iBookstore

On Thursday of this week, I’ll be at the Charleston Conference appearing in a conversation organized by Anthony Watkinson that includes me and Peter Brantley. Brantley and Watkinson both have extensive backgrounds in the library and academic worlds, which are the milieux of most attendees at this conference. I don’t. I am being brought in as a representative of the trade publishing community. Watkinson believes that “the changes in the consumer area will break through into academic publishing and librarianship.” I am not so sure of that.

I am imagining that what creates interest, and concern, among all librarians about trade publishing has been the well-publicized tentativeness of trade publishers to serve the public libraries with ebooks in the relaxed and unconcerned manner with which they have historically been happy to sell them printed books. Big publishers have expressed their discomfort with ebook library lending in a variety of ways. Macmillan and Simon & Schuster, up to this writing, have declined to make ebooks available to libraries at all. HarperCollins instituted a 26-loan limit for ebooks with libraries a little over a year ago. They received apparently widespread — certainly loud — criticism when they announced the policy, but it seems now to have been accepted. Penguin and Hachette delivered ebooks for lending and then stopped. Now both are putting toes back in the water with experiments. And Random House raised their prices substantially for ebooks delivered to libraries for lending.

So, six for six, the major publishers have struggled publicly to establish a policy for ebook availability in libraries.

The concern, as I’m sure my conversation-mate Peter Brantley will point out, extends to what rights libraries have when they obtain ebooks. I’ve expressed my belief before that all ebook transactions are actually use-licenses for a transfer of computer code, not “sales” in the sense that we buy physical books. When Random House declared the opposite in the last fortnight — that they believed they sold their ebooks to libraries — it only took Brantley a wee bit of investigation to find that Random House’s definition of “sale” didn’t line up with his.

Of course, his doesn’t line up with mine. I believe (he’ll correct me on stage in Charleston, if not in the comments section here, if I’m wrong) Brantley accepts the one-file-transferred, one-loan-at-a-time limitation that has been part of the standard terms for libraries since OverDrive pioneered this distribution over a decade ago. That control enabled ebook practices to imitate print practices (except for the “books wear out” part, which Harper was addressing with its cap on loans). Without it, one ebook file transfer would be all that a library — or worse, a library system — would need of any ebook to satisfy any level of demand. The acceptance on all sides of that limitation says clearly to me, without resort to any other information or logic, that there is an agreement — a license — that the library recipient of an ebook file accepts in order to obtain it.

People who spend a lot of time with libraries and library patrons are quite certain that the patrons who borrow books and ebooks often also buy books and ebooks. (Library Journal offers patron data that supports that idea.) Although library services are many-faceted and not primarily designed to serve as marketing arms for publishers, the libraries themselves see the ways in which they aid discovery by their patrons.

And they also see the patrons that couldn’t afford to buy the books or ebooks they borrow and therefore wouldn’t and couldn’t read them if they weren’t available in the library. Since these patrons become part of a book’s word-of-mouth network by virtue of being able to read it, it looks like this behavior by publishers is not only anti-poor and anti-public, but also counter to the interests of the author and the publisher itself. (In fact, most publishers acknowledge the importance of libraries to the viability and marketing of the midlist although that, until very recently, was adequately addressed with print alone.)

And, the libraries point out, the one-book, one-loan limitation means that all the hot books have long waiting lists anyway, so many patrons just cut to the chase and buy the ebook rather than wait. (In fact, schemes by which the libraries themselves can sell the ebook are beginning to develop as well.)

The view from the publishers’ perspective (and, it is important to add, from the perspective of the agents of many highly-compensated authors, who have enormous influence over publishers’ thinking) is quite different. Libraries, which can be the core market for many books published by academic and professional publishers, are more likely to be around 10 percent or less of an adult trade book’s sale. So the risk-reward calculation starts with a sharp limitation on what is the expected “reward”.

The risks are harder to quantify because they are much more complicated than just trying to figure out how many of the loans of an ebook licensed to a library cost the publisher a sale of that ebook through retail channels.

The big publishers are acutely aware that the ecosystem of bookstores they’ve depended on for a century is giving way to something new, which appears to be a mix of retail ebook platforms, community book information sites like GoodReads, author-based marketing, and, of course, publisher efforts to reach potential book buyers through community- and list-building, SEO, and collaboration with other websites.

Consumers will, of necessity, be changing their shopping habits as they migrate from reading print books to reading ebooks. Right now, as ex-Random House marketer Peter McCarthy points out, the key decision is which retailing platform they use. If you buy a Kindle, NOOK, Apple, or Kobo device, you’d be inclined to buy from their platform. It would definitely be easiest and on a Kindle, Nook, or Kobo device, it is really the only practical choice.

