The Anti-Trust Suit Settlement—A Layman’s Opinion

Let me state from the outset, if the title is not enough of a warning, that I am not a lawyer. My opinion on the settlement, if nuanced at all, is not informed by the law. I’m reacting to what I read via news stories and in commentaries by folks who know more law than I do. In other words, you’re getting exactly what you’re paying for here.

That said, the settlement of the anti-trust, price-fixing lawsuit brought by the Department of Justice against Apple and a number of publishers is fascinating for what it does and does not do. Apple, McMillan and Penguin are fighting the suit, Hachette, HarperCollins and Simon & Shuster have settled and Random House was never charged. The suit was brought because, it is alleged, that the “Agency model” was a conspiracy by which publishers agreed to raise prices of ebooks paid by consumers.

Whether or not the suit has merit, and there is some doubt that the government will be able to make it stick, it’s the settlement that concerns me. The Passive Voice blog has been all over this situation, and I’ve linked back to the cogent documents so you can study along. The settlement, agreed to by Hachette, HarperCollins and Simon & Shuster, contains the following provisions:

1) For a period of two years,
2) Publishers will not be able to set a restricted retail price for their product.
3) Retailers will be able to set their own price for an ebook, but they cannot discount the book below their own discount. (In short, the retailer cannot sell ebooks at a loss.)
4) Publishers cannot “retaliate” against retailers during this time.
5) The “favored nation” status that prevented a publisher from selling at a lower price to one retailer over another is gone.
6) The Agency Pricing discount of 30% off the top that retailers pay publishers can remain in place.
7) There are compliance procedures being set in place (that I don’t bother discussing) so the government can make sure that the publishers are complying with the agreement.

Okay, so what does that all mean?

First off, the suit was brought because prices were too high to the consumers. Notice any relief/rebates to consumers? Me, neither. Your tax dollars aren’t getting you any return on your investment there.

Second, let’s apply numbers to the above. Amazon has tried, for ages, to keep ebook prices at $9.99, to make ebooks attractive. Under this settlement, then, a publisher releases a book at a $13 price point, Amazon discounts it to $10, breaking even on the deal, at the 70/30 Agency Model split level. Amazon could then say to publishers, any book priced over $13, we’ll only buy at a 50% discount. So, a $15 book drops to $10. In this latter case, the publisher makes $7.50 and Amazon clears $2.50. The $15 price point is more profitable for Amazon than the $13 price point, and it appears they’re giving consumers a greater discount. So, the impetus for Amazon to want books priced below $15 is exactly what? Zero. And for the publishers, their max profit potential is at $20 or above, so why would they price things lower?

So, the settlement doesn’t guarantee lower prices for readers. In fact, by doing the same math above that I’ve done, or by just reading this blog post, publishers can independently decide what the best price points are when selling ebooks. This isn’t changing business practices, this is just forcing folks to modify spreadsheets.

Third, since when haven’t publishers colluded on price points? Publishers aren’t stupid. They look at what the prices are on various books that their competitors put out. If someone jacks the price of paperbacks from $4.99 to $5.99 and sales don’t take a hit, everyone will do that. When I was in the gaming industry and we went to price a product, we looked at the competition, decided what the market would bear, and that’s what we used as our pricing guideline.

I know, you’re thinking that’s small-time stuff, but it happens with big publishing, too. In fact, allow me a digression. This is a true story.

I was visiting my parents in the fall of 1997 when I got a call from the Roc editor. Roc, who published the BattleTech novels via a license from FASA, was going to be reprinting the Warrior trilogy the following year. Those were my first novels. I remembered them fondly and well.

The editor reported that they had a problem. While the second book in the series was short enough that they could print it to the spine/case size they wanted (they wanted to make sure they could get 24 or 48 books to the case), the first and the third books in the set were “too long.” Therefore, they wanted to edit these books.

I calmly replied that if the second book was short enough, so was the first, since it was shorter by about 5,000 words. The editor said they’d adjust the type size or leading and that would take care of that. The third book still had to be cut. I noted that I don’t write to be cut, and further pointed out that if they cut a single word, the missing passages would be posted to the Internet and Roc would take heat for the cuts. The editor allowed as how this was true, but those fans “should get a life.” I pointed out that “those fans” were the folks who paid for our lifestyles.

Then I came up with a radical plan. I said, “Hey, those books will be the ’10th Anniversary Editions.’ Just slap a starburst on the cover stating that, and charge a buck more for the books.” I’d seen the prices being offered for original copies of the books on collector sites, so I knew folks would be happy to pay $6.99 for the reprints.

Lo and behold, that is exactly what Roc did. No “rising price of paper” nonsense, it was just a move to cover getting fewer books into a case—at the suggestion of an author. [Note: yes, that increased my return on the books, but since royalties seldom got paid on those books—back then or even now—my benefit has been largely illusory.]

