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 Justice Department vs. Book Publishers: What This Really Means

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

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

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

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

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

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

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

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

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

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

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

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

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

E-book Wars, Episode 10: Revenge of the Killer Librarians

Your local librarian

Book publishers, take cover. The librarians are at the gate. The issue is, like almost everything else in publishing right now, e-books.

 If you go to your library website, chances are that you will see that it has a new program where you can check out e-books. Cool! Right? Hey, I’ve done it.  It’s free. All you have to do is select the book you want, hit the button, download the book, and voila!

 And you  can avoid the usual inconveniences that detract from the library experience. You  don’t have to go into one of those shabby old buildings , filled up with shabby old people,  and try to find one of those shabby old books. (Who knows what person may have been picking his nose while reading it last?) Furthermore the library rarely has a copy of the book you really want anyway, right?  Sure, if you are looking for  The Muncie Indiana Junior League Cookbook of 1954, you are likely to find one – or more than one. Maybe an old broken spine volume of Funk and Wagnall’s Desk Encyclopedia.  But if you are looking for  Freedom by Jonathan Franzen,  get  in line. You’re number 205 on the waiting list. And when you lose the book,  or maybe your kid cuts it up and makes paper airplanes out of it,  or when you just  bring it back late (which you almost always do), ka-ching!

The new e-book checkout program gets around all that. You do it all  from your home or maybe from the beach in Hawaii with your slick new  iPad2 with 3G .  Hit the button. Read the book. And  if you forget about it, the book automatically gets checked back in after 14 days. No muss, no fuss. No lost books.  No late fees.

 I went to the e-book check out site for the Oakland Library.  It wasn’t perfect. It is, after all, still a library. There were some of the usual library annoyances. The selection wasn’t great and half the titles available were in Chinese. And the books I really wanted were all on hold. But the list is growing, and it’s going to be pretty nifty.

Publishers have been concerned about this and with good reason. These  new library e-book lending  programs, which are all managed by a wholesaler called “Overdrive“,  are so easy that it really is the same experience  as buying one from a bookseller.  It’s just like going to Amazon.com – except no charge.

This week, HarperCollins decided to put the brakes on this. They implemented a new policy where instead of just selling the library  an e-book like they do to bookstores, they will only sell libraries a license to download the book 26 times. That is the estimated number of times that an ink-on-paper  book would be checked out in a year. After that, the library would have to buy another copy. Harper would also impose rules that the libraries could only provide this service to members located in the communities they serve.

The librarians are pissed. They and their knuckle dragging goons are already planning  to punish HarperCollins. They’ve even launched a boycott.  Check out the website. Josh Marwell, Harper’s president for sales pointed out that with the millions of e-reading devices expected to be purchased by consumers in the coming year, HarperCollins decided that the terms of sale of e-books to libraries “if left unchanged, would undermine the emerging e-book ecosystem, hurt the growing e-book channel, place additional pressure on physical bookstores, and in the end lead to a decrease in book sales and royalties paid to authors.”

Look, I don’t want to say anything bad about libraries. Just like I don’t want to say anything bad about puppy shelters.  But dammit!  I’m tired of all these people who think that authors shouldn’t get paid for their work. “Ask the Agent” has previously written about the noxious idea that “information wants to be free.” It is a view espoused in books by Internet gurus who get paid quite well for promoting this idea.

The United Kingdom has a curious notion that authors should – well — get paid. In 1979 parliament passed the Public Lending Rights Act   that mandated that authors receive a royalty every time their book is checked out of a public library.  The royalty  amount is 12 cents per check out with a yearly maximum of  about $10,000 US. Other countries that offer some form of compensation to writers for library check outs are: Germany, Netherlands, Israel, Canada, Australia, and Denmark. Civilized societies who honor intellectual labor. And what countries do not pay royalties for library check outs? Libya, Yemen, North Korea, and The United States of America.

Librarians, listen up! It is written. “He who troubleth his own house shall inherit the wind.”

Enhanced E-books

Just when you thought you were beginning to understand what an e-book was, along comes “enhanced e-books.” These are e-book editions that are being “enriched” with multimedia content. These kinds of books (or whatever they are) were unavailable as long as there were only e-book reading devices like the Kindle that handled text only files. But now that we have the iPad and other multimedia tablet knockoffs on the way, the door is wide open for all sorts of “content enrichments.”

Publication of enhanced editions seems to have begun with  the release of an enhanced version of Ken Follett’s Pillars of the Earth   on July 20 of this year.  It   coincided with the television mini-series and includes content from that series. It has material about the characters in the show, an author interview, music from the 12^th century, and behind the scenes material. The edition is available at the iPad store.

Not to be outdone,  on July 29 Simon and Schuster issued  an enhanced edition of  Rick Perlstein’s  Nixonland. Embedded in the text are news clips of the Nixon-Kennedy Debates, the death of Martin Luther King, and of course, all things Watergate.

Every major publisher seems to have joined the bandwagon and are making daily announcements of  enhanced e-book editions.

It’s pretty hard to predict how this will play out by next month,  let alone  next year. But we can expect to see such enhancements as: cooking demonstrations in cookbooks, author interviews in reading book editions, film clips in history books (like Nixonland) and all sorts of ways of exploiting media spin-offs. I wonder whether psychological self-help books will have clips of the psychotherapist-author sitting at his leather chair and thoughtfully rubbing his chin while staring out at the reader   and saying: ” Hmm. I see.”

The creative possibilities are infinite. Ask the Agent will let the reader decide whether this opens up a brave new world of literary enrichment or whether we will descend into a McCluhan-esque inferno.  I’m a little concerned that I won’t be able to sit down and read the newest translation of  Cervantes’ immortal Don Quixote, without  having to listen to  Andy Williams singing The Impossible Dream  in the backround.

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.

Hitler Rants on Book Publishing

We are beginning a series of thoughts on book publishing by prominent thinkers. Beginning with Herr Hitler