The Shatzkin Files


Auletta’s New Yorker piece is good orientation for thinking about the DoJ case


Writing about the lawsuit the DoJ has instituted against Apple and five leading publishers is very hard. It’s a big issue and doing it justice requires navigating two very large and complex bodies of knowledge: anti-trust law and the trade book publishing business. Whenever I write about it, I feel handicapped because I don’t know much except what I’ve read lately about anti-trust law.

I just know the industry. And I know the arguments for “collusion” or “conspiracy” are mostly built on illogic or misunderstanding of what is called “evidence”.

And I know that all prosecutors have the right and responsibility to decide what cases are worth making. It is on that basis that I think the DoJ is terribly wrong in pursuing this case, that the consequences of doing this will be dire for the industry and the reading public, and — again apologizing for not knowing anything about anti-trust law — that this action will lead directly to a real and obvious monopoly which will have to be addressed at some future time.

Except then it will be too late to undo the damage or to rebuild what will have been destroyed.

The June 25, 2012 issue of The New Yorker has an article by Ken Auletta called “Paper Trail” which is a sympathetic synthesis that untangles and clarifies a complex web of law and behavior. Except for a single sentence where Auletta attributes Microsoft’s investment in a new venture jointly owned with Barnes & Noble to be primarily driven by the desire “to produce a more popular tablet computer” (I think there were other motivations that were more important), I don’t take issue with his presentation of the facts.

(Bob Kohn, the founder and CEO of RoyaltyShare, who is a lawyer experienced and knowledgeable about the issues and who filed his own comments with the DoJ, provides an alternative view to those of the legal experts chosen from academia by Auletta. He is surprised that Barry Hawk of Fordham Law School failed to come up with the well-known 1979 BMI v CBS case, decided by the U.S. Supreme Court, as a relevant precedent, and that Tim Wu of Columbia Law School could not understand the obvious point that Amazon was selling the ebooks at a loss to lock people into their ecosystem, where prices could obviously be raised later. But I’ll leave it to the lawyers to argue the law. On the business side, Auletta’s facts were solid and his choice of interviewees on all sides, quite aside from yours truly, was excellent.)

Reading Auletta inspires me to extend or re-emphasize a few things he said or touched on, some of which I learned from his piece.

I perhaps should have known, but didn’t, that Hachette USA had lobbied the Justice Department to examine Amazon’s predatory practices. (And frankly, had I known, I would never have reported it. I’m not a reporter; I’m an independent synthesizer, analyst, and articulator. There’s a difference.) Auletta reports that Hachette made what should be the very powerful argument that their copyrighted material was being used to sell Kindle devices and “drive bookstores out of business”. The point is accurate (and since Auletta’s reporting on an appeal that was made in 2009, also prescient) but elides an even bigger one.

Kindle was locking people into the Amazon purchasing ecosystem. What publishers saw, very early in the game, really, was that Amazon was aggregating customers that would soon find it difficult to get an ebook from any other source. In the parlance: their switching costs would be high. And they were the industry’s best customers.

(I mean, imagine this! “They’re locking customers into their platform with our books by selling them at a loss!” How would any business react? And do you think you need to “collude” with your competitor to come to the same conclusion? Give me a break.)

I was at the least reminded by Auletta’s piece, though perhaps I should already have been aware, that Apple had stipluated to all the publishers that they wouldn’t open iBookstore unless four of the Big Six were on board. That fact gives rise to a series of obvious observations that surely haven’t been mentioned often enough.

1. If that’s true, then all the chatter about publishers discussing their intentions to proceed is one very large and very red herring. Apple had made it clear that there would be four or no store. That’s all any of them needed to know.

2. How could Apple have proceeded any other way? As it was, the biggest of the Six (Random House) holding out really handicapped iBookstore and the Agency Five. Not only did it give Random House (and Amazon) a whole lot of price-advantaged brand-name-author books (with Random House also collecting the higher wholesale-pricing cut from the retailer), it kept those many desireable titles out of the iBookstore.

Most of the other publishers seemed unimpressed with the share iBookstore took of sales in 2010 even though the Random House books weren’t competing. But everybody was delighted with the additional reading screens delivered by iPads that brought them, as well as Random House, a lot more ebook sales through the other ebook retailers.

I don’t think that iBookstore would have been viable for Apple without four of the Big Six. It was perfectly reasonable for Apple to have made that business determination. It would have been irresponsible of them not to have done the calculation. Is Justice saying that, knowing that, they shouldn’t tell a potential trading partner if they were asked?

If the law actually prohibits this, which seems impossible, please change the law. And if you can’t change the law and if you have to choose which one is a smart one to enforce, this is a good “skip”.

3. A lot has been made of the fact that Apple has required the publishers to let them price-match. Now we know that Apple drove the deal. They said to the publishers, “we’ll let you set the price. as long as you don’t make us look like monkeys in relation to the print book price. But, of course, you can’t require us to sell at a price disadvantage, so you have to allow us to match any lower price.” How could Apple, or anybody else, do it any other way unless they were fools? They couldn’t allow themselves to be locked into a price that made them look extortionate to the consumer. They were proposing the terms on which they’d provide their proprietary access to their devices. Isn’t this a reasonable demand?

If the law prohibits this, please change the law.

I really liked the fact that Auletta emphasized, for the first time in any widely-distributed story I can remember, that the publishers going to agency sacrificed significant revenue by doing so. He quoted agent Simon Lipskar praising them for being far-sighted, willing to accept a hit on their watch to build a sustainable ecosystem. He quoted a CEO who estimated that $100 million was the aggregate hit to profits in a year.

