The Shatzkin Files


Trying to explain publishing, or understand it, often remains a great challenge


I went to the In Re Books conference at New York Law School last Friday and Saturday in hopes of curing some of my ignorance about the law and publishing. I learned some things, including the facts about a very interesting case involving a book publisher, the associations of publishers and booksellers, and a large general retailer that took place over a century ago and anticipated a lot of what we’re seeing today as the other players in the industry battle the power of Amazon.

But I’m afraid my major takeaway was, once again, that the legal experts applying their antitrust theories to the industry don’t understand what they’re monkeying with or what the consequences will be of what they see as their progressive thinking. Steamrollering those luddite denizens of legacy publishing, who just provoke eye-rolling disdain by suggesting there is anything “special” about the ecosystem they’re part of and are trying to preserve, is just part of a clear-eyed understanding of the transitions caused by technology.

So perhaps we have symmetrical ignorance and will never understand each other.

The conference was lively and well organized. The speakers were articulate and well prepared. There were two panels I wish had taken place in a different order.

On the first day, the In Re Bookstores panel had an antitrust lawyer who fully supported the Justice Department’s case against the publishers, although he seemed to be attacking the Agency model itself, rather than the collusion which, as I understand it, was the core of the government’s case.

But it was only on the very last panel of the conference, on the second day, that two speakers created some meaningful context for the whole discussion. Author James Gleick made a clear and cogent case for the agency model. (Essentially: because there is no investment in inventory or shelf space by the retailers, it is more sensible to consider them “agents” of the publishers than retailing intermediaries equivalent to what we have for print, where substantial investments are required and are at risk.) And Professor John B. Thompson of Cambridge, author of “Merchants of Culture” who is, as far as I know, the single person who has spent the most time and effort learning about trade publishing and synthesizing a coherent view of it, made it clear that Anglo-American trade publishing has challenges which make it unlike other endeavors, even other book publishing endeavors.

So that gives me three things to elaborate on: the blatant misunderstandings about the industry and its concerns about the DoJ case which came from the bookstore panel; the old publishing case that is so resonant with current circumstances; and a reprise of Thompson’s cogent analysis.

The lawyers speaking on the bookselling panel (and lawyers were dominant on just about all the panels; this was, after all, an event staged by New York Law School) were dismissive of the argument that any special treatment for publishing was called for because of the nature of our business. Then they proceeded to get two things startlingly wrong:

1. They dismissed the idea that any “predatory pricing”, i.e. sales of books below cost, ever took place. There was a wee bit of wiggle room there, where they might have meant “in the aggregate” as opposed to “title-by-title”. But they never made that distinction clear and, if that’s what they meant, there was further explanation called for. One is left with the impression that they simply didn’t understand that Amazon was paying publishers $12 or $15 for ebooks they were selling for $9.99. (And, in fact, there were far more dramatic examples of loss-leading than that!)

2. They seemed to think that the concern on the part of those opposing the DoJ was that Amazon would only lower prices to gain market share and would then exercise predatory behavior by raising prices to a captured market. That, actually is not the concern. Or at least it isn’t mine.

As I tried to spell out in a talk in Washington last July, what is concerning is that Amazon will restructure the pricing of books so that the profit for publishers is squeezed out, robbing us of a publishing ecosystem that invests in unwritten books tens of thousands of times a year. My argument and fear is that a restructured ecosystem will deny us books like Walter Isaacson’s Steve Jobs biography or Ron Chernow’s George Washington. Books that take years to write and require hundreds of thousands of dollars of financing to be written will never see the light of day if publishers can’t earn a profit by investing in their creation.

This is an argument and a concern which the attorneys on the platform at this conference made explicitly clear they never entertained. I don’t think the ones in the DoJ did either. Perhaps this has no bearing on the law, but I wish they’d stop trying to tell us the concerns of the industry are just the same old crap coming from a different source when they haven’t taken on board what we’re actually saying.

I tried to inject some of these facts and thoughts from the floor, as did a woman from a Big Six house who was similarly frustrated by the twisting of the reality to fit the antitrust narrative. The moderator cut me off from pressing the argument (which was appropriate; I hate it when people use the rubric of q&a to make their case from the floor at my conferences too!) But for the rest of the conference, at every break people from publishing houses kept thanking me for making the attempt to inject reality about our business into the discussion.

The old publishing case was Bobbs-Merrill versus Straus from the first decade of the 20th century. It seems that Macy’s, the department store that sold just about everything, also sold books at at discount. Bobbs-Merrill posted a notice in its books that the retail price was set at one dollar and that selling below that price constituted a violation of copyright. The Straus brothers, who owned Macy’s, insisted on selling these books for eighty-nine cents.

Both the trade association of publishers and the trade association of booksellers supported Bobbs-Merrill’s position, but the courts did not. There was a “horizontal” as opposed to “vertical” price-fixing angle explained from the stage that I didn’t fully grasp, but we can all appreciate both the irony and distinctions between this case and our present conversations.

Clearly, Macy’s was the Amazon of the time. They saw books as commodities — nothing special — and they simply extended their business model of offering lower prices to cover books. From the perspective of publishers, they were cheapening the perceived value of the intellectual property. From the booksellers’ point of view, they were subsidizing book sales with their ability to sell other things and clearly constituting a threat to what was then a very tiny bookselling network. So the entire publishing community of the time opposed the price reductions being offered by an interloper. In that way, they were creating the same price-fixing “problem” DoJ was “solving” with their lawsuit against Apple and the publishers.

