The Spindle's End

In December of 2011 the United States Department of Justice launched an investigation into Apple and the big six publishers (Hachette, HarperCollins, McMillan, Penguin Group, Random House, and Simon & Shuster) for suspicion of non-compliance with anti-trust laws in using the agency model. These laws are meant to encourage competition, ensure ethical business practices, protect consumers, and to prevent any one company from gaining a monopoly. A monopoly is defined as when a sole entity has the complete control of a commodity in a marketplace. By definition, every media company (whether for books, movies, or music) has a monopoly over it's content because they own the copyright on the material. You can only buy that content from them (or from the companies a media company retails through), and the media company controls nearly all aspects of that product's creation. But the DOJ was worried that the big six had taken this one step further and were colluding with each other to fix prices at a level that was beneficial for them, but not to the consumer. While the monopoly end of media business is the nature of the beast, price fixing is not. The DOJ has also expressed concern over Apple's 'fair nation clause': a publisher who sells its content to Apple may not sell that same content to another company for less than what it was sold to Apple for.

As part of it's investigation, the DOJ contacted each of the companies named in the investigation, as well as several smaller companies who also follow the agency model but who are not named as being in collusion to fix prices. Smashwords, one of the largest and most well respected self publishing platforms, posted on their blog the information they provided to the DOJ during the investigation, which took place in March of 2012. This is a listing of their sales with Apple's iBookstore from October of 2010 until March of 2012. Remember, under the 'fair nation clause' of their Apple contract, Smashwords and Smashword's authors cannot price their content lower than their Apple iBookstore price at another retailer. Overall, they showed that prices had gradually dropped during the period of agency pricing by a not insignificant amount.

Also in March of 2012, the DOJ offered Apple and several large publishers a settlement agreement. This agreement does not mean that the DOJ found criminal wrongdoing on the part of those it was offered to, it only means that if the parties accept the settlement the DOJ agrees not to take them to court. Because of the large legal expenses involved in going to court, it is sometimes advantageous to settle. The only part of the settlement that I have found that's been made public yet is that it would forbid those publishers who signed it from selling through Apple. Should all of the parties named in this settlement have taken the agreement, that would have effectively been the end of the iBookstore, leaving the field of e-books primarily to Amazon and to Barnes & Noble. However, as we saw in 2009 and 2010, this is a competition that Barnes & Noble cannot win. Over time, the e-book market would shrink to just Amazon, perhaps at great detriment to the publishers. In effect, people like the chief executive of Barnes & Noble are arguing that the breaking of the agency model will result in less competition, not more.

As of today, April 12, 2012, the DOJ has launched a civil lawsuit against Apple, Simon & Shuster, HarperCollins, Hachette, McMillan, and Penguin Group. Random House accepted the DOJ's settlement, thereby avoiding the extensive legal costs of this lawsuit. HarperCollins and Hachette are listed in court documents as also having accepted the settlement, so I am unclear as to why they are listed in the lawsuit.

John Sargent, the CEO of McMillan both during the Amazon face-off and through today's struggle with the DOJ, issued a statement regarding the lawsuit. In it he defends his and his company's innocence in price colluding, as well as derides the DOJ's settlement as having large long term negative effects.

So that's the story of why you pay the price you pay for your e-books, right up to today. I'll keep watch over the next few weeks and months, and be back with Part IV once the dust has settled.

Even though I'm still puttering around writing my 'first' book (or at least the first one I have real hopes of getting published, however grandiose those hopes may be), I still like to keep an eye on trends in self-publishing and the growing e-book market. Every once in a while, I'm reminded that not all of my acquaintance (both online and offline) are doing the same, so I thought I'd talk a little about the realities of e-books and the shift to digital content. For the purposes of this entry, I'm only going to look at traditionally published material. Self-publishing is an entirely different kettle of fish, and follows a few different rules. I'm also going to do this in three parts. Historian that I am, these parts will be in chronological order. Hopefully you will find this illuminating and thought provoking.

While electronic books have been around in various formats for decades (yes, decades) it wasn't until 2009 that they really began to represent a noticeable market share in the publishing industry. In part, this was thanks to companies like Amazon and Sony aggressively marketing dedicated e-book readers. Since then, more devices have entered the marketplace and e-book sales have grown at an exceptional rate. While print sales have also grown during this period, e-book sales are a growing percentage of total sales. This overnight jump in sales, as well as a shift in American culture, has sent a few shock waves through the publishing world over the past few years. These shock waves will affect how you buy your books (whether print or digital), and what price you pay for them, for the rest of your life.

First, how much should an e-book cost? This article in the NY Times from 2010 does a good job outlining the costs of publishing. In essence, digital publishing only saves the publisher about 30% of the price of traditional printing, which is only the actual cost of physically printing the book. Cover art, editing, formatting, and overhead (I hear offices have electricity bills to be paid), are all still in effect for e-books at the same prices they are for print books. The cheaper a traditionally published e-book is sold for, the less the publisher makes in profit. The less they make in profit, the fewer advances they can afford to pay for new work, and so they publish less in the future.

Books in the United States were sold under a wholesale model until 2010. What this meant is that the retailer paid a wholesale price (50% of what the publisher decided was it's retail list price), and then was free to sell that book for whatever price it wanted. Large retailers like Barnes and Noble could offer their special membership prices, or massively discount bestsellers, because they could sell these items in massive volumes. But these price cuts all came out of Barnes and Noble's profits, not the publishers'. In 2009, in order to push Kindle sales, Amazon took this a step further, and started listing e-book prices below the wholesale price. This is called loss-leading. Amazon was taking a loss on smaller products in order to encourage sales of a higher-profit item, the Kindle. Amazon felt, and was likely correct, that the key to triggering an e-book revolution was price. With the Kindle initially introduced at nearly $300, consumer's were not likely to buy a $26 book to read on it.

This created concern in the publishing world. While it was Amazon taking the loss on those $9.99 bestselling e-books, it was a loss that even Amazon could not maintain indefinitely. Publishers were worried that eventually they would be the ones called upon to take the long term losses associated with a $9.99 e-book price, which they were not prepared to do. Publishers were also worried that if given a choice between a $9.99 e-book and a hardback print edition at $26, they'd take the e-book. This becomes even more problematic, because those hardbacks are priced with a high profit margin. Loosing that profit margin means that the payback on publishing a book takes more sales, and more time. It could mean less profit in total. Publishers were faced with diminishing profits on all fronts should Amazon be allowed to set prices that were good only for Amazon, and not for the makers of their products. This is a similar scenario to what's happened to several companies who produce product for Walmart.

In 2010, Apple arrived on the scene with the iPad and the iBookstore. In Part II of this series, I'll talk about just why that's so important.