The Book Publisher Antitrust Suit Point by Point

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.

 

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

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.”

Will Apple Buy Barnes and Noble

There is a bizarre rumor floating around financial circles that Apple Computer may be interested in buying Barnes and Noble. Actually this may not be quite as farfetched as it sounds at first hearing. Check out the story on Investor Place.  The cost of acquiring BN is estimated at between $1 and $1.5 billion. This is pocket change for Apple. They are sitting on $76 billion in cash. In purchasing BN, Apple would have access to the huge selection of  BN electronic books and Nook customers   and enhance the Apple iBookstore that is struggling against mighty Amazon. Additionally Apple could use many of BN’s 800+ physical bookstores as locations for their own Apple retail stores. And, not insignificantly, Barnes and Noble is the largest owner of university book stores in America. Control of this would be very valuable to Apple for whom the college market is important.

What this means for us book lovers down here on the ground is hard to say. As a general rule I always think that any development likely to erode Amazon’s almost monopoly power over e-books is a good thing. Stay tuned for more information.

E-book Economics 101

 The e-book is turning the  book business upside down. No one in publishing  seems to be talking about anything else. Manufacturing costs, retail prices, competition, author royalties, the future of the physical bookstore, the future of the novel, enhanced books, book reader technology, eye strain, how to read an e-book on the beach, are commercial publishers out-dated dinosaurs; these are but a few of the subjects that are generating the most agonizing soul searching in book publishing. Nobody knows how these things will ultimately sort themselves out. The changes are just coming too fast.

  In this post I am   going to analyze the economics of publishing and compare the cost of publishing a hardback book to that of the e-book. I’m an agent, so I have an ax to grind.  It looks like the bottom line is that book publishers stand to  make more money on e-books and authors will make less.  

 For this post, I am using information that I took from an article in The New York Times. Here is the link to the article.

First let’s look at the costs of publishing a traditional hardback. The numbers  in The New York Times article  were calculated for a  hardback with a $26 suggested  retail price. (Remember that booksellers can charge any price they want. And a lot of bestsellers are discounted to the book buyer.  Here is the breakdown.

Amount paid to publisher by bookseller: $13.00

Printing, warehousing, shipping: $  3.25

Author Royalty:  $   3.90

Design, editorial, typesetting:  $      .80

 Marketing:  $  1.00

 Profit before overhead:  $4.05

I am not entirely pleased by the robustness of this analysis. It neither accounts for all of the expenses nor all of the income associated with a particular book.  But it is a good indicator of the relative costs of publishing a title.

 What is an E-book?

 If you don’t know the answer to this question, what have you been doing for the last two years? And if you are reading this on a Kindle, skip to the next section.  E-books are like iTunes. And, in fact, the  iTune division of Apple will be managing  the Apple e-book store. New technology for the e-book changes almost daily. As of (let’s see now) yesterday I believe, you can even  download e-books onto your iPhones. The largest selling e-book reader is the Kindle. But the Apple iPad is moving up fast as of this writing. There is also the Sony Reader, the Nook, the Kobo reader and new brands popping every month.  Readers are beginning to get sold at the big box stores and should be a popular item this Christmas. It is estimated that by the end of the year, there will be over 10,000,000 readers sold.

 In 2009, e-books accounted for about 4% of unit trade book sales, but sales are increasing exponentially.  E-book sales  in 2010 are up over 150% from previous year’s sales. Unit sales of  cloth and paper books have been decreasing.  Amazon.com claims that they are now selling more Kindle Editions than traditional cloth titles. Most major publishers though are showing less dramatic e-book sales. But they are reporting that 10%  or more of  bestselling new titles are e-books.

 The advent of the iPad creates a suitable platform for visual books as well. People are already experimenting with books that incorporate multimedia integration. The first “enhanced” e-book was published last July.  Perhaps soon you will be able to buy a cookbook that includes film demonstrations by the author. Or book group editions with film clips of interviews with the author.

 The e-book is a perfect fit for our gadget-obsessed world.

 And what are the costs of publishing an e-book?