But on an Apple device or a tablet computer (or a laptop or desktop, for that matter, although fewer and fewer people will read ebooks on them), the consumer is actually free to use any of the ecosytem apps and, if they want to, choose by price. McCarthy makes the case that doing that on a title-by-title basis will become increasingly unusual. He’s probably right.

But we’re nowhere near the final stage of ebook development. It is going to get easier and it is going to become more widespread. Ultimately what concerns publishers is a vast reservoir of ebook content available on one website (your local library’s, or even a not-so-local library’s) for free while the merchants are trying to make you pay. That’s why such programs as KOLL (Kindle Owners Lending Library) have not gained favor with big publishers.

It really isn’t hard to imagine that in a pretty short time, libraries and KOLL (and some fledglings like the recently-announced “maybe we’re the Spotify of ebooks, or maybe we’re not” Oyster subscription service or Spain-based 24 Symbols) have robust selections available for free (libraries), as part of a broader offering (KOLL), or for very cheap (Oyster’s and 24 Symbols’ aspiration). If that happened, how many customers could be drawn away from the ebook retailer sites and effectively removed from the market for title-by-title purchasing of new books?

How many? Well, we don’t know how many. That’s precisely the concern.

Another thing we really don’t know is what is the future of public libraries. As the relative utility of a building full of printed books declines, libraries correctly point out that they serve many other functions. One that is often cited today, but which I think will be more dated than the printed books aggregation ten years from now, is that libraries provide hardware and Internet access for people who otherwise wouldn’t have it. As devices and bandwidth get cheaper, and the social and commercial benefit of having everybody connected grow and become universally acknowledged and appreciated, that deficiency is likely to be cured by other means.

What is an ongoing need that is not likely to go away is the need for librarianship. The more sources of information there are and the more sophisticated people become about demanding the right information for any task or need, the more that professional help navigating the choices has value. But how will that help be delivered? Online, I reckon, not in a building that you go to and seek out the help. I don’t know the business model yet, but I do know that communities are going to be sorely tempted in the years to come to devote the cash they now spend on public libraries with books and computers in them to providing wider access to more materials through the Internet and providing the information experts, the librarians, outside the confines of a building full of the materials. The materials — with a variety of access and payment models — will be virtual and the librarian will help you get what you need at the price you want to pay for access.

And all of that sounds, and seems, a lot like what booksellers do today (except a lot more complicated).

Which brings us back to publishers and their concerns. Right now, the biggest publishers’ biggest worry is that they will end up in a world where Amazon is the only path to a majority of their potential customers. (Right now, for trade publishers, that number is probably more like 20-30 percent.) That’s why three of the biggest publishers (one being Penguin, so ultimately, this could involve Random House as well) are continuing to struggle to launch Bookish, a strategy that looks increasingly dubious to me. It is why they were so eager to help Apple launch the iBookstore and why they root from the sidelines for NOOK and Kobo and Google to be successful competitors.

Anything that takes business away from the ebook retailing network might be depriving one of Amazon’s competitors of the oxygen they need to compete. (That’s one of the reasons Bookish is looking like a bad idea.) But, more important, with the Internet now making it pretty easy to deliver a selection of reading material larger than anybody will ever plow through at rock-bottom prices, having libraries offer and promote free ebook availability could foster habits that will cost authors and publishers customers in the future.

Of course, all of this is speculative. The library community’s belief that making ebooks available through them will stimulate sales of those books is speculative. But so is the fear of the commercial authors and publishers that libraries in the digital age will have a significantly different impact on reading and purchasing habits than they did for print.

When the problem is lack of information, one of the best antidotes is to enable flexibility and experimentation. That’s why I’m very pleased to be working with Recorded Books on a new ebooks-for-libraries program that will give publishers enormous flexibility in how they structure the license for each book: with granular, title-by-title control of availability, price, a number of loan limit, or a time limit. This requires RB to also give libraries the information and dashboards necessary to manage their ebook collections in ways their print book collections never required. The flexibility will mean that publishers can experiment with a variety of models. The multiplicity of models will be a nuisance for libraries — although RB can do a lot to mitigate it — but it will make a lot more ebook titles available by giving each publisher the ability to control the risks as they see fit. Recorded Books expects to put the program in beta early in 2013 and roll it out by Q3.

It is my hope and belief that the various models offered and the libraries’ reaction to them (agreeing to the licenses or not) will lead to some consensus-forming around particular formulas for these deals. Of course, everything is temporary because everything is changing. And that will continue to be true for quite some time.