Part of the $100 million that publishers lost provided some of the $200 million that Auletta reports Nook invested in delivering and launching the Color Nook. That’s a consumer benefit provided by the competition that is provided by agency pricing. The same is true of Kobo devices and Amazon devices, which are getting better and better and cheaper and cheaper thanks to the subsidy provided by the sale of publishers’ content.

If the law prohibits this, please change the law.

The most poignant part of the piece to a relative insider was Auletta’s reporting on the much-derided Picholine dinner in September, 2008. David Young of Hachette is reported to have organized it to welcome Markus Dohle, the new CEO of Random House, to New York. Anybody who knows David Young, as I am very pleased to have done for years, will recognize this immediately as the friendly and gracious behavior that is entirely characteristic of him.

As Auletta makes clear, this dinner took place before Apple had even announced it was going into the book business. In fact, I think it was still in the period when the Jobs pronoucement that “people don’t read books” was the prevailing wisdom from Silicon Valley.

And if the law prohibits this, and makes it part of a conspiracy, you’re making me happier than ever that I wrote a book on the New York Knicks instead of going to law school.

Auletta’s piece concludes on a telling, and chilling point. John Sargent spells out how small publishing is in relation to the giants now influencing its fate, which Auletta identified as Amazon, Apple, Facebook, Google, and Microsoft. Their strategies all involve the book business in some way. Sargent’s observation that books, by which he means the book publishing ecoystem that has built up around paper over the past 300 years, could become “roadkill in a larger war” gives pause.

It is increasingly easy to imagine. And it is worth considering seriously before it is a fait accompli.

It isn’t Amazon’s job to figure out what the book business needs to look like. They’re doing their job, which is to maximize the opportunities for their business as they see them within the rules of the game and the limitations imposed by competition and their trading partners.

Seeing that it isn’t their job means recognizing that it is everybody’s job. A lot of people need a better understanding of what publishing does and is for that to happen. I think the DoJ is making it very clear that smart people with a lay knowledge of the publishing industry routinely misapply what they think they know from other places.

Publishing one book is complicated, although a bit simpler if digital only. Publishing 200,000 books a year, which is what the industry does, is infinitely more complicated and made only more so by digital opportunity. Nobody from some other place — any other place — has entertained equivalent workflow, operational, administrative, and financing complexity.

I think the Auletta piece is valuable because it exposes the lie in the cartoon picture of “Greedy Big Publishing” stiffing the poor novel-reader while the selfless heroes at Kindle fight to save them two or three bucks a book. (And never mind that the price of your reader dropped by 50% because the guys across the street are offering one too.)

It isn’t Amazon’s job to do the PR for the other guys either.

I am speaking on approximately this topic at the 5th Annual GW Ethics & Publishing Conference at George Washington University on Monday, July 9th. 

  Back to blog

  • sethgodin

    Thanks as always, Mike.

    When the big publishers chose not to interact directly with consumers (the internet opened the door wide fifteen years ago and they refused to pursue it–I saw them say no) they established a vacuum. The internet leads to natural monopolies (like Google and eBay and Facebook). I’m not at all surprised that the ebook business isn’t populated by dozens of ebook readers without consumer lock in. Are you?
    I have a hard time believing they were surprised by how it happened, or feeling sorry for the obvious implications of the bad choices they made despite plenty of warning and evidence.

    The thought that the online world would look like a village of independent bookstores, with all the power going to the publishers, is silly. And yet the publishers just sat and waited for someone other than them to become the dominant middleman.

    Would it have made their lives any better if there had been three platforms with consumer lock in instead of one or two? Not much. The power goes to the person with the consumer’s attention. And by their choice, it’s not the publishers.

    • /blog Mike Shatzkin

      Seth, I think we agree and disagree. Overall, I think your summary gives too little credit to Amazon and too much blame to the publishers.

      There’s no doubt that publishers should have started collecting email names and establishing direct customer contact years ago. (They’re all doing it to varying degrees now, but they’re way behind where they could have been.)
      However, I’m not sure it would have changed much. The more likely candidates to have forestalled the Amazon monopoly were the other retailers and the book clubs. In the late 90s, some people (maybe you were one of them…) called for the publishers to create a jointly-owned retailer to compete with Amazon. I don’t think that would have worked either.

      I wrote recently about what I think was a key momentin that early history: when Amazon cut their prices drastically to shut down Ingram’s I2S2 operation, which would have (theoretically) let thousands of ebook bookstores bloom. Amazon was playing both a long and a broad game. They could take losses on book sales in pursuit of a bigger objective and nobody else who didn’t see it that way could have competed with them. Which means that nobody did.

      So if you’re saying publishers, *particularly general trade publishers,* could have been Amazon in any way: selling enough books direct to live without
      other help, I just think that’s mistaken. If you’re saying publishers would
      be much better off today if they had 2 or 3 or 10 times the number of
      direct customer contacts (permissions) they have, we definitely agree.

      Amazon is where they are because they were smart and they have executed
      well. That doesn’t mean it is a healthy state of affairs for the industry.

      Mike

      • sethgodin

         I’m not talking about what’s healthy, I’m describing what is.

        The publishers could have thought about what it means to be a “publisher”. Just as Ted Levitt wrote about in Marketing Myopia fifty years ago about Penn Central. Publishers should have been Google and Wikipedia (finding relevant information–isn’t that part of a publisher’s charter?). Publishers are bad at running bookstores (Scribners?) But they could and should have created an ebook format and relentlessly pursued it, enticing entities to build readers and promote them.

        For a long time, publishers have defined their business as two things:  Use paper and please bookstores. Both of these choices are bad ones.