 Let’s go back to The New York Times article that we discussed above on the cost of publishing a book. There are some substantial savings to the publisher on e-books. No manufacturing costs, no warehousing costs, no shipping and receiving, no returns. Sweet!

 Like all other things e-book, the economic model has been changing protean-like, and no one in publishing can predict what it will look like in a month, let alone in a year. Let’s take a look at the $26.00 hardbound book from the example above. Currently publishers are giving book lovers a break and selling e-books for about half  the price of the hardback. Sometimes Amazon is selling these books even lower and at a loss in order to gain market share. About 90% of all e-books are currently being sold by Amazon. And Amazon is hoping to keep it that way, in spite of fierce competition from Apple.  Google recently w rolled out its e-book store and is selling in a variety of formats. (Amazon only sells Kindle editions that only can be read on the Kindle reader). Independent stores have linked up with Google and are selling e-books on their sites as well.   

 There are several different systems of selling e-books, but let’s keep it simple and look at the sales for books from most major publishers. So here are the costs and the profits:

 Price to the consumer:  $12.99

Cost paid to publisher by bookseller: $ 9.09

Author royalty:  $ 2.27

Digitization, typesetting, editing :  $   .50

Marketing:  $    .78

 Profit before overhead: $   5.54

 The first and most astonishing thing you will notice is the hit that author royalties have taken on the e-book economic model. Authors will receive a royalty of $3.90 on the hardback vs. $2.27 on an e-book.  (Actually that may not be the first thing you notice, but agents and authors are understandably  concerned about this. “Livid” might be a better characterization.) Note also that even with consumer prices being half of the list price of a traditional book, publishers stand to make considerably more money on each sale, because of negligible manufacturing and distribution costs.

A lot of people think that e-books don’t cost anything so they should have a price that reflects this.  Amazon seems to be promoting this idea for their   own reasons. But remember e-books still have costs for royalties, marketing, and editorial. There are a number of Internet gurus who think that “information wants to be free”. But most writers feel that their work is worth something and they should be paid for the ten years that they toiled on their novel, for instance.

 There are some other, as yet, unquantifiable factors that would tend to make e-books an even better deal for publishers. E-books will not generate costly returns of unsold books from the bookseller. They are sold to consumers non-returnable. You can’t even give it away to a friend. And you can’t sell it to used book stores. My gadget -obsessed brother, Ken Ross, (check out his company, Expertceo.com)   now only reads books on his Kindle. He claims that he buys many more books than before, because of the ease of purchase. If he gets bored with what he is reading, he just hits the button for a new book and moves on. That is what publishers are hoping for – more readers like Ken. And if Ken’s buying patterns are anything to go by, reports of the death of the  book  and of book publishing will have been greatly exaggerated.

 

 

Buy E-book Downloads from your Independent Bookstore — Now!

I have been writing a lot about the role of the independent bookseller in the brave new world of e-books. A lot of people have been talking about this, usually  with sad-countenanced  head-shaking and hand-wringing. And it is true  that  indies are facing and will continue to face enormous challenges.  Recently I wrote an article in Publishers Weekly reprinted in this blog trying to provide some hope in this situation.  But it was pretty speculative. Today I am going to interview Len Vlahos, who is Chief Operating Officer of the American Booksellers Association, the trade association that represents over 1400 independent bookstores operating in more than 1700 locations nationwide. We are going to talk about the future of indie stores, their challenges and their opportunities, in the  age of  the  e-book.

Andy: Len, I assume that the ABA is not just sitting back and ceding the terrain of the e-book to Amazon and Apple. What is ABA doing to bring the Indies into the game?

Len: ABA offers members an  e-commerce product called IndieCommerce. Through this service, members can have a turnkey website with a great search engine, shopping cart, and robust content management tools. The sites exist at the store’s URL and with the store’s brand. A few examples:

 

http://www.politics-prose.com/

http://www.bookwormofedwards.com/

http://www.bookpassage.com/

We’ve partnered with both Google and Ingram to allow our members to offer e-books for sale to their customers in four different formats – Adobe (works with Sony eReader, Nook, Kobo), Palm/iPhone (works with iPad, iPhone, other smart phones), Microsoft (with the Microsoft Reader), and Google (works with most devices other than Kindle). Some of the Ingram titles are already live. Google will be live before the end of the year. Between these two aggregators, the 200 + IndieCommerce sites will have a robust catalog of titles, and will offer a competitive experience relative to the rest of the market place.

