United States v. Apple Inc
The United States v. Apple Inc.

Yesterday federal judge Denise L. Cote, of United States District Court in Manhattan, ruled against Apple in the United States vs. Apple Inc., et. al. ebook case. You can read Cote’s ruling here.

Anyone who thinks this isn’t a terrible outcome for publishers, authors, and readers, isn’t paying attention.

Let’s recap.

Amazon (who is at the crux of this story) sells ebooks under the wholesale model. This means that they can set prices as they wish, usually at $9.99. They can sell the title for $9.99 even if their agreement with the publisher stipulates that they must pay the publisher a royalty of more than $9.99. Meaning, Amazon chooses to lose money on many of the books it sells, a fact documented in the Department of Justice’s (DOJ) suit (see page 17 of the ruling).

That sounds great for both publishers and readers, right? Publishers receive more revenue and readers, subsidized by Amazon, pay less. What is not to like?

Here is the catch. Some books are niche titles, such as those published by university presses or other independents. They don’t sell enough copies to recoup their costs at $9.99. Other books, such as those by bestselling authors sold by larger publishers, can command high prices that are needed to offset the losses such publishers incur on other titles. This is why different books have historically had different prices and why niche titles and blockbusters (at least when the first come out) often cost more. But because Amazon chooses to sell an ebook at $9.99 (or whatever price they like), the ebook can’t be sold anywhere else for more. Who is going to buy the ebook for $19.99 via the publisher’s site or Barnes & Noble or anywhere else when they can get it via Amazon for $9.99? Amazon is selling the book below cost to forestall competition in ebook distribution.

Enter Apple. Back in 2010, Steve Jobs had a magical new invention called the iPad. It was like an iPhone except you could more easily read books on it because it had a larger screen. Unfortunately, Amazon had beaten him to the ebook market with the introduction of the Kindle. Moreover, they had used Jobs’ own playbook to do so. Amazon essentially copied what Apple had done with iTunes and the iPod with their Kindle and Kindle Store. Jobs therefore knew this game well and knew he had no hope of competing against Amazon in ebook distribution as things stood without touching off a price war and losing money on every sale (which he could have afforded to do but that just isn’t how Jobs rolled). Jobs needed to change the playing field.

He did this by getting publishers to agree to the agency model whereby publishers set their own prices with Apple receiving a percentage of each sale. Moreover, publishers agreed to what has been called a “most favored nation” clause which stipulated that Apple could match the price in any other ebook store (e.g. Amazon’s Kindle Store).

Five of the so-called “Big Six” trade publishers (Hachette, Penguin, HarperCollins, Macmillan and Simon and Schuster) agreed to Apple’s terms (Random House was the only large publisher who did not participate at the time of the iPad’s launch). The publishers then went back to Amazon and used the deal with Apple, and the hype around the new iPad, to pressure Amazon into accepting an agency model on the same terms as Apple, ceding more pricing control to publishers (and the free market).

This, says Judge Cote (page 9), constituted a “conspiracy” to raise prices:

“The Plaintiffs have shown that the Publisher Defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy.  Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010.”

Due to browbeating by the Department of Justice and fear of a protracted suit and punitive fines, all five publishers settled out of court and agreed to reinstate the wholesale model with Amazon for at least two years. Yesterday’s ruling against Apple has made it less likely that publishers will have the leverage to revert to the agency model in the near future after the two-year period dictated by the settlement ends.

What this means is that anyone wishing to enter the ebook distribution space will face an ebook pricing war against an entrenched competitor that is willing to sell at a loss, propped up by a seemingly limitless supply of cash from investors who do not seem to care about margins so long as market share is growing.

The result is likely to be an ebook market (at least in trade publishing – professional and scholarly publishing is a different matter) with little innovation – why would anyone bother? Not only must a new entrant invest in new technology, negotiate complex, multi-national rights agreements with publishers, and market their new product to consumers, they must then slog it out in a price war. And while a very few entrants such as Kobo are trying, one of the few companies with the cash hoard to withstand Amazon is Apple (Google is another and Microsoft, reported to be flirting with the idea of purchasing Barnes & Noble’s Nook business, is a third), though a price war goes against their DNA and it is not clear that ebooks are important enough to them to be worth the cost.

In case anyone thinks that this is overstating the bleakness of the situation, I direct you to the recent departure of Barnes & Noble’s CEO, William Lynch, a former Palm executive who was brought into the company to grow their reader business, in what Reuters called an acknowledgement that its digital division Nook has failed to compete successfully in the e-reader and tablet markets“. Furthermore, after reporting that Nook sales dropped 34%  last quarter, the company announced it was pulling the plug on its hardware division.

So what, you might say, if Amazon controls the market so long as they keep prices low? Anyone who has looked at Amazon’s price to earning ratio will tell you that Wall Street is assuming the company is engaged in a market share maximization strategy. As CNN has pointed out, whereas it would take 13 years for Apple to pay back your investment based on their current P&E ratio, it would take Amazon nearly three millennia (and while Jeff Bezos is known to play a long game, I suspect even his horizon is quite a bit closer). The aim of a market maximization strategy is to dominate the market and, once all credible competition is vanquished, to raise prices and substantially grow margins unfettered by competitive pressures. While Wall Street has, of course, been wrong before, this one looks like a good bet – there is even some evidence this is happening already.

This view of Amazon’s strategy is shared by publishers as evidenced by the recent Penguin/Random House merger, completed just last week, which reduces the Big Six to the Big Five. The primary motivation for the merger is reportedly to establish a publishing house with enough size to have leverage with Amazon. More mergers may be yet to follow. And while such consolidation may indeed improve the publishing industry’s leverage with Amazon, there are consequences for readers as Boris Kachka observes in an op-ed in the New York Times. These may include lower bids on author manuscripts, few options for authors, more homogenized titles (you think there are too many vampire novels now), and a even greater focus on genres and blockbusters.

So we now have a market in which ebooks are steadily commandeering a larger slice of the book market, but sales for which are dominated by a single player intent on keeping competitors out even if it means selling at a loss. Moreover, when this loss-leader strategy falters we have a Department of Justice ready to step in to “protect consumers” from potentially spending a couple extra bucks in the short term, meanwhile all but ensuring we will see even higher price increases over the longer term given the lack of competitive preassure. We have decreasing incentive to innovate in ebooks, with even established firms such as Barnes & Noble exiting the market. And we have market conditions that are forcing publishers to consolidate, leading to a less diverse offering of titles and lower royalty checks for authors.

And while there is, at the same time, a growing array of self-publishing options (including directly via Amazon) and there remain independent trade publishers such as McSweeny’s as well as the university presses (and, of course, the professional publishers such as Wiley, Elsevier, Springer, etc.), these are typically not options for professional writers who require substantive advances to, you know, eat. Moreover, these smaller and independent houses face the same pricing challenges with regard to ebooks.

Apple intends to appeal this decision and they have strong motivation to do so. That motivation has little to do with the ebook market at this point, however. The iPad was the last major product Jobs was closely involved in developing and he was personally involved in negotiations with publishers – emails written by Jobs (that may or may not have been sent) were used as key evidence against Apple. The fight is now first and foremost about the legacy of Apple’s iconic founder. Publishers will have to fend for themselves.

Michael Clarke

Michael Clarke

Michael Clarke is the Managing Partner at Clarke & Esposito, a boutique consulting firm focused on strategic issues related to professional and academic publishing and information services.


99 Thoughts on "Why the Apple Ebook Ruling is a Loss for Publishers, Authors, and Readers"

I think the problem is that there was clearly collusion on Apple and the publishers’ parts. I agree completely with your analysis, and that the collusion was an attempt to level the playing field and ensure long term competition in the market. But even with good intentions, the move was illegal, so the court case here was something of a slam dunk.