      • /blog Mike Shatzkin

        I guess we agree on “what is”.

        Doesn’t sound like we agree on the rest of it.

        People are in the businesses they are in. Amazon was in the business of aggregating customers for online purchasing and they used books as a fabulous starting point. That made everything they did in their business make sense. Publishers were in the business of putting books on shelves. They could have completely changed their businesses, but before I castigate them for not having done so, I’d castigate those who could have pursued Amazon’s strategy by changing their businesses a lot less: retailers and book clubs.

        I never thought it was particularly useful advice to tell railroads they were in the transportation business and should have flown airplanes, if that’s what you’re referring to… I don’t think it would have helped the blacksmiths much to learn how to do oil changes, either.

        Mike

      • http://twitter.com/PeterTurner Peter Turner

        Hello Seth: 

        When you suggest that publishers should ask what it means to be a ‘publisher’ I’m curious where that leads you. For me, I take publishing to mean ‘to make public;’ that is, if a book falls in the forest and nobody reads it, it wasn’t published. Or at least that’s my view. 

        When you say ‘publishers are bad at running bookstores,’ I think you may be painting publishers with too broad a brush. Many smaller, niche oriented publishers are actually accomplished booksellers, I’d argue. 

        One of the dynamics running through all such discussions about publishing is the inclination to weigh what’s published on that small island called Manhattan with more consideration than what’s published elsewhere. It may shock may readers of this blog, but more books are published off the island than on, and the business dynamics that support them are often very different. (Spoken as a true Bostonian, I suppose.)

        Best,
        Peter Turner

      • /blog Mike Shatzkin

        I think the distinction, really, is between publishers who publish many books for mass audiences and publishers who publish few or none. You’re right that just about all of the former reside in Manhattan, but although more of the latter are elsewhere, some of them are here too.

        Mike

      • http://twitter.com/PeterTurner Peter Turner

        I think I would trace the “key moment” (when publishers handed over the key to the kingdom to Jeff B.) a little differently. The traditional discounting terms, the ability to return books, was an effort (I believe dating back to the early 50s) to make possible the representation of a wide variety of books at retailers, allowing publishers to test the market without undue burden on the retailers. The notion that these same terms should be extended to an online retailer, who didn’t necessarily have to tie up cash with inventory in order to make a sale, was the fundamental flaw, it seems to me. Physical retailers could always order a book for a customer that they didn’t carry but the discount to the retailer was a short discount and required a lot of extra effort. That, combined with the State tax benefits, seem like the more likely cause of death for so many bricks-and-mortar retailers. 

      • /blog Mike Shatzkin

        The thing is, Peter, that returns are a very small part of Amazon’s MO. They don’t make many returns, never have. In fact, they’d argue that they should get higher discounts; they’d almost certainly agree to buy non-returnable to get them.

        When they started, Amazon bought almost everything from the wholesalers
        I just don’t think this is a pressure point publishers could have applied.
        Mike

  • Andrew Malkin

    I don’t mean to get in between a lively exchange between you and Seth (which I am enjoying) but I will also say that I found Auletta’s piece  terrific and informative. I had not realized that Cue and Apple needed 4 of the Big Six to proceed with iBookstore. Maybe it was out there and I hadn’t seen it mentioned before. Second, the hit to profits of $100 million by going agency was also a fascinating point raised in this story. Thanks for the blog post, as always.
    Best,
    ARM

    • /blog Mike Shatzkin

      Thanks, Andrew. I agree that Auletta informed even those of us who thought we were keeping up with all of this. I think his piece was a service to the industry which is why I am hoping I can drive a few more people to read it.
      Mike

      • http://claudenougat.blogspot.com/ Claude Nougat

        You certainly have driven me to Auletta’s piece, thanks, Mike! I never suspected to hear from you the other side of the coin or a different bell (pick the metaphor you like best!) I was convinced we were faced here with a classic anti-trust case – guess I was wrong, at least to a certain extent. It is still a fact that publishers’ agency model has kept prices unnecessarily up – that they lost $100 million a year in profit, I find hard to believe. Indeed, I don’t believe it at all. On what basis, for heaven’s sakes, did they ever come up with that figure?
        Maybe you have an idea and can explain it?

      • /blog Mike Shatzkin

        Claude, perhaps you (and *many* others) haven’t fully taken on board that publishers *reduced their revenue per copy sold* under the agency model. In a typical case, they would have been selling an ebook of a $30 hardcover book under the wholesale model at $14 or $15 (50% of $28 or $30). When they switched to agency, even if the book were at the top agency band ($14.99), the publisher would get 70% of that, or about $10.50. They *forced* the stores to keep the margin they got (that’s why “prices were raised”) but the yield to the publisher and author went down.

        The estimate of $100 million is from an anonymous executive, but if you look at what DoJ and the States are claiming was “lost” by consumers purchasing ebooks, it puts the number in that ballpark.

        This is one more reason the caricature of greedy publishers was so misleading.

        Mike

      • http://claudenougat.blogspot.com/ Claude Nougat

        Interesting…thanks for the clarification!

  • Max Alexander

    Great post Mike–I’d love to read the transcript of your upcoming speech sometime, and I hope you post it on your website. Although I am highly skeptical that the legacy publishing business “gets” the digital revolution (I admit part of my skepticism stems from seeing my own books still being edited with a red pencil), I have a hard time seeing collusion in the Apple deal.

    • /blog Mike Shatzkin

      There will probably not be a “transcript” because I’m delivering this talk from a PowerPoint outline and no script. We might put up the slides, though. And, who knows, maybe the conference will capture the audio or even a video. I don’t know.