And let us not forget, way back in 2009, that after years of telling readers that book prices were climbing because of the “rising cost of paper,” that publishers came out and said that the reason they couldn’t sell ebooks for less than printed books was because the actual cost of creating a physical book was only 10% of the cover price. How curious that the DOJ didn’t land on folks for that little bit of fiction.

Fourth, out of this settlement there will be a huge commotion noting that Amazon is the only winner, and predicting that Amazon will turn into a rapacious monster, Walmarting suppliers into charging less, while jacking prices to consumers. People will note that this ruling will allow Amazon to solidify its hold on the market, thus smashing what appeared to be a monopoly only to turn around and guarantee one.

I disagree with this assessment, for the following reasons:

1) Amazon, in the past, has reacted very badly when faced with negative backlash from its consumer base. One might recall that the first time Amazon tried to raise a book price over $9.99, the infant Twitter community called for a boycott. News went viral and Amazon backed down. Moves to raise prices or lower discounts to indie authors would engender that same backlash.

2) Lowering discounts to indie authors would allow Apple, Barnes & Noble, Google and Kobo to appeal strongly to indie authors, offering them deals that include promotion. One must remember that the best of the indie authors are those who have built an audience and can carry that audience with them. Amazon would, in essence, be providing their competitors with the means to establish “exclusive content.” While it might not hurt Amazon’s bottom line for a long time, it would establish its competitors as the new darlings of indie publishing, and brand Amazon as being greedy. It’s literally more trouble than it’s worth for Amazon.

3) Hello Piracy! Piracy occurs when the perceived value of an item is much less than its actual cost. Were Amazon to jack prices, pirates and rival retailing sites would spring up all over the place. Authors would band together to create coop sites to sell directly. Webstore sites would establish dedicated and low cost author packages, and set up websites where they aggregate the author stores so they can promote books. When you think about it, the very concept of anyone having a monopoly on virtual products in the information age is just silly.

4) Though I do not think publishers will use the two years of the settlement wisely, they really should be thinking about establishing their own stores. I mean, if an author can do it, so can Random House. Moreover, publishers should secure deals with authors that allow authors to sell books from their own websites, returning to the publisher the same amount of money any retailer would send them. I’d happily retail books at their full MSRP off my website and send my publisher checks (just to have them send me a smaller slice back six months later); since the 30% I’d make now is a heck of a lot more than the eventual cut I’ll get through my royalties.

All in all I think the settlement, and any likely outcome of the lawsuit, is a badly done show of shadow puppets. The suit started for relief to the consumer, but nothing in the settlement provides any relief to the consumer. (Sure, there may be class action suits that follow.) As nearly as I can see, the only folks who benefit are the new employees that get a two year stint making sure the publishers comply with the terms of the settlement. Otherwise, nothing has changed.

And if you want to check me on that latter assumption, let me ask you this: Since news of the settlement was released, have you noticed a single site/retailer/publisher announcing price rollbacks, or even predicting same? Neither have I.*

Nothing in the settlement prevents publishers or retailers from charging consumers more. How they arrive at their prices has changed—for the next 24 months, that is—but we’ll still end up paying. That’s how the game is played.

* An article in the New York Times indicates that Amazon will be cutting prices, but as of noon on 12 April 2012, I’ve not found a press release or comment on the Amazon site that provides more information on this move.

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13 Responses to “The Anti-Trust Suit Settlement—A Layman’s Opinion”

  1. Mike,

    Excellent post, as usual. One thing I’d point is there is some money going back to consumers, as AP reports: “Connecticut and Texas, two of the 15 states filing a separate lawsuit, reached agreements with Hachette and HarperCollins to provide $52 million in restitution to consumers, using a formula based on the number of states participating and the number of e-books sold in each state. Other states in the case may sign onto the agreement, and other companies might be persuaded to join.”

    So states may look to get some money back to consumers, though I don’t plan on waiting by the mailbox.

    Overall, though, if publishers are worried about Amazon’s competition, they can certainly start their own stores. Or try offering authors better terms, or maybe getting books to market in weeks or days instead of months or years, or paying royalties monthly. Naw, they’re going to fight having to change they way they do business as long as they can, and meet music publishers in the bar afterwards to commiserate over how digital made the whole comfy business go to hell.

    Meanwhile, smart authors will figure out how to make money regardless of the maneuverings of the big companies.

  2. Andrew Timson 12. Apr, 2012 at 1:44 pm

    I haven’t noticed any rollbacks yet, but while it would be nice if they were immediate I wasn’t expecting it. Nothing is going to happen regarding discounts until the publishers & retailers can sign new contacts allowing the discounting.

    It would be interesting to see more publishers have their own stores. Random House used to have one, and Simon & Schuster still does; back in the pre-agency days they were often the place to find the best discounts. Most readers probably won’t go there—can’t buy Kindle books, more work to buy/sideload ePubs than to buy from B&N—but I’d give them my business if they had the best prices (which they could thanks to the now-dead most-favored-nations clauses).

