It has been speculated for several weeks now that the DoJ was going to sue five major publishers for alleged ebook price fixing and general collusion, and as the Wall Street Journal broke today, they have done just that.
Publishing does not often hit the forefront of business news, so it presents a very interesting and unique case to analyze. Today I am going to present some basic facts and milestones that led to the official lawsuit:
In 2007, Amazon debuted the Kindle and, it is fairly safe to say, single-handedly made ebooks successful for the first time in history. Other electronic book devices and formats had existed before, but never before was it commonplace to see people reading from them, or finding that they sometimes preferred ebooks to print books.
To promote Kindle device sales, Amazon began selling ebooks at low prices. Amazon arguably has the best selection of content among the top tablet makers (including powerhouses like Apple, Samsung, or Sony) and that is also arguably the biggest draw to purchase those devices. Making a wide range of content suddenly very affordable is a huge draw.
Publishers were alarmed at this practice because, although they were used to selling their books wholesale to Amazon, they saw low ebook prices as threats to their hardcover and even paperback sales, through which they still make a majority of their revenue. Why would someone buy a new John Grisham novel for $27 in hardcover when they could get it on their Kindle for $9.99? Some publishers began to see Amazon's new practice of discounting bestsellers and new books in the electronic format as predatory pricing.
Predatory pricing is one of the more difficult anti-competitive cases to prove because true proof can only be shown after the practice has already done its damage; competitors must already have been driven out of the market. A company will price something so low, at a loss to themselves, that they drive other companies out of the market. That company has to expect that they will be able to succeed even after taking hits on extreme prices. Even if the company is sued at that point, simply ceasing predatory pricing will not bring back the competition-- they may even already be a monopoly. There must also be high costs to entering the market for the strategy to have any hope of success, and a lawsuit would also have to prove that the pricing was in fact staggeringly low, rather than the product of common price competition. In short, even if Amazon was ever investigated for predatory pricing, it would be almost impossible for the charge to hold water.
The publishers thought they had such a case on their hands. And if the DoJ's lawsuit finds what it's looking for, then they will find evidence that the next step was to collude and create their own anti-competitive strategy.
It's not terribly hard to find, though. In fact, I found it a few months ago when I read Walter Isaacson's popular biography of Steve Jobs.
In a discussion that the author had with the computer tycoon, Jobs revealed that, prior to unveiling the iPad, he had a meeting with the largest publishing houses in the United States, known as the "Big Six": Hachette Book Group, Simon & Schuster, HarperCollins, Macmillan, Penguin Group, and Random House. Jobs wanted to let them use a retail model known as "agency pricing" for the iBooks store and corresponding app that would open with the iPad. Unlike the wholesale model that had originally allowed Amazon to set its own prices once it purchased books from the publishers, the agency model would force a retailer to allow the publisher to set its own prices and retain a larger portion of the sale. Publishers, as they have been doing on the Kindle book store, could set their ebooks at $14.99 or higher, in theory to match whatever the print book price is. In order to get Amazon to change to such a drastically different model, however, they would have to force their hand.
One publisher couldn't withhold their books; they would just get blacklisted by Amazon in all likelihood. A collusion of publishers, however, could threaten to withhold the most sought-after book titles, essentially forcing Amazon to allow the new pricing model in order to sell the best content. It had nothing to do with perceived "value" of ebooks versus print books-- multiple authors have already sold millions of dollars worth of ebooks on Amazon, often by self-publishing and selling at $1.99 or even lower. And it led to higher prices in ebooks, so it wasn't about getting better prices for the customers. It was all about getting a larger cut of the sale for these massive publishing houses.
In Walter Isaacson's book, Steve Jobs is quoted as saying, "We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway."
And so the E-Book Price Fixing Scandal was born. Of the Big Six, only Random House stayed out of the alleged collusion, at the time willing to continue with the traditional retail model, and they alone remained free of the Department of Justice investigation. Hachette, HarperCollins, and Simon & Schuster settled with the DoJ and agreed to break their price fixing contracts with their retailers-- Penguin, Macmillan, and Apple (the supposed competing retailer looking to get an edge on their Amazon rival) are willing to fight it out.
I will continue to follow this case as more details of the settlement-- and potentially the visible changes to Amazon ebooks sales-- begin to come to the surface.