The Shatzkin Files


Jane Litte explains the DoJ suit very well, and I have a couple of points to add

Posted by Mike Shatzkin on April 22, 2012 at 4:13 pm · Under Authors, eBooks, General Trade Publishing, Supply-Chain


Jane Litte at the DearAuthor blog has written a remarkably concise, clear, and cogent piece about the DoJ case. This whole paragraph is a link to it. That’s a signal.

In fact, if this is a subject of high interest to you and you are not a lawyer, I would encourage you to read Jane’s post before you read this. I am not in any way attempting to substitute for or contest anything in Jane’s piece, which explains the law and the issues in terms that really helped this layperson feel like a participant in the discussion. A number of things struck me as I read it, but there were three paragraphs Jane wrote that called for answers. I hope she and others will find this a useful addition to her mighty contribution to the discussion. Quotes from Jane’s piece are in italics.

There are two elements that stood out for me in reading the DOJ’s complaint. First, Apple set the pricing floor and ceiling for ebooks and every publisher accepted those terms. Did the publishers individually attempt to negotiate for differing floor and ceilings? Why was it the same for every publisher? No other app in the app store has a pricing floor or ceiling like the books in the iBooks store. Why were books treated differently?

No other app in the app store has a print equivalent. The pricing floors and ceilings are, as I understand them, all expressed in relation to the print retail prices. That logic cannot be extended to other apps in the app store. These restrictions, almost certainly sought and engineered by Apple, were to assure them that there would be an understood relationship between the print competitor and the ebook. Whatever that means, I find it hard to see how it constitutes publishers colluding with each other.

And the publishers chose their print prices, so, in effect, they chose their ebook prices as well. Without collusion. Publishers don’t talk to each other about what retail prices they’re setting.

Second, the David Shanks email to Barnes and Noble. In the email, Shanks urges Barnes & Noble to punish Random House for not hopping aboard the pricing agreements that the other publishers had agreed to with Apple. This type of email is evidence that the DOJ will point to as attempting to police or enforce a collusive agreement. In other words, if there is only conscious parallelism why would Shanks need Random House to engage in the same type of pricing. That is one piece of evidence that seems to rule out independent action.

There is absolutely nothing strange about this nor is there any reason to think Shanks wasn’t acting totally independently.

Remember that Barnes & Noble entered the ebook market with the Nook in November 2009. They were very explicit and clear with all their trading partners that the Amazon pricing was a big problem for them. You don’t need to have it spelled out to you or be a rocket scientist to see the unpleasant consequences of having to give away all that ebook margin: fewer brick stores, less resources to develop the Nook against the Kindle, and perhaps the need for more margin from the publishers on the print and store side. All the publishers were aware of that.

When Random House stayed out at first, some people were confused about that choice but the insiders understood that they had “gamed the system”. Now they’d sell their ebooks to Amazon at the old (higher) wholesale prices and get the benefit of the lower retail prices because they had the branded loss leader category to themselves. And perhaps they’d even get better treatment from Amazon on their print books too, because, after all, their titles were the ones Amazon could promote which would promote their ebook pricing policy at the same time.

I can tell you that this caused massive teeth-gnashing at all the other houses. But there was, actually, not a damn thing they could do about it. They had to swallow lower revenue per copy for their books as well as a price-disadvantage in the marketplace and they did it because they thought leveling the playing field on price was so critical to their futures. Meanwhile, from their perspective, the biggest player sat out the fight.

And from Random House’s perspective, they did the best thing for their owners and their authors.

At the time, all the other houses were aware that they had done all this partly for B&N and that B&N was presumably being hurt by Random House’s unwillingness to go to agency, and, dammit, why wasn’t Barnes & Noble doing something to push Random House in the right direction?

Executives from many of the other firms, although not David Shanks, asked me why Barnes & Noble wasn’t pushing Random House into line on this. In fact, I made the observation to people at Random House that the question got asked by their competitors. It would have been neither polite nor politic to push the conversation any further than that, but nobody registered any surprise.

My own read of the B&N-Random House relationship is that it has been strong for years on many levels and it therefore withstood this blow to it without disrupting most of what else was going on. I have no doubt that B&N expressed displeasure about it and that making them happy was one of several factors that motivated Random House to move to agency pricing a year later.

But David Shanks was representing a point of view that every informed executive at every major publishing company had. He didn’t need to talk to anybody else to come up with it and it is totally appropriate within the context of a frank and open relationship with a major trading partner for him to have said what he did to B&N.

The problem here is that Apple was not (and is not) a dominant player in the digital publishing market. I don’t know if iBooks has even a 1% market share. The hub in a hub and spoke conspiracy ordinarily has a dominant market share such as the two theatre houses that controlled the majority of the market in which they had first run theatres. The DOJ identified the relevant market in its petition as trade ebook market. I find that definition too narrow and wonder if it won’t spike the DOJ’s suit.

