Archive for the ‘Book Industry news’ Category

The Amazon – Hachette Dispute: What’s at Stake for Authors?

May 23, 2014

bezos_bookstore-620x412The book industry has been abuzz with the latest news of Amazon bullying book publishers. According to an article in The New York Times on May 8, Amazon has been involved in tough negotiations with Hachette Book Group, the fifth largest publisher in the United States. In order to pressure them for better deals, Amazon has engaged in a number of practices to make it harder  for Hachette to sell books through Amazon. This includes “slow walking” Hachette titles — delaying reorders of out of stock books in order to  slow down delivery. Normally Amazon ships books within 24 hours. On some Hachette titles, Amazon is saying that delivery will take as long as 5 weeks. Examples include new and backlist titles and even some best sellers.

Today we learn Amazon has removed the pre-order function for many not yet published Hachette titles. Also typically Amazon discounts books 20-40%. Since the dispute began, there are many Hachette titles being sold at list price.

In the past Amazon has taken the “buy” button off titles — making them effectively unavailable  in order to pressure publishers for better terms. They seem to be doing the same thing but using subtler methods in this instance.

No doubt Amazon is trying to induce authors to pressure publishers into capitulating to Amazon demands. If an author’s book is not available on Amazon for 5 weeks, it could be quite distressing, particularly if it is a new title with sales being driven by publicity. But in this instance the industry –  including the authors –  seems to be outraged by Amazon and inclined to support Hachette hanging tough.

There is another possible threat to author royalties in all this. Every publishing contract has a so-called  “deep discounting” provision. Typically the contract stipulates that if a publisher sells a book to a retailer at very high discount, then the royalty to the author will be cut, in some cases as much as 50%. These kinds of transactions have traditionally been limited to wholesalers and non-returnable bulk sales to big box stores like Target, Wal-Mart, and Costco. But if Amazon is successful in extracting ruinous terms from publishers, we can expect more sales to fall under these deep discounting provisions and author royalties to be reduced accordingly.

Today the Authors Guild, the largest organization representing the interests of book authors, came out with a statement unequivocally attacking Amazon’s strong arming Hachette. They characterize Amazon’s tactics as “blackmail”.

Indeed.

Descartes, Plato and E-Books.

April 2, 2013

On February 7, Amazon.com announced that it had patented a way to sell “used e-books, music, videos, and other digital objects”.  I was puzzled by this. Digital files aren’t really “used” in the same sense as a physical book or a music cd. They don’t get dog eared. They never have disgusting stains or other unknown but probably unsanitary items stuck to the pages. They don’t get mildewed like Leslie’s boxes of old feminist tracts from the 70s still moldering in our basement. Hmmm. What’s going on with this?

My mind started to spin. I began thinking about the great philosophical systems. Plato. Buddha. Aristotle. Descartes. Immanuel Kant. The English empiricist Bishop Berkeley (pronounced “Barkley”) who famously said that if a tree falls in a forest and no one hears it, there was no sound. But there is the even more famous anecdote by Samuel Johnson who said to Boswell as he kicked a stone: “Thus do I disprove Bishop Berkeley.”

What is real? That is the first and fundamental question of all philosophy. And now, thanks to the endless ingenuity of Internet entrepreneurs in their ongoing efforts to exploit all potential digital markets, we now bring this question to the virtual world. Is a digital file a physical object or is it an idea in the mind of the creator (creator, that is, the creative artist, not the Lord our God).

Let’s backtrack. There is a legal concept ( section 109 of the Copyright Act) called “the first sale doctrine”. Under this provision, ownership of a physical copy of a copyright-protected work permits lending, reselling and disposing of an item but does not permit reproducing the material, because transfer of the physical copy does not include transfer of the copyright to the work.

Can one legally sell a used copy of a digital product or is it simply a reproduction and a violation of the Copyright Act? On March 30, Judge Richard Sullivan of the First District Court of New York issued a judgment in Capital Records v. ReDigi in which he categorically rejected the right to apply the “first sale doctrine” to the reselling of digital products. The issue before the court was music downloads, but the language in the judge’s decision would equally apply to e-books.

ReDigi dubs itself as “the world’s first pre-owned digital marketplace.” The model is simple. Users can upload their old iTunes to ReDigi servers, a process which at the same time removes the tracks from the user’s computer. The company then offers the music for sale at a “used” discount keeping a commission on the final sale price. ReDigi claims that it migrates a file from the user’s computer to its Cloud Locker, so that the same file is transferred and no copying occurs.

Judge Sullivan rejected this argument, calling ReDigi “a clearinghouse for copyright infringement”. He said that “when a file is moved from one material object to another, a reproduction has occurred….Similarly, when a ReDigi user downloads a new purchase…yet another reproduction is created.”

He made an interesting distinction by pointing out that digital files can still be sold if it resides on a hard disk, an iPod, or other device onto which the file was originally downloaded and which is being sold a the same time.

Who wins and who loses? It’s a big victory for authors, publishers, and copyright holders. A defeat for ReDigi and probably for pirates. And I guess you would have to say it is the triumph of Descartes over Plato.

The Random House – Penguin Merger

October 28, 2012

Note. This is an update from yesterday’s post which was written before the announcement of the merger between Random House and Penguin.

The big news in book publishing this week, probably the biggest news all year, was the announcement that Random House and The Penguin Publishing Group are in negotiations over a possible merger.  Random House, owned by the German company, Bertelsmann AG,  is the world’s largest book publisher and the largest US book publisher by far. Penguin is owned by  the British company, Pearson PLC,  and is the second largest US book publisher.

What does this really mean? The new company will have sales in the US of over $2 billion dollars.  It would have an estimated 17% market share of the general book publishing  business. But expect the share of best sellers to be even higher. In 2011 Random House and Penguin together had 45% of all bestsellers on the Publishers Weekly list.

