The Shatzkin Files


After the DoJ action, where do we stand?


This post went up around midnight last night (Saturday, 4/14) in London, or between 6 and 7 NY time. I had been concerned about a part of it that has been edited below. If you read it before 5 pm today (Sunday, 4/15), you’ll not have seen this correction. And you’ll see some comments that obviously pre-date the update.

Well, we certainly have a confused book business on our hands following the announcement of the Department of Justice intervention last week.

According to my (admittedly tentative) understanding:

1. We have three Big Six publishers (Hachette, HarperCollins, and Simon & Schuster) that have agreed to a settlement with Justice that obliges them to modify their agency arrangements over the next 60 days in ways that will eliminate their ability to control discounting in the supply chain for the next two years.

2. We have two Big Six publishers (Macmillan and Penguin) that will contest the DoJ position that they acted illegally (in collusion). They can apparently continue to manage their business with agency pricing the way they have, at least until a court rules. And, as we know, that can take a while.

3. We have one Big Six publisher, the biggest of all (Random House), which can continue to sell under agency terms without restriction and without a lawsuit to defend. Why? Because they didn’t take simultaneous action with the other five and were, therefore, not implicated in the alleged collusion.

4. Agency terms, including even most favored nation clauses (which never really affected the Big Six anyway), have not been ruled illegal. (Cader said in his post on Friday, blocked by paywalls I think, that, as a result of this set of legal actions “agency itself is demonstrably considered legal.” If that is accurate, and he almost always is, that is certainly an unintended consequence.)

5. The DoJ delivered some convincing evidence, surfaced on the Melville House blog, that despite my conjecture to the contrary, big publishers did discuss agency among each other before they implemented it. That certainly doesn’t look good. But whether or not it was implemented legally does not affect my opinion about the value of agency or the damage from losing it.

Added later. But, aha!!! This is not convincing evidence of a conspiracy. It is most likely that this discussion, assuming the email quotes are all legitimate to begin with, was about Bookish, the book retailing initiative funded by Hachette, Simon & Schuster, and Penguin. If that’s true, it would suggest that HarperCollins was an early participant in the conversations about starting it. That makes sense. HarperCollins is a partner with Penguin in the financing of Anobii, an ebook retailing site in the UK. 

And hats off to my great friend and favorite consulting competitor, Lorraine Shanley of Market Partners, who made the penny drop for me in a conversation at the Digital Minds Conference today in London! I was only comforted when I spoke to one of the smartest guys in trans-Atlantic digital publishing who said, “of course” to this when I told him, just as I did when Lorraine told me. Like me, he didn’t get this right off the bat!

6. The publishers who settled appear to be on notice that the new arrangements they create to replace the status quo better not look too similar to each other’s when they’re done. (This seems extraordinarily difficult to me. The accounts actually limit the amount of variation that can exist…)

7. In a separate proceeding from DoJ, the settling publishers appear on the verge of refunding money to consumers who “overpaid” for ebooks. (This is a result of settling lawsuits arising from States, not DoJ.)

8. “Loss-leading” sales were addressed by Justice in a very creative way. They are banned, not on a “per-sale” basis, but rather on a “aggregate” basis. So retailers can give away ebooks. Heck, they can pay customers to take some ebooks, as long as they make back the margin they shed on other ebook sales from the same publisher. Since Amazon has never done anything else (they told me very clearly, and not under NDA, two years ago that they discount a small percentage of the total titles that constitute a big minority slice of total sales and their overall ebook sales deliver positive margin) and nobody else could afford to, that’s a restriction without any real meaning.

Looking back at the post I wrote six weeks ago when the possibility that agency would be ended or damaged first surfaced, I find nothing I want to take back or change.

I would summarize the situation this way. Amazon (which includes any other player largely dependent on Amazon) and the most price-conscious ebook consumers have won. Everybody else in the ecosystem: authors, publishers, and other vendors, have lost. The reaction from all quarters seems to confirm that analysis.

The biggest question going forward is how Amazon will react to this. Cader’s unique and invaluable analysis says that Amazon will have a “pool” of about $113 million for discounting and incentives in the coming year. B&N, with half their market share, would have about $57 million.

It will be fascinating to see how Bookish, owned by three Big Six publishers (two that settled, one that didn’t) navigates all this if it opens, as rumored, between now and BEA.

The Digital Book World website (a fine institution I have nothing to do with; we just program their annual NYC conference) reports that James McQuivey of Forrester expects Amazon to be very restrained in how they’ll employ discounting when the dust on this all settles (in about 60 days). I’d actually expect precisely the opposite. I think Amazon will do the splashiest discounting they possibly can, making the point as loudly as possible that they deliver the lowest prices to the consumer and daring their competiton to match them.

Every company in the industry is going back to the drawing board. Only one is not unhappy about it.

There’s a response from Dick Heffernan, President of Sales at Penguin buried in the comment string after my last post making the point that Penguin has also not cut its sales force in recent years. I congratulate them for that and I’m sorry that I jumped to the conclusion that because the major house senior executive who mused about Random House saw their behavior as unique that it must be so. I think the insights from Random House were useful — the comment string and traffic to the post seem to confirm that — but I’m also happy to also acknowledge Penguin’s persistence in maintaining service to the bookstore channel.

  Back to blog

  • Jimnduncan

    Curious if this new discounting only up to aggregate commissions has any real effect on Amazon? Is that 113 million significantly less than what they were using prior to all of the agency model stuff. Will they actually have to pay some real attention to their level and amount of discounting? If it does, I find it curious as well how little this bit of the settlement is getting air time. Mainstream media is basically ignoring it, playing up the hype that Amazon will not go back to their discounting ways. Even the publishing end of things doesn’t seem to giving it much notice. What’s your opinion, Mike? Is it going to have much of an impact?