      Publishing companies are very big things and editors are often the last ones whipped into digital line!

      Mike

  • http://twitter.com/mcsullivan Margaret C. Sullivan

    Great post. I remember when the iPad was anticipated but not yet announced, there was a lot of excitement in publishing/reading circles, because it was felt that an Apple bookstore offering on a color tablet would save publishing from Amazon. That might have had some affect in making the publishers eager to work within Apple’s dictated terms. 

    However, iBooks has not been the rousing success that was anticipated–but the success of Nook in the ereader space has come as a surprise, because the prevailing wisdom when the first Nook came out was “too little, too late.” The Nook Color, however, was the class leader in dedicated reading devices when it came out, and I submit that Barnes & Noble still has the best hardware among dedicated reading devices. (I am a bit biased because I am still madly in love with my Nook Color, more than a year after I bought it.) I think the increase of Nook’s ebook market share might have as much to do with the popularity of the hardware, and the fact that book buyers have to pass the Nook kiosk on the way into every B&N, as agency pricing has done. Once someone has the hardware, it’s just easier to buy and download a book with one click, even if it’s a dollar or two more, than buying a book elsewhere, downloading to PC, stripping DRM if necessary, doing a format conversion, and sideloading. I *can* do that, but I prefer not to if I don’t have to.

    Amazon has been reactive towards Nook from the beginning. It was the pricing of the first Nook that first started driving Kindle prices down; and I would imagine the popularity of the Nook Color and Tablet (and the iPad to an extent) probably hastened Amazon’s hand in producing the Kindle Fire. Nook had library books first. Nook had book lending first, I think. Competition has been good for everyone, including consumers.

    • /blog Mike Shatzkin

      Thanks for adding the detail concerning the devices. You’re absolutely right that once you’ve got a device the simplest thing to do is to use the ecosystem that is tied to that device. And your point that Nook has really led the “device wars” since they came on the scene is also correct. What the DoJ needs to understand is that it wouldn’t have happened without agency pricing!

      Mike

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  • Matteo Berlucchi

    Mike,

    I’d like to highlight another small factor which has never been mentioned when talking about Apple and the agency model.

    I think it should not be underestimated the fact that at the time of launching the iPad, Apple was coming out of a very successful experience with the App Store. The business model, as everyone knows, is based on taking a 30% cut from any app sold in the App Store. Apple has never aspired to become a retailer of apps and strong of the success of the App Store model had no reason to think that ebooks could have been sold in any other way. It would have been operationally impossible for Apple to price the ebooks one by one using the wholesale model. 

    And if you had been in their shoes, you would have immediately realised that the AppStore model would have not worked if the ebooks could have been purchased anywhere less for less.

    In essence, I think Apple naturally extended the AppStore model to ebooks because they couldn’t really do it in any other way. So, I seriously doubt that the Agency model was a cunning idea devised between Apple and the publishers to alter the market dynamics, it was simply the most natural and logical way for Apple to consider selling ebooks on iPads and iPhones.

    Matteo

    • /blog Mike Shatzkin

      You’re absolutely right. Apple didn’t “invent” this for the publishers and to beat Amazon. They just applied the only model they knew and, as you say, the only one they could practically apply.

      It will be an enormous challenge to Apple if they’re forced to price the books in the iBookstore.

      Mike

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  • http://www.facebook.com/echristopherson1 Eric Christopherson

    Amazon is not a monopoly (the only seller that matters) or a threat to become one IMO. It’s a monopsony (the only buyer that matters) in some areas of its business. And the DOJ for the past thirty years has unfortunately only been interested in monopoly power, in keeping consumer prices low. With monopsonies it’s the suppliers who end up hurt (but ultimately the consumer too because monopsonies, like monopolies, are inefficient in the long run).

    Amazon briefly was a monopsony in ebooks until Apple entered the fray, and now that B&N has attracted the titan backing of Microsoft, for example, I don’t think they’ll ever re-establish their monopsony.

    Here’s a good primer on monopsonies if interested: http://www-siepr.stanford.edu/papers/pdf/04-08.pdf

    • /blog Mike Shatzkin

      Monopoly and monopsomy I will let others define and debate whether now or in the future.

      Amazon is in the strongest position any single company in publishing has ever held and it is getting stronger every day. Every other player in the ecosystem — author, agent, publisher, wholesaler, retailer, library — has to keep an eye on Amazon as it plots its own strategy.

      Mike

  • ChurchLady108

    This whole piece ignores the simple fact that the DOJ lawsuit is not about agency pricing models, but about collusion to fix prices by the major publishers. 

    The agency model is fine if it is one publisher creating its own pricing structure. It is not fine if it is five major publishers and the world’s most valuable company colluding to fix prices. 

    Whether Amazon is engaging in predatory pricing is a separate issue. Predatory pricing is not illegal, it is called “competition”. We get that all the time throughout the consumer marketplace, whenever a retailer puts a product on sale, or simply advertises “lower everyday prices”. The wholesaler can demand that the retailer sell at their agency pricing model, but their only recourse if the retailer continues to discount that item is to discontinue supply. The retailer can then negotiate with competitor wholesalers who are willing to allow discount pricing.

    All of that is legal. What is illegal is for multiple major wholesalers to agree en masse to enforce the same agency model on all retailers, with no competition between them. That is a violation of anti-trust laws, because it stiffles competition. 

    Publishers are free not to sell to Amazon if they don’t like the way Amazon sells their books. They are not free to band together to prevent competition among themselves for Amazon’s business. 