You’re correct, our court system is more concerned with winning legal technicalities than trying to preserve good long term business practices.

I think the collusion was *hardly* an attempt to “level the playing field.”

Basic economics: according to IPG (Independent Publishers Group), it costs something like $30,000 to do a 10,000 book print run. (I do have a source for this, but I don’t have it handy. I can find it looking through my blog archives if needed.) This is print-only, and this is only the cost of the actual printing, shipping, and housing the product.

Then there are the overhead costs connected to *just* the title of the book. Editing, design, office overhead, so forth. According to IPG’s figures, that cost comes out to about $22000 (based on what they said their “take” would be in the end after all of the costs were paid down). So, we’re what, $52000 into this title so far, for a 10000 book run and the editing costs, etc, associated.

Now, to add an ebook title, I did the research; there are several companies that will take a digital manuscript and put it into every ebook format for $500 or less. If it’s a print book that they have to scan, it could cost in the neighborhood of $2500, but most new books will be digital to begin with. Bearing in mind that we’ve already sunk in $52000 of necessary costs for a print run and the office costs, adding that ebook title would cost less than one percent more to produce even at $500, which is on the high end for that service, from what I found. (I mean, it doesn’t take a wizard to make an ebook–it’s basic HTML added into a manuscript that has already been polished up by professionals.)

Less than one percent more. But publishers can sell unlimited copies of ebooks. So every ebook copy sold is chipping away at the overhead on every print copy sold, because it’s distributing the editorial and office costs among even more copies for a negligibly small amount of extra money; once they sell 166 copies of the ebook, the digital title has caught up with the print title in terms of cost to produce per unit (not including the costs that are rolled into the title itself, this is just pure production per unit costs). Even if we add in $500 extra dollars, generously, for time for someone to upload it to Amazon, Barnes and Noble, iStore, whatever (if said person is making $25 dollars an hour, that gives them 20 hours to get the title uploaded and checked over.. which they’ll probably delegate to lower-paid minions, which gives them more time), it’s still less than 2% of the cost they’ve sunk into the title already for a print title.

tl;dr: ebooks cost less than 2% of the price of a 10k copy print run to manufacture, and the cost per unit will approach zero as more and more units are sold.

What this means: logically, ebooks should not only be relatively inexpensive, but they should be making print books cheaper because they reduce the amount of overhead per title sold. By keeping the price of ebooks inflated past what the market should be charging for an item that was produced less expensively than a mass market paperback (usually sold around $7 – 9), competition with print books has been artificially hampered.

Not to mention, according to the site Smashwords, sales of ebooks are less competitive at the 9.99 price point and above. In fact, they’re pretty abysmal compared to price points at $2.99 and $5.99. Some may say that $5.99 is “too cheap,” but the fact is that you sell enough copies that you actually net more profit at that point. Because you can sell unlimited copies, you have to look at the total projected amount of copies that can be sold, not the cost per unit, which is flexible with a digital item.

But Amazon isn’t even under fire for selling ebooks consistently at $2.99; they’re under fire for using the $9.99 price point, which should be, by all rights, more profitable than selling them at even higher price points because they will sell more copies overall.

The numbers are not adding up to what the publishers are claiming. They’re screaming about all of this preservation of literary culture, and blah-de-blah, but it comes down to cost and production in the end, and their numbers just don’t. add. up.

1) By “level the playing field” I meant leveling the retail market playing field, not leveling things between print and ebooks. If you have a market where one corporation owns 90% of the business and does so by selling products at a loss, that makes it much harder for others to enter that market and compete. As stated, I don’t think Apple’s solution was the correct one, but as far as I can tell, it was intended to bring more competition to the market, which is a good thing.

2) The numbers you state are very different from the numbers I’ve encountered in creating books, although I’ve only done so in non-fiction, scholarly publications which generally require a much higher level of editing than trade books. Then again, they don’t require much, if anything, by way of advances. If you do have links to your sources for numbers, I’d love to see them.

3) Your economic scenario relies on an unlimited number of purchasers for every book. If the idea is that by lowering the price of the book, you’ll sell more copies, then you’re depending on there being a horde of book buyers out there who would read everything published if they could afford to do so. Academic/scholarly books are generally written for a small, professional audience. If there are only 200 researchers in the world investigating planar cell polarity, then it’s unlikely I’m going to sell more than 200 copies of a book on that subject, no matter how much I lower the price. There are lots (most of the) books in Amazon’s self-publishing program priced at $2.99 that don’t sell very many copies. A low price is not a magical solution automatically yielding profits.

I cannot comment on the data you received from various sources; but it appears to be a trade book with a print run of 10,000.

So please take the following as a suggestion regarding a trade book. Similar calculations are done for a book published by a university press or a scholarly and commercial press, although the numbers are very different..

In order to run a profit and loss (P & L) statement for a book, you need to determine the costs.

1. Production: total print run.
a. minus free copies given to sales reps, etc.
b. minus returns (books are returnable for a complete credit as long as the terms and conditions are followed. [return rate for a mass marker paper is generally in the 40% range; for an adult trade hardcover in the low 20% range; although some books have lower return rates and some higher return rates].
c. minus copies that never ship.
d. final sell through rate (final sales).

2. Cost of goods sold (COGS)
a. printing, paper, and binding (PPG).
b. plant (editorial, art, design, layout, and page make-up).
c. earned royalty after the advance (if any) is earned back.
d. sales and marketing costs.
e. inventory write-offs (if any).
f. total COGS is calculated.

3. Net revenues
a. plus any foreign/sub rights (if any).
b. total net revenues.

4. Total net income.
a. minus COGS
b. minus overhead
c. equals total profit
d. equals total profit as a % of net sales.

Some of these COGS disappear with a print book; and some do not disappear with a digital book.

The bottom line (and there is a bottom line): we have conducted interviews with a wide cross section of publishers in the trade book sector. Out of every ten new trade hardcover books published, one (1) is profitable.

Check the financials released by trade publishers.
Check the reports released by Wall Street financial service companies.
Check the quarterly report from Scholastic that will be released on July 18, 2013 at 8:30 am/ET.

The economics of publishing are harsh and unforgiving; but the economics are understandable once view the “whole equation” of publishing is understood clearly: supply and demand.

I hope this sheds some light on what is an intriguing subject.

AL Greco
Fordham University
Professor of Marketing

Have to agree with David.

Apple could have responded by just charging the same prices as Kindle.

Judge Cote’s public comments suggesting that the government will prevail in this case were given prior to any testimony being taken. This event alone would fuel a spirited appeal.
However, I don’t see this as primarily a defense of Jobs’ legacy though that probably is a factor. Like the publishers who caved earlier, it’s all about not admitting any wrongdoing. This is the intolerable outcome. What Apple is saying publicly is, “We did nothing wrong and, so, we’re going to appeal this (prejudiced) verdict.

Apple could have indeed responded by charging the same as Kindle. However, a protracted pricing war between Apple and Amazon is only a slightly better outcome than the present scenario. It would still make it hard for new entrants to come into the market and would still give publishers no pricing power over their own wares. What would be best for publishers and consumers is competition on technology, price, business model, and other vectors for numerous players.

While the publishers colluded, the collusion was around the move to a new pricing model, not on specific prices (what if they had used the agency model to lower prices?). That said, I am less interested in the merits of the legal case than the ramifications of its outcome.

Meanwhile, under the “radar,” Google Books is clumsily discounting ebooks it sells online.