I think such a merger will be bad news for authors, booksellers, and book lovers. Both Random House and Penguin have a huge number of imprints. By my count, Random House has 56 and Penguin 39. (Imprints are units within these publishers that operate independently, essentially as separate publishers. For instance Knopf and Ballantine are imprints within Random House. They have their own editors and  their own styles and cultures. Sometimes they even compete against each other.)

A lot of these imprints overlap  with  one another. There is likely to be some consolidation and elimination of some of some  imprints that would allow the new super-publisher to reduce overhead. Agents are understandably distressed that less competition will mean smaller advances. That will certainly be true. But more significantly,  I worry   that fewer imprints with fewer editors is going to mean fewer books. The big name brand authors: Stephen King, James Patterson, Janet Evanovich, John Grisham, Malcolm Gladwell, etc.  will always be there.

The pressure will be on the midlist. These are the books that never become bestsellers, but I suspect these are the books that most of you like and admire. There just won’t be as many slots in the catalogues for these kinds of books. It astonishes me, really. Whenever I go to New York to talk to editors, they are always telling me how much they want “new talent.” Smaller midlist opportunities mean fewer chances for new talent to break out and fewer chances for book lovers to discover this new talent.

Still,  these are but  the  parochial concerns of the editors, the people on the creative side of publishing. They have some rather quaint and old fashioned values. They love books, for instance. The mergers are being driven by the business side and probably at the level of the parent corporations, giant multi-media conglomerates.

There are probably a few silver linings  in all this. Certainly a lot of the midlist is going to be picked up by independent publishers. And we have to hope that all this available midlist  talent will help these midsize publishers to thrive. And since a lot of these midsize publishers will care more about these authors than the mega-publishers, it might even turn out to be a blessing in disguise.   One might even suppose that by strengthening these publishers, we will paradoxically end up with a more diverse and robust  commercial publishing universe. But one ought not to get smitten by this possibility.

This is probably very bad news for Amazon.com. (Which is usually good news for everyone else.) The new Random House/Penguin would be so powerful that Amazon couldn’t threaten to remove the buy button from their titles if they don’t agree to Amazon’s draconian trade terms.  I suppose that the best defense against Amazon’s monopolistic intentions is another monopoly.

In a related story, Simon and Schuster announced this week that they were merging 3 of their imprints into other imprints. Most notably the extremely prestigious Free Press is being combined with the Simon and Schuster imprint. Whether Free Press will still retain any independent identity is unclear. But several very good editors, I mean editors with towering reputations, have already left. Not a good sign.

The advocates of self-publishing, who issue jeremiads with increasing frequency  about the imminent  fall of  “legacy publishers”, seem to be excited about all of this. But for them, the misfortunes of other publishers  always seem to be a revelation of a new and radiant future. Self publishing will continue to grow with or without the demise of commercial publishing.  And there is much to be said for self-publishing. But  the choice to self-publish comes with some big negatives as well. However,  that is the subject for another blog on  another day.

Self Publishing at Book Santa Cruz Using the Espresso Book Machine

August 22, 2012

Casey Protti and the new Espresso Book Machine at Bookshop Santa Cruz

Today we are going to speak with Casey Protti, owner of Bookshop Santa Cruz, one of the truly iconic independent bookstores in America. The bookshop just acquired an Espresso Book Machine, a new technology which is able to create a perfect bound paperback book in minutes. The quality of the books produced are indistinguishable from paperbacks published by major publishers.  It’s a new technology that has the potential of redefining the role of local bookstores.

Andy: Casey, Can you tell us a little bit about the Espresso Book Machine.

Casey:  I’m really excited about our new machine. It is a remarkable technology that allows Bookshop Santa Cruz to print books on site, and on demand.  We can just hit a button and it prints, binds, and trims a paperback book in just a few minutes. What I love about this technology is not only the convenience factor of being able to give a customer a book when they want it, but more importantly, our ability to become a community publishing center- a place to have human to human interactions to create and distribute books.

Andy: The machine allows the local bookstore to become a self-publishing venue? Really.  Tell us about that.

books printed and bound in 5 minutes on the Espresso Book Machine

Casey: For those authors who have a novel or memoir or book of poetry that they want to make into book form, we can help them to bring their work to life through every step of the publishing process.  And not just people who think of themselves as authors. This could mean people who want to create family histories, compilations of family recipes, businesses who want to customize journals, student groups who want to make zines or graphic novels, or teachers who want to put together an anthology of their students’ work.

Andy: Other than self-publishing, what else can you do?

Casey: There are 8 million titles available including works in the public domain and hard to find and self-published titles.  Just the other day we had a man who had been searching for a hard to find book for over 20 years in used bookstores.  We had it on the EBM and printed it for him in 5 minutes.  Although other stores with Espresso Book Machines have seen self-publishing account for 80-90% of all the activity on the machine, more and more publishers understand the EBM as a good way of keeping their backlists available.

Andy:  That’s a good point. It seems to me that as publishers get more commercial and media –obsessed, they are putting their slower moving back list titles out of print faster. Will Espresso change that?

Casey: I think publishers see the EBM as good way of keeping their backlists available even if demand for a given title has waned. It’s economical for them, because they don’t have to warehouse titles or incur shipping and handling costs.  With EBM  we only produce as many copies as are sold.   We want to be able to sell a book that a customer asks for right away. It is of huge benefit to us, to publishers, and to the customer. And he gets the book a lot faster than he would if he purchased it online. And   we’d love to bring books back in print that have local significance and could sell well to the community but that may not  warrant a traditional print run.

Andy: What’s the quality of the books produced by the Espresso?