What I can tell you is that major publishers put Apple’s share of the ebook market to me at between 10 and 20 percent. Because they don’t have as wide a selection of titles as the others, it is likely that their overall share is something slightly less than that. Dominant? No. Third in the market in the US.

And these italics are me again, not Jane. I have another post just about ready that I was holding for tomorrow morning but now might hold another day.

I am going to do all I can in the next 6 weeks to encourage an understanding of the DoJ case (which I think Jane makes clear is not close to overwhelming) and the necessity of people in the industry registering their concerns with the settlement, which could be devastating if it became law. When I saw Jane’s post a couple of hours ago, I thought I could usefully add to the discussion and I want to encourage as much traffic to her as I can. I think she presents some foundational understanding here that is very important for people to have about the law. I was encouraged by her explanation and analysis that there is more hope for what we need as an industry to happen than I had previously thought.

  Back to blog

  • Jane

    Thanks Mike. I hear what you are saying. I’m just not sure why Apple tied the digital price to a print product. I think that if the publishers were able to negotiate differing floors/ceilings that would have been helpful. I’m not saying that the ceiling/floor is the smoking gun, but that was a curious element that has always bugged me. I think I’ve mentioned before that it is hard to see how a publisher is truly the principal setting the price if the ceiling/floor is determined by someone else.

    As for David Shanks’ comment re BN, a number of cases talk about punishment of the cartel for acting out of line. Here Random House isn’t acting out of line, but failing to fall into, ah, cooperation? with the other publishers?

    There are a number of issues that stand out for me as murky. I.e., it isn’t enough for me that the CEOs met at the restaurant to talk about business. Of course, we don’t know exactly what was said and I would guess that the CEOs who would testify would be as vague as possible. (I suspect that there will be a number of “I do not recall” answers during depositions). But the meetings themselves don’t signal an agreement.

    I’m also not convinced of the hub and spoke conspiracy. I know that the plaintiffs in the civil action argued that in their resistance to the motion to dismiss and the hub and spoke (and rim) conspiracy has been applied fairly recently (in the last 5 years I think) but Apple lacking a dominant market presence in the ebook market seems to mitigate against that. I think DOJ should have defined the monopoly market broader.

    • /blog Mike Shatzkin

      Jane, I think Apple tied the digital price to the print price to fit their own notions of what the reduction should be from one to the other. But since the publishers are setting the print price, and we know that is approached differently for different books (it isn’t always a simple calculation from the page count or manufacturing cost), I think that, in a manner of speaking, the publishers are setting the ebook price as well.
      Shanks isn’t punishing anybody. Shanks is trying to understand why the trading partner that pushed him (and the others) toward the agency model, and which has proven itself capable over the years of expressing its pleasure or displeasure with publishers through its buying, was apparently not making it painful for one big publisher who was resisting their wishes. Not just the other publishers’ wishes: *their* expressed wishes.

      Apparently the restaurant story told by Melville House (and not in the court papers) was a joke, or a hoax. I’m sorry I linked to it and was gullible enough to believe it. But of course these publishers were meeting then. They organized Anobii in the UK (investment from Penguin, Random House, and HarperCollins) and
      Bookish here (Penguin, Hachette, and Simon & Schuster.) So they were meeting and they were discussing issues that involved Amazon. I don’t understand the anti-trust law well enough to understand why one thing is legal and another not, but a) the college textbook publishers were allowed to do Course Smart and b) nobody has alleged anything about Bookish yet.
      Presumably there were discussions about it and it is even possible that
      other publishers participated in conversations and decided not to invest.

      In other words, there were other things besides agency for these people to
      be talking about.

      As for the point about Apple’s share, I also wonder exactly how big the Big
      Six share is. It really depends on how you define it. It might be as high
      as 80% for commercial fiction and bestsellers, but I doubt it is that high
      across what bookstores sell and especially doubt it is that high across
      what Amazon sells, which includes a lot of the long tail.

      Mike

      • http://mindtherant.blogspot.com/ MindTheRant

        Hi Mike –

        Thanks for sharing Jane Litte’s antitrust primer and bringing me another step closer to understanding what on earth is going on — though I confess I remain pretty confused.

        You mention above — and mentioned in your first post about the DoJ suit against Apple et al. — that the publishers supposedly colluding to engage in agency pricing could just as easily have been meeting (legally) to hammer out the details on Bookish.  But since two of the three publishers involved in the Bookish venture have chosen to settle with the DoJ, doesn’t that militate somewhat against your argument?  Granted, settling need not convey guilt and I believe the terms of the settlement (and most such settlements) explicitly relieve the settling parties of the requirement to plead guilty or admit wrongdoing.  And settling carries the obvious benefit of capping the legal costs associated with protracted litigation … though agreeing to pay millions in restitution for overcharging on ebooks might make it worth it to contest the claims.