  • Wayne McDonald

    I think the fundamentals of why Amazon discounted so much has changed thanks to Agency. Amazon discounted before to sell Kindles which they made a profit on. Now, since Agency, Kindles are at or below cost according to many people’s speculation, why would they discount heavily? Amazon adapted to what the publishers did and to raise kindle prices and drop book prices dramatically isn’t likely to work well.

    Also, mild discounts across a wider variety of books seems more likely to please
    Amazon buyers than a few big name bestsellers being sold as a loss leader.

    Many Amazon buyers who hate high eBook prices have been waiting for this and will likely be unhappy no matter what at how Amazon does it. The perception that ‘years ago it was a golden age’ for eBook prices will be impossible to live up to.

    • /blog Mike Shatzkin

      When you make a case that it isn’t in Amazon’s *interests* to discount, that’s a case worth considering. I don’t think I agree. There is still a significant portion of the market — between 35 and 50 percent — that Amazon doesn’t have. It is held by competitors that they can beat in just about every way (selection, presentation, technology) but they’ll get the attention of the audience with price and cut off the oxygen to their competitors by forcing them to match price.

      I think there’s plenty of incentive for them to use price, but I agree that the logic would have to be different than it was when they were using it to build the Kindle installed base for lock-in.

      Mike

  • Joel

    Hey Mike, just wondering if you can confirm the legitimacy of that link on the Melville House blog. Can’t find any information anywhere else about it or where they got it from, and it kind of looks like a spoof. Also, I’m told the email addresses aren’t correct. Is it just an elaborate and slightly off-colour joke?

    • /blog Mike Shatzkin

      Doubt it. Don’t know for sure. Will ask around and update post if necessary. Would prefer it if you are right!
      Mike Shatz

    • /blog Mike Shatzkin

      Sorry for typos. iPhone in moving cab!

      Mike

      • Joel

        No worries. Very strange. I’d prefer it if it were a joke too!

      • /blog Mike Shatzkin

        Just heard it might be hoax. Will keep asking.

        Mike

  • gous

    Well there are losers and then there is B&N, the greatest loser of all. One notes that Goldman Sachs has just lowered its target price from $15 to $14 on Barnes & Noble, and their comments justifying that decision sums it up:

    “We see risk to BKS from two sources: (1) Lower book prices could reduce gross margin in the ebook business, impeding an already precarious model (EBITDA losses through our forecast horizon). (2) Hastening the migration of book sales online, and away from the physical channel which, despite its secular challenges, is generating all of the firm’s free cash flow, and, in our view, most of its value.”

    Notice that they do not think much of the NOOK side of the business, implicit in their suggestion that most of B&N’s value is in its B&M operations. This is probably due to B&N’s inability to make any profits online. In the last holiday quarter online losses ballooned to 94 million – sales were up 32% year-over-year, while losses were up 85% year-over-year. All of this while selling agency titles with a built in margin of thirty percent! As you noted previously their print sales online have also been in decline, in itself a highly disturbing sign.

    I agree that Amazon will come out swinging, not least because they will scent an opportunity to knock a competitor clean out of the business. Bezos does not strike me as the kind to let such a rare chance slip through his fingers.

    • /blog Mike Shatzkin

      Boy, I really wish I had something to say to soften or mitigate some of your observations, but I don’t!

      Mike

  • EricWelch

    The actual DOJ complaint is damning enough.  You can read the actual document at 
    http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/04_-_April/e-books_complaint.pdf  The list of illegal behavior begins page 12 (Sec. VI para 37).  It’s no wonder three publishers settled so quickly and are willing to pay a considerable sum to settle state complaints. Even aside from the fact that they surely didn’t want the DOJ nosing around in their accounting systems and deposing ad infinitum. I suspect that was their real fear.

    • /blog Mike Shatzkin

      If part of what you think was “damning” was the email exchange quoted by Melville House in the link I provided, check again. There’s an explanation.
      The publishers have not been charged with anything for starting Bookish. That’s very likely what they were talking about. Not agency.

      Mike

      • EricWelch

        I didn’t find the Melville “emails” particularly interesting except as a record of where they liked to eat.  I was referencing the DOJ complaint which is quite explicit in what they considered illegal behavior, hence my link.

      • /blog Mike Shatzkin

        Sorry. If Melville House made a poor selection of what was damning, then my consideration of the most damning evidence will have to wait for another time.

        Mike

  • http://gravitationalpull.net/wp/ ampressman

    I would love to see Calder’s analysis because it doesn’t make sense to me on its face. Is that supposed to represent the total amount Amazon was collecting as its 30% share of ebook sales under agency pricing from the 3 publishers who settled? Because the section of the settlement that contains the limitation you are referring to in your point #8 appears only to apply to a modified form of agency pricing, not to other models like traditional wholesale/retail. And I think it is EXTREMELY yet to be seen what kind of new deal Amazon will strike with those three.

    I’m not sure the legality of agency pricing per se was ever in question. The Supreme Court (foolishly in my view) ruled in 2007 that such arrangements which relied on wholesalers controlling retail prices would no longer be automatically illegal. And so the tactic has since spread like kudzu in a variety of industries. The DOJ case quite clearly goes after the alleged decision by a group of suppliers to fix prices at a higher level than the then-current market levels.

    I’m not sure based on your reference to imagined, phony emails that are supposed to be a tongue in cheek summary of the DOJ case whether you’ve had a chance to read the DOJ complaint itself. It’s not long and it’s pretty clear that there is a lot of evidence about discussion of pricing, MFNs and so on. See http://www.justice.gov/atr/cases/applebooks.html

    • /blog Mike Shatzkin

      Cader (not Calder) has his analysis in the archive at Publishers Marketplace. He doesn’t sell by the article. It costs $20 a month to access his site. There’s a wealth of information there.