Casey: Books produced on the EBM are virtually indistinguishable from traditionally produced paperbacks.

Andy: Some people have said that this is a real transformative technology. Can you tell us what this means.

Casey: Six years ago, when I took over Bookshop from my father, I could never have imagined a technology like this.   In the age of the Internet,  our customers are looking for instant gratification, but also personalized services that you can’t get online. The EBM plays to the typical strengths of indie bookstores in terms of community connections and relationships with local authors but then brings it further with new products and services that meet new customer needs.  Our hope is that as more publishers add content to the EBM, we will one day be able to say that we can print any book ever published on demand.  That’s transformative!

Andy: What about ebooks? Aren’t they going to make print on paper books obsolete? That would make the Espresso machine a kind of dead end technology.

Casey: It has been  fun to see people  so excited at watching a physical book being made. Seeing this excitement puts to rest the idea that the book is dead.  Although people rightly want to publish their books electronically, they’d be shooting themselves in the foot if they didn’t also want people to see their books in physical form in bookstores.   Publishers will tell you that local bookstores are the showrooms for books. Online  stores can’t duplicate that experience.

Andy: Let’s say that you want to use the machine to publish your own book. What do you need to bring to the bookstore?

Casey: The EBM machine prints from PDF files that authors can either choose to format themselves (following the EBM submission guidelines) or by getting help from their local EBM operator.

Andy: And how about distribution of the book after it has been printed? Is the store involved in this?

Casey: Authors using the EBM can upload their titles to the main EspressNet catalog making their work available at other EBM locations worldwide and  authors printing their books  at Bookshop Santa Cruz can also enroll in the consignment program to have their books added to the shelves of our store.

Andy: How will Espresso allow Bookshop Santa Cruz to compete with companies like Lightening Source and Create Space?

Casey: The self-publishing services we offer are much more one-on-one and personalized then most of the online self-publishing companies. We can walk through a project with an author insuring that we are able to assess and meet all his needs from cover design to purchasing an ISBN number. The authors never need to go it alone. They can easily reach their local EBM operator for trouble-shooting help and project support in person, over the phone or via email.  This part of the EBM service package is completely in line with what indie bookstores do best – building relationships, customizing services, and providing that human connection that you can’t get online.

Andy: How much does a book cost per copy?

Casey: The base printing price for the EBM is $5.00 + 4.5 cents a page, although we do offer some bulk discounts and price breaks depending on the nature of the project.  We also have publishing packages which include various levels of service including graphic design, proof copies, obtaining an ISBN, etc.

Andy: How long have you been operating the machine in the story? How much business has it been generating.

Casey: The Bookshop Santa Cruz EBM has been operational for about a month, and on a typical day we print anywhere from 20-50 books.

Andy: I hear that these machines are incredibly expensive. How much do they cost? Will they really support a viable business model?

Casey: Typically the machine, software and installation runs $100,00-$125,000. American Booksellers Association members receive a discount on the software.  With just over a month under our belt, it is too soon to determine profitability.  However, since the opportunities to connect with the community to publish works are endless, we think there is a good chance that the machine will be a profit center for the store.  In addition, the feeling amongst your customers that the store is trying to remain relevant and innovate is priceless. Since the margin is so small on books, bookstores of the future need to move further into a service-based model in order to survive.  This is a step in the right direction.

Andy: If you want to find out more about the Espresso machine or if you have a self-publishing project and want to work with the Bookshop, call Sylvie Drescher at the Bookshop at 831-460-3258  or email her at ebm@bookshopsantacruz.com.

Thanks, Casey. We’ll check back in a few months to see how this new technology is unfolding.

More Letters Against the Department of Justice Anti-trust Action

June 26, 2012

Two very thorough, compelling,  and eloquent letters were sent to the Department of Justice today criticizing their lawsuit against Apple Computers and the book publishers. Hundreds of letters have been sent by people and organizations in the book business criticizing the DOJ for attacking the victims  in their misplaced efforts to oppose monopolistic practices in the industry. Letters have been prepared by trade associations, publishers, authors, agents,  and booksellers, all sending the same message: this lawsuit will do nothing but enhance the market power of the only entity that poses a monopolistic threat to the book business, Amazon.com. I suppose we owe a debt of gratitude to Amazon for bringing together parties who have historically been wary of one another. Chain and independent bookstores are united on this as are almost all publishers and, with few exceptions, authors and agents.

The Authors Guild, the major organization representing book authors, and Bill Petrocelli, owner of Book Passage (and a leader in the historic efforts by independent booksellers to stop anti-competitive practices) have made some new and telling points. Check out the complete texts of these. Bill Petrocelli’s letter  and The Authors Guild letter.

The Authors Guild reminds us of a practice by Amazon of pulling the “buy” buttons from print on demand books being published by iUniverse publishers and printed by  Lightningsource. Lightening Source was the first major company to offer this new technology for self-published books. When Amazon created its own service, Booksurge, to compete, they played hardball and temporarily refused to sell selected Lighteningsource titles. Here is what Authors Guild described:

“The Guild had launched Backinprint.com in the summer of 1999, allowing authors for the first time to republish their out-of-print books without incurring any set-up costs. (The Guild had negotiated an agreement with on-demand publisher iUniverse to prepare the books for on-demand printing.) The service was an immediate hit with members; within two years, more than 1,000 titles were available to readers again, including books by Mary McCarthy, Thornton Wilder, William F. Buckley, Jr., and Victor Navasky….

Sales of all on-demand books grew steadily in the early 2000s. By 2005, sales of on-demand books had reached a new high. Backinprint titles sold 41,000 units that year. Amazon, the storefront for most on-demand sales, took notice. It purchased BookSurge, an on-demand printer, to compete with Lightning Source, the industry-leading on-demand printing service run by Ingram.