But the difference, as explained by James Gleick a day later, was that the bookstores and Macy’s were, indeed, buying these books from the publishers (and, at that time, they might not have had a returns convention to cushion them from bad buying decisions) risking — or at least tying up — capital to provide stock to the public. In the case of ebooks, that isn’t true. No capital or shelf space (which also costs money) is tied up; all the retailer does is accept and display metadata and pay for the “goods” at some point after the customer pays for them. So the justification for the price-setting in the two cases is quite different.

Still, it was interesting seeing that history was — in a way — repeating itself 100 years later.

And now to Professor Thompson. He interviewed me a few years ago for his book “Merchants of Culture”, which has been out for a few years but which I’m just starting now to read. (Shame on me.) Thompson provided two absolutely fundamental pieces of information which could have been infinitely more helpful to the audience if they had come as the first thing on the program rather than the last.

1. The trade book business is quite different from other segments of the book business and has little in common, as a business, with school or college text or academic or professional publishing. Thompson made it clear that knowing one segment doesn’t mean you know another. After two days of hearing librarians complain that publishers were dissing their “biggest customers” because of the big houses’ concerns and restrictions on ebook sales to libraries, it was good to have somebody explain that publishers were different. In fact, libraries — relatively speaking — are not very large customers for general trade book publishers.

2. Thompson also emphasized — and this was critical insight coming, as it did, from the single speaker most knowledgeable about the transition trade publishing is making from print to digital reading — that nobody knows the future course of ebook adoption. Will it remain, as it is, in the 20% range for general trade reading? Will it go to 30%? 50%? The fact that nobody knows the answer to that question means that publishers’ policies have to accommodate uncertainty about a critical component of the publishers’ future commercial reality.

A couple of other points Thompson made bear repeating. One is that he sees big Anglo-American publishers fighting off threats to their margins. But he thinks the main source of margin erosion for American publishers is the agents, who exercise their power to drive up the cost of acquisition for the most desireable books; whereas for British publishers the source of the biggest problems are the big book retailers, particularly the supermarkets. It is ironic that America’s Robinson-Patman Act, which by requiring manufacturers to offer the same terms to like customers aims to protect small merchants, is actually the shield which protects American publishers from facing ever-escalating demands for margin from their largest accounts.

And Thompson showed a chart tracking the percentage of sales that were ebooks for trade publishers, year by year. The numbers were:

2006 0.1%
2007 0.5%
2008 1%
2009 3%
2010 8%
2011 20%

So the multiple from prior year sales is:

2006-07 5x
2007-08 2x
2008-09 3x
2009-10 2.7x
2010-11 2.5x

The indications are that when we get the report on 2012, it will be about 30%, or 0.5x.

No wonder Thompson makes it plain that we don’t know what’s ahead of us. Did you think that the rate of switchover would drop by 80% this year over last? I didn’t.

The big news of the past few days, of course, is the proposed new Penguin Random House entity. I think the only surprise here is that it has taken so long for a Big Six merger to occur since the last one (which was when Bertelsmann, owners of Bantam Doubleday Dell, bought Random House in 1999). My back-of-the-envelope arithmetic says that PRH is bigger than the other four of the formerly Big Six combined. So I’d expect to see further mergers, but the title of “biggest trade publisher in the world” is secure for the foreseeable future.

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  • Philip Turner

    Valuable post, Mike, thanks for the historical perspective. Gotta read that Thompson book, thanks for the reminder of it.

  • http://www.facebook.com/people/Troy-C-Johnson/1154955573 Troy C Johnson

    If you have the name of that case you mentioned it would be great if you could pass that on.

    • http://idealog.com/blog Mike Shatzkin

      I think Bobbs-Merrill, Straus, and the decade of the 1900s should give you enough to find it. But I’ll admit to being less than the best reporter…
      Mike

      • emmittc

        U.S. Supreme Court

        BOBBS-MERRILL CO. v. STRAUS, 210 U.S. 339 (1908)
        210 U.S. 339

        BOBBS-MERRILL COMPANY, Appt.,
        v.
        ISIDOR STRAUS and Nathan Straus, Copartners, Doing Business under the Firm Name
        and Style of R. H. Macy & Company.
        No. 176.

        Argued March 12, 13, 1908.

        Decided June 1, 1908.

        “The owner of the copyright in this case did sell copies of the book in quantities and at a price satisfactory to it. It has exercised the right to vend. What the
        complainant contends for embraces not only the right to sell the copies, but to qualify the title of a future purchaser by the reservation of the right to have
        the remedies of the statute against an infringer because of the printed notice of its purpose so to do unless the purchaser sells at a price fixed in the
        notice. To add to the right of exclusive sale the authority to control all future retail sales, by a notice that such sales must be made at a fixed sum,
        would give a right not included in the terms of the statute, and, in our view, extend its operation, by construction, beyond its meaning, when interpreted
        with a view to ascertaining the legislative intent in its enactment.

        This conclusion renders it unnecessary to discuss other questions noticed in the opinion in the circuit
        court of appeals, or to examine into the validity of the publisher’s agreements, alleged to be in violation of the acts to restrain combinations creating a monopoly or directly tending to the restraint of trade.”

      • http://idealog.com/blog Mike Shatzkin

        Thanks. That’s it.