      I reported the information as on the Melville blog, which I believe (but didn’t confirm) was lifted verbatim from the DoJ filing. People questioned it the veracity of it in the comment string. I asked around about it (I’m in an environment thick with professionals here at London Book Fair, and I have NO time for any contemplative reading) and some people believed it was a hoax. High executives in a position to know from one of those companies said to me today that at least in their case “there were absolutely no meetings about agency.” Then the connection got made for me about Bookish, and I re-read the quoted material and realized it could have ALL been about Bookish! And that makes sense, considering the players.

      Could they be lying to me? I guess so. Could they not know everything going on in their companies? I guess so. I believe them, which is why I was so disappointed when I read the Melville House stuff and saw it as being about setting up agency.

      It is no secret that publishers (and agents) don’t like loss-leader pricing and it is no secret that just about every publisher is highly stressed about the increasing difficulty of negotiating with Amazon. This is not a secret. It is part of the industry ether.

      Hey, maybe even creating Bookish as a way to break what already feels to
      publishers like an Amazon monopoly is illegal; I’m not the guy to ask. I
      admit that it seems ridiculous (in the truest sense of the word) to me that
      anti-trust power is being used to help promote Amazon’s position. But if
      what Melville House printed was the most smoking of the guns…I’m sticking
      to mine.

      Mike

      • http://gravitationalpull.net/wp/ ampressman

        It’s not lifted from the DOJ filing

      • /blog Mike Shatzkin

        Well, that’s interesting. So we need to wonder where they came up with it.
        Mike

  • MRaber

    Mike: I always like your comments, and I think you have a good view of the issues. My concern about this post is how you  (and I think the big publishers) define the ecosystem.  For you, the reader is apparently not part of the ecosystem. As a reader, I agree with some of your commentators that there has been some good (lower prices for e readers) and some bad (higher prices for e books) from the agency system. I believe it is good for authors and for publishers to have more people read their books. In some respects agency pricing has as its goal making e books more expensive in an attempt to maintain the revenues of an antiquated system. Not letting libraries lend out e books is part of that same strategy. Publishers need to think more about  innovative ways to increase readership and produce their product in a form and at a price consumers think has value, and less about how to make reading on a kindle or nook less enjoyable . Publishers act as if e book readers are the problem. Actually readers (in all forms) are why the rest of the ecosystem exists. Amazon figured this out quite a while ago. Hopefully the big publishers will as well.

    • /blog Mike Shatzkin

      I never met a person who wouldn’t rather pay less for anything they buy. Customers don’t know what things should cost except in relation to the same thing available somewhere else or something comparable available at a different price.

      Amazon is setting prices to fulfill *its* corporate ambitions, which are to gain customers and customer loyalty and, as much as possible, lock in customers to buying from them.

      But it is a publisher’s job to maximize the value of a copyright for an author. That may mean charging the amount that gets the most possible readers while maintaining revenues, or it might be about the price that generates the most revenue (which is higher, and will therefore mean fewer readers.)

      That is, the interests of Amazon on the one hand and authors and publishers on the other hand are *not* aligned.

      Amazon has the industry in a judo hold, though. How can anybody in their right mind be for *higher* prices for consumers, right?

      So, therefore, everybody in the industry (authors, publishers, and all other retailers) are not in their right minds.

      Slam dunk of an argument. Too bad it is wrong.

      Mike

      • Srpaulsen

         So, publishers are devoted to making sure authors get  a fair “wage”? Really? I’m sorry, but I (and a whole bunch of other people) have a very hard time believing that. Just as Amazon is devoted to its own corporate health and well being, so are publishers. They’ll give authors the bare minimum required to keep them producing and not a cent more. They are in it to maximize their own corporate profits. Period. The idea that traditional publishers are some sort of warm, fuzzy advocates and protectors for authors is just unadulterated nonsense. Look at the system that’s been created by those publishers to “hire” those authors. It’s brutal, demeaning, disrespectful and only very rarely is there a pay-off. I have no doubt that Amazon is out for itself, but it’s time to admit that the Big Six are as well.

      • /blog Mike Shatzkin

        If self-interest is the measure by which you want to compare, it’s a pretty simple choice.

        Amazon has had and will always have a very healthy business without any relationship with authors. And nothing in their business model is changing to change that fact.

        The Big Six are out of business without authors. I won’t offer a judgment about how much is enough, but I can tell you that the interest in being a good partner that can serve authors has rocketed up the corporate priorities in every major house over the past 10 years. There is tons of tangible evidence of that, in staffing and resources and services offered. It will become increasingly obvious in the next year or two that Big Six authors get marketing apps and metadata management and that social network marketing which can be accomplished at scale, which is quite a lot. They’ll be getting dashboards to see their sales and tools to manage their publicity. Things like this are in development all over town.

        Amazon can develop author tools too, but there are two big differences. One is that anything they make, they’d really want to offer to all authors, not just their own. After all, they’re a long way from publishing most of the books they sell. And the other is that Amazon doesn’t really want to promote sales from other retail sources. Publishers want to push them all.
        So an author’s self-interest is much more aligned with a publisher’s
        self-interest. Naturally.

        Mike

      • MRaber

        Mike:  Your ecosystem does not include the reader. Therefore what I the reader want is not particularly of import to you. You dismiss my wants as being driven by the cheapest price and you point out that as a reader (customer) I have no idea what a book (product) is really worth.  This comes across as more disdainful of readers than I think you really are. Price is part of what drives me to buy a particular book, but only part. The price I am willing to pay for one book may be very different than what I would pay for another. It seems to me that your ecosystem has decided that the problem is not inefficiency or failure to innovate, the problem is the reader, or rather Amazon, which has figured out how to attract readers. Perhaps it is because for them the reader has always been the customer and they know that without customers they are finished. When publishers start thinking of the reader as their customer and think in terms of how to satisfy that  customer they will have a chance of being successful in the new world. 