I think we have not seen the end of this issue. While Apple may have lost this case, the battle is far from over. There are a number of large media companies in Apple’s court and nearly everyone is concerned about Amazon. Yes the top five settled with the government, they were forced to by their owners. No one wants a unknown liability on the balance sheet. There are many who believe that Amazon was behind the government’s action in this case.
I believe the appeal will continue and perhaps yield different results. The judge in this case tried to force Apple to settle before the trial. Both she and the government thought this was a slam dunk case and no evidence would change the outcome.

A minor point of clarification.

Under the wholesale model, a publisher sells a book (a printed copy or an e-book) to a retailer, including Amazon.com, at a discount (listed as the “terms and conditions of sale” on the publisher’s web site and in the publisher’s catalogue).

This is a discount not a royalty. A royalty is a financial amount paid by the publisher to an author(s) subject to the author(s)-publisher contract.

Under Federal Law (the Robinson-Patman Act of 1934, 15 U.S.C. section 13(a-f)), the same discount rate must be offered to all retailers; however, there are certain provisions in the law regarding special situations, including distribution costs.

So if a best selling book has a suggested retail price of $27.95, and if the book is sold at a 50% discount to the retailer, the publisher keeps $13.98 of he suggested retail price.

The retailer, perhaps Amazon.com decides to sell the e-book at $9.99, effectively generating a loss of $3.99 per unit sold. Actually, the retailer suffered a loss greater than $3.99 when you run a profit and loss statement and start to calculate the retailer’s cost of goods sold (e.g., credit card transaction fees; overhead; etc.).

As for printed book and e-book prices, see “The Library and Book Trade Almanac 2012: 57th edition” (pages 488-503 for printed books; and pages 506-507 for e-books). The e-book prices cover 2008-2011; 2011 is preliminary; see the 2013 for final 2011 and preliminary 2012).

For most book categories, e-book prices fell between 2008 and 2011, including certain scholarly and professional books (e.g., business and economics fell from $57.52 in 2008 to $45.10 in the preliminary 2011 numbers..

The 2013 edition of this book will be available in July 2013.

The Kirtsaeng v. John Wiley case (Supreme Court of the United States; No. 11-697; decided March 19, 2013) will likely have a substantive impact on scholarly and professional publishers publishing and printing books in certain foreign markets. Under the Supreme Court’s 6-3 majority decision, these books can now be imported into the U.S.; and their suggested prices are rather low.

This might be great for libraries and consumers; but the impact on publishers could be a serious problem.

Al Greco
Fordham University
Professor of Marketing

I’m glad Al mentioned Kirtsaeng because that is another case where the government clearly did not understand how the publishing business works and thought it was acting in the best interests of consumers when, in fact, the decision–as in the Apple case–will ultimately hurt consumers. It is scary to think that we have a federal government that is ready to make such decisions, based on narrow legal grounds, when the larger public interest gets sacrificed in the process. It almost makes one want to join the Tea Party!

Your point is well taken Sandy. I’m not an attorney and can’t comment on the technical aspects of this case. However, it is clear that the primary motivation of the publishers and Apple was to introduce more competition into the ebook space (for self interested reasons of course, but these happen to align, in this instance, with a more diverse marketplace which is better in the long-term for consumers) and their primary point of discussion was a pricing model, not specific prices.

Did the publisher and Apple cross a line? I can’t say though obviously there was enough evidence for a judge to rule that they did.

However, the DOJ has a great deal of leeway in what cases is pursues. It is concerning that they chose to pursue a case that results in reinforcing a lack of competition in the marketplace. Moreover, the settlement terms that they foisted on publishers further privileged Amazon. If the issue was simply a price point, why did the settlement not focus on price? Instead, it insisted that publishers return to a wholesale model. A pricing model is not a price. This wholesale pricing model plays to Amazon’s market maximization strategy, however, by enabling them to sell below cost at the expense of competition.

The DOJ seems to be handing an advantage to Amazon, not to consumers.

It’s worth pointing out, as far as expertise is concerned, that the Intellectual Property Section of the American Bar Association sided with Wiley in the Kirtsaeng case. Read its brief and you will see how flawed the SC’s decision was purely as a matter of law. It’s also worth noting that the judge who wrote the majority opinion, Breyer, has never been a fan of copyright; his first big article was an attack on the need for copyright titled “The Uneasy Case for Copyright.” Breyer thought that the advantage of first to market was all that publishers needed to survive–which showed how little he understood scholarly publishing.

I am somewhat confused by the comment that the same discount must be provided to all retailers. Publishers often do not offer the same discount to all retailers. The discount for Walmart, Borders, and Barnes & Noble are all different as are the discounts given to Ingram, Baker & Taylor. The discount and terms of condition vary with retailer and wholesaler.

It might have been better to say the same discount schedule, since a schedule offers a range of discounts depending on the quantity ordered. But all customers within the same class–libraries, retailers, wholesalers, etc.–must be offered the same schedule of discounts. You can’t legally offer one customer a different discount schedule than another.

Sandy is correct. I should have used the phrase “the same discount schedule.”

Robinson-Patman (15 U.S.C. section 13, et. seq. outlines the basic law regarding offering the same discount to all retailers.

However, the law does allow *see section 2(a) “difference in price” which include actual difference in net prices after taking into account all factors affecting price, such as discounts and rebates.

See the American Bar Association: The Robinson-Patman Act by Ross E. Elfand (www.americanbar.org.
See The Legal Dictionary: http://legal-dictionary.the free dictionary.com/Robinson-Patman+Act.
See The federal Trade Commission. Speech by Donald S. Clark, June 7, 1005. http://www.ftc.gov/speeches/other/patman.shtm.

See 15 U.S.C. section 13(a-f) for the act.

Obviously, Michael’s article triggered a very interesting series of comments about what is a somewhat complex issue(s).

Al Greco

The problem I have with this case is that Amazon is not really “buying” the eBooks for resale, like they would a physical, printed book. What Amazon is really getting from publishers is a license to distribute digital content for a fee. I dont think the standard rules of retail sales should apply.

The court based its decision on laws intended to apply to the purchase and resale of physical products held in inventory by retailers. The agency model developed by Apple and the publishers in this case seems to be a more appropriate business model for handling digital or “virtual” products.

The digital world requires new rules and new business models, and in this case Apple is being punished for trying to innovate, when the alternative was getting sucked into a “race to the bottom” with Amazon.

Minor point of clarification.

Amazon.com and other online retailers sold an e-book to a consumer; this was not a rental or lease situation.

So if you buy a digital copy of, perhaps, a novel by Mary Higgings Clark, you own the copy (but you do not own the copyright; see 17 U.S.C. for details).

Coursesmart.com rents higher education PDF textbooks for 6 months; and in this case the reference to a license is correct for Coursesmart; but not for Inkling (which sells to a consumer the enriched text or novel) or Amazon.com or BN.com, etc..

Amazon.com has received a patent to buy and re-sell used digital products, including e-books.

Apple has a patent pending to do the same thing.

Hope this helps.

Al Greco
Fordham University

But: if I buy a physical copy I have the right to resell it. And the original seller has no right to come to my propery and take my own off me without my consent (at least not without a court order at the very least).

But Amazon doesn’t allow me to resell my digital ‘copy’.

And Amazon has form for wiping copies from Kindles without the consent of the presumed owner (by your argument above).

So is a digital copy the same as a paper copy and Amazon has no right of control after the first sale?

Or is it different and so different rules apply across the board?

Or has Amazon earnt the right for special treatment?

