14 April 2012

e-books and antitrust

by Matt Rubinstein at 7:55 am


More than two years ago (but shamefully still on the same blog page as this entry) we spoke of the imminent launch of the iPad and iBookstore and their consequences for e-book pricing and distribution. I noted that Steve Jobs seemed eerily sanguine about competing with Amazon and its heavyweight Kindle Store despite projected iBook prices being 30% to 50% higher than their Kindle equivalents. “The prices will be the same,” Steve predicted breezily.

And he was right. Amazon’s famous $9.99 new releases and bestsellers are no more, and now most new trade books cost $12.99—the same as they do on the iBookstore, and indeed on the Nook Store, the Kobo Store, and whatever Google is calling its e-bookstore this week. How did Steve know? According to the US Department of Justice, it’s because Apple had already agreed with the major publishers to engineer an industry-wide shift from the traditional wholesale-retail model to a new agency model that would allow publishers to set retail prices directly, paying distributors a uniform 30% commission instead of charging a wholesale price.

On the face of it, this was never an astounding deal for publishers or authors: if the old wholesale price for a new release was $10 or more (so that Amazon’s $9.99 broke even or lost money, as has always been argued) then taking $9.09 on a $12.99 title doesn’t seem like much of an improvement. But it seems the publishers were more worried about customers getting used to the $9.99 price point and being reluctant to pay any more than that for either e-books or printed books into the future. As a result, they’ve been willing to sacrifice some short-term revenues—and allegedly limit retail prices to the tiers agreed with Apple—in order to wrest control of the emerging e-book market from a powerful Amazon.

I’m a bit conflicted about all of this since I like basically all of the parties involved. As an itinerant reader I like e-books as well as print books, and I sure liked Amazon’s lower prices. I also like Apple hardware, and have a ton of Kindle books on my iPad. As a writer I like publishers and want them to make money and keep publishing books and paying advances—though I would rather see them competing among themselves to innovate in the emerging market instead of just coordinating to prop up print sales. And as a sometime competition lawyer I like the Antitrust Division of the Department of Justice and am not at all sure that the best answer to a dominant Amazon is the elimination of retail price competition.

Anyway, Hachette, Simon & Schuster and HarperCollins have all settled with the DoJ, and will have to renegotiate with Apple and stop preventing other retailers from discounting e-books to undercut the iBookstore. This is essentially a renunciation of the agency model, since an agent who can set the retail price isn’t really much of an agent. Macmillan—the first to force the agency model on Amazon—and Penguin have refused to settle, and Apple has denied everything. The world’s biggest trade bookseller, Random House, quietly adopted the agency model in February 2011 but has escaped the DoJ’s wrath and is referred to only obliquely in the filing as “the holdout publisher” and “the non-defendant publisher” bullied by the other five and Apple for not going agency sooner.

What happens if the DoJ wins or settles with the remaining publishers and the agency model is consigned to a footnote? The publishers and Authors Guild president Scott Turow argue that Amazon will return to its below-cost pricing and kill all other electronic and print outlets. I’m not convinced that this will happen, partly because it’s not clear to what extent Amazon’s pricing was ever properly predatory, and partly because things have changed considerably in the past two years.

Going in the face of the conventional wisdom, the DoJ asserts, presumably on information from Amazon, that:

From the time of its launch, Amazon’s e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles.

I’m going to assume that Amazon isn’t sneakily accounting Kindle hardware sales into its “e-book distribution business” and conclude that, even if Amazon did sell new releases and New York Times best-sellers at or slightly below the wholesale price it paid to publishers, it could still turn a profit overall by charging comfortably more than the wholesale cost on other books—the slightly older or more specialist titles that make up its immensely long tail. You can see this strategy at any physical bookshop.

The kick from Kindle hardware must have been a factor, but I wonder whether this would still be such a big deal if the wholesale-retail model were to return now. Remember that for the first two years of the Kindle Store, you could only read a Kindle book on an actual Kindle—unless you went to the trouble of decrypting and converting it to read on your computer or sideload onto another e-reader. In very late 2009 Amazon released its Kindle Reader for PC, and since then has provided its own apps for almost every major mobile and desktop operating system, as well as the Kindle Cloud Reader that lets you read your Kindle books on any browser.

As a result, there’s no longer any guarantee that a loss on a Kindle title will be offset by any sale of Kindle hardware: instead, cheap Kindle books are just as likely to drive iPad sales (whereas you can’t read an iBook on any non-Apple device without significant hackery). At any rate, Amazon’s ability to subsidise e-books from hardware sales is no greater than Apple’s or Barnes & Noble’s. Amazon’s expansion beyond the Kindle may well have been a response to the new agency arrangement, but it’s hard to see them going back on it now.

The agency arrangements have certainly fostered new competitors to Amazon and levelled the field somewhat. But without retail price competition and the ability of retailers to experiment with new models, this is not a competitive system in any substantive sense—Scott Turow’s “the government may be on the verge of killing real competition in order to save the appearance of competition” is catchy but empty. The agency model, whether it resulted from a conspiracy or not, may have been a useful transitional arrangement in a fragile emerging market, but I don’t think it’s healthy in the long run. I want to see what happens next.


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