    Your arguments against Amazon are based the notion that by engaging in competitive pricing, Amazon is destroying competition. And yet, in the time during which Amazon has engaged in competitive pricing, it’s share of the ebook market has fallen, from 90% to 60%, due to competition. This shows that competition is good for all of us.

    It’s understandable that giant corporations like Apple and the Big Six publishers would like to be protected from competition. It’s understandable that bookstores don’t like the competition that ebooks offer, or that Amazon represents. But the purpose of anti-trust law is not to protect businesses from competition, it’s to protect consumers from price-gouging. Amazon’s business model is not predicated on price-gouging, but on offering consumers lower prices. That’s why it is not illegal. It does not prevent its competitors from offering lower prices to undercut its own. 

    Apple is certainly able to engage in a price war with Amazon and undercut Amazon’s ebook prices is they so wish. They are not some fledgling business being attacked by a giant corporation. They have over $100 billion in cash at their disposal to spend fighting for market share. They could bury Amazon if they wished to. 

    The problem is that the major publishers want to control the entire publishing industry, from authors to wholesalers to distributors to retailers. They want to do that because it would be to their advantage, obviously. But anti-trust law is in place to prevent that kind of control. It is not there to dictate market outcomes, or winners and loser, or to protect traditional winners from competition. 

    In other words, you don’t have to like Amazon, you don’t have to like ebooks, you can say that ebooks should be priced as the Big Six say they should be, rather than as Amazon wants to sell them, and individual publishers can decide for themselves how they want to distribute their books. They just can’t collude with each other to do that. They have to face competition from one another like everyone else in a free marketplace. 

    Making Amazon out to be some evil force in the publishing world flies in the face of consumer experience. If publishers don’t like Amazon, they don’t have to sell their products through Amazon. There’s plenty of competition. They just can’t collude with one another to fix prices. It’s that simple. 

    • /blog Mike Shatzkin

      But it is not that simple

      You give up millions of Kindle owners if you don’t sell through Amazon. They can’t effectively load books on their device if you don’t.

      And the “price-gouging” allegation requires ignoring what happened in the *device
      market!* Nook has pushed Kindle every step of the way since they came out, pushing down the price and introducing new features (touch, color, and lighted screens all pioneered by Nook, *not *Kindle.) So the total cost of reading has plummeted, even if you think that ebook prices have been pushed up (and there is some very good testimony in the B&N and Simon Lipskar letters to DoJ saying the prices of the books themselves didn’t actually go up!)

      The collusion case is trumped up. There is plenty of evidence that Apple told the publishers that they would only open the store if four of the Big Six came in. That was a *necessary* business decision and it was out in the open. (IF you don’t like that, tell me what you would suggest. That Apple just not figure out what the minimum acceptable number would be? That they figure it out and not tell the publishers? That they refuse to tell them if asked? How ridiculous would all of that be?)

      When you take on board that publishers all knew that, it becomes obvious that all the chatter about them talking to each other (“are you doing it? we’re doing it!”) as just a load of bull. They all already knew that it was either four or no store.

      And including that Picholine meeting in the collusion allegation — when we know that at that time (September 2008) Apple had no plan anybody knew about for books at all (in fact, the prevailing Apple wisdom then was that Steve Jobs had said nobody read books!) — really lays bare the weakness of this “collusion” case.

      So the DoJ got three publishers whose parent companies were sick of paying the legal fees and were otherwise afraid of the government (two of them own TV stations…) to settle.

      They’ve convinced a lot of people who have no reason to know better that some nefarious conspiracy took place to steal money from consumers. And they’ve cleared the path for the one company that does actually have a monopolistic (or monopsonistic) position to continue their push for hegemony.

      This will be plain for all to see in a few years and there will be a great need to “fix it”. But by then the industry will have been destroyed.

      I won’t argue the law; I don’t know the law. Plenty of smart lawyers, including David Boies, say that agency pricing is legal and that the DoJ’s action is wrong. I will assume that, at the very least, prosecutorial discretion would have allowed Justice to say “the effect of pursuing this case will be to strengthen an existing threat of monopoly and weaken an important industry we don’t completely understand.” They didn’t have to do this. It was extremely unwise that they did.

      Mike

      • ChurchLady108

        “You give up millions of Kindle owners if you don’t sell through Amazon. They can’t effectively load books on their device if you don’t.”

        And Amazon loses millions in book sales if they don’t accept a publisher’s pricing model. This is part of the risk of standing one’s ground. It’s a game of chicken, and who wins is up to the marketplace. Who ever said that publishers have some ultimate right to both set their own pricing, and force retailers to sell their books? It’s supposedly a free country.

        “And the “price-gouging” allegation requires ignoring what happened in the *devicemarket!* Nook has pushed Kindle every step of the way since they came out, pushing down the price and introducing new features touch, color, and lighted screens all pioneered by Nook, *not *Kindle.)”

        Which just goes to prove that competition results in lower prices, more
        options, and better service for customers. You are only demonstrating
        that Amazon also faces competition and that it must respond to that by lowering prices and offering more. But you don’t want publishers to respond to Amazon’s competition in similar manner. Instead, you want them to be able to collude and violate anti-trust laws in order to keep prices higher and prevent competition.

        And the prices of ebooks did indeed go up, as soon as Amazon capitulated to the Agency model enforced by the Big Five and Apple.

        “The collusion case is trumped up. There is plenty of evidence that Apple told the publishers that they would only open the store if four of the Big Six came in. That was a *necessary* business decision and it was out in the open.”