Three years later, however, few on-demand publishers had moved their printing to BookSurge. Small wonder, since it charged more for its printing services than Lightning Source and had a reputation of offering lower quality service. So Amazon turned to aggressive tactics to win market share, reportedly removing the buy buttons from all iUniverse titles during the 2008 AWP conference. Author Solutions, which had acquired iUniverse, saw its sales plummet. It quickly agreed to use BookSurge for its Amazon sales, and Amazon restored access to its millions of customers. “

The Guild also pointed out some troubling practices by Amazon who recently purchased the rights to sell some very important titles and imprints that Amazon would be able to sell exclusively:

” With the launch of the Kindle Fire, Amazon’s drive to acquire exclusive rights to books, by acquiring publishers with substantial backlists and other arrangements, has taken on a new urgency.

In September 2011, Amazon’s acquired the exclusive digital rights to one hundred popular DC Comics graphic novels. If a customer wanted to read any of these on an e-device, it had to be on a Kindle Fire. Barnes & Noble, trying to break into the e-device market with its Nook, retaliated by pulling all print copies of DC Comics titles from its shelves. Books-a-Million, the third largest bookseller, followed suit. “As Amazon seeks over the next few years to expand its tablet line,” predicted the New York Times, “these collisions over content are likely to become routine.”

Amazon is moving quickly. In December, Amazon entered the children’s book market, acquiring more than 450 titles of Marshall Cavendish Children’s Books. In April, Amazon announced it had acquired the exclusive North American rights to publish Ian Fleming’s James Bond novels — in both digital and print formats. Earlier this month, Amazon expanded its holdings of genre fiction, purchasing the publisher Avalon Books and the exclusive rights to its 3,000-title backlist of romance, mystery and Western fiction.

Balkanization of the literary market is something new and deeply troubling. “Bookstores used to pride themselves on never removing any book from their shelves,” reported the Times, “but that tradition—born in battles over censorship—is fading as competitive struggles increase.” Awful as it is for our literary culture, the balkanization of the book market is but a logical extension of Amazon’s no-prisoners approach to competition.”

Bill Petrocelli, owner of Book Passage in Corte Madera, California, put some historical perspective on the actions of the government:

” To put the issue in its starkest form, does a shaky claim of collusion under Section One of the Sherman Act take precedence over a clear violation of Section Two of that same act? I am aware that the DOJ has characterized the actions of the publishers as a per se violation, but the invocation of that label should not be a substitute for clear thinking. The creation of a monopoly in the book business is a far more serious offense than the claim of collusion alleged in this case, because it creates a permanent, anti-competitive situation that is extremely difficult to dislodge.

And this leads to the question of the role of the DOJ. What is the Justice Department doing in this case? Why – of all the potential cases it could be pursuing – did it decide to take this one? Amazon. com – the supposed aggrieved party in this case – is one of the largest, richest companies in America. It is perfectly capable of protecting its own interests and asserting any claims it might have in the courts. So why, then, has the Justice Department decided to align itself with this monopolist?

The actions of the DOJ are especially galling in light of the fact the Justice Department and its sister agency, The Federal Trade Commission, have turned a blind eye to anti-competitive activities in the book business over the last forty years. There has been substantial evidence of anti-competitive uncovered practices uncovered by lawsuits initiated by Northern California Booksellers Association and by the American Booksellers Association. There were two investigations conducted by the staff of the FTC, but in both cases the recommendations of the staff were turned down by the Commission itself. The Justice Department is certainly aware of these investigations, because Christine Varney, the immediate past head of the Anti-Trust division, was a Commissioner on the FTC at the time its investigation was curtailed.

So once again, why now? Why has the Department of Justice decided to ally itself with the interests of a monopolist? By placing the power and majesty of its office on the side of Amazon.com, the Justice Department is undermining that fabric of the book business and signaling to all future monopolists that concentrated, anticompetitive behavior will get a free pass from the government. “

The Authors Guild and the Book Publisher Antitrust Case

June 4, 2012

Today The Authors Guild issued a statement of position on the antitrust case ititiated by the United States against Apple, Penguin, and Macmillan. It is a very thoughtful and elegant analysis of the competitive dynamics book publishing from the point of view of the largest organization representing writers. Here it is:

Agency pricing, in which the e-book vendor acts as the publisher’s “agent,” with no authority to change the retail price of the book, was a reaction to a specific anticompetitive provocation – Amazon had been routinely selling frontlist e-books at below cost. Amazon’s predatory tactic wasn’t scattershot; it was (and remains – Amazon continues to deploy this weapon with the titles of non-agency publishers) highly targeted. When not constrained by agency pricing, Amazon chooses to absorb substantial losses on e-book editions of a specific subset of new hardcover books: those that are most likely to be stocked by traditional bookstores.
The Justice Department’s proposal, which would permit Amazon to resume using the frontlists of three major publishers for anticompetitive purposes, appears to be based on a fundamental misunderstanding of the market for trade books, particularly the interplay between the online market for print books and the e-book market. Amazon, which has long commanded 75% of the online market for print books, clearly understands that relationship well. The story of the introduction of the Kindle is largely a story of Amazon exploiting its dominance in the online market for print books to gain control of the e-book market.
 