  3. Piracy is already rife in ebooks. It’s just that a “napster for ebooks” hasn’t turned up yet so that “mom and pop” can do it – though Google comes pretty close in being able to find any ebook title with less than a minute’s effort. As for the “piracy price point” – sites like the anti-copyright Slashdot have a substantial number of people already using a benchmark of “if it is over 99cents, I will pirate it”.

    Can’t beat the price of free and Cory Doctorow has told us that noone gets hurt – so why not?

  4. The settlement has to be approved by the court before any rollbacks happen.

    Also, I don’t understand how a settlement that doesn’t include any retailers is going to prohibit retailers from selling at a loss. Does the settlement agreement provide for some sort of redress to the publishers should a retailer do such a thing?

  5. Good article. When I first heard about this the first thing I looked for was a class action lawsuit (considering I’m also a reader who had to pay the $14.99 price point if I wanted to read G.R.R. Martin’s aDwD on my Kindle, among other books)

    I see nothing of the sort on the horizon. No mention of it. Or perhaps I’ve missed the info somewhere?

    In any case, hopefully I can build a reader base while all this craziness is happening so that if things go south for indie authors in the future I can make a living.

  6. Baen sells direct. It’s the only way I know to get their books electronically and they sell new “hardbacks” for $6 right away. I’ve bought several of David Weber’s books that way. It’s not as convenient as buying from Amazon, but I’ll gladly do the extra step or two to get the books for $6!

  7. Francesco Nicoletti 15. Apr, 2012 at 8:17 am

    Is not the allegation that the conspiracy is holding the cost of e-books above the price point where they would otherwise settle in a free market, in order to slow their adoption ? The need for the conspiracy is to stop all the major publishers experimenting with e-book prices and thereby maximising e-book sales. Now that the conspiracy has uravelled, and paper books in a long slow slide, do you not think at least one of the publishers is going to start pricing e-books to maximise income ? If one does they all will. As you say all the prices will be again in lock step, but now it will be market driven. My guess given increased supply of books and lower barrier to entery into the market that is where the price drops will happen.

  8. Honestly, this settlement looks like a worse mess for publishers than agency was in the first place – and agency pricing was VERY bad for publishers.

    Agency pricing was entered into to keep ebook prices high, to better protect print sales. That failed, because Amazon promoted indie books well enough (at the low prices they wanted) to ensure they had a good stock of lower priced titles. And if the top 100 lists for various genres are any indication, self published books now have a majority share of ebooks sold on Amazon.

    That might not have happened, or at least not happened as fast, had publishers not priced themselves out of the market.

    This settlement…? Well. Amazon has never discounted *all* titles to loss levels, even pre-agency. They set prices on some select, high profile ebooks to loss levels in order to draw attention and gain customer share. However they never priced all their ebooks at a loss, and according to Amazon they always made a profit on ebooks in aggregate.

    That leaves publishers in a bind. If they price a book to $15, assuming Amazon will discount the allowed 30% to $10.50, then if Amazon leaves that title alone they’re left with an ebook priced higher than they want. If they price the book at $11.99 assuming it will not be discounted, and Amazon drops it to $8.99, then they’re stuck with a book selling for less than they wanted.

    But the *control* is now out of their hands. They’re going to be forced to price how they see fit, and let retailers discount the titles they want to discount. After two years of complete control, it’s got to be a shock to the system.

    Lastly: as PG has noted on Passive Voice, DOJ interventions rarely leave a company unscathed. The longterm effects of the DOJ keeping an eye on the publishers involved are unclear, but will likely hamper their efforts in the future. Tech companies investigated by the DOJ (and like it or not, publishers are tech companies today) don’t tend to do very well. Whether settling or not, the suit will likely have lasting negative impact on innovation and expansion into new markets – areas that the major book publishers were already not doing particularly well in.

  9. Mike,
    Good post :)

    One of your points I would like to comment on is, “…since when haven’t publishers colluded on price points? Publishers aren’t stupid. They look at what the prices are on various books that their competitors put out.”

    I agree that it’s perfectly reasonable for businesses to examine each others’ price point as a part of competition, but if I understandstand the DOJ correctly, part of their smackdown is about publishers examining each others prices and also “acting in concert” to keep them at a fixed level. That’s an action most of us would probably agree should not be done by business in general. There’s a similar case in California right now alleging tech companies including Apple and Google had agreements not to poach each others’ employees, stifling employment competition. I’m not certain the DOJ suit will lower ebook prices, but I think the larger intent is the slap a few corporate wrists to discourage collusion or similar agreements.

    My two cents :)

    Aron

  10. Baen still seems to be the best of the larger publishers at handling ebooks on their own. It may take 5 minutes more work than buying from BN directly from my NC, but they are cheaper and after a certain amount of time has passed, a truely astonishing amount of work has been released to their free library.

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