      • /blog Mike Shatzkin

        You could just as well say about the people you think know about price (presumably Amazon) will have to know something about creating and honing content for people to succeed in the new world. It will actually take both.
        The point I was trying to make, which apparently wasn’t clear enough, is that whatever Amazon knows about the sale side of the equation, they neither know nor care anything about the cost side. (And publishing a relative handful of ebooks with no print component doesn’t qualify them.) And, frankly, the customer doesn’t know anything about the cost side either. Except, as I said, by comparison.

        Mike

      • http://twitter.com/emmittc emmittc

         good point – and to complicate it further – amazon as a publisher has a conflict with itself – and you wonder how that will be resolved….

  • Kevin O. McLaughlin

    As someone below commented, the biggest winners include both Amazon and readers, who will probably get some ebooks cheaper out of this. (Yes, Amazon may someday go all Dark Side on us and raise prices, but I doubt it. The day they do will be the day some new startup eats their lunch. And don’t forget the DOJ hovering in the wings waiting for them to have a monopoly…)

    For writers, I see this as pretty neutral, for now at least.

    Trad pub writers won’t make any less per sale when Amazon discounts books. If a publisher sets list price at $10, then the publisher gets the same $$ per sale whether Amazon sells the book at $10, $5, or gives it away. Therefore, the writer gets the same. Some publishers may be a bit distracted by lawsuits, leaving them with less resources to do their primary jobs, but I doubt that will be noticeable to most writers.

    Mike, we’ve both speculated in the past that losing agency might hurt indie writers, because it would allow Amazon to deep discount some trad pub books, which might hurt indie sales. I’m feeling less and less like we’ll see a major impact from this. Publishers can (and might) raise list prices a bit to compensate for expected discounts. Amazon can only discount 30% for those who settled, which puts an $11.99 ebook down to about $8.39 and a $14.99 ebook down to $10.49. Both are still well above the top indie range of $4-6. I think enough gap remains that indie writers will be largely unaffected.

    So right now, based on what we know, I see this largely remaining neutral for most writers, with a small boost for indies, perhaps, if some of the fallout from this is more readers moving to ebooks due to dropping prices and more media coverage. Writers ought to stay on their toes, though, as I get the feeling this is a situation likely to change rapidly.

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  • Andrew Malkin

    Mike,
    Thanks for summarizing the circumstances.I have a few questions but did miss Pub Lunch paid piece last week so Cader may have covered this or not.#4 above–Maybe basic but why would MFN no really apply to the Big Six? Because they had set up agency with all of the major platforms so a bestseller would be the same price in those instances? #6 will be interesting because they can’t go with status quo as you suggest but how many options do they really have? Worth following…Other than AMZN, doesn’t Random look smart for waiting to go agency at least to not be named in this and have the cost/distraction?  While Perseus doesn’t fall into Big Six, they are well-run and a sizable aggregator/publisher. Can you shed some light on Perseus? Am I right they sell both agency and wholesale? 

    Lastly, I am curious where Cader comes up with the “pool” of $113 million. AMZN cash on hand is more like $5 billion (not that they want to use all of it to continue to gain market share) while BN is $59 mill as of ’11 on their balance sheet. I agree with the others that it would be most uncharacteristic for AMZN to NOT come out with discounting barrels blazing at least on visible,top, commercial titles and then some. We shall see…

    Looking ahead, do you see AMZN launching their own Kindle mobile phone or be satisfied (for now) with Kindle app functionality via Android or iOS phones? I am sure they watching the RIM and Nokia demise closely. 

    Best,

    ARM

    • /blog Mike Shatzkin

      No opinion on the mobile phone and I don’t want to get into replicating Cader’s paywall-protected piece.

      But on the MFN, the logic is all mine. MFN protects the counter-signator (Apple) from being undercut by competing retailers. If you’re operating Agency, which all the Big Six are, that just doesn’t happen. They set the same prices everywhere and can enforce respect of those prices. It is with the others — the ones that Amazon won’t *allow* to work on agency — where discounting below the agency-price can occur. I wrote a piece last Fall about the Jackie Kennedy book where precisely this circumstance arose. It was published by Hyperion, which is not Big Six and was selling Amazon wholesale but setting prices in the agency way with Apple.

      Mike

      • Andrew Malkin

        Thanks Mike. I understand how MFN works but your explanation about Hyperion’s title is insightful (not sure how I missed your Jackie Kennedy book post) in those agency with Apple but not with Amazon situations. No opinion about Perseus or Random’s standing as they are not involved in the DOJ case so lack the legal cost, payout to end consumers and overall distraction? I will have to ask Michael about the cash reference on B&N and AMZN. He skipped a day for those who don’t pay for premium service but his coverage is excellent (either way–free or paid). Enjoy LBF ’12.
        Best,
        ARM

      • /blog Mike Shatzkin

        And *I *understand MFN better as of today because I met a big Italian publisher that does *agency without MFN*! What difference does it make? They can do price promotions at a single retailer without having to do the same for all at the same time. I’m not aware of whether any Big Six publisher has the same possibility in their contracts.

        Mike

  • Popnfresh100

    “The biggest question going forward is how Amazon will react to this.
    Cader’s unique and invaluable analysis says that Amazon will have a
    “pool” of about $113 million for discounting and incentives in the
    coming year. B&N, with half their market share, would have about $57
    million.”

    Is it just me, or does this heavily favor Barnes and Noble? 

    BN doesn’t have half of Amazon’s market share unless you look at one specific metric:  domestic sales of books published by big publishing houses.  In all other markets Amazon is further ahead.

    But now, for some bizarre and artificial reason, that one specific metric is going to be the sole determinant for how deeply and frequently a company can discount bestsellers.

    Should be interesting.