Frontlist, Backlist, and the Rise of Online Bookselling
To understand the U.S. market for trade books, one needs to understand how online retailing has radically altered the competitive landscape of bookselling.
The literary marketplace has traditionally been divided into two broad submarkets: frontlist (the season’s new books) and backlist (everything else). Retailers faced the most competition in selling frontlist books – new hardcovers and new paperbacks were the most likely titles to appear on the shelves of stores (bookstores, airport newsstands, and big box retailers, among others) across the country. Backlist books were far less likely to be on store shelves, except for the relatively rare “core backlist” titles that had become steady sellers (To Kill a Mockingbird, Green Eggs and Ham, What to Expect When You’re Expecting, for example). “Deep backlist” books, a subcategory of backlist books that were sold almost exclusively through special orders or at used bookstores, were the least commercially available books.
With the rise of online bookselling, these categories still largely existed, but online booksellers, with endlessly long bookshelves made possible by inexpensive warehouse space and on-demand printing technology, came to dominate the market for backlist and especially deep backlist titles. For nearly all backlist books, representing roughly 90% of all in-print titles, the online market had become the market, and Amazon owned the online market. The deeper one traveled down the backlist, the more complete Amazon’s dominance. Amazon had even gained control of the furthest end of the long tail – out-of-print books – by buying up the major competing online used bookselling networks.
 
Online Print Book Dominance Dictates Amazon’s E-Book Tactics
From Amazon’s perspective, as it prepared to launch the Kindle, the print book market had two components: the part in which it faced significant competition (the market for new books and core backlist titles) and the part in which it didn’t (everything else). Amazon would leverage its online print book dominance to conquer the e-book market, protecting its profits on 90% of titles by focusing its predatory tactics on the other 10%, the books that were most likely to be on store shelves.
Brick-and-mortar bookstores were in the crosshairs, jeopardizing vital participants in the literary ecosystem. Bookstores remain critical showrooms for works by new or lesser-known authors and for entire categories of books, such as children’s picture books. Marketing studies consistently show that readers are far more open to trying new genres and new authors when in a bookstore than when shopping online.
It seems to come down to browsing versus searching. Brick-and-mortar bookstores are optimized for browsing; the stores’ “search engines” – their information desks – aren’t what draw in customers. A reader browsing the shelves and tables of a bookstore is often hoping to discover something unexpected. Virtual bookstores, on the other hand, are optimized for search – browsing isn’t the attraction. Readers behave accordingly, tending to use virtual bookstores as search engines to find books they’ve discovered elsewhere.
Publishers were aware of much of this and that the health of brick-and-mortar bookstores relied heavily on frontlist hardcover book sales, but Amazon persuaded them to break with established practice and release books in digital form at the same time they released them as hardcovers. The protection for the hardcover market (and brick-and-mortar bookstores) was implicit: Amazon agreed to pay the same wholesale price for e-books that it did for hardcovers.
Things didn’t work out. As Amazon launched its Kindle in November 2007, publishers learned that it would be selling a long list of frontlist e-books at a loss. As Scott Turow said in his letter to members on March 9th:

It was as if Netflix announced that it would stream new movies the same weekend they opened in theaters. Publishers, though reportedly furious, largely acquiesced. Amazon, after all, already controlled some 75% of the online physical book market.

Amazon quickly captured the e-book market as well, bringing customers into its proprietary device-and-format walled garden (Sony, the prior e-book device leader, uses the open ePub format). Two years after it introduced the Kindle, Amazon continued to take losses on a deep list of e-book titles, undercutting hardcover sales of the most popular frontlist titles at its brick and mortar competitors. Those losses paid huge dividends. By the end of 2009, Amazon held an estimated 90% of the rapidly growing e-book market. Traditional bookstores were shutting down or scaling back. Borders was on its knees. Barnes & Noble had gamely just begun selling its Nook, but it lacked the capital to absorb e-book losses for long.

The publishers had made a huge mistake.
 
Taking Aim at One Percent
Even as it targeted the 10% of titles sold in bookstores, Amazon would be selective. Amazon could get the most bang for its buck by taking aim at the narrow band of books on which its brick-and-mortar competitors were most dependent – those new titles from larger publishers that bring readers into bookstores. Once in the stores, a reader might choose to purchase other books within the list of 10% of titles in which Amazon faced competition: it was best, from Amazon’s perspective, to keep readers out of bookstores and safely online, on Amazon’s turf.
So Amazon’s predation focused on a slice within a slice of the literary market. Amazon would sell at a substantial loss the electronic versions of select new hardcovers: the new bestsellers, near bestsellers, and might-become bestsellers from commercial publishers. Our best estimate was that Amazon’s predatory tactics focus on less than one percent of in-print titles.
Amazon’s highly selective predation not only conquered the e-book market, it paid immediate dividends in the print book market. Marketing studies confirm what Amazon no doubt guessed: readers who buy Kindles tend to dramatically shift their print book purchases to Amazon.
The strategy was brilliant, a predatory feedback loop in which online print book dominance allowed Amazon to absorb selective losses to gain control of the e-book market, which in turn gave Amazon an ever-larger share of the print book market. It was a tactic Amazon could continue indefinitely, as it offset its losses on the most recognizable new e-books by taking profits on e-books by lesser-known authors, on backlist e-books, and on its growing share of print book sales.
 
After Two Years of Predation, Agency Pricing Opens the E-Book Market
For more than two years Amazon’s predatory pricing went unchecked. Then, in January 2010, one month after B&N shipped its first Nook, Steve Jobs introduced Apple’s iPad, with its iBookstore and its proven iTunes-and-apps “agency model” for selling digital content. Five of the largest publishers jumped on with Apple’s agency pricing, even though it meant those publishers would make less money on each e-book they sold. Again, from Scott Turow’s March 9th letter:

Publishers had no real choice (except the largest, Random House, which could bide its time – it took the leap with the launch of the iPad 2): it was seize the agency model or watch Amazon’s discounting destroy their physical distribution chain. Bookstores were well along the path to becoming as rare as record stores. That’s why we publicly backed Macmillan when Amazon tried to use its online print book dominance to enforce its preferred e-book sales terms, even though Apple’s agency model also meant lower royalties for authors.