The news that Faber in the UK has partnered with a company called Firsty Group to offer direct-to-consumer services to their distribution clients again calls the question about publishers selling direct. In my recent post about the likely outcome of the DoJ settlement being accepted by the Court, I said I was re-thinking my admonition that all publishers should sell direct because it would appear that Amazon (and all retailers) will now be free to discount ebooks to their heart’s content and therefore can undercut any publisher’s prices if they want to.

It would appear that the wholesalers would have the most to gain from publisher-direct selling. The win for them would be complicated, because the ones with the most to lose would be the retailers who are the wholesalers’ best customers. But, ultimately, as Amazon demonstrated clearly nearly two decades ago and, most recently, F+W Media proved again, anybody can become a retailer of a large selection of print and digital books simply by setting up an account with Ingram or Baker & Taylor. (Amazon started out by having the wholesalers ship the books to them which they then re-shipped to the consumer. F+W works with Ingram on the same model, probably because their own books are combined in many of the orders and they’d lose margin unnecessarily if they had Ingram ship their books.)

Ingram brings a staggering selection of printed books through its warehouse holdings and the millions of titles available to print-on-demand through Lightning, as well as the Ingram Digital ebook wholesaling capability that represents most of the ebooks published. (Setting up distribution for an agency publisher through Ingram also requires the active cooperation of the publisher.) Baker & Taylor is trying to couple its Blio ebook platform, which handles illustrated books but does not have anything like the title selection Ingram has, with its warehouse print inventory, to provide a slightly different combination of titles.

The bottom line is that you don’t have to own inventory to offer a wide selection.

Phil Ollila of Ingram expanded on their approach to direct selling. They provide what they’re good at: inventory and fulfillment and the database of titles. They refer publishers to other service providers for the “cart and card” component of ecommerce. There are a variety of reasons, including potential tax issues involving “nexus” and the requirements of PCI compliance, the rules about what you have to do if you’re storing consumer data, that Ingram prefers to leave that portion of the business to specialists.

But Ollila also reports that Ingram found recently, surveying the top 100 web sites for which it does digital fulfillment, that about half of the top sellers were publishers. A few of them are selling books from other publishers, but most are just selling their own ebooks very successfully. So either my theory about Amazon undercutting these publishers on pricing is just wrong, or they haven’t turned their attention to these “competitors” yet.

Any business the size of a major publisher which has the ability to sell digital downloads (with or without the ability to sell printed books too) would find useful opportunities to employ it. Or, put another way, not having the ability to complete transactions with consumers would constrain a publisher’s ability to build the direct relationships with end users that so many believe are essential to the future of publishers. Being able to offer distribution clients what might soon be seen as an essential capability for publishers is probably what motivated the Faber deal with Firsty.

One vision of the future that appeals to me is that every web site that has any substantial traffic could offer books and/or ebooks as a combination service to its audience and enhancer of its revenues. I thought this would be the proposition we’d get from Open Sky when they first came on the scene but they changed the business model away from providing that capability. A fledgling retailing platform called Zola Books has a variation of this idea — individually curated “stores” that they host — built into their planning. I liked the idea when Open Sky had it originally and still do; it will be great if Zola can pull it off.

The creative minds at Random House have come up with a different approach to capitalize on the potential for the widely distributed retailing model. They’re prototyping it with Politico, which has a huge audience of the politically-interested.

Random House now merchandises Politico’s “Bookshelf”: its hosted bookstore. The store displays a wide range of titles from all publishers, divided by political category, on which you can click through for additional information. Then you can buy, offered a choice of retailers. I saw the choices Amazon, Barnes & Noble, Politics & Prose (a local store in Washington, DC) and Apple’s iBookstore.

In addition, on the bottom of many, if not all, of the Politico stories, there is a row of additional book offerings called “Related Books on the Politico Bookshelf.” The books in that row below the stories are all Random House books.

Aside from curating the store, which gives Politico both value-added information for its site visitors and an additional revenue stream from affiliate sales (which they presumably share, although I don’t know the commercial arrangement), Random House can help Politico publish.

Random House is developing technology to help them curate the offerings of all publishers for the Politico store. This is no small feat from a standing start. But building the technology that can curate from metadata has additional value. They learn how to combine the metadata associated with the title file with what they can learn about sales ranking and placement by observing what is happening at other retailers. And they’re learning about their competitors’ lists as well in a different way than they ever had before. It seems likely that this knowledge will someday help inform acquisition decisions for new books and the positioning — timing and pricing as well as marketing emphasis and metadata creation — of the books as they publish themselves.