    • /blog Mike Shatzkin

      Yes, but that one specific metric is the one the DoJ has authority for: sales in the US!

      I think you’re the first person I’ve heard from who thinks the decision might be unfair to Amazon.

      Mike

      • Popnfresh100

        To paraphrase Steve Jobs: we have to drop the mindset that for Barnes and Noble to succeed Amazon must fail.

        Unlimited discounting could have created an Amazon monopoly, or it might have attracted an even bigger fish like Google and made them a monopoly.

        Continuing the agency model might have frozen the growth of ebooks and ereaders altogether.  Right or wrong, consumers hated it.

        This little “must be profitable” quirk more or less freezes the current market share ratio as it is, but lets the market keep growing.

        I think 25-30% market share is more of a win for Barnes and Noble than 60% market share is for Amazon.

      • /blog Mike Shatzkin

        Hey, *some* consumers may hate the agency model, but your statement generalizing that fact is pure speculation. In fact, agency priced books sell very well. They certainly capture far more revenue than any other category you can name!

        Mike

      • Popnfresh100

        Fair enough.  I’m always impressed by how you reply to every comment.

        I’m personally in favor of the agency model, but it’s become a moot point.

        I keep thinking about the impact of these profitability clauses, though.  The fact that accounts may need to be zeroed out for each publisher seems like a fundamental game-changer to me.

        I think we should call these clauses “peacock” clauses.

        Here’s why:

        Right now, ebookstores view self-published books, books from small
        publishers, and back list titles from large publishers as pretty much
        interchangeable. They’re all just part of that same long tail.

        But with these clauses, the long tail becomes divided- like a
        peacock. Simon and Schuster’s bestsellers can only be discounted using
        books from the Simon and Schuster feather, Hachette bestsellers can only
        be discounted using books from the Hachette feather, and so on. So the
        retailers must either abandon bestseller discounts- likely a
        market-share losing strategy- or devise methods to promote titles simply
        because they belong to the right feather.

        Whatever those methods may be- publisher specific loyalty programs,
        unpaid coop, biased recommendations- self-published authors, and authors
        from small presses without peacock clauses are going to be the ones on
        the short end of the stick, because they aren’t part of any feather.

        I just made a similar comment at teleread, trying to coin a phrase:)

      • /blog Mike Shatzkin

        Not sure I grasp your idea, but, in any case, agency is *not* dead! Three publishers have agreed to a settlement — primarily to avoid further litigation expense and distraction — that was based on collusion (which those publishers deny, by the way.) Agency has *not* (yet) been declared illegal.

        In fact, that question is very much open and we’ll all have a chance to influence it, thanks to the Tunney Amendment. Cader wrote about it and I will do the same in a few days, when I’ve had a chance to learn and think a little more.

        Mike

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  • Ryan Hover

    Mike, thanks for your insight on this.

    You and many others have estimated that Amazon now has a 60% U.S. market share for ebooks, but I’m having trouble finding the ultimate source for this. What was your source for the 60% figure?

    • /blog Mike Shatzkin

      The source is anecdata. There is no authoritative or aggregated source of share by retailer that I’m aware of. I talk to a lot of people and that’s what I come up with.

      Mike

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  • Blulapis

    Mike, I think you’re very astute, but I quite frankly wish you would leave the author out of your posts.  You make unsubstantiated allegations that the author will suffer here, and I’ve seen it in other posts as well.  That is rhetoric, not debate. As someone who represents themselves as an intellectual, this is unethical argumentation.

    In a post below, you state the the writer’s self-interest is tied with the publisher, convienently leaving out the fact that Amazon is now a publisher as well.  It is also a retailer directly dealing with authors and providing them with terms that leave publishing terms in the dust.  The fact that authors can publish without publishers, that the landscape is completely changing, is also left out of your post as well.

    The allusion you make to the idea that publishers are taking the author more seriously is also unsubstantiated, and quite frankly, not relevant until if and when that actually happens.

    When it comes to authors, you are exhibiting sloppy argumentation tactics, something that should be beneath you.  If you want to include authors, that treat the reality of the stuation fairly, otherwise, leave them out of your arguments.

    • /blog Mike Shatzkin

      What you call “unsubstantiated allegations” I would call my prediction based on my knowledge and logic.

      I don’t buy your characterizations of Amazon in relation to authors or publishers but I wouldn’t tell you not to write them.

      I’ll make a deal with you. I’ll write what I want and you can read what you want. And then you can take seriously what you want and dismiss what you want.

      But I’ll write what I want.

      Mike

      • Blulapis

        Of course.  I stated my wishes.  You will write what you want, but know that I will continue to critique you if you continue to misrepresent the situation truly facing the author.

      • /blog Mike Shatzkin

        You know, that’s an opinion not a fact. But you’re only entitled to your opinion. You’re not entitled to mine.

        Mike

      • Blulapis

        Fair enough.  We don’t have to agree.  All I’m asking is if you make an assertion – like the author is hurt by the DOJ decision – you explain why you believe that.  Blank statements like that are rhetoric.  I’ve come to expect more from you than rhetoric.

      • /blog Mike Shatzkin

        Sorry, but that point has been elaborated upon by me before.

        There are two reasons. Short term and long term.

        Short term: Amazon pushes the prices of premium books down and therefore the price advantage that has helped indie authors get a leg up disappears.
        Long term: If Amazon gets the monopoly on the audience that some of us fear, the good deals the authors get directly from them are bound to be modified to be less favorable.

        It appears pretty unambiguous to me, actually. Authors are hurt the *worst *by this decision. And, as I said, I’ve elaborated on that in recent posts about agency (including, I think, the one linked to in this one!)