Agency pricing brought real competition, steadily loosening Amazon’s chokehold on the e-book market: its share fell from 90% to roughly 60% in two years.
Agency pricing allowed cash-strapped B&N to make substantial investments in e-readers with the reasonable hope of earning a return on those investments. Customers are benefiting from the surprisingly innovative e-readers those investments have delivered, including a tablet device that beat Amazon to the market by a full twelve months.
Authors in Amazon’s Kindle Direct Publishing program benefited as much as anyone, as Amazon more than doubled its royalty rates to match Apple’s agency model royalties.
Most importantly, agency pricing has prohibited Amazon from using the most popular new books from six large publishers to undermine the economics of bookselling. Agency pricing has given bookstores a fighting chance.
 
The Proposed Settlement Allows Amazon to Resume Its Predatory Practices
The Justice Department’s proposal undoes all of this. Its settlement with three large publishers would require the publishers to allow Amazon (and other e-book vendors) to sell e-books at below cost, so long as the vendors don’t lose money on the publisher’s entire list of e-books over a 12-month period. Amazon, a far richer and more powerful corporation than it was even two years ago, has every motivation to revert to its prior ways – it will take losses on the books that bring customers into bookstores, and make it back on less popular and backlist books. It will lose money on the one percent, and make it back on the rest.
The Justice Department is sanctioning the destructive, anticompetitive campaign of a corporate giant with billions in cash and boundless ambitions. The situation is bizarre, and without precedent, to our knowledge: the Justice Department is intervening to help entrench a monopolist.

The Book Publisher Antitrust Suit Point by Point

May 31, 2012

Today Penguin filed its answer to the Department of Justice antitrust suit against Apple and the US book publishers (MacMillan and Penguin). Prior to this both Macmillan and Apple  responded to the suit. The Penguin response is 75 pages long, so I won’t be going over it point by point. But it is particularly enlightening in that it restates the government  allegations and responds to each of them. While I was reading the documents, it struck me how much it really addressed the big issues of this litigation.  Penguin did a lot more than simply make the obligatory categorical denials to each of the 103 government  allegations.

Antitrust law is exceptionally arcane and frequently difficult to understand even  by those who specialize in such matters. There are so many exceptions that have been carved out over the years that it is always difficult to determine what the outcomes are likely to be. I know. I have been a plaintiff in 3 suits and a consultant to the Federal Trade Commission in an antitrust investigation, all of them  against  – would you believe? – the book publishers.

Let’s go over some of the key allegations and the Penguin responses.

United States allegation #2.  The government asserts: that e- book sales have been increasing “ever since Amazon released its first Kindle device in November of 2007…..One of Amazon’s most successful marketing strategies was to lower substantially the price of newly released and bestselling e-books to $9.99.”

Penguin response: Penguin admits that e-book sales have been increasing and further  “admits that Amazon’s below-cost selling of certain newly released and best-selling e-books for $9.99,… was a successful strategy for locking consumers into its proprietary Kindle platform and raising a significant barrier to entry.”

[My comment. This is a very revealing response by Penguin. Framed as an admission of the government's allegation, it includes some  twists on Penguin's part that go to the heart of their defense. The government implies that Amazon is simply pursuing a typical market strategy to offer  lower prices and  sell more books. Penguin emphasizes that the practice is very selective and that the strategy was initiated to lock consumers into purchasing Kindles and keeping other potential competitors from entering the market. In other words, Penguin is pointing out that the real threat to competition is Amazon, not them.]

US allegation #3. “Publisher defendants feared that lower retail prices for e-books might lead eventually to lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid….Publisher Defendants teamed up with Defendant Apple which shared the same goal of restraining retail price competition…”

Penguin response: Penguin admits that they had concerns about Amazon’s pricing practices. They point out that Amazon was selling some of these books “well below the prices paid by Amazon to Penguin…for these titles.” They believed that Amazon’s practices were “anti-competitive and detrimental to the long term process of expanding opportunities for developing authors and creating more content.” They also point out the Government’s complaint  “is careful to avoid stating, prior to Apple’s entry, Amazon’s share of eBook sales was 80 to 90 percent.”  Penguin goes on to argue  that Amazon’s practices  were “undercutting the margins and incentives of other booksellers, fostering a perception of eBooks as lower cost commodities, and threatening the viability of book publishers and authors, as well as other bookselling outlets vital to the marketing and promotion of books.”

[My comment. Penguin pointedly mentions  that the government avoids bringing up an inconvenient fact:  that Amazon had 80-90% of e-Book sales prior to Apple's entry. Again, they are emphasizing that the real competitive danger lies with  the "monopolist-Amazon" and that the result of the publishers – Apple relationship was to increase competition, not to restrain it.]

US allegation #5. The government alleges that Apple and the publishers “jointly agreed to alter the business model governing the relationship between publishers and retailers. Under the old “wholesale” model, “publishers sold books to retailers, and retailers, as the owners of the books, had the freedom to establish retail prices.” Under the new model, “publishers would take control of retail pricing by appointing retailers as ‘agents’ who would have no power to alter retail prices set by publishers.”

Penguin Response. Penguin denies there was any agreement  among the publishers to change the pricing model. They again reiterate their position that “the allegation that there was a ‘robust retail price competition’ before  the adoption of the agency model ignores the indisputable fact that the ‘competition’ was nothing more than the below-cost, predatory, market-domination strategy of a monopolist distributor [Amazon].”

[ My comment. This gets to the heart of the government's case that the publishers jointly conspired to establish a system that fixed prices at a higher level than would otherwise be the case. Certainly if  the government can establish the factual basis for such a joint agreement, then they will be in a very strong position. Penguin claims here and repeatedly in their answer that there was no joint agreement and that they were simply responding individually  to the anti-competitive practices of  the "monopolist", Amazon.]

