Wednesday, April 18, 2012

TSoP, Part II: Ebook Pricing and the DOJ Lawsuit

Last week I tackled the issue of DRM and what it means for consumers. In Part II, we'll discuss how ebooks are priced, as well as the implications of various pricing models on the pillars of the publishing industry: authors, publishers and bricks-and-mortar booksellers. At present, they appear to be, in turn: "uneven," "unclear" and "not good." And that, kids, is with a thing called "agency pricing," which publishers favor.

Unfortunately for publishers, mega-retailer Amazon and the Department of Justice disagree. In fact, the DOJ has brought an antitrust suit against six publishers and Apple, described as the mastermind of an "anti-competitive price-fixing scheme" to keep ebook prices artificially high.  Three publishers have already settled, leaving Apple and the rest exposed.

Before getting into more detail, let's first consider two terms bandied about in the press a lot, and typically without much explanation. First, the "wholesale model." This is how Amazon prefers to buy its ebooks: as with most goods for sale, publishers suggest a retail price to retailers, and sell the actual product at a set discount. The retailer, though, reserves the right to adjust the actual selling price according to market conditions. With the wholesale model, a retailer like Amazon or B&N can sell a book they bought for $5 for $1, if they feel it will help them sell Kindles/Nooks or build brand loyalty among customers.

The second is the "agency model," allegedly brought into the ebooks market by Steve Jobs for iBooks. With the "agency model," the publisher sets the final price, and the retailer gets a set commission. The actual amount of money that goes to the publisher is roughly the same as with the wholesale model; the difference is who gets to set the final price.

Open Questions

So why would publishers prefer the agency model, when they get paid the same thing either way? Why would one retailer prefer the wholesale model, and another prefer the agency model? Why does the DOJ care? What about the people actually writing the books?

1. The first question is an interesting one, given that publishers already use the wholesale model to sell books to bricks-and-mortar retailers--as well as online retailers, like Amazon and B&N, for physical books. But that's a different kind of case: while Amazon heavily discounts its physical books, it seems prepared to take a bigger loss per ebook in order to get people hooked on its proprietary format, Kindle. Plainly put, if you've got a Kindle or Kindle app, and see an ebook version selling for $0.99, are you really going to buy the mass market paperback for $7.99 instead? Diehard paper-lovers might, but an increasing number of people would not.  And if Amazon does it, you know Apple and B&N won't be far behind.  A price war could claim B&N as a casualty.

For publishers, this kind of aggressive ebook pricing is viewed as threatening to their other customers: bricks-and-mortar booksellers . As author Scott Turow notes in a thoughtful essay, rapid growth in ebook sales, in the context of the wholesale model, could create a new bookselling universe in which everyone is even more dependent on Amazon than they already are. Noted science fiction author Charles Stross makes an even more strident version of this argument, suggesting Amazon is aiming for a true monopoly of the ebooks sector. (The market seems to agree: Amazon rival B&N's stock fell almost immediately on news of the DOJ suit.)

The agency model, by contrast, forces all the major ebook retailers to adopt the same--and standardized--pricing model, which appears to appears to allows publishers to keep ebooks from eating too quickly into physical book sales, and protecting smaller sellers from price wars.  I think, from the publisher's point of view, this is definitely the preferable route: with prices stable, you could actually envision more ebook retailers emerging, including a technically improved version of the partnership between Google and independent bookstores.  More customers means more leverage, and better hedging against a bad turn of events.  That becomes difficult to imagine in a price war context.

2. The answer to the second question is more straightforward: back in 2010, Apple had this new device called the iPad, and resident genius Steve Jobs figured, correctly, that the ability to use the device as an e-reader would be one of its biggest and most immediate selling points.  This being Apple, Jobs didn't just want to let Amazon, B&N and others sell their books for his device--he wanted to sell them himself.  But how to eat into Amazon's marketshare and propensity to underprice the competition?  Jobs, one of the craftiest businesspeople of the modern era, decided to harness publishers' discontent with Amazon:
"We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30 percent," Jobs told Isaacson. "And yes, the customer pays a little more, but that's what you want anyway."

Jobs then told Isaacson that the publishers were able to force the agency model on all the other retailers. That's what some say is a smoking gun.
3. This also speaks to the DOJ's interest: Apple, they allege, schemed with publishers to set prices at a standard, rather than let the market dictate prices. This arguably has kept ebook prices artificially high, to the detriment of the consumer.

Did publishers really collude?  Bestselling author and SFWA president John Scalzi has expressed healthy skepticism:
My immediate thought is that if all of them were in fact stupid enough to have colluded, then sue away, United States Justice Department. If they were dumb enough to collude, then they get what they get.