Andy: I pointed out in my article that the new model for e-book pricing is for the publisher to set the price of the book. It seems that Amazon.com has always succeeded in gaining market share  by price completion. Can you describe the new plan. Is it going to help Indies?

Len: In the traditional  (often called “wholesale”) model of publishing, publishers set a suggested retail price for a book and  then sell that book to a retailer at a discount. The retailer then sets its own retail price and sells that book to a consumer. Under this model, chains and big Internet retailers  have been selling popular titles — in both conventional editions and digital editions — at significantly below-cost pricing and with loss leader marketing in what appears to be a blatant attempt to acquire market share and to concentrate power in a small number of mostly online retailers.

 

Under the  new and developing  “Agency” Model, a publisher sets a retail price for a specific book and engages an agent — typically a retailer — to facilitate the sale of that book to a consumer, at that price. In this model, the retailer is bound by the price set by the publisher. To date, this model exists only for digital content. The retail price set by the publisher reflects production costs — acquisition, editing, marketing, printing, binding, shipping, etc. — which vary significantly from book to book.

The artificially low prices at which e-books have been sold are threats to any profitable business model for writing, publishing, and selling books.  They offer consumers only a fleeting bargain while enacting serious long-term losses. Ultimately such below-cost pricing is very likely to drain the resources publishers need to discover, develop, compensate, and successfully publish new authors, a loss of diversity that ABA believes will have very bad long-term effects on many fronts.

ABA strongly favors the “Agency” Model for the sale of digital content. The benefit of the Agency Model to our members — independently owned bookstores — is obvious. It’s an essential defense against predatory pricing, and it allows for a wide diversity of retailers in the marketplace. It also helps to ensure the continued distribution of books by smaller, independent publishers with a variety of viewpoints, ultimately benefiting consumers by showcasing not just discounted bestsellers, but a wide selection of writers. Finally, it will help prevent the concentration of power within the hands of a few megastores and chains. Such a narrowing of options would significantly harm consumers and our society.

Andy: Do you see any other models for  e-book distribution on the horizon that also would offer opportunities to independents?

Len: A long-range goal would be to partner with a technology company to use geo-locating software to allow a customer in an indie store to download an e-book to her smartphone from within the store, and then have the bookseller be credited with that sale. This is down the road a bit, but should be possible. It opens up interesting opportunities.

Andy: It is a little unclear to me how indies can provide a kind of convenient channel for downloading the e-books. One of the nice things about e-books, as they are being sold by the big guys,  is the seamless way the book buyer can order books without getting off his tush.

Len: With Google in particular, we will provide just as seamless a solution if you’re using your iPad, Android, or other tablet or smartphone. You can sit on your couch in your PJs at three in the morning, or sit in the airline frequent flyer lounge, and search for, purchase, download, and read your e-books, all from one device.

Andy: And do you visualize independents as selling e-readers as well? At the very least, that seems like a way of showing that indies are serious about being in the e-book business.

Len: This is trickier, as we’ve yet to identify the right device partner, but we’re still looking.

Andy: You might as well prognosticate about the future. Everyone else is, after all. Are e-books going to spell the end of the traditional book? How are independents positioned to benefit from the trends?

Len: ABA firmly believes that print books are here for the long haul. But to think that e-books are not already impacting print book sales would be a bit of a stretch. The focus of our channel must be on serving our customers how, when, and where they want to be served, and to sell the right book to the right customer in the format of that customer’s choice. That’s what we’re trying to empower our members to do.