US allegation #8.  The government alleges that after executing the new trade model with Apple, “the Publisher  Defendants all then quickly acted to …[impose the new model] on their other retailers. As a direct result, those retailers lost their ability to compete on price, including their ability to sell the most popular e-Books for $9.99…”

Penguin Response.  Under the new model, “price competition has moved from the retail level to the publisher level. Price and non-price competition both among publisher and among eBook retailers has exponentially increased as a result of the move to the agency model.

[My comment.  Penguin's apparent argument that price competition continues to be robust because it is practiced at the publisher level, as distinguished from the retail level seems to be a bit of a strain, even if true.  But they do point out that outside of the very limited class of best sellers that Amazon had been selling for $9.99, there is increased price competition. And furthermore the government has not considered the competitive benefits of more players in the market selling more types of electronic readers and even more types of book formats, like enhanced e-Books that did not exist until the iPad.]

Ok. That’s enough for this blog. The complaint goes on with numerous allegations of specific facts that the government hopes  will prove  their case. Probably the most conspicuous allegations (at least from the point of view of publisher tittle-tattle are #39-45, where the government describes repeated meetings  attended by publisher CEO’s at fancy New York restaurants. The government complaint fails to show exactly what was discussed over Chardonnay but insinuates that this was the venue where the agreements were made.

I hope this gives you a little flavor of what the issues are in this case and how the two parties frame those issues.

 

My Letter to the Department of Justice

May 8, 2012

Everyone in book publishing has been talking about the anti-trust litigation and proposed settlements initiated by the United States against Apple and 5 major book publishers. The government’s case alleges that the defendants agreed to fix prices on e-books and  that these agreements  had the effect of raising prices to consumers. Most people in our business believe   that the United States’ position is misdirected, that the lawsuit will enhance the market power of Amazon.com and that this is the real anti-trust threat to the industry. The Authors Guild representing authors, the American Booksellers Association representing independent booksellers and now the Association of Author Representatives representing literary agents are on record as opposing the position of the Department of Justice. I decided to weigh in, myself, with the letter below. The DOJ is required to consider these letters, so any of you who wish to express your opinions should write to  John Read at the address below.

John R. Read
Chief, Litigation III Section
United States Department of Justice
450 5th St NW
Suite 4000
Washington DC 20530

Dear Mr. Read:

I am writing regarding the proposed settlement between the three book publishers ( Simon and Schuster, HarperCollins, and Hachette Book Group)  and the United States regarding e-book pricing.

I feel that it is wrong for the Department of Justice to focus its anti-trust efforts against Apple and the major book publishers for their implementation of the so-called “agency model” for pricing. There are restraint of trade issues in our industry, but this litigation is misdirected and likely to exacerbate those issues.

The decision by each book publisher to implement agency pricing was in response to Amazon.com’s policy and practice  of setting prices on e-books below cost in order to drive other potential sellers of these products out of the market, thus giving Amazon a virtual monopoly on the sale of e-books. This strategy was  enhanced by the manner in which Amazon designed and marketed it’s Kindle format editions of e-books,  so that those books could only be read on Amazon’s proprietary Kindle book readers, and only purchased on the Amazon web site.  Amazon  refused to allow other potential competitors in the e-book business to sell Kindle edition titles. At the time that publishers began contemplating implementation of the agency model, Kindle Editions accounted for 90% of  book sales on e-book readers.

Amazon was able to  sustain this otherwise ruinous pricing policy, because it could  offset its losses by driving people to its website where they would also purchase more profitable items.

The dangers implicit in this strategy  can be demonstrated. Amazon has shown its willingness to stop selling titles by publishers who will not agree to Amazon’s trade terms. This happened recently with 5000 Independent Publisher Group titles.  As a result, these e-books  are simply not available to the 60% of  all e-book readers who read e-books on their  Kindles.

Amazon’s policies have already had a devastating effect on community based bookstores including the recently bankrupt Border’s, Barnes and Noble, and the thousands of independent booksellers across the country.

The United States should be pursuing policies that discourage excessive concentration in industries, particularly when that concentration will reduce  the free dissemination of ideas in the country. The current litigation and settlement agreements against the major book publishers is doing quite the opposite.

Andy Ross

Andy Ross Agency

Paulo Coelho and Book Piracy

May 2, 2012

Publishers Weekly had a story today about Paulo Coelho reaching an agreement with his publisher, HarperCollins, to reduce the price of the e-book edition of his titles to  99 cents for an unspecified length of time. Coelho has been a very vocal advocate of  book piracy for many years now. It’s a position I have trouble understanding, particularly when it is  being espoused by a writer and an intellectual.

PW allows for comments on its articles. So I got involved in a rather long and colorful thread about the virtues and  vices of intellectual property theft.  When you think about it, the issues in this conversation are fundamental, touching on the ontological nature of work and its value to the worker and to society. In the case of intellectual property, it goes to the heart of the question of whether intellectual activity and creativity is “work” and whether it is worthy of being compensated.

According to a February, 2012 article in The Guardian, Coelho has long been a supporter of the illegal downloading of his own writing.  Of course, if an author chooses to allow his books to be downloaded for free (assuming he controls the copyright to those books free and clear), this isn’t piracy. It’s a gift. But that isn’t really the situation with Coelho. His books are published in the United States by HarperCollins and they have been translated, published, and sold in almost every country in the world.  (The Alchemist has sold over 35,000,000 copies worldwide, probably the best selling title in the world by a living author).  Coelho has a contractual relationship with his publishers. Most book contracts give the publisher the exclusive right to sell the book for a given period of time, in exchange for which the author is compensated.  Coelho is enabling the free and unauthorized downloading of his books when he has already licensed those rights to another party.  This is very clearly piracy.