My next thought, however, is that I’ll be interested to see if the case can be proven, because I don’t think they had to act in concert. That Apple would be aware that publishers would be desirous of agency pricing in a general sense is not hard to imagine; Apple doesn’t enter a market without knowing the players and how to leverage themselves to make a maximum splash and receive a maximum benefit. Once Apple made it known it would accept agency pricing (but not selling books at a higher price than other retail competitors), the publishing companies didn’t have to act in concert, although one of them had to be willing to bell the very large cat called Amazon by moving to the agency model.
+1 for this logical, incisive argument. Apple certainly agrees; Macmillan too. While denials are expected, like Scalzi I'm also not sure how the DOJ would go about proving collusion. Thing is, though, 3 of the publishers have already settled, and the terms were not favorable. That makes me think the DOJ's got something they haven't revealed yet. This guy agrees.

4. The final question concerns the people actually writing the books. Let me begin by stating the opinion that--wholesale or agency model--authors get the shaft. The median advance for first-time authors is $6,000, if they have an agent, and $3,500 if they don't. And did I mention it takes them an average of 11 years to sell that first book? Writers aren't compensated well enough for stuff that takes them a really long time and a lot of blood, sweat and tears to produce.

How the wholesale vs. agency model debate affects authors isn't totally clear. Many authors and literary agents, though, aren't happy with the DOJ lawsuit. Author Sherman Alexie, quoted by the LA Times:
I know for a fact that my publishers and my editors publish books that they know are going to lose money but they think should be of the world...The John Grishams of the world support the experimental nature of publishing. [The DOJ's suit] gave Amazon explicit permission to go for a total monopoly.
While these are legitimate concerns, I haven't ben able to find any evidence that the wholesale model actually treats authors worse than the agency model, while Mike Schatzkin over at Idealog provides data suggesting that authors are marginally better off with the wholesale model, and generally (though still marginally) better off with ebooks than printed books.


If this feels like a pile-on-Amazon, then that's because: a) there are some legitimate concerns about Amazon's growing dominance of the publishing industry; and b) a lot of people in the industry view Amazon as an existential threat, but do not feel the same way about Apple. Though some side-taking is inevitable, Scalzi, in another good blog post, cautions against treating the antagonists like sports teams:
Amazon is not on your side. Neither is Apple, or Barnes & Noble, or Google, or Penguin or Macmillan. These are all corporations, not sports teams, and with the exception of Macmillan, they are publicly owned. They have a fiduciary duty to their shareholders to maximize value. You are the means to that, not the end. The side these companies are on is their own side, and the side of their shareholders. This self-interest doesn’t make them evil. It makes them corporations.
I agree, and given that I actually really like both Amazon's and Apple's ebook platforms, don't want to give the impression that I've got a stake in this fight.  I do think that there's a very valid argument that the government shouldn't aggressively pursue antitrust legislation when it so clearly benefits the market leader.  And the traditional publishers, booksellers and so on are worth preserving.  At the same time, Amazon is also one of the driving forces in America's current reading renaissance, and, well, provides a better user experience than Borders did. Popular detective fiction writer Michael Connelly, in the LA Times piece linked above, offers some measured commentary:
I believe in fair play. So I feel that if the government is going to step in and put controls on how publishers act to ensure a competitive marketplace, then I hope the government will be just as vigilant in guarding this amazing, creative and important industry from being monopolized by one entity...Amazon spreads my work far and wide. You can't beat that. I'm very grateful. But I don't want a world where there are no bookstores or other venues for discovering my work or the work of any other writers.
I feel you, Mike. What we want, ultimately, is a competitive market populated both by innovative big players like Amazon, at least a couple other big ebook retailers, and an ecology of high-quality independent bookshops.

That said, I can't help but think everyone's barking up the wrong tree here: in this whole debate, the fate of the people actually creating the books remains unaccounted for. With ebooks, where print runs are not a factor, we could move away from the "throw lots of mud at the wall and hope some of it sticks enough to make up for the stuff that doesn't" business model. Instead, we could be talking about getting to a place where authors actually get paid commensurate to what they produce, or at least closer to it. Instead, we're arguing over which other elements of the supply-chain should get the most say/cut.

So do I think that it's okay to ask consumers to pay moderately higher ebook prices? YES, provided the right people get that extra love. If, say, Amazon or Apple were to suggest a wholesale model that allowed retailers to set prices, but included a retailer-supplied $1/ebook increase in author royalties, we'd simultaneously satisfy the DOJ's antitrust concerns, take some of the pressure off print and make publishing more fair.  Net win, right?

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