        Mike

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  • gregor_wolf

    Thomson’s distinction between trade and academic/professional is correct and helpful, but shouldn’t it go without saying? I would go one step further and say that it is a fundamentally different business:

    It already starts with very different consumers: Trade is a BtoC-Business (although through resellers). Academic is a BtoB-Business, >90% of the customers are libraries, institutions, consortia (with or without resellers). Professional is a BtoB-business, primarily targeting the customers directly, who can be small and big, but rarely academic libraries.

    I would even go so far, that categorizing both under “publishing” is more misleading today than describing the few commonalities correctly. Isn’t it rather the case that academic/professional is “information providing business” and trade is “entertainment providing business”?
    With this distinction, we also understand why the digital transformation implies totally different things for academic, professional and trade.

    Academic/professional means making content findable, accessible, more usable, curating content, guaranteeing quality. For these guys digital is more a chance than a threat and that’s why Elsevier, T&F or Springer are running well. Digital tools allow them to repurpose their content, re-slice and dice, reuse, create more products, invent additional monetization models, and finally, improve access to their content – this is exactly what people in need of information are finally willing to pay for. Monetizing access to information
    is easier in a digital word. Therefore, all the heavily discussed digitally driven monetization models like ebook-packages, print/ebook-bundling, patron driven acquisition or open access are simply void and irrelevant in trade.

    If I am right, and trade is an entertainment business, then the transformation to digital means transformation to a technically different way of consuming the entertaining content. Easier
    reading, more fun than with the dull device printed book, more fun with features beyond the scope of reading words in lines (now we could come to enriched books, social network features, and everything which could be better in digital books, but like Mike, I hate it when people use the rubric of
    q&a to make their case, so full stop here). Digitally driven entertainment has very little in common with digitally driven access to information.
    It remains invariant that people buy trade content because (they hope) it’s entertaining. There is only one reason why people buy ebooks: Because it is more exciting, looks better, is more fancy, adds features (add criteria however you like, it will always entertainment criteria), and, ultimately, because it’s cheaper (but that’s not the primary driver in entertainment, or nobody would buy an iPad or iPhone).

    So, what will happen to trade ebook sales? Looking at why ebook sales grew in the past years tells us how it will develop. In my humble view, there is little secret in it. Ebooks jumped over what I would call the acceptance threshold – when the readers became competitive to a printed book for the first time. They were a worse reading device than a book before this threshold point in time, although existing. Two (technical) events marked the threshold:

    1. Passive digital ink, making digital reading near-to-print, which is fundamentally different to reading on a computer device (clarity, reading, in the sun, battery consumption, …)

    2. The ease of the transport from shop to device, perfectly demonstrated by the Kindle-Amazon-integration and the iDevice-iTunes-integration, making the way from purchase to use as convenient as with a printed book (which you can read after purchasing without any technical step at all). This point has always been underestimated, primarily by the techies, although nicely demonstrated by the iPod a decade ago; I truly believe that the success of the iPod had the same reasons: it was fashionable, it made the listening-experience entertaining, and it eliminated the transport-from-shop-to-device issue, which was the most important point. It was not successful because it invented MP3, or because it was a portable player, all this already existed long ago.
    Because the commodity of ebook readers is now there, but still far away from a technical peak (we can await much better passive color displays, true digital paper, much faster passive displays, declining cost), and has just reached the tipping point where ebooks are just competitive to printed books, there is no reason why this trend should stop. I would rather predict that ebook reading devices will technically outperform the reading device print in all (I mean all) aspects within the next 10 years, and will then simply be better (in weight, size,
    readability, adaptability, …). If then the majority of trade books is naturally sold digitally, two things will count: Who will make most out of the features ebooks can add compared to print, and who has the best stories to tell. The second point has never changed, whether print or digital.

    • http://idealog.com/blog Mike Shatzkin

      A few points provoked by yours.

      1. If I didn’t make it clear that both John Thompson and I believe that trade is a fundamentally different business than academic (or professional or textbooks…), then that’s my fault. Your principal premise is the same as ours.

      2. But I *don’t* agree that, as opposed to academic, “trade” is primarily about “entertainment.” Certainly *some *trade is, maybe (depending on how you measure it), *most* trade is. But there is a ton of trade publishing which is primarily about information.

      3. For that part that is academic, *if *I am understanding you right, you’re suggesting that embellishing the book to make it “more entertaining” is a path to success. If that’s what you’re saying, we fundamentally disagree. There may indeed emerge hybrid forms that get some consumer uptake; I wouldn’t doubt that. But the basic form of entertaining reading — immersive straight text — will remain dominant for the rest of our lives at least.

      4. And we also disagree on what drove ebook adoption. There was “passive digital ink” before Kindle and Kindle proved that ebook reading could catch on before the platform fostered interoperability across devices. Those weren’t the key drivers. The key drivers were: a) Amazon was selling a device and pushing it hard to their large core of dedicated readers, b) they created a device where you could load directly without going through a computer, and c) most important of all, they used their clout and contacts with publishers to, for the *first* time, build a list of title choices that was comparable to what a bestseller-reader would find in print.

      Mike

      • gregor_wolf

        Mike, apologies for some misunderstandings, but I hope we can partly meet :

        1. We are all on the same page – academic, professional, education and trade are *different*.

        2. Surely, trade is not just and only “entertainment”. But for the sake of making the difference between trade and academic clear, I find this black and white picture helpful. Academic is “information providing”, and this offers many opportunities to academics, because there are so many ways to improve acccess to information by digital tools. Contrary, the major interest of trade book customers is to be entertained by reading. I don’t state that this cannot be improved digitally at all, but it’s easier to improve the user experience in the academic world.