Andy: Thanks, Len. I just clicked on my favorite bookstore, Book Passage;  and I see that they are, in fact, selling e-books for immediate download in Adobe and Palm format. So I urge you all out there with e-book readers to go to their website and start downloading.

iPad versus Kindle (and Nook)

There is a terrific article in the current issue of The New York Review of Books. The article is by Sue Halpern  and is called “The iPad Revolution“. It is a very good comparison of iPad and Kindle and the relative differences in the approaches of Apple and Amazon. Bottom line is that neither of them are perfect. (We already know that). But  it is the best thing I have read on this issue so far.

Battle of the (E-book) Titans

Ask the Agent has been covering the developing story of the changing models for selling e-books and the struggle for market share between  Amazon and Apple.

An article appeared in the New York Times on March 17 that adds a new and troubling wrinkle to the story.

90% of the retail sale of e-books is now done by Amazon. This would be a monopoly by any reasonable definition. Amazon is cementing its dominance in the marketplace by offering  e-book downloads that can only be read by the Kindle, a media device that is manufactured by Amazon and sold exclusively  through Amazon. Thus if you own a Kindle, you can only buy e-books from Amazon. If you buy e-books from Amazon, you must buy a Kindle to read them.

Amazon has come to dominate internet retailing by aggressively discounting products in order to increase market share. They did this to great effect with books from the very beginning. They have been doing the same thing with e-books. Publishers have been selling e-books to Amazon for approximately $12.50. Amazon has been selling below cost at $9.95 for their  e-book  best- sellers.

If you ask the  major publishers how they feel about this, they will tell you privately, as they have told me,  that they are profoundly troubled by the market power of Amazon and are concerned that the deep discounting practiced by Amazon will devalue  what the marketplace thinks is a fair price for books. Last month the sixth largest American publisher, Macmillan, announced that it was changing its retail terms for e-books to the “agency model” which would not permit Amazon to discount titles. Amazon retaliated by pulling  “buy” buttons for all Macmillan books both electronic and physical.   This lasted only a week, but it should be a cautionary tale regarding the dangers of monopoly power in the distribution of ideas in a society or, in the case of Amazon, in the world.

Enter Apple and the iPad. It is difficult to imagine that Steve Jobs can be considered the friend of the little guy and a force against monopoly. Certainly the clout that Apple exercised with  the music industry in forcing them to accept   the iTunes model has done considerable damage to the music companies and artist royalties. But in publishing, as in Mid-East politics, the principle that “the enemy of my enemy is my friend” rules.

Five of the six largest book publishers fell into the arms of Apple and negotiated a new  sales model that allows the publishers to control the retail price sold to consumers of the book. But Steve Jobs is not Mahatma Gandhi and has imposed his own stringent conditions on the publishers. Under the new agreements with Apple, publishers will not be permitted to allow any other retailer to sell books below the price that is sold by Apple.

Amazon has reluctantly gone along with the new model, but is insisting on having a 3 year contract that would lock publishers into the current arrangement and guarantee that no other retailer will get better terms. Publishers are reluctant to agree to such a contract. The whole e-book market is in flux. Nobody knows what the e-book firmament will be like in three years.

But according to the New York Times, it gets a lot worse. Amazon has only agreed to the new “agency model” for the six largest publishers. The other 10,000 smaller publishers have not yet signed on with Apple. Amazon  has been speaking to them and telling them that they prefer to stick with the old model where Amazon can sell books for whatever price it chooses.

 These same publishers have spoken to Apple and have been told that Apple will only work with them if they sell to all other retailers under the same terms as  they are selling toApple. In other words, there is reason to believe that in order to do business with  Amazon, publishers will not be able to do business with Apple –and vice versa. A tough choice for the smaller publishers and a distressing possibility for the consumer.

The message Amazon sent forth during  last month’s negotiation between Macmillan was eloquent and persuasive.  That message was that  a publisher who doesn’t agree to Amazon’s terms risks having their books not be carried by the largest book retailer in the world.

Book publishers, and particularly smaller book publishers, are clearly getting whip-sawed by the two giants. The stakes are high for both Apple and Amazon. But the stakes are even higher for book buyers and the free marketplace of ideas.