The Justice Department vs. Book Publishers: What This Really Means

The Anti-Trust Division of The Justice Department announced  this week that it is considering filing charges against Apple Computer  and 5 of the largest book publishers for violating anti-trust laws. The issue, at least as far as I can determine, is whether there were illegal agreements  made between Apple and the  5 publishers to  fix  the retail price on e-books.  It is illegal under anti-trust law to make agreements to “restrain trade”.

I know a little about anti-trust law. When I was a bookseller, I was involved for about 20 years in various anti-trust lawsuits having to do with unfair competition by chain stores. I won’t go into detail here about anti-trust except to say that the laws are incredibly arcane and usually hinge on “facts” that are murky at best. And I do not know the specific facts of this case that would either incriminate or exonerate the putative conspirators.

So let’s talk about what this means in the real world. Here’s the back story. In 2010 when Apple was poised to release the iPad, Amazon controlled about 90% of the e-book business. Amazon sold books in the proprietary Kindle format which could only be read on Kindle readers. If you had  a Kindle reader (and at that time most e-book consumers did), you had to buy your e-books from Amazon.

As is their wont, Amazon began selling newly released best selling e-books at $9.95, below their cost which was typically about $12.50. This was anathema to publishers for a number of reasons. 1) The prices were so low that it had the  potential effect of eviscerating  sales of the print on paper editions. Publishers recognized that e-books should be cheaper, but not that cheap. 2) Related to this, publishers felt that Amazon’s selling below cost would discourage entry of other  potential vendors in the e-book business. This would leave publishers  completely beholden to one vendor, Amazon, whom they have never really felt comfortable with.  3) Finally this kind of pricing would put into the heads of consumers that there was an inherent  value to an e-book of $9.95. Presumably Amazon had no intention of selling below cost forever and they would  eventually use their monopolistic power to  force publishers to reduce the prices on  e-books books.  Amazon would  then have a sustainable business model. But publishers probably wouldn’t.

Enter the Apple iPad. At last the publishers hoped that they could break the Amazon monopoly by throwing themselves into the arms of  the only company with the resources to compete successfully against Amazon. Apple Computer    has the highest capitalization of any company in America, probably the world. Compared to Apple, Amazon is a mere street peddler.  Apple and the publishers worked out an alternative system for selling books that was similar to the  relationship iTunes had with music publishers.

Most products for sale in  retail stores are purchased   at “wholesale” for a low price, and the retailer can set any price they want. Thus the old saw that all you need to know in retail is: “buy low, sell high”. But Amazon had the resources to buy low and sell lower,  to sell below cost for as long as it took to drive out the weaker competition. After all, they could make up  the lost profits by selling more Kindle Readers and driving business to their other products. Cameras, shaving cream, what have you.

Apple and the six largest trade publishers adopted a new model. Rather than giving a lower wholesale price to a vendor and letting the vendor set the retail price, under the new “agency” model, the publisher would set the retail price of the book and give the vendor (say Apple or Amazon) a 30% commission on the sale. There were many complicated deals made (that may or may not have been legal) that would force Amazon to accept this new “agency” model. Amazon would have to sell the e-books at the same price as their competition, thus defeating what has always been Amazon’s competitive strategy.

The Justice Department argues that this new “agency” model  is bad for the consumer because it tends to insure that e-books are selling at a higher price than they otherwise would if  the retailer was able set its own price. Publishers argue that the “wholesale” model would create an unhealthy monopoly by Amazon  that would not be in the long term interest of book buyers and society at large.

Yesterday, the Author’s Guild weighed in on this issue. The president of the Guild, Scott Turow, sent a letter    to all of its members calling the decision by the Justice Department to challenge Apple and the 5 publishers: “grim news”. As most of the followers of this blog know, I have frequently expressed my own concerns about the sometimes  unhealthy power of Amazon in the book business.

Turow was speaking for the interests of authors, but he makes some powerful points about the ultimate impact of a de facto monopoly by Amazon. He is concerned, as are publishers, that predatory pricing of e-books will attenuate the ability of physical bookstores to compete. He says that it is as if: “Netflix announced that it would stream new movies the same weekend they opened in theaters.”

Turow goes on to say: “Marketing studies consistently show that readers are far more adventurous in their choice of books when in a bookstore than when shopping online. In bookstores, readers are open to trying new genres and new authors….A robust book marketplace demands both bookstore showrooms to properly display new titles and online distribution for the convenience of customers.”

He also points out that 2 years after the agency model was implemented Amazon’s market share of e-books is down to about 60%.  Barnes and Noble  has successfully entered  the market with its highly regarded Nook. Apple has an excellent e-book store. I can say first hand that the iPad is an insanely good e-reader. You can even buy e-books from your independent store through Google books – and at prices competitive with Amazon.

Last week we wrote about the fact that Amazon stopped selling 6000 titles from America’s second largest small press distributor, IPG, after a dispute over terms. Those books are simply not available to people with Kindle readers. I think this fact tells us all we need to know about what this dispute means to society at large.

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8 Responses to “The Justice Department vs. Book Publishers: What This Really Means”

  1. Rayme Says:

    Great summary of the issues. Thanks, Andy.

  2. mikerol Says:

    This looks to me as though that both author and publisher is caught between the devil & the deep blue sea. What is not factored in your discussion and perhaps not in the DOJ complaint and perhaps not in Scott Turow’s letter is a rough difference [ of course varying cost, depending on print-run amortization etc,] of an individual title whether as a book in paper or electronicized. I would think that having a monopoly and selling under the actual cost, so as to be able to acquire a monopoly, and then set the price, amounts to restraint of trade, and violates all other kinds of laws – and I am amazed that no one has prosecuted Amazon for this procedure. I must check with my German ex-colleagues what the situation is there, since German book trade operates under what is known as PREIS BINDUNG, which prohibits precisely the kind of behavior of which Amazon and the big chains are guilty, thus keeping smaller wonderful book sellers alive. AMAZON.DE exists there very much!

    The DOJ going into action now against a model that is preferable if not perfect to Amazon’s strikes me as weird – and it may continue to do so until I become better informed.
    Michael Roloff, ex-publisher Urizen Books

    > http://www.facebook.com/mike.roloff1?ref=name

    http://www.roloff.freehosting.net/index.html

    • andyrossagency Says:

      Mikerol. It sounds like you are from Germany. The European Union has also instituted an investigation, not against Amazon, but against Apple and the major book publishers.

      • mikerol Says:

        No, Urizen Books was in New York, but I certainly had a lot do do with European publishing during my 25 year in that world. I will have the answer to my question by Monday, but will also check with Amazon.de what they are up to there. xx michael r.

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