More Letters Against the Department of Justice Anti-trust Action

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. “

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Looking for Respect (and Swag) at BEA

Leslie at the “old” BEA

I just got back from New York City where I was attending Book Expo America (BEA), the annual convention and trade show of book publishing. What happened? Let me just put it this way. In 2007, the last year I attended as a bookseller, I was invited to over 50 parties and dinners at the toniest New York venues. The following year, my first as an agent, I was invited to…let me try to remember.uh. I believe it was zero including even the party that was being hosted by one of my best friends in bookselling. It was an indignity, but one  that taught me a heartbreaking lesson about the fickleness of fame. It calls to mind  T.S. Eliot’s unforgettable line: “The only wisdom we can hope to achieve is the wisdom of humility.”

I returned home feeling pretty depressed. After a few months, Leslie told me that it was time to get over it, stop moping, buck up,  and start being a good father again to Hayley. I didn’t go back to BEA for three years. But finally, my self-respect restored, I decided to return.

There was reason to be hopeful. Before the convention, I contacted Bob Miller,  of Workman Publishers. Not only did he most enthusiastically agree to meet with me,  he even invited me to the Workman cocktail party at their offices on Varick Street. It seemed like a sign, an indicator,  that my status in this business was starting to look up. I kept waiting for the mail to come every day, even standing on the porch looking  for the postman. But as I sifted through the daily harvest of letters, I began to realize that there would be no other invitations forthcoming.

When I got to BEA, I walked up and down the numbered aisles around the convention floor at Javits Center thinking that my old friends in publishing, people I had known for 30 years, would come up and stick an embossed invitation into my breast pocket, give me a little pat, and tell me that they hoped I could come to their  intimate  private dinner at The Four Seasons in honor their author who had recently won the National Book Award for Fiction. But no. Sometimes they said hi. Sometimes they said: “We’re really sorry you aren’t still at Moe’s.”

On the second day of the convention, I was walking out of the hall and encountered an old friend in bookselling. I told her that I was feeling a little down because I had nothing to do that night. She raised her eyebrows and motioned for me to come with her over to a darkened niche adjacent to the men’s room. She told me that she had pinched an extra ticket to the Publishers Group West Party being given that night and could give it to me if I promised not to say a word about  where I had gotten it. I just shook my head and told her that this old bookseller still had a little pride left in his heart.

We walked back to the front entrance and ran into another bookseller, an old friend who had served with me on the American Booksellers Association Board of Directors. She asked me if I would be attending the Knopf dinner for David Remnick of The New Yorker. Looking down at the floor, trying to hide my shame, I told her, “No. I had not been invited.” She looked at me with a kind of smirk on her face, and said only, “Pity”, before turning away and leaving the hall.

As I walked down the aisles,  the images of the great moments at BEA  seemed to fade in and out of my thoughts  like specters of times past,  better times for book publishers and booksellers alike, times when we could let go of our phony elitist literary pretentions and   indulge our  secret longings for all things crass and  tasteless.

 

The Bodice Ripper

I remembered the years that the Harlequin booth was the most splendiferous at the show. Harlequin is  the downmarket  publisher of racksize paperbacks of women’s romance. We used to call them “bodice rippers.”  At the booth  there was always a bit actress dressed to look like Scarlett O’hara reclining next to a man, probably a “b” list model,  with bulging biceps, a shining saber at his side and a patch over his eye.

My favorite moment was in 1982. I was walking down the aisle of university press booths and saw another day actor dressed in overalls and a John Deere cap, dragging a live hog on a leash down the aisle. I believe  they were trying to promote a book being published by Oxford University Press, a quantitative economic analysis  of the emerging agribusiness economy in America’s heartland..

And the swag back then was something else. This year the only handout I saw was at the Houghton Mifflin Harcourt booth,  a book bag promoting the new edition of  Tolkien’s Hobbit, tied in to the movie release this December. The fabric was cheap, the workmanship shabby. (I noticed a “made in Bengladesh” label attached to the inner lining.)   You would have never seen that kind of  Schmattah  being given away in the 80s. When  I tried to grab one for Hayley, the smiley face greeter at the booth gave me a dark and threatening look and growled, “Sorry. Booksellers only.”

I remembered the best freebee I ever got at BEA. I was sharing a cab with the CEO of one of the major houses.  They were  heavily promoting a new thriller for the fall called, Jig. Larry, the CEO,  pulled a watch out of his pocket and handed it to me.  It was oversized. The face was black with huge white letters J,I,G. It was a real treasure. Later I proudly showed it to my friend. She commented rather archly that I might not be making the right fashion statement wearing an accessory with an ugly racist epithet scrawled across it. The Jig watch is now gone along with so many other treasures of my past.

That was a long time ago, a different time. A time when bookselling meant something. It was a time when I used to stand next to the new title table at the front of Cody’s greeting my customers. I remember once an elderly woman came up to me and said, “Mr. Ross, your taste in books has always been unerring. What do you recommend that I purchase today?”

I turned and scrutinized the tall stacks of new titles, the best sellers on the front table, and gingerly picked up one. I turned back  and handed it to the woman. “Try reading this  one.  I think you will find it quite satisfying. People are talking about it a lot this season.  It’s called, Jig.”

The Authors Guild and the Book Publisher Antitrust Case

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.