        Mike

  • James Nuttall

    I personally don’t like seeing Amazon get the upper hand. I am legally blind and must have all of my books read to me. I love the emergence of ebooks. Now I can have books read to me using an iPhone or an iPad. Unfortunately, the largest player, Amazon, has not made their books accessible to screen readers or VoiceOver on the iPhone. Amazon has made little progress in this area inspire of much lobbying by disability organizations. I will continue to purchase books from the iBook Store. Now that Amazon can throw its weight around again I expect to see little progress from them on accessible ebooks.

    • /blog Mike Shatzkin

      To be fair to Amazon, they wanted to hook up text-to-speech through their Kindle years ago and publishers and agents objected because it would have impinged on the audiobooks business. So I’m afraid this particular problem can’t be attributed to their strong hand.

      Mike

  • http://twitter.com/jimnduncan J.N. Duncan

    Mike, I’m curious about something and value your opinion. Assuming for the moment that Amazon gets something near monopoly status in the nearish future, is it necessarily true that they would jack authors or raise prices if they had near total market control? Reason I ask is that Amazon’s business model is predicated on building a customer base. They’ve used books as one source for this, built on the notion of having the cheapest books available from any retailer. It seems to me that making a profit from books, or at least not losing money on them could be a goal, but it isn’t necessary. If making money isn’t a requirement from their book business, would there be much incentive for them to mess with anything that would raise prices and destroy customer perception of providing the cheapest possible books?

    I also have been wondering if they could create a monopoly on the ebook market and not really suffer any consequences from it because they’re actually providing the lowest possible price on books. Or, are monopolies per se illegal simply because they have the potential to control prices.

    • /blog Mike Shatzkin

      If B&N had a monopoly they’d be free to play with two moving parts: the price charged consumers and the share paid to authors (content creators.) Absolutely lowering the former is a more attractive option for them than raising the latter. But if there’s profit pressure on them, which many predict there is going to be, there’s no reason they couldn’t pursue both.
      Remember that their stock trades at about 135 times earnings. That is *not* sustainable.
      Mike

  • http://www.facebook.com/people/Peter-Turner/1179393690 Peter Turner

    Thank you, Mike, for your post, summarizing this DoJ action. Running through some of the comments here may be a little confusion or a muddle over the relative interest publishers and Amazon have in pricing and revenue. For the publisher, the value of any sales transaction is their margin; for Amazon, the value of any sale is their margin (if any) plus the long-term value of their acquired customer and their customer data.

    • /blog Mike Shatzkin

      Add one more element.

      When Amazon makes a sale, they hurt the competitive retailer from which they took it and there is a battle going on for survival. And the publisher loses commensurately because they only competing retailers give them any clout in the marketplace and any real proposition to offer to authors.
      Mike

      • http://josephratliff.com/blog JosephRatliff

        I see your point Mike, I think… but…

        But isn’t Amazon a business… just like the competitive retailer is?  Don’t they both have the same opportunity to compete for the same market of people who buy books (or ebooks)? 

      • /blog Mike Shatzkin

        Of course they’re a business and of course they should have the right to compete.

        But publishers run a business too and they should have the right to manage their copyrighted properties in a manner that preserves the value of the copyrights (which are, of course, Constitutionally-sanctioned monopolies!)
        And eliminating price as a competitive factor to maintain diversity in the ecosystem is existential.

        Amazon’s existence is not threatened by the agency model. Barnes & Noble’s existence is definitely threatened by its being crippled. And publishers depend on the continuance of a multi-vendor distribution system for their survival.

        Mike

      • http://josephratliff.com/blog JosephRatliff

        So because Amazon built a different business that adapts to current trends and technologies… it should suffer? 

        Amazon was innovative enough to create an atmosphere where it isn’t threatened by the agency model… so it should intentionally be threatened by it just because publishers can’t figure out how to adapt to current trends and let go of an older way of doing things?

        To me, it looks like the market is deciding that maybe the “Constitutionally-sanctioned” monopoly shouldn’t be a part of the transaction.

        That, or publishers need to find a different way to compete IMO (like build something that competes with Amazon, instead of against themselves).

      • /blog Mike Shatzkin

        Amazon’s *existence* isn’t threatened by the agency model. It’s *growth *and *profitability* are. They lose a big weapon that they use to put pressure on bookstores and ebook retailers who compete with them..

        They’re a powerful company; *much *more powerful than any of the publishers the DoJ is intimidating on their behalf. Don’t you find it even a wee bit peculiar that anti-trust concerns are being used as a justification to promote the interests of the single most powerful company in the book business?

        Hey, if you don’t believe in copyright or in the rights of authors to be fairly compensated for their work, that’s a position you’re welcome to part company with me on. But neither Amazon nor the DoJ seems willing to say that, even though their actions say that. (And please don’t give me the bit about the royalties Amazon pays today while they’re competing with publishers for authors; that’s all part of their loss-leading strategy with an end game, that I assure you, will not continue as publishers disappear!)
        It isn’t just about today’s world. It’s about tomorrow’s too.

        Mike

      • http://josephratliff.com/blog JosephRatliff

         Ok, of course I believe in copyright protection (in a strict sense, e.g. profiting from the work of another author or creator’s copyrighted work is illegal and quite wrong) and that authors should be fairly compensated… and I think J.A. Konrath, and many others who have adapted, would say they are in fact more than fairly compensated.

        But what I gather from your points here you’re assuming Amazon would be using a loss-leading strategy to monopolize the whole playing field (e.g. eliminate publishers, retailers etc…).  I get that, I think, but I haven’t read where you acknowledge one important piece of the puzzle… the author.

        Since they are doing the writing… creating the material that Amazon sells in this part of their business… if they did in fact reach their “end game”, and pissed a number of authors off… they could use other options to sell their work (like marketing it themselves).  This wouldn’t be beneficial to Amazon, as without authors… this part of Amazon’s business disappears right?