It’s also possible that Amazon is working on a “publishers are freaking idiots” model rather than an “eventually we will crush you” model. If they are trying to get people in the habit of purchasing reading content online, then they need to give them a reason – especially since we have to buy the device, essentially subsidizing the distribution costs for producers. A break on price is really the only thing that will work here. Plus, since we’re paying distribution costs it seems, you know, fair. Publishers, being stupid, freak out about cannibalizing hardcover sales instead of salivate over losing distribution/return costs, the short in-print timeline caused by shelfspace in stores, having to actually go to stores to buy the things, etc. They want to charge me the cost of the actual physical object for a digital copy, even though over 30% of the cost for the book is tied up in its physicality. hahahahahahahahaha. No.

Catch-22: publishers won’t price ebooks to entice people to switch to them – thus both saving them money on each sale and increasing peoples’ opportunities to buy and read books – until AFTER ebooks are the majority of their sales. But we know that – even without Amazon and others goosing demand with advertising and ereaders – people want ebooks. How do we know that? Because people read on smartphones. It’s a crappy reading experience, but it’s already always with you and connected so you can buy anywhere and read anywhere. So, inevitably, if people want ebooks and won’t pay the price they’re being sold for, solution: bit-torrent. Most people already do it for music. But authors don’t have ready-made alternative sources of revenue like live shows and merchandise. Whoopsie.

But Amazon can bridge that gap by forcing ebooks low enough in price that people are willing to buy them instead of pirating them and they stay in the habit of paying for books. Unlike, you know, music. In the long run, that’s good for everyone who loves books.

Except, Ann, that with those low ebook prices their costs are being subsidized by print sales. It’s not clear whether ebook sales will ever come to displace print sales as the main revenue stream for publishers; they have been growing, sure, but sales have been leveling off at far below 50% of publishers’ revenue. Ebook publication, unless you do it in the cheap, no frills way that self-publishers do, cannot be sustained at the price levels being charged by Amazon, so it seems unlikely that the major publishers will ever become 100% ebook publishers so long as Amazon can control pricing.

@Sandy Thatcher: I think the problem is that publishers are trying to pursue a revenue/distribution structure that predates the most significant game change (in the means of printed word production) since Gutenberg. Ebook publication *should* be sustained at these price levels, or cheaper. The remaining Big 5 might even stay in the game, if they can abandon dead publishing/distribution models.

The historic markup on physical media was incredible. Decades before the advent of a truly usable ebook, publishers were raising prices while dropping many of the services to authors (promotion, editing, etc.) whereby they had once justified their existence. The pre-ebook distribution models of the “Big 6” were characterized by constant corner-cutting in terms of quality, wasteful overprinting and subsequent deep-discount remaindering, mostly to cater to investors and now-failed chain stores. Instead of taking advantage of the potential efficiencies of ebook distribution, they colluded every step of the way to preserve the bloated profit margins of what was essentially an oligopoly, to hinder the production of ereaders or pre-break them with DRM, etc. etc. Despite substantial ambivalence toward Amazon, I’m with Ann on this one, and with the courts on their ruling.

I’m not going to try to defend the bog commercial publishers or their practices. But I can tell you that Amazon has been, at best, a mixed blessing for university presses. Amazon has jerked presses around at will, dictating terms unilaterally, making threats to de-list all titles if the presses don’t accept doing business exactly the way Amazon wants, running roughshod over presses’ IP rights, etc. Ebooks are not going to be the salvation of scholarly publishing. indeed, if anything, the downward pressure on prices for all ebooks generated by Amazon will ensure that scholarly publishers too cannot operate in the market effectively. This will probably force university presses to change their model eventually to open access, shifting the burden of paying the bills to authors and their institutions, away from customers. I myself think this will be a good outcome, but not everyone in scholarly publishing agrees. And it comes with problems and challenges of its own, though one definite benefit is to make piracy redundant.

The Big Six (now big five) are going the way of newspapers, because they are stupidly clinging to old business models that don’t work in the digital age. The STM journals and textbook publishers are doing the same and will eventually hit the wall of their traditional business model(s) as well.

As an avid reader, I feel the ruling is GREAT for readers and authors. Now some of the viable alternatives to the Googles, Apples, and Amazons of the world have a better chance of becoming mainstream. For instance, magazine publishers and indie publishers are using micro-licensing to distribute their digital publications. The book and journal publishers need to take note and start looking beyond of their rapidly crumbling empires.

Micro-licensing opens up all kinds of wonderful business opportunities for authors. It frees them from needing a publisher at all, and provides much more profitable models for reaching and selling to readers. For us readers, we get access to many more authors and materials at costs that are far more compelling than has been the case for the last several decades. The future is a win/win for readers and authors even with the Googles, Apples, and Amazons of the world trying to control everything.

Regarding the idea that “the big 6 (now big 5) are going the way of newspapers:

I might be prudent to recognize that there are a number of distinct book categories:
Trade (adult; juvenile/YA; religion; mass market paperbacks);
educational (K-12; higher education);
scholarly and professional (STM; LTR; HSS); and
university presses.

If you analyze these categories closely, and review the available statistical datasets, you will notice that different book categories are going digital at very different rates.

To assume that all books will be digital in a short period of time (perhaps 5 years) does not correspond with the available datasets. To assume that all book publishers will be out of business in a few years also does not correspond with the available datasets.

See: quarterly and annual reports and presentations from public book companies; see revenue and operating data for public book companies in “Publishers Weekly;” see financial service reports on the public book companies; etc.

You might also want to check the recent studies from AAUP (i.e., the university press association); etc.

You might also want to review annual print unit data and e-book data for 2012 (and 2011 and 2010) in “Publishers Weekly”. Most libraries have this publication.

Al Greco
Fordham University

I hope digital doesn’t eliminate physical books, newspapers, magazines, etc. as I love this medium.

I never implied, nor do I assume, that all books will be digital. In my opinion, digital consumption just doesn’t make sense for some forms of publishing. However, I also believe digital distribution makes sense for many forms of publishing and this is where the old business models are be disrupted.

Fortunately, the disruptive innovation of micro-licensing doesn’t preclude the physical consumption of digitally distributed publications. This is why it is being adopted, primarily by magazines, music, and technical publications.

As for disruption, historic “available datasets,” as you like to reference, don’t foretell the future. This is especially true of financial metrics since such datasets are backwards facing and do not take into accounts the business and revenue drivers created by disruptions.

Although my colleagues and I use big-data analytics daily to project the future, we are constantly reminded that foretelling future events and outcomes is very difficult when they are shaped by new innovations combined with new consumer behavior. We can only offer ranges of possibilities in such cases.

However, it wasn’t difficult just seven years ago to predict that many newspapers would fail in a few years despite their good looking financial datasets. Their business drivers were rapidly being disrupted. I believe this is the case for the Big Five today despite their quarterly and annual reports. Unless these publishers quickly respond to new consumer behaviors and innovations, it’s just a matter of time for them too.

“Quickly respond” how? Lots of people say this but when you ask them how you get a welter of conflicting opinions, so the rhetoric is pretty empty. The industry is awash with would-be change agents all pulling in different directions. That is not a strategic plan.

Agreed…pulling in different directions is not a strategic plan…but neither is resting on one’s laurels. Just because there is “a welter of conflicting opinions,” doesn’t mean all the rhetoric is empty. Marketing to consumers / readers today is complicated, and it is a very comprehensive topic, not one that can be summarized here. I suggest publishers hire the marketing firms and advertising agencies who are already successfully guiding their clients to new selling opportunities and revenue channels. Part of the challenge is doing the work to find who is successful and why they’re methods succeed. It’s not a simple “how” answer. If it were, it would be worth nothing because anyone could do it, and I would be unemployed. 😉

Sure, profitable for self-publishers. But what kind of product do they sell if they fail to pay any attention to quality in design, copyediting, etc.? In my sector of publishing, scholarly, this is the road to utter disaster. By the way, what exactly is micro-licensing? It’s not a term I have heard used before.