        3. I do not suggest that academic shall be more entertaining. If this came across, my post was simply incomprehensive. Academic shall concentrate on information providing using digital tools – and all academics have already understood this, and offer ebooks, databases, add value by features like search, browse, cross-link, semantic search, Such features are nearly pointless in trade, so trade needs a different approach to digital. To keep it black and white, trade must use digital tools in order to provide more entertainment and ease of use.
        I accept that such a black-and-white view invites disagreement, e.g. a cookbook (is that really trade) would benefit from the same technical search & browse features as a professional information book, but the basic message remains true.

        4. Let’s see if we disagree in what drove ebook adoption…

        We both said, one reason was a device where you could load directly without going throung a computer. In my words, “it eliminated the transport-from-shop-to-device issue”. I my view, this was the killer feature.

        You correctly add, that Amazon used their contacts with publishers to build a reasonable list of titles right from the start. It would not have worked without enough content right from the start.

        I do not agree that it became a success, because Amazon was pushing it hard to their large core of dedicated readers, because another company with reasonable financial and technical power could have done this, too. Nobody disagrees that it was easier for Amazon given their customer base and market share, but I truly believe it could have also been Sony, Apple, or a Pearson-Hachette-RH joint venture.
        Why do I believe this? Becasue Apple proved it years ago, when they were not in the music business, had no music shop, had little contact to the music industry, BUT believed that iPod plus iTunes would work. Neither iTunes alone nor iPad alone would have worked. Neither Amazons’s reader nor Amazon’s ebook-store alone would have worked alone. We come back to the point on which we fully agree, which is the seamless integration of shop and device.
        Best, Greg

      • http://idealog.com/blog Mike Shatzkin

        I don’t think the question is “what might have worked if Amazon hadn’t done it”? I think the question is “why did Amazon succeed when previous efforts failed”?

        And, while you may be right that somebody else could have reached the readers as persistently and persuasively as Amazon (although I don’t know whether that is true), it certainly would have cost somebody else a bloody fortune and for them it was all about opportunity cost (what could they have been peddling instead with the same engagement opportunity…?)

        Apple knew how to sell devices, too, which is what made the iPod-iTunes ecosystem work. Sony knew how to sell devices, but failed miserably. Apple at the time and since was not at all interested in dedicated readers as a market worth building. And Hachette had no background for the task.

        Mike

      • gregor_wolf

        You made a very valid point: I was a lower financial risk for Amazon than for anybody else.
        Upselling to existing clients is easier (and cheaper) than setting up a business from scratch. But it’s all history and nobody knows.
        Best, Greg

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  • Michael

    Thanks Mike, great post. This is illustrative of just how misinformed the public (those outside of publishing) are about the role publishers play. Because of the boom of self-publishing “opportunities” and the “ease” with which one can bring their own book to market there is a perception that publishers are quickly becoming the interlopers.

    What they fail to acknowledge is the role that VC plays in bringing ideas to the marketplace in a meaningful and well-executed manner. Kill the money, kill the quality – as you pointed out with your Isaacson illustration.

    • http://idealog.com/blog Mike Shatzkin

      This risk-shifting aspect of established publishing gets far too little attention.

      Mike

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  • http://twitter.com/Jellybooks Jellybooks Ltd.

    There is no question ebook growth is slowing, which is exepected if ebooks are displacing printed books in market where the number of readers is constant.

    This makes it also very dangerous to draw any conclusions from
    first of second derivatives (percentage growth of percentage change of percentage change).

    We could look at it differently. Growth is associated with real human people – readers – witching their behaviour from print reading to digital reading. Some change 100%
    others change a bit, but practically speaking, but the change is quite rapid for an individual, i.e. complete in 3-6 months. Thus growth comes from more people adopting the habit not ereaders
    gradually buying more and more ebooks and fewer and fewer print books.

    Thus growth is a function of how many readers Amazon, BN, Kobo et al can convert from p to e.

    So lets take market share as a crude proxy for American readership and lets looks at the difference in market share as a change in reader penetration in years since the onset of the ebook revolution:

    +10.4%

    +2
    0.5%

    +3
    2%

    +4
    5%

    +5
    12%

    +6
    10%

    What
    you see is that the “digital land grab” got bigger year after year until 2011,
    which is a reflection of viral phenomenon. Now in year 6 it is flattening (from
    12% to 10%), which is indicative that viral efficiency is declining because
    penetration is already 30%. This is pretty typical. BY this measure you would
    expect 5-10% to continue for a little while 2-3 years), which means 50-60%
    penetration will be reached by 2015/16 and then penetration will get harder and
    harder

    The
    printed book will never die, because it has too many advantages (gift,
    sentimentality, coffee table books, right of first sale, libraries etc, etc).
    The question is where is the resistance level? Is it at 5%, 10% 20%, 30%. This
    will determine how soon the growth rate will flatten, but fee people have
    looked at how big the hard core appeal of printed books is. Also few people
    have looked at how the economics of print change, if 50-70% of the market is
    digital. What we are seeing with “digital first” is that it can be quite
    economical to operate print when you now there is a basis of digital demand. It
    gives you a better guess at how many print books might sell, than the print run
    of similar book previously.