        I suppose the “Copyright” arena needs some work then eh?
        (different topic, different discussion)

        I just bought your ebook by the way… from Amazon.  Good stuff Mike.  And, I appreciate your replies here. :)

      • /blog Mike Shatzkin

        The answer to this riddle exists and it exists inside Amazon.

        There’s a company called Audible that sells digital downloads of audiobooks by subscription. They dominate the market, since they are the audio supplier to both iTunes and their parent company, Amazon. (The deal with iTunes predated the purchase by Amazon.)

        Audible works on the 70-30 split model. But they KEEP 70 and give the author (or publisher) 30. I think that describes very succinctly how the corporation views the fair division of revenue between the entity that controls the audience access and the entity that controls the copyright and creates the content.

        With cheaper ebooks and a 70-30 split in that direction, there are a lot of important books that just wouldn’t get written. (Start with the recent Steve Jobs bio.) And I doubt very much they’ll see much injury to their business in that fact. I think this might be the subject I’ll write about this weekend. (But maybe not…)

        Mike

      • http://josephratliff.com/blog JosephRatliff

         I hope you do write about it Mike.  This well thought out post certainly inspired me to do so. :)

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  • http://www.kainosprint.com.au/ Digital Printing Services

    Hi Mike, thanks for clarifying  facts about DoJ action. I am not sure about all as a few things need a discussion.

  • Hank West

    The publishers used to treat their authors, who they kept in what was euphemistically called their stable, like dirt, that should really tell you what publishers think about author. Write a book, get out of my face, and run of and write another.
    The publishers were the gatekeepers who decided which books would be published and which books would not, and for the privilege the author normally had to sigh a contract which gave them a pittance, typically 7.5% to ( for a well know author) 15%.The publishers provided no marketing and often there were up front costs for the editing, printing etc. etc etc. etc. etc. without any obligation to actually publish. If a publisher got their hands on the books rights, the author for all intents and purposes, no longer owned the book. I know writers who have lost the rights to successful books only to have to take the Publishers to court to get them back after ten years or more. Get a layer to read the contract. The general attitudes of writers about publishers is that they are rapacious self interested swindlers not to be trusted and only interested in their own bottom line (money).The publishers, like the leopards, have not changed their spots. Now the digital age has set authors free from their dominion the publishers are trying to change the rules so they can maintain their profit margins and the savings, from not having to print a book or distribute it, goes straight into their own pockets. If the publishers hadn’t been so greedy they would never have found themselves in this situation.And Apple, Apple is interested in market share and has no qualms about how they do it.If you want a clear picture of what is going on in this affair with apple and the publishers go to the following linkhttp://davidgaughran.wordpress.com/2012/04/12/how-the-agency-model-led-to-an-antitrust-suit/ Since the advent of the digital age and Amazon writers and the writing culture has grown exponentially. The real problem isn’t Amazon, the real problem is the publishers and booksellers are scared to a frazzle about loss of revenue, and so they should be. Goodbye and, except for a few independent book shop owners, good riddance. Hank West AuthorScorza
    Quest for Vengeanceon Kindle

    • /blog Mike Shatzkin

      Well, “Quest for Vengeance” seems to describe you pretty accurately.

      Your rant has elements of truth, elements of gross generalization, some errors, and elements of misunderstanding.

      When, only a few short years ago, the job of the publisher was primarily to get a book onto bookstores shelves, there really *was* very little the author could do to help and a lot of what authors wanted to get involved in was a distraction. When you’re trying to settle on the best cover among professionals (including the opinions of major accounts who are the key to success), it is very hard to involve the author who wants to be involved in those decisions, (For example.)

      That’s very different now, and has been getting different for a few years. Publishers have changed as a result. It’s a practical change, not a morally-motivated one.

      And I am not aware of ever having seen an author contract by which the publisher kept rights to a book without publishing it! No major publisher does that.

      I think the flipping of the finger to all bookshops, except those that manage to meet some arbitrary standard of yours, is a pretty succinct summary of your attitude.

      Some people just aren’t built to work in a collaborative way. They would
      find the least success working with any organization. In fact, they might
      respond to any slight, real or imaginary, with a quest for vengeance and
      are probably best avoided by publishers.

      Mike

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  • Curt Matthews

    What the huge publishing companiesIPG do about Amazon is important, but they could if they acted  together shut down Amazon’s book business in one day. What I am worried about is the fate of the indie publishers who do not have the market power to get a reasonable deal. My company, IPG, declined to accept the deal Amazon offered because at the time Amazon was working with the big six publishers for a distribution fee that was less than half of the fee that they charged IPG and the rest of the indie publishing commumnity.  Any fool could see that if this situation persisted, the indie publishers were toast. Where are we now after the clueless DOJ has jumped into this dispute? I do know this. If the indie publishers can’t compete on a level playing field, they will be forced out of business.

    Curt Matthews
    CEO, IPG/Chicago Review Press, Incorporated 

    • /blog Mike Shatzkin

      Curt, thanks for this. It has seemed to me all along that the problem was * not* that the Big Six had implemented agency but that Amazon prevented everybody *else* from implementing agency.

      And I think the indie authors ought to look at the situation for the smaller publishers to understand what they will likely face as the power of Amazon grows.

      Mike

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  • Alan

    Ow :).  Could people not link to the Melville House emails without some sort of warning for gullible people like me? 

    The headers on the first email alone would have had *all* the parties settling as fast they could.  It’s just not plausible. 

    From: Makinson, John ([email protected])

    To: [email protected],
    [email protected], [email protected],
    [email protected], [email protected], [email protected]

    cc: [email protected]

    Subject: the $9.99 problem

    Sure, the joke goes on for long enough to make the point; it’s all very cute.  I’m sure it’d be funny if I read the original on a blog.  But it’s a bit much linking to it deadpan, in the middle of an article that’s really about something else.

    Equally, if it wasn’t a joke, it’s close enough to need a big “no really, I checked, and this is actually supposed to be true”.

