The Spindle's End

My E-book Pricing Examined: Part III was posted within two hours of the lawsuit filed by the United States Department of Justice against Apple and five of the six major publishers. I have since had the time to actually read the legalese of the suit itself, so I thought I'd offer this addendum and some corrections. (Honestly, what can I expect when the big news media can't get it right the first time around?)

The key to this lawsuit is that the DOJ is accusing these six companies of violating Section 1 of the Sherman Anti-Trust Act. This piece of legislation was passed in 1890, and is primarily about ensuring healthy competition between companies operating within the United States. Section 1 reads:

Every contract, combination in the form of trust or otherwise, or conspiracy, or restraint of trade or commerce among the several States, or with foreign nations, is declared illegal. Every person who shall make any contract or engage of any combination or conspiracy theory hereby declared illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by a fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, at the discretion of the court.

For those interested in doing their own digging, this is US Code Title 15, Chapter One.

In their suit, the DOJ is arguing that the agency model unlawfully restricts the trade of e-books. Further, that the defendants in the case conspired together to deliberately restrict the trade of e-books. The bulk of the document is an interesting list of a chronological order of events which is meant to establish that the CEOs of the corporations in question colluded on price fixing. Keep in mind, the CEOs in question are not themselves listed as defendants and are not being charged with anything. Whoever wrote the document does an interesting game of naming a few CEOs in certain places, but deliberately does not name CEOs or companies in other places. Not being of a legal background, I'm unsure as to the legal reasoning behind this, but as a reader this certainly made me feel like certain companies and CEOs were being targeted more than others.

Also, even though Apple, Hatchette, HarperCollins, McMillan, Penguin, and Simon & Shuster are all listed as defendants, Hatchette, HarperCollins, and Simon & Shuster have all signed a settlement with the DOJ. However, the settlement must be approved by the US District Court for the Southern District of New York before it goes into affect. Random House did not enter into an agency agreement with Apple and other retailers at the same time as the other five, and has therefore avoided any and all conspiracy charges. I should also point out that there are in fact seven defendants listed: Apple, the five publishers listed, as well as Penguin Group, the parent company of Penguin Group USA. I do not know why the London based company is listed along with its New York based subsidiary. All of the five publishers are parts of larger companies, but the multi-national conglomerations are not listed for the other four publishers.

This one is kind of hard for me. I can see where the DOJ thinks it has a case. However, I can see the flip side. In making a move to control prices, publishers actually encouraged having more e-book retailers in the marketplace. While Amazon is still the major e-book player, Barnes and Noble, Apple, and Kobo all have healthy positions. I am unsure whether this would be the case had Amazon continued with loss leading most (but not all) of their bestselling e-book titles at $9.99. Competition is now more about user experience than about price, but that's still a very valid method of competition. It's also become and increasingly important method of competition in the digital age. I've also notice a fairly unilateral rise in print book prices over the last year, though no one has complained about that in flame wars across the internet.

I don't know. Maybe I'm still just stuck on the "if you can't afford it, don't buy it" financial ideals I ascribe to. (Before I spark a flame war on myself, this DOES NOT include things necessary for basic survival. This is only in reference to life's little and not-so-little luxuries, some of which are books.) As well, I'm a library advocate. I couldn't afford to feed my book addiction right now if I bought everything I read at retail value. I'd read myself out of house and home if I tried. So, I borrow my books from the library. If indeed e-book prices were too high, consumers would not be purchasing them, and publishers would be forced to adjust the price to a point where they saw healthy sales or they would go out of business. To me, the fact that e-book sales are growing, as are book sales overall, means that e-book prices are not out of line for the market in general. But, just as my legal understanding of this lawsuit may be completely wrong, my understanding of basic economics may be as well. I also worry about what price the authors, editors, and other staff at the big publishers may pay if their product is deeply devalued. I want them to be able to eat, so they can go on keeping me addicted to all their stories.

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.

In Part I of this article, I talked about the cost of producing e-books as well as the initial domination of the market by Amazon.

To continue our story, in 2010 Apple released the iPad. Much of it's initial marketing included use as an e-reader, so it's launch also saw the launch of the iBookstore. Because Apple had never sold books before, both Apple and publishers were starting with a clean slate. Apple decided that it wanted to follow a marketing model called agency, and not wholesale sell-through. In an agency model, the publisher would decide the list price on the iBookstore, and Apple would take a 30% commission on each sale. After the struggles publishers were having with Amazon, they essentially jumped for joy, said yes please, and Apple became their knight in shining digital armor.

I'll stop here and outline some other players in our tale. The traditional publishers I keep referencing are a set of six conglomerations, who when combined constitute most of the books sold in the United States. Those six are: Hachette, HarperCollins, Penguin Group, Random House, Simon & Shuster, and McMillan. In February 2010 McMillan takes one for the team, and tells Amazon that it has a choice. Either it can enter into the same agency agreement that McMillan just signed with Apple, or it can face a windowing of McMillan e-book titles. This would mean that e-books would become a version of a paperback, and would be available after the hardcover print version of a book had already been on the market a while.

I should also mention that moving to an agency model was not likely to cost Amazon money on the e-books it was selling. Because Amazon was paying McMillan more than $9.99 for the e-books it was selling, Amazon was taking a loss. By raising the price, Amazon instead gained a 30% profit. While Amazon felt that low e-book prices were the key to selling its Kindle, and that the market would not bear prices higher than $9.99, McMillan felt that such low prices would cause a create deal of long term harm to it's ability to publish new books. Perhaps the key piece of the agency model was that Amazon lost the ability to set the prices on the products it was selling. Instead, the prices consumers paid for their books were set by the publishers.

Amazon had a snit fit at this ultimatum, and pulled all McMillan titles, both digital and print, from it's 'shelves.' You could still find these titles from Amazon affiliates in the used bookstores, but not directly from Amazon itself. This is not the first or only time Amazon has pulled books from it's inventory, simply the largest in the book market that I know of. Amazon then posted a snippy note on their site about why a significant portion of it's inventory had disappeared overnight. McMillan stood it's ground, and by the end of the week, Amazon was selling McMillan titles on the agency model at the higher price. Soon, the other five large publishers, as well as a number of smaller publishers, forced Amazon into the agency model with less fanfare. Other retailers like Barnes and Noble followed, again with little fanfare. Prices for new release bestselling e-books rose across the web, to an average of between $13 and $16 in the United States. There was a lot of grumbling from consumers, but the e-revolution continued unchecked. 2011, which was completely under the agency model rather than the traditional wholesale model, was the biggest year yet for e-book sales.

However, the fight over e-book pricing is hardly over. In December of 2011, the Department of Justice of the United States announced that it would be investigating the agency model because they suspected that it broke anti-trust laws.