I absolutely agree. The really important disciplines of authoring great works are not going away in our digital world. Editing, design, marketing, etc. are still critical; and as a reader, very much appreciated. In my opinion, however, great talent and skills in these disciplines are not confined to big publishing houses. So, I question what these established firms will bring to the table in the future for authors who can find these talents and skills elsewhere.

As for your question regarding micro-licensing, it is an approach used to digitally distribute publications to readers using intellectual property licensing. Each transaction that passes digital content to a consumer creates its own, unique license agreement where the information required for a legally durable license is fingerprinted into, and in some cases watermarked on, the digital publication. In essence, the publication becomes its own, unique digital work-of-art directly linked to the consumer (licensee) of that publication.

From your description, now I realize that the CCC (on whose board I serve) has been engaging in micro-licensing for quite some time as licenses obtained through RightsLink, e.g., come with very specific terms related to the very specific uses the licensee wants to make of the work.

CCC / RightsLink is a good example. I refer individual authors to CCC frequently.

This is a perniciously false article. Let’s start with “the crux of this story”. It’s not Amazon. The crux of this story is that Apple and its five publishing partners engaged in an illegal price-fixing conspiracy that took millions of dollars from the pockets of ebook buyers. That’s a fact that you want to run away from, but it is a fact. Here are a few other things you neglected to mention. Three Apple execs and two publishing CEOs lied on the stand in a federal court. They are criminals who should go to jail (but they probably won’t be charged). The evidence that Apple and the publishers engaged in an illegal price-fixing conspiracy was “abundant”, “overwhelming”, “compelling” and “powerful”. Furthermore, the judge found that all the parties involved in the conspiracy knew they were breaking the law when they entered into the conspiracy. To recap, the CEOs of five big publishing companies knowingly conspired with Apple to defraud consumers of millions of dollars.

Your conclusions about the outcome of the lawsuit are just laughable. You assert that Amazon will raise prices in the future based on nothing more than your bias against Amazon. The NYT article you linked to is just plain stupid. All the prices discussed are well below the list price chosen by the publisher. As the article points out, Amazon’s retail prices are very dynamic. Retailers use discounting to entice buyers to buy. If buyers don’t respond to the discounts, those discounts are just hurting the retailer. If you think Amazon’s business practices are illegal, report them to the FTC.

The idea that ebook innovation must come through retail distribution channels goes counter to my experience in tech markets. The fact that innovation has come from that way up to now is due to a slightly odd anomaly. The big producers of ebooks (publishers) really wanted them to fail. Now that their scheme to slow the adoption of ebooks is being dismantled, there is a huge new opportunity for innovation from new producers.

By the way, you are wrong in saying that the settlement agreements for the publishers required them to go back to the wholesale model. The agreements did no such thing. They just returned control of the retail price to the retailer. As far as I can tell, all of the settling publishers are still using an agency model for ebooks.

“To recap, the CEOs of five big publishing companies knowingly conspired with Apple to defraud consumers of millions of dollars.”

How was anyone defrauded? If a book is sold for $11.99 instead of $9.99 that is not fraud. Whether what the publishers engaged in met the technical definition of price fixing is neither here nor there. I’m not arguing the merits of the case or defending the statements of Apple executives. My article is about the impact of the ruling.

“You assert that Amazon will raise prices in the future based on nothing more than your bias against Amazon.”

No. I speculate that Amazon will raise prices in the future because they need to in order for their stock price not to plummet and to stay in the good graces of their investors. And I have no “bias” against Amazon and never said or even implied they have engaged in any illegal activities.

“The big producers of ebooks (publishers) really wanted them to fail. Now that their scheme to slow the adoption of ebooks is being dismantled, there is a huge new opportunity for innovation from new producers.”

What is your evidence for any of this? There is no evidence publishers want ebooks to fail. Where are these new producers you speak of? I don’t see them.

“By the way, you are wrong in saying that the settlement agreements for the publishers required them to go back to the wholesale model. The agreements did no such thing. They just returned control of the retail price to the retailer.”

Returning control of the retail price, is for all intents and purposes, the wholesale model.

How was anyone defrauded? By the illegal and deceptive actions of the conspirators in this case. You claim that you aren’t arguing the merits of the case, but anyone who reads your article can decide for themselves if you are being truthful about that claim. You put “conspiracy” in scare quotes. You accuse the DoJ of browbeating the publishers when the ruling clearly states that the publishers knowingly engaged in a price-fixing conspiracy. This isn’t a question of the technical merits of the case. This is a fact, adjudicated in a federal court.

You are being completely disingenuous when you claim that Amazon must raise book prices to prop up its stock prices. I don’t know if you’ve noticed, but Amazon sells a lot more than books from traditional publishers. They sell a wide variety of physical goods. They have a huge business in cloud computing services. They sell digital goods besides ebooks (movies and music). They have a very profitable business called Amazon Marketplace.Their stock price isn’t tied to the profits from the sales of traditionally published books.

Did you read the court ruling you are discussing? There is ample evidence that the whole point of the scheme was to discourage the sales of ebooks in favor of hard covers. In the words of Carolyn Reidy (which were quoted in the ruling if you want the context):

Higher price slows Ebks/casual purchaser/keeps retailers/stops authors leaving.

The big publishers wanted to slow adoption of ebooks. Higher pricing was one part of their strategy. Putting out substandard ebooks seems to have been another.

The new producers are coming. I’m building one of them. There are others out there. Do a little research and you will find them.

If you think that the retailer controlling the retail price and the wholesale model are the same thing, you don’t know what you are talking about. Let me explain with one example. The contract for Amazon’s Kindle Direct Publishing is an agency arrangement, but the retailer sets the retail price. A publisher who agrees to that contract sets a list price, but Amazon reserves the right to sell the ebook for whatever they want. If you set your list price between $2.99 and $9.99, Amazon will pay you 70% of each sale. Under a wholesale arrangement, you would receive the same amount for each copy sold. But under the KDP agency arrangement, the amount you get depends on the actual retail price at the time of the sale. A sale made at $6.99 will net you $5.59 while a sale for the very same title made at $4.99 will net you $3.49. That’s not wholesale. Not to mention that there are tax and legal differences between wholesale and agency sales.

You are factually incorrect to say that the settlement agreements required a return to the wholesale model. Read the agreements. They did no such thing. You claim that Agency agreements with retailers controlling the retail price are the same as the wholesale model, but that is demonstrably false. Your assertions about the likely outcome of the ruling are based on a false equation of a part of Amazon’s business with the whole. Why should anyone pay attention to your opinions when you get the basic facts wrong and show an ignorance of the ruling you discuss?

You seem to be unwilling to distinguish between price fixing and fraud, which are different things.

“Their stock price isn’t tied to the profits from the sales of traditionally published books.”

Amazon makes practically no profit despite their sales volume. At some point they must raise prices on things – which things they choose to raise prices on will be up Amazon and the exigencies of their business. Do you think they will not raise prices in an area where they maintain market dominance?

“There is ample evidence that the whole point of the scheme was to discourage the sales of ebooks in favor of hard covers.”

No. There is evidence publishers wanted to slow the sale of ebooks via Amazon given their (even greater) dominance of the market at that point and their pricing practices, which were, to publishers mind, creating an artificially low price point for nascent ebooks in order to fuel the Kindle ecosystem. You are confusing a tactic meant to buy time for competitors in order to create a more competitive marketplace and a general distain for ebooks.