        The collusion case is not even in dispute, precisely because it was out
        in the open. It doesn’t matter if Apple would have pulled out of the deal without the collusion agreement in place. It’s still an illegal collusion agreement. You can’t make a legal defense that breaking the law was necessary to make a business deal go through. That’s not a valid defense in any way shape or form. You have to do business legally, or find some other way to compete. But rather than compete fairly, Apple and the five publishers decided that they needed to collude to make the deal sweet for Apple. That’s not going to fly.

        If Apple is not interested in getting into the ebook market unless they
        can break the law and collude with publishers to set prices for the entire industry, that even Amazon has to go along with, then they shouldn’t get into the business. It’s not as if Apple has some sterling reputation for morality in their business dealings.

        “They’ve convinced a lot of people who have no reason to know better that some nefarious conspiracy took place to steal money from consumers.”

        There’s no need for moral straw men here. The publishers simply tried to dictate prices through collusion. It’s what most industries would do if they could get away with it. Which is why we have anti-trust laws. All because they don’t want to have to actually compete with one another or with Amazon.

        “And they’ve cleared the path for the one company that does actually have a monopolistic (or monopsonistic) position to continue their push for hegemony.”

        Amazon’s share of the ebook market is constantly dwindling through
        competition. They have no monopoly or monopsomy on ebooks. They only had such a high market share to begin with because they essentially
        created the market for ebooks. Now they are getting more and more
        competition from multiple sources. The barriers to entry on selling ebooks are pretty low, because it’s all digital ecommerce. Even small, independent bookstores are selling ebooks now. The only way Amazon can keep market share is to keep offering the best prices. Any time they stop doing that, competition will eat them up. They aren’t afraid of that, unlike the publishers, because they feel they can compete. The publishers don’t want competition, and they want to keep ebook prices high, because the only form of distribution they can control is in paper products.

        “This will be plain for all to see in a few years and there will be a great
        need to “fix it”. But by then the industry will have been destroyed.”

        No, the industry will be thriving. But publishers who can’t compete will
        be destroyed. Those who can, will thrive. As has always been the case in every industry. Amazon will likely do very well, because they are a well-run, forward thinking company. Publishers that are poorly run, backwards-thinking, rent-seeking, uncreative and spineless cowards will fail.

        “I won’t argue the law; I don’t know the law. Plenty of smart lawyers, including David Boies, say that agency pricing is legal and that the DoJ’s action is wrong.”

        Agency pricing is legal, but the DOJ’s lawsuit does not charge the publishers with agency pricing. They are charged with collusion and price-fixing. Agency pricing is only price-fixing if it is enforced by broad agreements by multiple publishers with a commanding share of the marketplace. It’s quite legal for individual publishers to sell their own books by. It’s also legal for a retailer to refuse to deal with a publisher who demands an agency model that the retailer doesn’t like. As it happens, Amazon sells the books of many publishers who use agency pricing models. They just negotiate those models with each publisher individually, rather than as an illegal monopolistic conglomerate.

        “I will assume that, at the very least, prosecutorial discretion would
        have allowed Justice to say “the effect of pursuing this case will be to strengthen an existing threat of monopoly and weaken an important industry we don’t completely understand.” They didn’t have to do this. It was extremely unwise that they did.”

        Amazon is not threatening to monopolize the ebook market. If they ever did, then the DOJ would go after them. It is the Apple-plus-five collusion deal that is threatening to dominate the ebook market from production down through distribution through price-fixing and collusion. That’s why they are being prosecuted. Amazon is not the bad guy breaking the law here. They are just trying to make a buck by offering the public fair prices. It doesn’t make them good guys, it just makes them smart guys.

      • /blog Mike Shatzkin

        Who said anything about *forcing* retailers to sell their books?

        *You* said publishers could just withdraw from Amazon as though that would be a viable tactic

        Are you familiar with the Amazon-Macmillan dustup of January 2010?

        In fact, there *is *an alternative, which is going DRM-free, which does enable putting books on Kindle devices. That was the threat used effectively by Pottermore to get Amazon to accept their conditions (pushing sales to them) which there is no way Amazon wanted to do.

        Mike

      • ChurchLady108

        Yes, I’m familiar with the McMillan dispute. You seem to be implying that Amazon should be forced to carry McMillan’s books on McMillan’s terms, and if they don’t, it’s monopolistic bullying. But Amazon simply wants to sell ebooks at its own prices, not those dictated by McMillan. What about that is wrong? Both lose out if they can’t come to an agreement. 

        And yes, I was going to point out that if books are DRM free, anyone can read them on a Kindle. Thanks for doing that for me. Amazon sells lots of DRM-free books, including many from its own publishing arms. 

        Also, its’ important to know that the Kindle is far, far outsold by iPads. It’s not even close. So it’s nowhere near to being a dominant tablet computer format. That would be Apple. 

        I guess you are conceding all my other points. Thanks.

      • /blog Mike Shatzkin

        Macmillan not McMillan.

        Nobody *forced* Amazon to carry anything. Amazon decided they would be doing themselves great damage if they didn’t carry Macmillan books so they conceded. And what they refused to sell were* print* books at that point.
        Your point about Kindles and iPads is a non sequitor. Whatever the number of either, those people reading on a Kindle device are only accessible for DRMd books (the vast majority of commercial content today) through Amazon. There is no analogous statement to be made about iPads. Although Apple showed *their* sharp elbows when they stopped the direct purchase links from the apps for the other reading systems.

        And don’t mistake my ignoring a point of yours with conceding it. I’m a busy guy and I’ll reserve to myself the decisions of what is worth a response and what isn’t.