        Still, considering that Penguin and Macmillan seem to be taking a legal-costs-be-damned approach, seeing Hachette and S&S settle at the get-go suggests at least two corporate counsel may not think the Bookish defense is exactly ironclad, no?

      • /blog Mike Shatzkin

        I don’t think the decision to settle in any reflects belief or lack of it in the strength of the case. There are other variables. Legal cost. Distraction. And different views from corporate parents.

        My hunch is that the last of these is the biggest factor. There may be much less difference of opinion among the executives of the five companies than there is among the executives of the corporations that own them.

        Mike

  • Kevin O. McLaughlin

    Great post, Mike. A few thoughts.

    You comment that publishers had been setting prices for print, but is that really true? They set wholesale prices, yes. But retailers were always still free to set the retail prices as they saw fit. What changed here was virtually overnight five of the biggest publishers suddenly mandated *retail* prices on ebooks, and in the process raised consumer costs a substantial amount.

    On Random House, one has to wonder if their legal counsel didn’t simply suggest they hold back for a bit to ensure they stayed clear of possible litigation around the agency system. Within months of agency pricing starting, there were already murmurs of anti-trust. I think it’s distinctly possible they held off intentionally to demonstrate they were acting independently; or that might have been part of the reason, at least. Pure speculation, of course.

    I look forward to your continued analysis of the topic as it unfolds.

    • /blog Mike Shatzkin

      *Perhaps* some lawyers at Random House were that prescient. It is certainly possible. But we don’t need to think that for their behavior to have made complete sense. It is true that they stayed out of the lawsuit. But they also cashed in heavily in the year they were out by gaming the ebook system, selling higher and seeing their books priced lower.

      Mike

      • Jane

        This seems to indicate that readers are willing to buy other titles at a lower price. I’ve been wondering what, if anything, will happen to the books published by the settling three when their titles are subject to discounts.  Will those houses sell more in the aggregate?

      • /blog Mike Shatzkin

        Almost certainly they will sell more. Lower prices always sell more. That was part of the conscious sacrifice the agency publishers were making in order to establish control of pricing. And it is part of the burden the publishers fighting will carry in addition to legal fees.

        Mike

      • http://twitter.com/KOMcLaughlin Kevin McLaughlin

        I agree, that’s likely part of the benefit those settling hope to gain. It will be interesting to watch how those publishers *price* their books though, once they can be discounted. Will we see those publishers raise SRPs on ebooks once they are moved to wholesale and become discountable? If so, will Amazon elect to discount them as deeply as the publishers hope?

        In other words, if a publisher raises an 11.99 ebook to $14.99 expecting Amazon to discount it 30%, Amazon might well simply elect to leave most or all of those books at the higher price and let the publisher hoist itself by its own petard.

      • /blog Mike Shatzkin

        That’s possible. Of course, Amazon has a choice of tactics on a book by book basis. I think their first instinct is to do what looks best to the consumer. (That’s why they are where they are!) But they do both on any one publisher’s books. This is all part of the pricing power they have which is being ratified by the DoJ.

        Mike

  • marcellovena

    Hi Mike,

    thanks for further developing the discussion. Jane contribution is very interesting too. Great post really!

    I’d also like to add that books (and eBooks of course) are not commodities that can be published and sold by more than one publisher. Except for the out-of-rights products, the overwhelming majority of titles is published by definition by a single Publisher who acts as “monopolist” for that kind of book. It’s hard to compare two different books by prices.. the books are NOT substitutes. So the claims of 5 Publishers are colluding with a not-so-big retailers Apple, to fix prices is something that is not so easy to grab. They do not sell the same products (again books generally are not commodities).

    Publishers and authors are by definition monopolist: they are the only one that can sell or write a specific book.  How can monopolist collude with one another if the sell different products?

    Retailers, on the contrary, are selling the same products and are on a potentially open market which might affect the consumers…

    So what market are we talking about? Publisher market? Wholesale market? Consumer market? 
    On the consumer market Jane and you are right, Apple is not a monopolist nor as significant player with less than 20% market share.
    Author/Publisher markets, on the contrary, are by definition monopolies. There is only one supplier for any chosen product.

    However one could push the reasoning a bit further and define the alleged talks between Apple and the other top 5 Publishers as “meta-collusion”.. that is to jointly devise an overall business strategy (based on agency, which is per se not unlawful) to induce/force the monopolist (Amazon) to accept new terms to the detriment of the final consumer.