“You are factually incorrect to say that the settlement agreements required a return to the wholesale model. Read the agreements.”

I did and I am not. See Al’s note below.

“The new producers are coming. I’m building one of them. There are others out there. Do a little research and you will find them…. Why should anyone pay attention to your opinions when you get the basic facts wrong and show an ignorance of the ruling you discuss?”

Says the person who writes under an apparent pseudonym, who says he is building a digital product of some kind he will not identify, who claims others have entered the market but will not identify them, and flings works like “ignorant” “disingenuous” and “perniciously false” around at people he has never met because he disagrees with their perspective.

Michael: My comments listed below were for Mr. Ockham not you. Sorry. Al

I have included a quote and a link. You and Al are wrong. Just read the actual agreements and admit that you are wrong.

I didn’t fling the word “ignorant”. I said that you show an ignorance of the ruling you purport to discuss. And that is manifestly evident. I stand by my assessment that you are being disingenuous with your totally baseless accusations against Amazon. Your post seems to me to be animated by a malicious attitude towards consumers, the Department of Justice, and Amazon.

I am not here to promote my company or to do your internet searches for you. If you want to know my real name, it is easy enough to find. I will give you a hint. Search the Digital Book World Experts Blog for my pseudonym. Or you can just send me an email.

Michael – There are some fundamental errors in your statements:

1) While off topic, I don’t know why you are arguing the semantics of fraud vs. price fixing. A definition of fraud “fraud is intentional deception made for personal gain or to damage another individual”. If fixing a price amongst publishers to gain more profit is not fraud, I don’t know what is.

2) “At some point they must raise prices on things – which things they choose to raise prices on will be up Amazon and the exigencies of their business.” This is completely incorrect. Amazon do not set prices. Full stop. Not in a nearly two decades of operating. With some only minor exceptions (Kindle, web services etc..)

Amazon set discounts. It may say ‘price’ on the e-product record. But believe me, the publisher sets the price of the ebook, Amazon chooses how much they want to sell it for. Amazon do not contact a publisher and say ‘we’re going to price the ebook of Harry Potter for $1 and we’ll give you 50%’. The publisher contacts retailers and says “the ebook for Harry Potter is $10, whatever happens you will give us $5 for every sale. If Amazon decide to sell it for $4, they still pay the publisher $5.
To be clear, Amazon have never (to my knowledge) raised the price of a book higher than the advertised list price set by a publisher. It would be impossible to do so without uproar and loss of sales to a competitor.

3) “Do you think they will not raise prices in an area where they maintain market dominance?” Let’s look at another market they have dominated. Print books. Again, they were by far the dominant player in this market, yet have consistently sold books below their list price and at some points below the cost of purchase. Have they reached out to publishers to set prices higher? Not to my knowledge and if so then they should be brought before the DOJ.

While your comments were rather interesting, it might be prudent for you to review the actual settlement involving Hachette, HarperCollins, and Simon & Schuster in this matter.

Please see Andrew Albanese’s article in “Publishers Weekly” on September 7, 2012. Albanese covered this issue rather closely, and he recently had an e-book published on this matter.

Re the 3 settling publishers listed above: “They must terminate their agency agreements with Apple within seven days, and must terminate agency contracts with other e-book retailers covered by this settlement ‘as soon as each contract permits’ after 30 days…” Albanese

I assume you must have missed this part of the decision.

Al Greco

I didn’t miss anything. I read the actual settlement agreements. It is true that they had to terminate the then-current agency agreements, but they were only prohibited from entering into contracts with an MFN clause and restricting a retailers right to offer discounts and set the retail price. In fact, under the heading “Permitted Conduct”, the settlement says:

“…Settling Defendant may enter into Agency Agreements with E-book Retailers…”

There are restrictions placed on those agreements to prevent the publishers from engaging in illegal conduct, but agency agreements are expressly permitted. You can read it yourself at http://www.justice.gov/atr/cases/f286800/286808.pdf

Amazon has basically created the ebook market, made books available in ways no one could have dreamed of when they began, done it cheaper than the publishing industry has (as well as more efficiently and easier to buy), created the self-publishing boom, while Apple and the publishers clearly broke the law in an effort to wrest control of the industry they were utterly out of step with, and somehow Amazon is the bad guy here?

Methinks some folks have a hidden agenda.

Sure, maybe someday Amazon will be a big bad monopoly that will raise prices and hurt consumers. Then, we’ll be back to where we would be now if Apple and the Publishers had won.

So, instead of “what if Amazon goes evil”, let’s face the “evil” we have and give Amazon a chance. So far, consumers and authors have benefited enormously from Amazon. The publishers and those dependent on them have not. And boy! are they throwing a tantrum about it.

Maybe this is the Betamax vs VHS debate all over again. Amazon made eBooks cheaper and more accessible, so right now their format is winning. But just like DVDs, blu rays, and streaming video replaced VHS tapes, if someone comes up with a better format for eBooks in the future, the Kindle format could easily be supplanted by something better down the road…

The one difference is that Amazon owns the Kindle format, and VHS was open to all manufacturers. So there is a risk of monopoly there.

Amazon is a great company that provides a consistently excellent service and a great price. I use them all the time myself. Moreover they indeed do deserve kudos for (among other things) making the ebook market work. While others like Sony had been slogging away for years with ebook readers, Amazon made it happen. I have nothing against Amazon and wish them continued success.

My point is not that publishers and Apple didn’t break the law – they did. My point is not that Amazon is a bad company – they are not. This is not about “good” and “bad” – it is about long-term outcomes. We need more competition in this space and incentives for further innovation in technology, business model, and format.

So the publishers and Apple broke the law – yes, OK. They should be fined. They should have other actions taken against them, OK. But the outcome here hurts consumers and authors as well by making the market less competitive. That seems to be a worse outcome than paying an extra buck for a ebook.

I don’t think anyone has a “hidden agenda” here. As far as I can tell, everyone’s been pretty open (and in Apple’s case, perhaps that openness is what doomed them to lose this case–had they not been so transparently collusive, they might have had a chance to get away with it).

Amazon has indeed been a leader in customer satisfaction–it’s not surprising that they’ve built such a loyal following. But from a supplier’s point of view, Amazon has a long history of brutal competition, of bullying small suppliers and employing WalMart-like practices. It should also not be surprising to see some resentment toward a major corporation that dominates a market, that stifles compeition and that readily throws its weight around

Consumers and producers do better in a competitive market where there are choices. I agree that the actions taken by Apple and the publishers here were not the right ones to correct the market, but there’s no denying that monopolies are problematic situations. As a book reader, I don’t want to live in a world where the only place to buy a book is Amazon, and the only way to read it is on a Kindle. I want to have choices, I want to have local bookstores in my community, I want other companies to be able to innovate and join the market, rather than being shut out by one enormous corporate behemoth with a stranglehold on the market.

Claims of an Amazon monopoly in ebooks would be subject to competition from Google Books — if the latter could ever get its act together — and the possibility of direct (“fire”) sales by publishers.

I will give you three specific instances of actions Amazon took that I consider arrogant and offensive:
1) Amazon threatened to de-list all books published by the university press I headed unless we agreed to use exclusively its print-on-demand service;
2) Amazon consulted with large publishers about its Search Inside the Book program, but ignored small publishers, claiming that it was protected by “fair use”;
3) in Texas where I now live, Amazon sought to avoid paying any taxes on sales even though it had a warehouse (physical presence) in the state.

Now do you understand why some of us don’t like Amazon?

If it’s just those three instances it would make them saints in comparison to the business antics of Apple.

Can’t comment on number one, as I don’t know the back story, but as for number two, that’s exactly what I would do. You can not ask everybody permission for everything, the internet would break. Check the big players are okay with it, probably a couple of smaller ones too, check you are legally fine, then move on.

