Department of Justice Sues Major Publishers

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Earlier this week, the United States Department of Justice filed suit against publishing houses Hachette SA, HarperCollins, Macmillan, Penguin, and Simon & Schuster for alleged price-fixing of ebooks. Hachette SA, HarperCollins, and Simon & Schuster settled immediately. That left Macmillan and Penguin to fight the case in court. It should come as no surprise that this case has my utmost attention, but before you pass judgment on the “evil” book publishers trying to price-gauge the customer I invite you to consider the points below.

At the heart of the matter, regardless of what Eric Holder claims it is, is who has the right to set book prices. In the past, before ebooks came along, the preferred mode of sales was the “wholesale model”. In the wholesale model, Barnes and Noble agrees to purchase X amount of books at Y cost from Z publisher. Publisher Z recommends to Barnes & Noble, and all other physical retailers for that matter, price A. Based on market conditions, Barnes & Noble can stick with Price A or adjust, always lower, to Price B. When they adjust to Price B they often do so to be competitive because they want you to buy Twilight 6 from them and not Walmart. Or, as is more often the case, Twilight 6 is selling horribly and they’ve tons of it to wash their hands of. Either way, and please take note of this, they have a physical product consuming warehouse and retail space hindering other business. By and large the wholesale model has worked for retailers—until recently.

Let me begin this next section by asking you three relatively simple questions

  • When was the last time you shopped at Borders Bookstores?
  • When was the last time you shopped at Crown Booksellers?
  • When was the last time you shopped at Barnes & Noble?

Obviously I’m driving home a point, and that point is intended to cause you to realize that there’s only one physical retail bookseller in the United States these days and that’s B&N. Luckily for us consumers, they’re taking the gentle-giant approach rather than outright raising their prices. Since they’re practically the only bookseller worth shopping at, the end of their competitors means good things for them. Increased traffic means increased sales and increased Nook visibility. On that topic: Barnes & Noble continues to exist today because they saw the writing on the wall. They rolled out their Nook ereader and gave the ebook a kiss on both cheeks rather than meet their demise by becoming obsolete. In fact, Gizmodo has a fantastic new piece on the bookseller’s upcoming backlit ereader, and you can’t help but feel that these people take their ebooks seriously.

I’m not yet knocking on Barnes & Noble. They have a strangle-hold on physical book sales in the United States. They have a monopoly, but since they’re benevolent, and since they have as much to gain from ereaders as everyone else, they’re treading exceptionally carefully. Only the future will tell what their master plan is, but until then, I return to the discussion of sales models for books.

Wholesale worked well. In fact, it’s the golden standard by which retail operates. But as far as books go…then along came the ebook. The ebook is a fundamentally different book because it is, simultaneously, a book and not a book. An ebook does not sit in a warehouse. An ebook does not take any effort to manufacture, ship, and deliver. So, as far as the digital version of a physical book goes, there is no material cost associated with it beyond the one person it takes to convert a Word file into an ePub file (the digital file format for ebooks). This is where wholesale begins to fall apart.

When you’re selling an ebook, you’re selling a digital file. It cost you, as the retailer, absolutely nothing to distribute or maintain. It is pure profit, unlike its physical brother sitting in your physical store. It makes more sense for you to sell that file at a crazy low price than it does to sell wholesale physical copies of the book. If you were the bookseller, you would be inclined to sell more ebooks for less and reduce your reliance on the wholesale books from the publisher. Your profits go up. The publisher, and the author, well, their profits go down.

And that is exactly what happened with a little company called Amazon. Maybe you’ve heard of them? Amazon has no physical retail stores. They have no real incentive to sell physical books over their own digital Kindle ebooks, and they vigorously took that route. They’re huge fans of their $9.99 price point for Kindle books and for years they held bleeding publishers hostage. It looks good to the consumer, sure, but it’s bad for the publishers and their authors. Amazon built and maintained their ebook monopoly from 2007 until 2010 through these practices. Senior Editor Dan Moren, of Computerworld, comments in his article:

And while a $9.99 ebook price may be good for consumers looking to buy ebooks, it’s the idea of this becoming a race to make the cheapest ebook that worries me. After all, Amazon operates on the principle of selling its ebooks at a loss to bolster support for its Kindle platform. Which means that competitors have to drop their prices lower in order to keep up.
The Department of Justice alleges, in their filing, that the major publishers colluded to shift their pricing tactics in 2010 coinciding with the release of a major new tablet device. It alleges that these publishing CEOs, via email and fancy New York City dinner meetings, agreed to transition to a new pricing scheme: the agency model. The BBC, in their article, best sums up the agency model as:

Under this scheme, publishers set the price of a book and the agent selling it gets a 30% cut. The agency model was adopted by publishers largely at the prompting of the late Steve Jobs.

