The Department of Justice Sues Publishers Over E-Book Pricing

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.

Don't Fear the eBook

Ursula K. Le Guin, who most famously wrote modern classic sci-fi and fantasy novels such as The Dispossessed and A Wizard of Earthsea, is a fairly prolific commentator on literacy and publishing. Last week, she wrote about her disapproval of the Time feature on “5 Famous Authors Who Loathe E-books,” which sparked my interest in compiling a retrospective on some of her extemporaneous writing from the past few years. Le Guin tends to post her op-ed-style pieces contemporaneously with milestones and watersheds in digital publishing, making her essays a unique insight on authors who are adapting and evolving along with the e-publishing process.

In May of 2011, Le Guin wrote a brief opinion piece for Northwest Book Lovers on the prospect of an all-electronic publishing environment. It is an essay meant to caution against forgoing the possibilities of paperback and print-on-demand in future publishing.

Time appropriated several comments from the essay and used them to describe Le Guin as an author who “loathes” e-books for their list that was published online on January 30, 2012. Le Guin wrote a refutation to her inclusion in Time’s list on February 6, published at Book View Café and on her personal blog.

Time correctly quotes Le Guin’s statement “I read fast, carelessly, superficially on the screen, and don’t enjoy it. I don’t know why” and also correctly acknowledges that in the same essay she stated, “E-publication offers vast availability and accessibility to older texts via our libraries,” but ultimately Time loses the broad context of Le Guin’s original essay.

Le Guin prefaces her predictions and cautions for e-publishing by titling them “my personal reactions.” As an author with specific content that has been digitally formatted, and also as a reader, she has personal preferences for how she would like her content to appear and how she would like to read content in the future, but she is not proposing any industry-wide movement. She is not inciting rebellion against e-books, as the title of Time’s list suggests. In fact, by the end of the essay, she writes, “I welcome e-publication, so long as it works like an immense new-and-used bookstore network including bookstores selling both paper and e-books—and so long as it is fully and freely hooked up with the public libraries,” as well as going on to hope she can publish in future with small publishing houses in both paper and ebook format. Le Guin is advocating for freedom of choice, while Time has included her in a list with the likes of Maurice Sendak, who had one four-letter word for digital publishers.

Le Guin’s blog entry rebuttal points out that the Time list turns her hesitation to embrace an all-digital publishing world into a threat to ebooks in a way that her words were never intended. Her advocacy for dialogue rather than vitriol, whether for or against digital publishing, is both important for the ebook movement as well as consistent with her essays from recent years.

When Amazon first gained widespread attention for its game-changing Kindle introduced in 2007, the Question in publishing went from, “Will ebooks ever work?” to “What is next for ebooks?” Just like when the similar question was posed in the music industry when their own brand of digital publishing began, answers were solicited from the biggest names in technology. Steve Jobs, who in January 2008 was introducing the MacBook Air, was asked by the New York Times about Amazon’s Kindle as a device that might compete with his netbook-style laptops (and future iPad), and responded:

“It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore,” he said. “Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

Now, years after the comment, it would be unusual to count the Amazon Kindle as a failure. The known sales history alone is enough to show that the device is a commercial success. But Jobs’ message was less about the possibility of Amazon or any ereader company making any money in device sales (a possibility that remains suspect until Amazon releases exact figures for greater financial transparency) and more about a fundamental flaw that would ultimately derail ebooks: eventually, we would cease to ever need them.

Ursula Le Guin’s response to Jobs’ comments, which she wrote for Harper’s Magazine in February of 2008, was an illuminating statement on both the future and the past of reading:

“I think [books are] here to stay. It’s just that not all that many people ever did read them. Why should we think everybody ought to now?”

More than that, Le Guin pointed out several flaws with a statement such as “people don’t read anymore”:

1. Who are the “people” we are talking about? The vast majority of society has historically had little access to, and was often actively prevented from, the opportunity to read until the 19^th and 20^th centuries. If even a small percentage of underrepresented groups are now allowed and have ready access to reading, is that no longer important?

From Advice to Young Men And (Incidentally) Young Women in the Middle and Higher Ranks of Life, by William Corbett, 1829.

2. What kind of “reading” are we talking about? “Novels” as we know them did not exist until the 18^th century, and mass market publications did not exist until the mid-20^th century. Prior to those times, the majority of reading available was either religious or rhetorical in nature, and was available only to wealthy, privileged men. Are certain kinds of reading acceptable (perhaps “cannon” literature or “important” writers) while other reading “doesn’t count,” and who makes those decisions?

3. If we are using faulty reasoning to make a statement like “people don’t read anymore,” what kind of problems might we create for the future if we act on that statement? Le Guin makes several statements about the potential for some people to act as gatekeepers to knowledge, and also on their tendency to view book sales the same way that other retail goods are sold, rather than as an incomparable product that has a relatively short history of existence. What would happen if people started scrapping digital publishing ideas based on a faulty statement like “people don’t read anymore”?

The essay is a holistic view (drawing from all three business, political, and emotional perspectives, which I talked about in my last post) on the current state of reading that ultimately asked people to let go of some preconceived notions about publishing. If you have ever wondered if ebooks “even matter,” I think you will find it a thought-provoking entry into the digital publishing discussion. Also, she is just a generally awesome lady and a terrific prose stylist, so if nothing else it is an enjoyable read.

Le Guin titled her most recent blog post "Fear and Loathing,"  which is a tongue-in-cheek way of addressing what has become a sticking point in the transition to digital publishing. People have come to take political stances on digital publishing based out of fear: you are either “for” or “against” ebooks. When you lay it out like that, and as Le Guin does on her blog, it shows how strange the situation is. Many people are afraid that ebooks will not succeed as a medium, and others are afraid that ebooks spell the end of book reading as they know it. As Le Guin points out also, it is time that people stopped reacting to the publishing transition with fear from either “side,” and instead approached the transition with open minds. Fear of ebooks can only cause industry stagnation and exacerbate the problems that already exist in publishing.

On Friday I will feature another popular author who has recently commented on how they would like their own books to be formatted, although this writer took a very different stance from Le Guin…