    Sure it’s hard to talk of price fixing since books are NOT commodities, however it’s still arguable that the new operating business framework (as the one served by the agency model) was created with the help of all involved players to make it works.
    If DoJ can prove the agency framework was co-designed by all involved players together AND that no single player alone would have been able to devise such agency framework (which is hard to believe, since agency as business model is not very new) then perhaps some creative attorney could claim a “metafixing” of pricing… meaning creating a new business environment that even the monopolist would have to accept, thereby leading to overall price increases in the monopoly markets held the by top 5 publishers (one monopoly for each published eBook)

    I’m not sure where this line of reasoning can head to, but it certainly passes the stress-test on the reason why RH has not been involved and also confirms the fact that agency is definitely not unlawful, as you Mike have been telling us several times.

    What do you think Mike?

    Best Regards,

    Marcello

    • /blog Mike Shatzkin

      Well, I don’t pretend to be the authority about whether agency is lawful or not. But it doesn’t appear to be. Certainly, DoJ doesn’t seem to be making that case.

      I have no idea whether your legal construct is valid or not. I’m just not knowledgeable enough to comment.

      But the point that copyright grants a legal monopoly seems worth considering here. It’s the publisher’s job to maximize the value of the copyright. I tried to make the point about software: that Microsoft wanted to get the same dollars for it regardless of their “cost of goods”. Same logic applies to books and ebooks.

      After all, the pharmaceutical company does not charge you for medicine based on the cost of actually making the pills. That manufacturing cost is close to irrelevant when they set their prices.

      Mike

  • Small bookseller

    I can vaguely see that my point below is not relevant to the legal case being made, but as a small bookseller participating in the Amazon marketplace, I find it troubling that no one seems to notice that Amazon mandates a price floor on anyone who seeks to sell in their marketplace. (Apologies for the unruly link, but see section S-4 about halfway into this document)  https://sellercentral.amazon.com/gp/on-board/help-content.html?ie=UTF8&repeatButtonsAtEnd=1&localizationKey=ATVPDKIKX0DER&isOnlineMapa=&marketplaceID=ATVPDKIKX0DER&mapaAcceptanceDate=&tokens=agreement.MERCHANT_SILVER&showTitles=1&hasPrintButton=1&invitationID=&agreementID=&hasCloseButton=1#SOA

    That’s right, I have to agree not to list my product anywhere else on the web or in any of my  other sales channels at a lower price than that which I set on my Amazon listing.  Granted, I and the other gazillion sellers are not conspiring to fix the prices, but Amazon is the dominant player when it comes to offering a marketplace, and this prevents any other would-be marketplace from competing with them on price. Sigh.

    • /blog Mike Shatzkin

      Now, THAT is a very interesting piece of anecdata that most of us don’t know. I am not sure it affects the legal case, but it certainly should be taken on board by anybody who thinks there’s a moral argument against Apple for wanting MFN on their agency books!

      Mike

  • Maria Powers

    Great post. Thank you for sharing your comments.

  • WzeroMN

    I cannot see how ebooks should be so high. It is obvious that since there is no printing or distribution cost (well obviously electronic distribution is very cheap) that alone should lower cost and more sales since the obscene DRM means I cannot resell or even give away my books.

    • /blog Mike Shatzkin

      eBooks *are* cheaper than printed books as far as the publisher is concerned. They take in less revenue on the ebooks, particularly when books are new and the hardcover edition is out.

      However, the online retailer may choose to take less margin on the print in order to “make a point”. That point is obviously not lost on you.

      Mike

  • marcellovena

    Hi Mike,

    some interesting date that confirm your guess (10%-20%) on iBookstore’s market share.

    According to art. 21 (pag 7 of the DoJ’s complaint) ebook sales (in term of consumer dollars) in 2010 for the big 5 publisher where above USD 300mln. Out of  this pie iBookstore represented a total of USD 40mln.  
    Therefoe one could imply that at least for the Big (non including RH) iBookstore represented more or less around 13-14% of total sales (revenue).
    However if we take into account the fact that the iBookstore sales began only in April 2010… the USD 40mln should be compared to the corresponding share (Apr-Dec 2010) of the USD 300mln. Basically we should remove the  first quarter 2010.
    The first quarter 2010 is unlikely to weight as 25% of total year 2010, since the market was  growing on a month-by-month basis and Summer and Xmas sales are in the second half of the year.
    If was assume Apr-December 2010 being 80% of total year revenue (it probably is a bit more than 80%).. then we would end up with a USD 240mln partial year that compares with the iBookstore’s USD 40mln. This would mean around 16-17% market share.
    A mid figure in the range 10%-20% (between 14%-16%) looks therefore quite reasonable, as you said. Of course, under the assumption, that the numbers stated in the complaints are confirmed.

    Best

    Marcello

    • /blog Mike Shatzkin

      Thanks, Marcello, for some apparent confirmation of my anecdata!

      Mike

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