The shift to agency pricing was also seen as a protective measure to head off attempts by Amazon to corner the market in e-books. It had been aggressively cutting prices to win customers over to its Kindle e-book reader.

So the publisher keeps 70% of the asking price which is, on the agency model, $12.99 to $14.99. It’s a model based off the current music distribution standard, where seller services keep 30% while the content creator keeps the other 70%.  The Department of Justice is sending several mixed messages here. If the agency model is okay for music, shouldn’t it be okay for books? Not exactly. Apparently, because the industry recognized the threat posed by Amazon and moved to counter it together as a, you know, industry, the agency model is illegal. It reeks of collusion because it threatens Amazon’s monopoly, but don’t mind that monopoly so long as it saves the consumer money.

In perhaps the most damning commentary of the whole affair, John Sargent, the CEO of Macmillan, states in his open letter where he vows to fight the charges in court:

When Macmillan changed to the agency model we did so knowing we would make less money on our e book business. We made the change to support an open and competitive market for the future, and it worked. We still believe in that future and we still believe the agency model is the only way to get there.

But why switch to the agency model, if it threatened them with continued losses? CNN Money comes in swinging:

Apple and Amazon both strike deals with publishers that forbid them from offering other retailers’ deeper discounts. Those agreements, dubbed “most-favored nation” clauses, aren’t straight-out illegal under antitrust laws — but they’re also not always legal.

And again, it’s the booksellers driving down profits by mandating that the prices stay the same across the board. The agency model enables publishers to restore value to their product, digital and physical, by setting a price that is fair and flexible. Is that price always going to be $9.99? No. But when a writer crafts something as marvelous as Harry Potter and the Deathly Hallows, said writer has a right to go to the publisher and say “This book should retail for $25 dollars. I worked to create this. Writing is my living.”

I do not pretend to be an expert in antitrust law. I do not profess to be an expert of any kind. I profess to being as well-informed in this matter as a citizen of the United States of America can be, albeit with a heavy bias.

I believe that the poor handling of this matter by the Department of Justice only threatens the ability of writers and publishers to make a living off of books as society continues to transition from physical books to digital books. It threatens to reignite the “race to the cheapest” that Amazon started back in 2007. Businessweek really nails the core issue of the debate in their article:

At the heart of the e-book pricing debate is the industry’s ongoing concerns about Amazon. Publishers see the “agency model” as their best, short-term hope against preventing the online retailer from dominating the e-book market and driving down the price of books to a level unsustainable for publishers and booksellers.

Sustainability.

At $9.99, books of all kinds will become unsustainable. If we allow the sellers to continue to dictate to the publishers what the prices will be on their devices, and if our government then sues the publishers for refusing to cede price controls to the seller, then books loose their value. Literature loses value. Instead of suing the pants off half the publishing industry, the government should be smart enough to see the obvious need for leadership. For regulation.

Instead, with Eric Holder’s newest nonsensical lawsuit, the government is about to plunge the literary world into the familiar and chaotic wilds where Amazon sets the price and you sell the ebook at that price or don’t sell it at all. Here’s a shocking thought for anyone who has ever read a book: Not all books are created equal. Masterworks of contemporary authors should not be slotted into systems of tiered values. But our society is losing sight of that in its demands to be given the most at the lowest. Our government is enforcing Orwellian views of equality and quality upon a medium that is inherently subjective.

I am not religious in the least yet I love books. I love reading them, I love writing them. As a content creator, I expect to be allowed to judge the value of, and assign a corresponding price to, my work. Watching this drama unfold, watching the publishers flounder against technology behemoths and battle a clueless Department of Justice makes me think that if my personal Eden could be burning, this is what it would look like. What’s happening here is bad for publishers. It’s even worse for authors.

Before I sign off, I want to quote from Macmillan CEO John Sargent’s open letter again:

I hope you will agree with our stance, and with Scott Turow, the president of the Author’s Guild, who stated, “The irony of this bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition. This would be tragic for all of us who value books and the culture they support”
Lead by doing, Mr. Holder, not by suing.
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