    Also
    these numbers hide the diversity of the market:

    ·
    trade publishing like crime, romance, fantasy SciFi that may go
    100% digital

    ·
    literary fiction, poetry, non-fiction where pint may be a
    significant share

    ·
    coffee table books, certain text books, picture books, etc where
    print will continue to dominate (with a small market share for enhanced apps)

    ·
    cook books, travel books, children’s books, which may go down
    the enhanced app route, but with actual paper (classical bedtime reading, etc.)
    still continuing

    Any
    serious forecast AT THIS stage, will need to segment the market to make an
    accurate prediction

    • http://idealog.com/blog Mike Shatzkin

      I am not completely sure I follow your math and logic, but it triggers an idea with me that might be what you were getting at. What we should be looking at is “what percentage of the previously non-e market converts to e each year”? At least we agree that the rate of conversion is declining by either your measure or mine.

      In any case, your point about segmentation is right on the money. I have argued that illustrated books don’t make successful ebooks for the most part. So the functionality of print is far preferred there. But the question is: when bookstores don’t sell immersive text anymore, because most of it is e- or online, can they keep the doors open to sell illustrated books?

      Mike

  • William Ockham

    None of those lawyers violated the antitrust laws. The people you ought to be blaming for the DoJ lawsuit are the heads of the companies who agreed to the deals with Apple. When you get pulled over for speeding it may make you feel better to blame the traffic cop, but she didn’t make you speed.

    And they didn’t get anything wrong about predatory pricing in the context of the book business. Predatory pricing has a specific legal definition. It hasn’t taken place in the book business. That is a fact. What you accuse Amazon of doing is what every supermarket in the U.S. does. It really doesn’t matter how loudly you make the claim, Amazon isn’t engaging in predatory pricing. The reason that they talked about Amazon raising prices in a captured market is because that is a requirement for an accusation of predatory pricing. If you aren’t concerned about that, you aren’t concerned about predatory pricing. You’re concerned about fair competition.

    Rather than getting anything startling wrong, they were trying to explain what the law is. That’s what lawyers do.

    • http://idealog.com/blog Mike Shatzkin

      What they’re getting wrong didn’t have to do with the law. It had to do with the business. It had to do with *their *reflex, lockstep, typical-from-out-of-publishing expectation that the consequence we in publishing (who virtually *unanimously — *authors, agents, small publishers, large publishers, book retailers not named Amazon, opposed the DoJ and said so in writing) was that Amazon would raise prices on books again once they had a monopoly. That’s not the fear. The fear is that they’ll take the profit out of publishing for publishers and then for authors. Whatever the law says, the lawyers assume that all is good if the net effect of the application of technology is to reduce prices. And they’re not understanding that the ultimate result of price reduction is the devaluation of the copyrights and the passing of control from the creators and owners of those copyrights to a corporation whose business, by the time this plays out, will be about 10 percent books.

      I am not arguing about the law. I don’t know the law, except to know that the DoJ had the right *not* to bring this case. And while I would never make the claim that what’s bad for the book business is bad for the country, I’d say in this case what we’re worried about qualifies as both.
      Mike

      • William Ockham

        The reason they had that reflex is that when you said “predatory pricing”, you were saying that you feared the “Amazon raising prices” scenario. That’s what predatory pricing means. You shouldn’t complain that they didn’t understand you when you were the one who gave the false impression. If you want to have productive conversations with professionals, it helps to learn the lingo.

        When you say “I don’t know the law, except to know that the DoJ had the right *not* to bring this case”, you give away your bias. You have been very careful to avoid learning anything about antitrust law that is unfavorable to the defendants in this case. You’ve had plenty of time. You are a smart guy and you have lots of motivation to understand this. But instead of looking at it honestly, you’ve clung to every crackpot theory that Bob Kohn has thrown out.

        If I’m driving my car on the freeway doing the speed limit and I see a car going whizzing past me so fast that it’s a blur, I think it is safe to assume that the other car is speeding. This case is just that simple. Sure, the cop doesn’t have to pull that car over, but that’s her job. The DoJ antitrust division’s job is stop schemes like the one Apple and the five publishing companies pulled.

        Even if your doomsday scenario is right, the publishing companies were wrong to break the law. Let’s assume for a minute that you are correct in your contention that the only way for publishing to survive is through fixed publisher pricing on ebooks. The worst possible way to achieve that for the long term is to do it the way those five publishers did it. All five of them doing it at the same time was guaranteed to get the attention of the DoJ. Picking a huge, very public battle with Amazon right after signing the contracts with Apple was the equivalent of hanging a “Sue Us!” sign around their necks. If you aren’t upset with the publishers for breaking the law, you should at least be mad at them for doing in such a way that fixed pricing is all but impossible to achieve.

      • http://idealog.com/blog Mike Shatzkin

        Your opening point — suggesting I should learn about the law if I want to talk to lawyers — might be a good one. I also think the lawyers should learn something about the publishing business before disrupting it. Perhaps I shouldn’t have attended this conference (which was at a law school and staffed heavily by lawyers) but I thought I could learn something about copyright law and other law by attending. Or maybe I just shouldn’t have said anything because I’m not a lawyer. I have already made it clear that the two people who made the most sense to me were James Gleick and Professor John B. Thompson, both of whom are not lawyers. (Presumably they wouldn’t have made any sense to you.)

        I am not going to re-argue the case for standardizing pricing for ebooks. I thought that Gleick made the logic justifying it it painstakingly clear. The retailers acquire no inventory and take no risk. They merely list the metadata that the publishers give them and, if they get a sale, make an authorized copy of the ebook to fill it, collect the money, and some time later, pay the publisher. That sure is a different relationship than a physical retailer has. For physical to be comparable, all inventory would have to be delivered on consignment with freight paid both ways. And, even then, it wouldn’t be the same because shelf space would be limited and for ebooks it isn’t. So a completely different commercial relationship not only makes sense; maintaining the *same* commercial relationship actually makes *no *sense. (And I wrote and said that LONG before agency conversations began. Years before. Although I hadn’t thought of a standard-price agency solution.)