    • Alan

      Sorry, I see you’ve already been discussing this.  One of the reasons I thought this was a hoax is having compared it to the public DOJ filing:

      http://www.publishersweekly.com/pw/by-topic/digital/content-and-e-books/article/51466-doj-outlines-settlement-with-s-s-harpercollins-and-hachette.html

      It looks much more like the emails have been made up from quotes mined from the filing, rather than the other way round.

      Note that the alledged emails are dated 2008, and include Steve Jobs and the agency model.  But the DOJ filing doesn’t mention communication between Apple and the publishers until “late 2009″.

      • /blog Mike Shatzkin

        Thanks for the additional “hoax” evidence…

        When do you cross the line from “joke” to “hoax”?

        Mike

    • /blog Mike Shatzkin

      I actually think a joke this close to truth is very unhelpful in the current climate. I hate to be revealed as gullible and I hate more being revealed not to have a sense of humor. I even like politically incorrect jokes and have made a few myself. But this is serious business and can be misunderstood. As I misunderstood it.

      Mike

  • Hank West

    Hi Mike, this is Hank from Quest for Vengeance.

    I have only been in the writing industry for four years, not
    a lifetime like you. When I began I listened intently to people who appeared knowledgeable.
    After a while I discovered that the writing culture is replete with flash and
    bling, charlatans motivated by self-interest blowing hot air up anyone’s skirt
    who was naive enough to listen.

    I don’t have time, or the inclination, to study law suits or
    the intricacies of the writing business. Perhaps you consider me naïve. Perhaps
    you have lost sight of the forest for the trees. You no longer see the obvious.

    I am engaged with a fledgling community of writers in Far
    North Queensland Australia but even I can see that Apple is actively partitioning
    the fledgling ebook industry into “Us and Them.” An obvious example for me is
    Apple’s recent “Book Creator” which can only be used on an Apple computer, and
    , I may be opening myself up to criticism but, as far as I know ebooks from
    ibooks can only be read on an ipad, iphone, ietc ietc. I forsee a future where I
    will need to use apple hardware and software to format an ebook, and an ipad,
    to upload or download ebooks to/from Apple’s ibooks.

    Apple is actively dividing the Digital World into Apple and
    everyone else, except those who side with apple, or else. Tell me, how does
    that benefit the writing community? It’s a rhetorical question Mike. 

    • /blog Mike Shatzkin

      After a lifetime in the book business, I have no patience for the details of lawsuits either. So we agree on that.

      I’m not sure where you get the impression that I see Apple as any exemplar of digital ethics. I don’t. You’re right that their practice of selling digital products that can only be consumed on their hardware is pretty ridiculous. In fact, Random House staying out of agency for the first year was a sure sign of how futile Apple’s strategy is. They reckoned they could get their books read on Apple devices through other retailers and they didn’t need Apple’s store. They were right.

      Apple created an opportunity for publishers to rethink the practices they’d started the ebook business with. They were imitating the print world, setting a retail price, and offering 50% margin to the intermediary channel. That was absurd. It is absurd. No digital retailer needs or will take that kind of margin if they can trade it for share. Even 30% is kind of rich, but it is closer to realistic.

      Apple is not a real retailer the way Amazon, B&N, and Kobo are. They don’t think like a merchant. They need agency to overcome their own shortcomings. That doesn’t make agency illegal and it doesn’t make publishers unwise for using it.

      Mike

  • Tom Semple

    Thanks for one of the more balanced, fact-based commentary on the DoJ action that I’ve seen. I agree with most of your assessments.

    However, I don’t think this development significantly affects the trajectory of the publishing business/ecosystem. Overall, people are busier and reading less (facebook, video, etc take time too), even as availability and convenient access to reading material increases. There’s more competition for fewer reader-hours, and while the move to digital will continue to fuel growth in ebooks, eventually it will level out and reach equilibrium with the overall, downward trend. So yes, ‘everybody else is losing’, but I would argue that agency pricing has been ineffective in countering this trend. 

    Innovation of another order is required to sustain interest and growth in e-reading, and we just aren’t seeing that right now in a big way in either technology or in marketing (particularly from Big 6). Subscriptions? Memberships? Bundling? more 99 cent impulse pricing? eBooks with embedded audio and video are not ‘innovation’. What sort of advances would actually make ebooks preferable to print books for reading, rather than merely more convenient to transport and replicate?

    The other point I’d make is that dedicated e-readers are probably not even now the center of gravity for digital reading, as smart phones and tablets greatly surpass them numerically and increasingly, in reading-hours. This greatly diminishes ‘lock in’ since the major mobile platforms offer many choices for purchasing and consuming content (Apple’s iOS in-app purchasing restrictions notwithstanding). And prices of dedicated devices continue to drop so the ‘investment’ cost is approaching zero even in those more locked in scenarios.

    Personally, this partial reversal of agency pricing will not affect my purchasing patterns very much. The books I’m most interested in are for the most part not best sellers that have been subject to agency pricing. 

    Can anyone save us from Amazon? Do we want or need to be saved? I’ve kind of written off B&N (they need to save themselves first), but perhaps Kobo and Google could make things interesting in the next year or two, as they can afford to be more strategic. Getting rid of DRM would enable more modularization, customization, standardization of interfaces, innovation and specialization of reading ecosystems, which eventually could diminish Amazon’s influence. But right now they are setting the pace, and providing the best digital reading experience for the masses (including me).

    • /blog Mike Shatzkin

      Thanks for the note. However, I’d suggest that if the problem for book-reading is all the other choices people have, then price or a subscription offer wouldn’t be a useful antidote. In fact, there might not be one.

      And I wouldn’t suggest that agency was working because I thought it increased reading. I thought it was working because it increased diversity in the ebook retailing ecosystem.

      Mike

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