What is more troubling is that Coelho goes beyond advocating that people should steal his  books. He has joined up with the notorious file sharing site, Pirate Bay, to facilitate downloading his own books and by implication supporting the illegal free downloading of millions of  books, movies, music, and software that is being done daily on Pirate Bay.

He seems to raise piracy to a kind of moral imperative. Here is what he says:

“The good old days, when each idea had an owner, are gone forever. First, because all anyone ever does is recycle the same four themes: a love story between two people, a love triangle, the struggle for power, and the story of a journey. Second, because all writers want what they write to be read, whether in a newspaper, blog, pamphlet, or on a wall….The more often we hear a song on the radio, the keener we are to buy the CD. It’s the same with literature. The more people ‘pirate’ a book, the better. If they like the beginning, they’ll buy the whole book the next day, because there’s nothing more tiring than reading long screeds of text on a computer screen.”

Coelho’s assertions are wrong and pernicious. He begins by positing that there is a kind of paradigm shift going on, and that the old models are dead. I see this a lot, usually coming from technology gurus  or Amazon.com fan boys. When I hear the term “old business model”, I can usually predict where the discussion is headed. Coelho is saying  that under the new business model ideas belong to us all. What that means  to me is that the writer ought not to be compensated for his writing, which is to say that the work that goes into artistic creation has no value. A curious insight from a writer who has made tens of millions of dollars from his own creative work.

He elaborates on this idea  by saying that all creative writing is simply the recycling of 4 themes. I suppose what he means to say is that creative writing isn’t really all that creative.  Let’s see now….how shall I respond?…….Shakespeare, Tolstoy, Joyce, Melville, Flaubert, Cervantes, Dante. A veritable Salvation Army of recycled ideas.

Coelho then argues that piracy is good because it is good for business. Kind of like radio. It exposes people to creative work that they might not otherwise know about, and this will induce the reader to go out and buy more of the artist’s stuff.  Well, this might be true. Or maybe  not. But it certainly is an article of faith amongst the “new paradigm” types.  This is quite beside the point. The copyright holder may  decide, out of ignorance or folly, that he simply doesn’t want to give away his product. Apparently Coelho feels that he is in a better position than the artist to dictate the conditions under which the artist’s or anyone else’s  book will be disseminated.

Moving along to the thread of conversation in the PW article, we see more of the “new business model” argument.  It usually revolves around the idea that traditional  commercial (often referred condescendingly as “legacy”) publishers are simply ripping off the consumer and making millions of dollars by charging unjustified and inflated prices. The idea is that if we get rid of these greedy middle men, we will arrive at a fair price for a book, which is usually about 99 cents. The Internet gurus  call it “disintermediation”. It’s a fancy term for a business model that cuts out the middle men. A lot of people seem to believe that because there are no manufacturing and delivery costs to an e-book, 99 cents is a fair price. But in the eyes of Pirate Bay and its apologists even charging 99 cents for a book is highway robbery. The  concept de jour coming from the “new business model” gurus is: “information wants to be free”.

I believe that intellectual work has value and deserves compensation. I believe that the work that goes into writing a book is at least as important and as valuable as the work that goes into flipping burgers at McDonalds.

It’s astounding to me that this conversation about piracy gets serious discussion at all. Piracy is theft. Theft is not a “new business model”. It’s the oldest one in the book.

The Media Speak Out on the Book Publisher – Apple Anti-trust Suit — And They Are Not Amused

April 16, 2012

The New York Times and The Wall Street Journal finally agree on something, and so does most of the mainstream media.  That suing the  book publishers for anti-trust violations  is inexplicable.  The problem is that if the DOJ succeeds in forcing the publishers to change their business model, the only party that will benefit from this is Amazon.com which is the real threat to competition in the book business.

David Carr, writing in The New York Times called the lawsuit “the modern equivalent of taking on Standard Oil but breaking up Ed’s Gas ‘N’ Groceries on Route 19 instead.” He  wonders “why the crumbling book business is worthy of so much attention from Justice while Wall Street skates is a broader question we’ll leave for another day.”  Carr continued, “after a week of watching the Justice Department and Amazon team up, I’ve learned that low prices come with a big cost.”
Holman Jenkins Jr.   in The Wall Street Journal said, “in essence, Justice says that, beginning in 2008, several plankton, in the form of five publishers, conspired against a whale, Amazon, whose monopoly clout had imposed a $9.99 retail price for e-books…. Given Amazon’s dominance, it’s hardly offensive that all five used the opportunity of Apple’s arrival in the market to reclaim that power….

“Justice calls it collusion. In reality, publishers have nothing to collude about, except maybe Clive Cussler’s next advance…. let’s face it: Publishers have every reason to fear Amazon’s exploitative behavior…”

Jenkins closes with: “Judging by Justice’s slobbering over Amazon, as if whatever Amazon wants is the Lord’s ordained order in the e-book market, many of those résumés are headed to Seattle.”

Barry Lynn at Slate says “the DoJ got this issue…spectacularly wrong…. Now this vital marketplace is, for all intents, under the sway of a single boss. One that has a direct interest in stripping capital from publishers. One that has a direct interest in gouging all writers who must ride its rails. One that has a direct interest in suppressing any work of reporting that questions its power, or for that matter the political economic regime that enabled such concentration of power. One that is swiftly capturing direct control over much of the rest of the U.S. economy as well.”

Michael Shermer in an op-ed piece in The Los Angeles Times said: “The Justice Department should have left things alone. Essentially, two titans —Apple and Amazon — clashed, and competition was working…. Amazon will gain a government-aided advantage over the competition…. What this lawsuit probably will do instead is return to Amazon the power to monopolize the e-book market through predatory pricing to the detriment of publishers, authors and, ultimately, readers.”


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