        The case the DoJ brought was one of collusion. To support it, they alleged that a meeting that took place before Apple even thought about ebooks was a part of it. They alleged that publishers telling each other whether they were in or out was part of it, even though Apple had told them all they wouldn’t proceed unless they had four of them in. And the publishers were each individually negotiating with Apple, all disadvantaged by the fact that Apple had been using this now-toxic agency model for years and was making demands — about price bands, for example — that the publishers really didn’t like. (And which it turns out the courts didn’t like either.)
        So far, no publishing company — including those that settled — has accepted the idea that they “broke the law”. Perhaps that question will get resolved by a trial, perhaps it won’t. But it is a claim that you — and the DoJ — make that the defendants deny. I choose to believe other lawyers (like Bob Kohn of Royalty Share, whose IP litigation history goes back to the 1990s around both software and music) who say that’s not true.

        If you want to argue the law, I suggest you take on Bob Kohn. If you want to argue what’s good for authors, publishers, and readers, that’s an argument you can have with me. But you’re not interested in that argument. You think you’ve found criminals and you’re glad they’re getting (metaphorically) “locked up”. You accuse me of bringing a bias to this conversation but you might want to look in the mirror when you say that.
        And I caught the statement on the other blog that arguing with me is “hopeless” because I choose my own facts. I’d say arguing with you is pretty frustrating because you keep coming back to your interpretation of the law and you refuse to engage on the real world consequences of interpreting the way you do, whether the interpretation is legally correct or not.

        One more time: I don’t give a rats ass about the law. Laws can be changed. Interpretations of the law vary. And I don’t know much about it. But I know a LOT about the publishing business and I see potentially permanent negative consequences that I don’t think are fully appreciated by the people causing them. Did you notice that EVERYBODY in the publishing business across the board — authors, agents, small and large publishers, and all the retailers — disagreed with the DoJ’s and Amazon’s position? Maybe we’re all wrong about the law, but I find the brazen disregard for the unanimous opinion across the industry to be just stunning hubris.

        Mike

      • Beverly

        This would be like saying that all of the meatpackers back in the day were okay with body parts sometimes ending up in ground beef, but dang that government didn’t agree with them! Or that textile mills all agreed that it was okay to have 8 year old children work there, but why didn’t the government consider their position?

        It doesn’t matter if everyone in the industry agrees on something if it is breaking the law that the government and citizenry agreed on.

      • http://idealog.com/blog Mike Shatzkin

        I think there is a an argument about a) whether agency is legitimate or b) whether there actually was “collusion” that is being elided here. Look, if you believe every entity in establishment publishing across the entire value chain — author, agent, publisher, bookseller — is basically corrupt, I’m not going to spend time trying to change your mind.

        And your logic really only applies if you do.

        Mike

      • William Ockham

        Here is the gist of the conversation over at the blog:

        Just to finish off this discussion, I am going to point back to the first comment I made:

        It’s essentially impossible to argue with Shatzkin in any productive way because he will simply refuse to accept any facts that don’t fit into his view of the world.

        Now look at what he said:

        7. This is not an argument that can be advocated, defended, or debunked based on empirical evidence. It involves making some assumptions about Amazon dominance, the end of bookstore shelf space, and the consequences of a very particular part of publishing (general trade) being hobbled and eventually eliminated because their path to market (bookstores) was taken over by a player which has a different idea about how the commercial book ecosystem should work.

        If everyone in the publishing industry shares your view that they “don’t give a rat’s ass about the law”, then yes, everyone in the publishing industry is corrupt. Not giving a rat’s ass about the law is a pretty good definition of corrupt. There is a reasonable argument to made about whether or not agency is legitimate. I believe that agency can be a legitimate market mechanism, but not always. That is a debatable concept.

        There is no argument about whether or not collusion is legitimate. There is no argument about whether it took place because the defendants have admitted to doing things that meet the legal definition of collusion. The legal definition of collusion isn’t difficult to understand, unlike many legal concepts. There numerous places on the internet to find that definition. Even non-lawyers like me can figure it out. Even Bob Kohn admits that the publishing companies and Apple committed collusive price-fixing. He just thinks there is legal theory that can be used to justify it. But he isn’t serious about his ideas or he wouldn’t have presented them to the federal court in the form of a comic book.

        I understand why you want the conversation to focus on your doomsday scenario. As you state quite clearly, that scenario is a tautology. Given your assumptions, the conclusion you reach is unavoidable. But your assumptions are based on ideas about things that are completely outside your area of expertise. You know a lot about how publishing works today, but you know little or nothing about some of the forces that will shape it in the future. You have no idea how the business of the internet works. You have never worked in an industry where the marginal cost of production is zero. I have. I am open-minded enough to listen to you to learn about the publishing industry, but I don’t have accept your nonsensical notions about the future of internet commerce or your frankly disgusting attitudes to the rule of law.