As for 3. I’m sure you could find similar instances of that in hundreds, if not thousands of companies, including Apple and Google. It’s odd to pick specifically on Amazon for that practice.

As my Mother used to tell me, two wrongs don’t make a right.

But no, these are not isolated incidents. See:


…to name just a few. Amazon is a brutal, hard-nosed, incredibly competitive corporation. That’s certainly their right (presuming they stay on the right side of the law), and the core reason that a for-profit company exists is to drive profits. So like Apple, no one should pretend that they’re a warm and fuzzy charity doing things out of the goodness of their hearts.

“… these are typically not options for professional writers who require substantive advances to, you know, eat.”

I’m always amused by comments like this. The average advance for the average author of fiction is somewhere in the neighborhood of 5K to 15K, which is paid out in increments over a period of about two years. While that kind of money may be good for a snack or two, it’s hardly enough for an author to eat regularly or pay his mortgage or even send his kids through college.

Six figure advances or even high five figure advances are few and far between. This fundamental misunderstanding of how publishing works is why so many of these types of articles get it wrong. An author, if he works hard enough, has a better chance of making a living wage through Amazon’s self-publishing program than he does through traditional publishing.

That’s the simple truth of the matter.

This is why I mentioned self-publishing options. Yes, if one is looking at a $5K – $15K advance (which would be considered quite generous at a university press), it is not likely that writing is one’s primary profession, which is why I specified “professional writers.” There are a growing number of avenues for getting one’s book published, which is a welcome development. However, there are not a growing number of options for getting an advance large enough to live off of.

Most authors of fiction don’t do the job full-time because they are very poorly paid by publishing companies who make millions selling their work. Even so, I still consider these authors “professional writers.” I’m not sure why you wouldn’t.

I don’t consider them to be professional because it isn’t their primary profession. That is not to say I consider them to be UNprofessional or their work to be inferior. TE Elliott was a banker for much of his life. Wallace Stevens worked in insurance. I am not making value judgements as to the quality of writing. My point is that a less diverse publishing market provides fewer options for writers, especially new writers, and especially writers who are not writing in an established genre.

Actually, there are more opportunities for authors right now than ever before, and if TE Elliott were working today, he’d probably be able to do it full time, thanks to Amazon and B&N and Kobo and, yes, even Apple. For the first time since the early days of the profession, authors now actually have control of their careers and are making more money than ever. Apple’s loss in court will have no effect on us whatsoever.

If a book is making a publisher millions the author isn’t living poorly, even on the most basic 10% contract they’d be making more money than many of us earn.

It’s not really that simple of an equation. Yes, there’s the issue of the advance, a chunk (no matter how small) of money paid to the author that, assuming they deliver the book, they don’t have to return. For an author, the real benefit of a publisher is all the services and efforts made on your behalf, all made at no cost to you.

If you choose to go the self-publishing route and want your book copyedited, you pay a copyeditor and hope to make that money back in sales. Ditto a cover illustration, a professional edit, design, publicity, etc. All those expenses come out of the self-publishing author’s pocket and all of the time it takes to either do or manage those things is time taken away from writing. It’s why so many writers like Neil Gaiman and Cory Doctorow constantly write pieces about how much they value their publishers. Perhaps the comprehensive explanation of all this is author Charlie Stross’ series on Common Misconceptions about Publishing (http://www.antipope.org/charlie/blog-static/2010/02/common-misconceptions-about-pu.html). Although author John Scalzi’s three act play version is perhaps a bit funnier (http://whatever.scalzi.com/2010/02/03/why-in-fact-publishing-will-not-go-away-anytime-soon-a-deeply-slanted-play-in-three-acts/).

I was in traditional publishing for many years and because I wrote fast and could write more than one book a year, I was able to make a good, full time living at it.

That said, since going the self-publishing route and acquiring the services you speak of on my own, I’ve had more success than I ever did as a traditionally published author. Why? Because Amazon and B&N and Kobo pay 70% for every book I sell, and oddly enough, I sell even more books than I did before. I know many, many authors who have gone this route and are not only making much more money than they ever did through traditional publishing, but are much happier in general about the profession.

It’s really a decision anyone in any business has to ask. Am I better off doing everything myself or hiring other professionals to provide services for my business?
In this case you’re balancing initial financial layout, assuming the financial risk and taking on a much larger workload with reaping a potentially larger financial reward. Some authors do enjoy running other aspects of the business–others just want to write.
It is indeed a good thing that authors now have more channels and more career routes available. That said, many (most?) greatly successful authors seem pretty happy with their publishers, so for some, there may still be some merit in the traditional pathway.

One advantage you give up is the publisher’s ability to go to court to sue for infringement. As an individual author, you will be hard-pressed to pay the costs of a suit (which average $300,000). Now, if the Copyright Office’s proposal for a small-claims court procedure for copyright infringement gets legislated by Congress, you may be able to deal with that problem better.

I don’t even understand this article or the so-called analysis of a very cut-and-dried case of price-fixing by the publishers and Apple. You don’t like what Amazon is doing, fine, go sue them for unfair trade practices. You might, in fact, have a case. We have laws against “predatory pricing” that don’t allow for pricing under retail in order to crush opposition. But you don’t attack one business by propping up the illegal practices of another, no matter how much you may love your iPad.

A “university press” can’t cover their costs selling a $9.99 ebook ?! Over what time frame? All authors and publishers enter into a contract with the retailer who sells their book and agree to the pricing and terms therein. No publisher is forced to sell for any amount. If my “university press” can’t afford to market a book or other product for the minimum price I agree to sell it for, then maybe I should try to get help from someone in the business department of my “university”.

And the bottom line is that Apple and their arrogance is what put them in the place they ended up. They were given numerous opportunities to settle and refused. They are not in this for the good of the publishers and writers either; they are in this for the good of Apple and their shareholders. Their real goal was to take a chunk out of Amazon, but the effort was ham-handed and poorly thought out by their legal people, who are supposed to be smarter than this.

There might be a lot of fertile ground for anti-trust complaints against Amazon and Apple, in my opinion, with their share of the e-reader market being what it is, and the effective “locking out” of other online stores that both of them do on their respective devices. I don’t believe this is much different from what Microsoft was sued for with blocking Netscape browsers in favor of Internet Explorer.

Isn’t it amazing that a company the size of Google hasn’t been able to make much of an entry into the digital content area, outside of games and apps for Android phones? What about Smashwords? Kobo? Shouldn’t consumers have a choice of where they buy their content, just as they have for where they buy their devices? Google sells ebooks, too, but you would hardly know it, because Android tablets are mostly sold by Amazon, which locks out the ability to buy from the Google store and Barnes and Noble. Ditto for trying to get something for your iPad or iPhone from Google, either. Both Amazon and Apple enjoy a “first mover” advantage right now, but that won’t last forever.

The bigger news this past week, that everyone took as a negative, though I think it could be very interesting, is the fact that Barnes & Noble is going to start trying to license out their Nook reader technology to outside manufacturers rather than build readers themselves. You can buy a decent Android tablet today for $100 or less. By allowing Nook software to be loaded on these tablets, it would put them in a more similar position to Google Play in being able to sell books to a reader built by anyone (anyone except Apple or Amazon, that is). In the end, readers should be agnostic of purchase point. Worry about freeing up these market entry points, and the free market will sort things out on its own. But don’t just wink at those who are blatantly breaking the law just because you don’t like their competitor.

A “university press” can’t cover their costs selling a $9.99 ebook ?!

