publishers bemoaned the "wretched $9.99 price point." One executive said that, "the goal is less to compete with Amazon as to force it to accept a price level higher than 9.99." And yet another said, "we've always known that unless other publishers follow us, there's no chance of success in getting Amazon to change its pricing practices." Our complaint also quotes Apple's then-CEO Steve Jobs as saying, "the customer pays a little more, but that's what you [he's referring to the publishers here] want anyway."'
All that is exactly what Sherman--who authored the anti-trust act these agreements violated--hoped to prevent. In Sherman's words, the act was intended "To protect the consumers by preventing arrangements designed, or which tend, to advance the cost of goods to the consumer."
The act has come to be held as a measure against trusts and monopolies, but its intention was prohibiting monopolies formed through collusion, not merit. Its co-author, George Hoar, said someone "who merely by superior skill and intelligence...got the whole business because nobody could do it as well as he could was not a monopolist..(but was if) it involved something like the use of means which made it impossible for other persons to engage in fair competition."
People have criticized the suit, claiming that the DOJ is reducing one monopoly (publishing & Apple) to make way for another (Amazon), but Hoar's distinction is important. Amazon has gained its dominance in the digital marketplace, particularly with regard to e-books, not by conspiring against its competitors but rather by, at every juncture, innovating, advancing, and refining its business model to better serve its customers--readers.
Publishers have maintained they can't sustain their business model on $9.99 e-books, and have attempted to justify that stance by claiming that though creating an e-book obviates costs of production and distribution (like printing and shipping), they must also consider costs of overhead, personnel, and maintenance. Amazon, on the other hand, has worked hard to deliver to readers a ubiquitous reading platform (Kindle), an excellent digital reading device (Kindle), and a terrific store designed with discoverability and efficiency in mind (also Kindle).
Amazon has also done better marketing and offers authors--at least directly--better royalties, all while delivering less expensive books to readers. I also note, here, that I direct a nano-press through which I digitally publish books by both myself and other authors, and Amazon has helped make that possible.
The problem is that corporate publishers (particular the five in question here) clung to a business model despite innovations that could have helped lower their costs. Did any publishers design e-readers? Have any of the publishers named in the suit built retail functionality into their websites?
Case in point: one of my favorite authors is Neil Gaiman, whose books are published by HarperCollins. But although Neil Gaiman has an author page at the HarperCollins site, readers are redirected to various sites to purchase his books. If HarperCollins wants $12.99 for one of Neil Gaiman's titles, why not offer a Mobi or ePub file directly through its site? (The fact that publishers adopted ePub only after Amazon bought Mobipocket is another discussion entirely.)
With J.K. Rowling's Harry Potter series and Pottermore site, Amazon demonstrated it was willing to reach new and innovative web retailing models/agreements with publishers. I think that's more than can be said of corporate publishers who tried to save their failing business model through collusion rather than innovation.
Before the introduction of the agency model and the iPad, e-books were nearly synonymous with one word: Kindle. More than once I heard someone refer to "Kindle book" when they really meant the generic "e-book." Some analysts claimed that Amazon had 90% of the e-book market.
It wasn't that there weren't other retailers, but none of them could compete with Amazon on pricing. (And to Amazon's credit, most of them couldn't match the experience, either. I had a Sony reader and bought all of one book because their website and interface were so terrible.)
Amazon's dominance in the e-book marketplace wasn't good for publishers, who knew that one day Amazon would stop selling e-books at a loss and would want a bigger piece of the pie (see this piece about Amazon's latest negotiations with publishers); it wasn't good for authors, whose income would be negatively impacted by any decrease in their publishers' e-book revenue; and it wasn't good for readers to have only one viable e-book retailer--especially one that locks readers in with a proprietary e-book format.
Enter Steve Jobs, the iPad, the iBookstore, and the agency model.
Up to that point, e-books were sold on a wholesale model: publishers set a list price, sold to retailer at wholesale (about half of list), and then the retailer was free to sell for whatever price they chose, even at a loss. Under this model, Amazon had been setting the price of bestsellers at $9.99 (at a substantial per-unit loss). Then came the agency model: the selling price is set by the publisher, no discounts are allowed, and the retailer is given a 30% cut of the sale. Amazon was now being forced to sell those bestsellers for $12.99 or $14.99, at the publisher's discretion. The DOJ lawsuit alleges that this increased the price of e-books. But did it? In fact, the average purchase price for an e-book from every retailer other than Amazon is lower under the agency model, as this piece from PaidContent explains. Publishers were making less money per unit sale, but they clearly felt the short terms losses were worth the long term gain of a more competitive e-book market.
The DOJ alleges that the move to agency was anti-competitive and bad for the market. But have e-book sales suffered? According to the AAP, e-book sales in 2009 were $313 million. In 2011, post-agency model, sales were up to $969 million. That's phenomenal growth in the market.
How about innovation? B&N has released several iterations of their Nook e-reader, including the the Nook Color, which was the first e-reader of its kind. Amazon has also released several versions of the Kindle, including the Fire, their first tablet-like device. Kobo has several different devices, as does Sony, not to mention two more iPads, released under agency. I'd argue that great competition drove all of these companies to innovate.
The DOJ says that their lawsuit and settlement terms are intended to return competitiveness to the market. But just one retailer, Amazon, stands to gain.
To oversimplify some very confusing accounting, retailers will be allowed to discount again, but will not be allowed to lose money. But they won't have to profit, either. The only retailer with the financial means to sell e-books without making any money? Amazon.
The settlement doesn't do away with agency pricing entirely, so the irony is that publishers could raise prices in order to counteract the retailer discounts. I think Scott Turow, president of the Authors Guild, put it best: "Our government may be on the verge of killing real competition in order to save the appearance of competition."
There's no question that the state of e-reading in 2012 is better than it ever has been. But just as the arrival of the agency model leveled the playing field, increased the number of competitors, and sparked innovation, I worry that the DOJ lawsuit, settlements and trial will only serve to raise prices and stifle both competition and innovation, dragging the industry back to where we were in 2009.
A competitive market, more than anything else, is the best thing for my clients, so it's hard to feel anything other than anger and disappointment at today's news.
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