        If you really want to convince people about the impact of the changes that the DoJ suit will have, you have to accept a few basic realities. First, the facts matter. If you want to talk to people outside the industry, you have to give a rat’s ass about what matters to them. The law matters. You can’t just wave it away. Second, it would be very productive to take every one of the points you enumerated and ask yourself, what if I am wrong about this. How would the outcome be different? Third, stop dismissing the people who disagree with you. I think you are making a mistake that I make frequently. The truth is, lots of people who nothing about your industry will do things that impact it. They aren’t under any obligation to learn about it. When the government sued Microsoft over being a monopoly, I felt pretty much the same way you do about this lawsuit. There were a bunch of lawyers who knew nothing about the software business destroying a good company and ruining the industry. I was wrong then and you are wrong now. Microsoft survived and the threat they face today has nothing to do with that suit. I didn’t know enough about the software industry to predict the future because nobody does. And nobody knows enough about publishing to predict its future. I don’t know what will happen, but neither do you.

        Here are a few things you are missing:
        You don’t understand Amazon as well as you think you do. Your perspective is colored by being in the book business. There is a lot more to Amazon’s strategy and it has a direct impact on your scenario.

        Ebooks have a zero marginal cost of production and a distribution cost that is nearly zero. This means that some books will be more profitable at $1.99 than at $34.99. Even books that require a lot of research. Pricing for ebooks will be divorced from pricing for hardbacks. The longer the big publishing companies fight this, the less likely they are to survive the transition. And make no mistake, tying ebook prices for bestsellers to hardback prices was the whole point of the price-fixing. It is explicit in the Apple contracts and we know Apple didn’t care about that.

        The real problem that the publishing industry faces isn’t this suit. It isn’t the lack of agency pricing. The big problem is that they want to protect the hardback line of business and that line of business isn’t sustainable.

      • http://idealog.com/blog Mike Shatzkin

        I have been in the business of trying to figure out what the digital change means to the book publishing industry for a very long time, about 20 years. Therefore, I have a lot of experience trying to figure out things that don’t have enough data to form an empirically-informed view.

        I can assure you that everybody in the publishing business does *not* share my perspective being dismissive of the law. The big companies are armed with counsels. I have the luxury of being a consultant and industry observer. Nobody wants my advice or observations about legal matters; they have lawyers to provide that. If I’m useful at all, it is because I understand the commercial and social realities of book publishing and have a bit of an ability to see around corners to predict what might happen that empirical data doesn’t show yet. On that basis, I was able to forecast that general trade publishers — dependent as they are on bookstores to sort things out by topic to deliver value to the public — would be highly challenged in an increasingly online-purchasing world. That may seem obvious now, but it wasn’t obvious when I started saying it 10 or 15 years ago or even when I did a speech called “The End of General Trade Publishing Houses” at BEA in 2007.

        OK, so you’re a non-lawyer. I’m a non-lawyer. Bob Kohn is a lawyer and a smart lawyer. He doesn’t buy the collusion argument you seem to think is prima facie. And he also points out that Judge Cote, in her ruling, specifically said that “agency” was *legal*!!! Have you taken that on board?
        You say the government was right about Microsoft and you were wrong. (Could you be wrong again?) You also say nobody can predict the future of the publishing industry. In a way, you’re right. Anybody predicting the future is going to be more like a hitter (getting it right 30% of the time is GOOD) than like a fielder (where making an error 1 time in 20 is horrible.) But I’ve been predicting the future of publishing for 20 years. It’s what I DO. And I have gotten it right enough times so that the people who have been tracking publishing for a long time have come to the conclusion that I’m right more often than chance, or more often than people who haven’t made a practice of this for two decades.

        You say I don’t understand Amazon. But you do? I understand them pretty well and I respect their capabilities A LOT. I have said repeatedly (perhaps in posts you didn’t read, or which didn’t register with you — or are you immune from the behavior you accuse me of, being selective about what you take on board?) that they aren’t where they are because they cheated; they’re where they are because they’re focused and very good at what they do. The problem is that delivering the lowest prices to consumers and — through that and through other means — growing their market share at the expense of all their competitors, including brick-and-mortar stores — are their principal objectives. That’s no secret. They are also not objectives that are consistent with the best interests of many of the players in the publishing ecosystem. And they use their increasingly dominant market position NOT to “raise prices” (which would alert and alarm the antitrust lawyers and judges) but by disintermediating other players (bookstores, publishers, agents), whether or not that is in the best interests of authors and readers (it certainly isn’t in the best interests of the bookstores, publishers, or agents!)

        Amazon doesn’t care if the book business is bigger or smaller or if writers make more or less money. What they care about is how big is the business that goes through *them*. (As they should, by the way…but let’s keep that straight.)

        And your lecture about the marginal cost of ebooks suggests that you don’t think I understand the economics. Ockham, I do. But the marginal cost of production has also always been a marginal component of book publishing’s pricing and profitability. The *problem* is that Amazon has nothing to do with the costs of production, which, for all books, include all sorts of activities that don’t include the cost of creating the next incremental copy. Amazon is trying to dominate the economic realities of publishing even though they don’t participate in most of the cost base. That’s a core tenet of my argument and the publishers’ need for agency pricing. If we keep going the way we’re going (and recent evidence suggests that, at least, we’re slowing down, although we’ll probably never reverse course), the consumer publishing business will have economics determined by what is best for a single dominant retailer. Now, how crazy is *that*?

        You are, in fact, 100% incorrect in saying that the Apple contracts tying the ebook pricing to hardcovers came about even though “we know Apple didn’t care about that.” Well, in fact, Apple not only cared about that, Apple insisted on those clauses. Publishers — each acting independently — didn’t have the clout to fight them. Publishers would very much have liked the freedom to set prices *higher* than Apple allowed them to be. And, in fact, the very first publisher which settled to reprice their books (HarperCollins) immediate *raised* agency prices on most of their leading titles. (Although they apparently lowered them on some backlist as well.)
        Let’s remember that the Apple agreement set *maximum* prices in relation to print. Publishers were always free to set prices *lower* than the Apple agreement specified.