To understand the market for most scholarly works, you have to understand the scale of things. Many (most?) academic books sell a few hundred copies at best. A book that sells a few thousand is considered a rousing success and more than five thousand a blockbuster. At the same time, scholarly books generally take more editing work than trade books due to extensive fact and reference checking. So you have higher costs and smaller specialized audiences. As such, many monographs or manuals are priced between $100 and $400, and even at that rate still lose money. In a $9.99 market those books simply don’t get written. That may not be the ideal outcome for scholarship.

“Many (most?) academic books sell a few hundred copies at best.”

Before 1970, academic libraries used to provide a strong economic basis for university press and other new books of research interest. Even two thousand copies of a “Books for Colleges” reprint was a reasonable production run.

These same libraries don’t seem very interested in electronic editions — no matter their affordable prices. Although they represent a substantial market for ebooks, they have been overlooked in all the fuss about Amazon, Apple, etc.

I fail to see the relevance of this. The court case does not mandate a $9.99 price.
The only problem was that the publishing oligopoly colluded and used their market power leverage to dictate to Amazon that they could not sell at $9.99 and had to adopt agency pricing. It would be as if all the record companies agreed to not sell Wal-Mart any records unless they stopped pricing records as loss-leaders to get people into the start.

That collusion was illegal. Publishers and resellers charging an appropriate price to cover costs was and still does remain legal.

You underestimate the effect of Amazon’s pricing on consumer attitudes. By making the most popular books available at that price, Amazon fosters the misconception that ebooks in general are cheap to produce, and that no publisher has much excuse to charge higher prices. University presses are not immune to that misconception among those who buy their books. I can’t tell you how often I have written on blogs and elsewhere to combat that misconception.

I would think an academic audience probably understands the cost of producing academic books.

You might be surprised at how little those in academia know about the publishing business. I’m someone who came from academia, did a PhD and did research at top universities, then moved over into the world of publishing. It took me at least ten years of hands-on, every day experience before I really felt like I had much of an understanding of the business.

I hardly think understanding of the current publishing business model matters to understand how much it would cost to produce an academic eBook.

Less the entire industry than understanding the details of the process, which are often complex. Most authors, particularly first time authors, don’t really have a handle on what goes into it, the different levels of editing, design, production, licensing, marketing, etc.

This is tangential to your argument that Amazon will influence academic consumers to stop consuming higher-cost academic books.


But I do think an understanding of both the costs involved, and the limited size of the potential audience are important to understanding why it would be bad for academic publishing if there were only one viable outlet for selling books, and if that outlet had strict pricing limits that could not be exceeded.

Good thing Amazon does not have strict pricing limits. Indeed, you can find books over $9.99 on their site pretty easily.

Monopolies or oligopolies cause societal harm (i.e. deadweight loss) is when they *raise* prices and/or decrease quantities.

As far as I can tell, this is more true of the publishing oligopoly (look at the textbook market) than Amazon (whose “crime” is lowering prices).

Academics have even less understanding of the costs of producing ebooks than they do of print books, which is exactly why the Amazon practice so badly leads them astray.

The function of markets is to allocate scarce resources efficiently. If the cost of the item is higher than the price that consumers are willing to pay for it, producing the item is wasteful. If the item has positive externalities, then that is an argument that the government might want to fund it.

Academics who expect $400 academic books to drop to $9.99 in eBook form because consumer books cost that low are mistaken. Academic books do not have similar pricing to consumer books *now*.

It’s not that they think academic books are like popular books, but they do harbor the illusion that ebooks cost virtually nothing to produce and therefore should be priced very low.

Let me return to David’s original argument: “As such, many monographs or manuals are priced between $100 and $400, and even at that rate still lose money. In a $9.99 market those books simply don’t get written.”

The problem with this argument is that, if it were true, then these books wouldn’t get written in a $25 market either. The consumer hardback market should have influenced academics not to be willing to pay a higher price. The reason it doesn’t is because consumer books are not a good substitute for academic books.

You are assuming that the phrase “a $9.99 market” was referring to buyer attitudes, not the presence of a monopoly seller who could set strict price limits on what’s allowed into the marketplace. The original comment was in response to someone who was incredulous to the idea that a university press could not cover its costs by selling books at $9.99.

Market power is abused when the monopolist or oligopolist raises prices to artificially boost profits at the expense of the consumer. The reason firms were designed to be profit maximizing entities is because it creates an incentive for them to lower costs and thus prices to increase the standard of living of consumers.

Lower prices is a feature, not a bug.

Also, as someone else already pointed out, Amazon doesn’t actually set the price, it sets the discount, because it is reselling a product that the publishers are pricing. They do not have the power to set “price limits.” Only the government can mandate price ceilings. Note that nobody can stop you from opening a firm that sells eBooks at a higher price, thus bypassing Amazon’s “strict price limits.”

“The aim of a market maximization strategy is to dominate the market and, once all credible competition is vanquished, to raise prices and substantially grow margins unfettered by competitive pressures.”

This is not plausible for two reasons. First of all, it violates anti-trust laws, and given the amount of attention the case has had, there’s no chance in hell the FTC would somehow overlook this.

Secondly, predatory pricing is a myth. A monopolist facing a smaller competitor faces a much larger loss due to the larger volume it sells, and then unless this is a market with significant barrier to entry, it would have to go through those losses all over again. Most alleged cases of predatory pricing turn out to be economies of scale. See more here:


And note that for digital products, there is very little barrier to entry.

Also, note that Amazon doesn’t produce the product in question, it is reselling a product that publishers are themselves reselling from authors.

This discussion would make a nice issue tree diagram. Notice the increase in detail as some lines of argument are pursued, plus the growth of speculative disagreement in others. There are ethical, legal, financial and technological subarguments. An interesting mix. Mind you this discussion is just a fragment of the entire public discussion, but it is probably somewhat characteristic.

I run a small publishing company — we publish about 15 trade books a year. We set a suggested retail price, offer a standard discount, and happily sell books through every retailer we can. If Amazon wants to sell the book for less than Apple does, they take a smaller markup. With ebooks, we work each one so that the finances will work at a price of $10, or at a much higher price that takes into account Amazon’s lower payments at higher levels.

Our monthly ebook payments from Apple are a fraction of what we get from Amazon, Nook, Kobo, and even smaller players like Overdrive. Whatever Apple is doing, it isn’t selling books from smaller publishers.


Matthew Yglesias has cleverly written, “Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers.”

Jeff Bezos quoted those words from Yglesias in a letter to shareholders in April, then countered the notion: Don’t worry, Bezos essentially said, we’re not a charity. So where is Amazon going to get its profit margin down the road? Company representatives often talk about “improving our execution,” but Amazon’s execution is already exceptional. So they will probably have to either buy stuff for less or sell it for more. The New York Times recently reported that Amazon is cutting back discounts on books (though the paper acknowledged that the company denies it and that “the evidence is anecdotal and fragmentary”). The article provoked some outrage at Amazon as it appeared to confirm fears that the company would raise prices once it captured the market for books.

But for the publishing industry, rising prices may be better than the alternative. As industry consultant Peter McCarthy told me, instead of alienating consumers by asking for more money, Amazon, which calls itself “Earth’s most customer-centric company,” could gets its profits by demanding that the publishers give them the goods for less. That could have a crippling effect on the quality of the books in an industry where risks are already high and salaries, advances and profits are low.

I don’t think it’s too much of a secret that Amazon’s real long-term strategy is to lower costs by eliminating the publisher middleman and dealing directly with authors within a self-publishing model. Schumpeter’s creative destruction at work, I would say.

Technological change generally results in great benefits to consumers, but it first causes disruptive upheaval for corporations and industries.

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