        Mike

      • conradg

        Mike, first, I don’t know why you are commenting on minor side issues and not the main one. The DOJ lawsuit isn’t about Amazon. Amazon’s Kindle is not the dominant tablet in the marketplace. The iPad is. Amazon books can be read on most other formats and devices. I read plenty of non-Amazon books on my Kindle. Amazon doesn’t control the DRM of books not sold by Amazon. DRM is a whole other issue, and another good reason to distrust the major publishers pushing it. Amazon is not pushing DRM.

        And Amazon was indeed forced to carry MacMillan’s books, because of the collusion with the other five publishers, who acted as an illegal consortium fixing prices under the same pricing model. Amazon could not negotiate with each publisher separately, but had to either go along with all of them, or none of them. That’s why Amazon caved. That’s why ebook prices went up. That’s what brought about the DOJ lawsuit. Collusion and price fixing between the five major publishers and Apple. It’s very simple. Stop changing the issue to something that is irrelevant to hide from these simple facts. Deal with them, if you can. If not, I can understand why. It’s tough being on the short end of an argument. 

      • /blog Mike Shatzkin

        You cannot put a DRMd book not sold by Amazon onto a Kindle. You can put a NON-DRMd book sold by somebody else onto a Kindle. And you can read a Kindle book on any device for which Amazon provides an app. You are incorrect if you believe that any publisher with DRM has access to Kindle device owners except through Amazon.

        Even Pottermore’s DRMd Kindle titles (which they consented to) are served by Amazon.

        The fact that several publishers did the same thing is not ipso facto evidence of collusion. It is evidence that the business arguments for doing what they did were so compelling that they each came to the only conclusion they could come to. Random House managed to be a free-rider for a year by postponing the decision.

        They did it to create a marketplace that was both *better* and *cheaper* for consumers*. *That’s transparently true if you think about what happened to reader device development (I’m talking about Nook, not iPad) and what obviously happened with device *prices*. B&N and Kobo were able to compete.
        And though it is* *DOJ’s *contention* that “prices went up” (which you repeat here), it is probably not true even ignoring (as they did) what happened with device prices (have you read either Barnes & Noble’s or Simon Lipskar’s answer to the DOJ complaint, on the public record). But you can’t ignore what happened with device prices.

        This lawsuit, and the bullpucky people believe about collusion and prices because of the misinformation it has spawned, would be a comedy of errors if the results were not so unfunny.

        And I love it when you, and so many other people who don’t understand what the hell is going on, keep telling me that “it’s simple”. It is NOT simple. If you think it is simple, you don’t get it.

        Got it?

        Mike

      • conradg

        DRM is a separate issue, and very complicated. It’s a terrible thing for consumers, and Amazon is trying to lead the charge against DRM. It only accepts light versions of DRM, that allow the consumer more options with ebooks. Hence, the DRM it allows on Kindle is not compatible with the harsher DRMs you get from most resellers. They want to get rid of DRM completely, which is a very good thing, and shows they are on the side of consumers on this issue also. It’s not part of some efrarious scheme of Amazon’s to make sure no one else can sell ebooks for the Kindle.

        Now the facts on the collusion case are indeed quite simple. The five publishers wanted to control pricing of their ebooks, and to prevent Amazon from discounting them, and to do that, they got together with Apple, and signed an agreement to do just that. They didn’t come to their agency models independently, and they didn’t each miraculously all dream up the same pricing scheme. They aren’t even pretending that’s how it happened. These facts are not in dispute. What’s in dispute is the interpretation of whether this constitutes illegal price fixing. That’s what the court will decide. The publishers are of course trying to make this case complicated, by claiming that this was just a good business decision on their part, to join together with Apple to force Amazon to accept their pricing. And they are welcome to try. But the facts are simple. The publishers colluded and fixed prices. Is that illegal? On the face of it, it would sure seem to be, which is why some of them already settled. But everyone gets their day in court. 

        It’s also a simple fact that this pricing scheme raised prices. Isn’t that obvious, in that the whole point was to prevent Amazon from discounting books, meaning selling them at lower prices? If Amazon can’t sell at lower prices than those dictated by the publishers, it means prices will be higher. Can you really argue otherwise? I’d like to see you try, really I would. Are there any examples of Amazon deciding to sell books at prices higher than what the publishers wanted? I haven’t heard of any such incidents, but please let me know if some exist.

        And yes, I’ve read B&N’s response, and it’s pure hand-waving. Do you really expect them to say otherwise, and praise Amazon’s contribution to lowering prices for consumers? They aren’t exactly disinterested parties. 

        Also, device prices have nothing to do with ebook prices. Kindle prices didn’t go down because of the agency model, they went down because of 1) competition from others devices, and 2) Amazon’s desire to sell as many Kindles as possible so as to have as many people buying books from them as possible. Amazon happens to understand that if you lower prices, you sell more product, and make bigger profits. The publishers ought to learn that trick.

        And that just brings up the real reason behind the Big Five agency plan. What really threatens them is not that Amazon will discount ebooks and pick up market share in the process. What they are threatened by is the notion of ebooks being priced at a level that makes them more attractive than physical books. They don’t want the free market to set prices for ebooks, because if they allow that to happen, the market will shift dramatically towards ebook sales rather than physical book sales. And if that happens, then their entire business model starts to fall apart.

        Because the publishing industry’s business model depends on having control over both the production and distribution of books, which they have established over physical books for the last century. They have colluded for a very long time in establishing these business practices, which is why, for example, author contracts are almost all the same, royalties are all the same, and rights issues are almost all the same, except for the biggest selling authors who are able to break these standards. Likewise, the distribution networks they have set up give them a huge advantage in the marketplace, and in the marketing of all books. And so they are trying to protect all that from being upset by ebooks, which they don’t have the same control over. Which is why they decided they needed to stop Amazon from discounting. 