        You are correct when you say that publishers want to set ebook prices that “protect” the hardcover. In doing that, they are not just defending their core capability (which, I have said over and over again, is “we put books on shelves”.) They are defending bookstores and they are defending “discovery”; the still-very-large number of book purchasers who find what they want by browsing physical shops. They are doing that on behalf of copyright holders, who have legal rights as well (which I’ll let the lawyers describe and fight about, but which seems to have been missing from your comprehensive legal research). I actually agree with you that, in the long run, the hardcover model is doomed. But whether it fades out quickly or slowly matters economically and publishers would be stupid not to recognize that and react to it.

        Which brings me to the last point: collusion. When six very smart management teams at six very smart companies were all presented with the same set of circumstances — Amazon at 90% ebook share and more than 70% online print book share — they all recognized the same existential threat. When they were all presented with the agency proposition by Apple — presented as “take it or leave it” — they all saw the same lifeline. They’d have been stupid not to. They aren’t stupid. They didn’t need to talk to each other to recognize that this was a lifeline they wanted to grab.

        In the end, Random House gamed the system (this is not meant to be pejorative; it was smart, even though the other five big publishers were very annoyed by it) by staying out at the last minute, but I can assure you that they fully understood that the other five had done the industry and * them* a very good turn.

        The point is, collusion is not necessary to explain why all these companies did the same thing. Each of them was negotiating with Apple separately, but Apple was calling the tune.

        Despite your castigation, I will continue to try to view the industry through the lens of commercial reality and leave the legal interpretations to others who are trained to do that. I am in a position to do that because I’m not running a publishing company. I don’t give legal advice, which I think is a good practice for a non-lawyer. I will stick to what I know, which is the book publishing business and how it works.

        Perhaps you should consider a similar philosophy.

        And, as for the frustrations of dealing with somebody as bullheaded and difficult as I am, let me say I won’t miss you if you decide to deliver your pearls of wisdom through some other forum. I’m very easily ignored.
        Mike

      • William Ockham

        Your description of what the publishers did meets the legal definition collusion in antitrust law. The goverment does not have to prove that the colluders talked to each other. They only have to show that they did the same thing at the same time and the effect was to raise prices of some ebooks. You know they are guilty, but you won’t spend the 15 minutes it would take to verify that. You can hide by your supposed ignorance of the law all you want, but the truth is you keep bringing up the law. You keep saying that Amazon is a threat to the legal rights of copyright holders. How can you make a judgment about that when you, by your own admission, know nothing and don’t give a rat’s ass about the law. Your legal ignorance seems pretty selective. When it helps your case, you claim total ignorance. When you want throw out vague accusations against others, suddenly you are perfectly capable of making sophisticated legal analysis of the law.

        Bob Kohn knows that the publishers colluded and that is why he acknowledges that it happened. You really need to read his briefs more closely. His theory is that there are extenuating circumstances. It is possible that he is right, but no court has ever bought in to his theory and every precedent says that collusion to fix prices is a “per se” violation for which there can be no extenuating circumstances. He is asking the court to overturn a substantial part of antitrust law.

        As to the legality of agency agreements, I agree that agency agreements which allow retailers to set the final retail price are legal. That is what is permitted by the settlement. What is not clear to me is whether it would be legal for, say the new Random House Penguin, to negotiate a deal that allowed them to enforce retail prices on their books. That is a very confusing question, depending on a lot of specific facts.

        The problem you are having is that you are stuck in the mindset of the way things have always been done. Your projection of the future is a simplistic linear model of the present. That works pretty well, except when an industry is experiencing a technological disruption. Amazon isn’t the threat that you should be worried about.

      • http://idealog.com/blog Mike Shatzkin

        You know, William, I think I’ll let this be your final post on my site. It isn’t the substance I object to so much as the nasty and dismissive tone. What is settled in your mind isn’t necessarily settled. INCLUDING whether ebook prices — writ large — were actually raised or not.

        I am happy to let the exchange as we have it stand. I’m sure you will refer people to it because since you don’t take any of the distinctions I make on board, you’re sure you’ve “won”. I’m comfortable with that.

        But I will delete any further responses from you. You can say what you want about me or anything else in some other forum in the future.

        Mike

      • Bob Kohn

        Allow me to respond only to clarify that I have never suggested that the book publishers actually colluded to raise prices or that prices actually increased as a result of the alleged collusion. I had only assumed those allegations as true for purposes of my argument, which the law requires me to do in the procedural context of my argument. No sense in arguing the rest here. I have an appellate brief to finish.

      • http://idealog.com/blog Mike Shatzkin

        Thanks for adding that bit of clarification. I am happy to continue leaving the legal arguments to the lawyers and to apply my thinking to what is best for all the stakeholders in the book business. You’ve just demonstrated how easy it is for a non-lawyer to be confused by what they read and think they understand.

        Mike

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  • Stanislav

    A quick note on the fear that many great titles may never get published. The Kickstarter funding model may very well offer a solution to this problem.

    • http://idealog.com/blog Mike Shatzkin

      Not if the profit has been taken out of publishing by the “supply chain” model! That’s the problem for whoever funds it.

      And the books I’m talking about require a LOT of money. How many Kickstarter projects get a million bucks?

      Mike

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