        It’s not Amazon itself that they are so scared of, it’s the dissolution of their old business model that scares them. Amazon is just part of that process, and their aggressive discounting of ebooks is simply accelerating an historical change in the industry that they are trying to prevent from happening. They are standing athwart history and yelling “stop!” But it isn’t working. The digital world is changing under their feet, and they don’t know which way to run. 

        They really should be thanking Amazon for preventing what has happened to the music industry from undermining the publishing industry. By introducing the Kindle and a full-market estore for digital books at the outset, they have given consumers a legitimate and non-piracy driven way to buy and read ebooks, rather than forcing them to resort to piracy. And by keeping ebooks as cheap as they can, they are giving less reason for consumers to resort to piracy. This would never have happened without Amazon. Instead, publishing would have be transformed by the literary equivalent of Napster. 

        Likewise, Amazon is offering a huge number of very inexpensive ebooks, and making it possible for authors to self-publish at high royalty rates, far beyond anything offered by traditional publishers. In the long run, this is even scarier for traditional publishers, who have depended on their headlock on distribution channels to force authors to accept their terms or never be published at all. Amazon is making all of that more and more obsolete, and this of course scares a lot of publishers, who are responding by circling the wagons and openly colluding to keep ebooks as expensive as possible.

        If all publishers wanted was to sell more ebooks and make more money from ebook sales, their agency model makes no sense at all. Lowering prices, especially with Amazon taking the hit, will just increase sales and decrease overhead and maximize profits. But it will also take away from their physical book sales, which is the only channel they can control for now. So they have very good motives for colluding and fixing prices. And it’s not to serve customers better. It’s to protect themselves from competition. 

        Now, you can try to make the argument that they have the right to collude and fix prices to prevent technology from changing their industry. I don’t think the courts are going to find that argument very compelling, however. Nor do I. It’s pretty obvious what they are up to, and it’s all about trying to create an oligarchic model rather than a free market one. I’m not sure why you think that’s better for anyone but the oligarchs, but I’d like to hear your argument, if you have one. 

      • /blog Mike Shatzkin

        Look, I’m not going to get into a point-by-point refutation of erroneous facts and sophistry because it is pointless.

        I’ll let your post sit here full of errors though it is, starting with Amazon being an opponent of DRM. And nobody ever said the “publishers all made this up”. It isn’t hard to understand how they all came to a similar deal, and no collusion was necessary to make it happen. But you obviously have more time to make this stuff up than I have to knock it down.

        Saying “the facts are simple: the publishers colluded and fixed prices” is simply wrong. And saying that the fall in device prices had nothing to do with agency is also wrong. Ad infinitum.

        Mike

      • conradg

        Mike, you are just plain lying now, saying that all the publishers came to the same deal independently. They signed identical mutual agreements with Apple, fixing retail prices. Do you really think this came about by accident?

        I understand why you can’t go on with this. You just don’t have any facts to support your contentions. The agency deal with Apple is what led to device prices falling? The agency deal had nothing to do with device prices. Device prices were falling before the agency deal, and they will continue to fall after the deal is negated by the DOJ. Consumer electronics prices have been steadily falling for decades. You think the world revolves around publisher prices for ebooks? Amazon and B&N subsidize device prices to get more people in the door of their stores. Eventually, they will probably give them away for free, or close to it. That’s going to happen no matter what. And in a free market, ebook prices would also fall. In falling, their sales will increase, and ebook devices will fall in price also, to capture that expanding market. 

        It’s also real strange for B&N to be against predatory discount pricing. For years they gave steep discounts to hardcover bestsellers to get people into their stores, putting lots of independent bookstores out of business in the process. Now that someone is putting pressure on them, they play victim. Not terribly convincing. 

        As for DRM, it’s Amazon’s policy to allow publishers to set DRM for their own books. Amazon doesn’t have much control over it. It offers a lighter version of DRM for publishers who want it, but doesn’t require that anyone actually use it. 

        Good luck getting the DOJ and consumers to see things your way. 

      • /blog Mike Shatzkin

        You know, “lying” is a nasty word.

        This is your last post on my blog.

        You’re wrong in 100 ways. But you really don’t want to know that and I’m really tired of correcting your mistaken thinking, which is rife in your posts. As is either stupidity or deliberate misunderstandings. Like what you say below about DRM. My point was that a publisher couldn’t put a book on Kindle WITH DRM without Amazon’s support. Which you’ve repeated, while explaining that I’m wrong.

        I’m really tired of it.

        Further comments from you will be deleted without being read.

        Mike

      • http://twitter.com/emmittc emmittc

        Bravo Mike…..i had started to reply to this (triggered by the word “lying”) but figured I should defer….you have been so patient and tolerant with much of this nonsense…so grareful for your generous blog and most of the conversation it generates……really mystified as to how the publishers have become such pariahs…..you would think they were gaming libor or defrauding investors or tanking the global economy….so out of whack…..

      • /blog Mike Shatzkin

        Thanks for the note. I sorta count on the fact that most of the regular readers of the blog (which, even for the comments, could well be hundreds) are just as annoyed by the long-winded and uninformed self-righteousness as I am. I feel a professional obligation to be polite and considerate for an exchange or two. Usually that’s enough.

        Mike

      • conradg

        Thanks for demonstrating the bankruptcy of your arguments. You’ve been insulting me throughout this exchange, but when I come back at you, it’s too much to bear. Well, it’s your blog. Just know that you aren’t fooling everyone. And maybe not anyone.