This approach gives Random House what amounts to a gatekeeper position for book offerings to Politico’s substantial site traffic. If they’re acquiring a book appropriate to that audience, they have that marketing exposure and sales opportunity to factor into their revenue calculation (and into their pitch to the agent that they’re the “right” publisher). Other publishers’ books will be sold there too, of course. But they aren’t the gatekeepers, so they can’t be as confident of the boost, and they certainly can’t promise it to an author. And Random House has the exclusive opportunity to exploit the “related books” shelf on each story page.

Meanwhile, Random House is developing the curation and merchandising tools that will enable them to do similar things on sites that have robust traffic for different topic verticals. If the Politico experiment works, they have a very appealing capability to put in front of all of the most heavily-trafficked sites for which a curated book offering would be an attractive value-add.

Random House has essentially chosen to develop bookstores without cart and card. They’re not collecting customer names with their ecommerce or building an installed base of consumers whose credit cards they have on file. Rather, they’re organizing somebody else’s traffic to be distributed to the retailers they are already doing business with.

And, of course, in the same way that Amazon started out relying on the wholesalers for books before they went to buying most of their inventory direct, Random House can install the ecommerce engine any time they like and add a “buy direct from us” button to the choices.

I see this as building future distribution with a trade publisher’s mentality, which is “I don’t need to own the customer; I need to reach the customer and I’m perfectly happy doing that through an intermediary that does lots of work to attract the customer.” If the combination of curation and publishing tools that it can offer site owners like Politico is sufficiently attractive, one could imagine Random House building a network of high-traffic sites with very extensive consumer reach which would, in effect, comprise a new distribution model.

The Random House approach has opened my eyes. It has long been clear to me that the web would organize people by vertical, as it has, and that ultimately specialized content would be found and transacted within the verticals. I leaped to the conclusion that the publishers needed to be the vertical, or own the vertical, in order to thrive in that environment. That is essentially the strategy being executed by F+W Media and Osprey, to name two outstanding examples (both of which have recently made an acquisition that substantially increased their size, F+W of Interweave and Osprey of Duncan Baird).

But Random House is showing another way: becoming the book specialists for the verticals. It is too early to know whether the experiment being executed at Politico will turn into a replicable business model. But it sure is a smart idea to try.

While I was Googling doing some research for this post, I was stunned to see this on the site for the Firsty Group [see update below] that I refer to at the top. It was disturbing to see that they’ve been lifting my posts verbatim and posting them without attribution to their own site. (In fairness, there is a link, but you have to intuit that it is there to find and use it!)

On reflection, it appears that what they’re doing is just publishing our RSS feed, which a) does include the whole post and b) leaves out any “author” name. In that case, this copyright violation is actually being done “unconsciously.” I’m checking out whether that’s true with this post, because they certainly wouldn’t be posting something where I call them out for copyright violation except in an automated way!

Once we see what happens with this post and confirm my hunch that the behavior is automated, we’ll send a polite takedown notice and suggest that Firsty change its policy to post only the first X words of an RSS with a link through. (We are also exploring changing our RSS feed, but we actually don’t want to inconvenience people who are using it legitimately.)

I cast no aspersions on Faber here. They’re a great company and I’m sure they and Firsty deliver a solid service together.

***Very quickly as this post went live, we got an extremely apologetic note from Firsty explaining that, indeed, they were working from the RSS feed, and they indeed did have a protocol of cutting off the article and then linking through. For whatever reason, it wasn’t working on my stuff and, apparently, only on my stuff. They did a takedown while they investigate and fix and asked that we agree to allow them to continue to host our RSS samples after they had. Of course, we agreed. Great to know that it was a mistake and that they were alert enough to jump on it quickly. All’s well that ends well.

Now that the DoJ’s response to the public comments has made it overwhelmingly likely that the settlement it negotiated with Hachette, HarperCollins, and Simon & Schuster will be accepted by the Court, it is time to contemplate the changes we’ll see in the ebook marketplace in the next couple of months.

The settlement requires the three affected publishers to inform retailers working under agency agreements that they can be released from them. Ten days is alloted from the time of the Court’s acceptance for that to take place. Then the retailers have 30 days to terminate their agreement and then the publishers have 30 days from receiving that notice to actually end it.

So the process could be almost instantaneous, if the publishers served notice immediately, the retailers responded immediately, and the publishers reacted to the response immediately. Or it could take as long as 70 days from the Court judgment, if everybody used the entire time alloted by the judgment.

Assuming that Amazon acts with competence and alacrity in its own interests (and I’d expect nothing less), the entire process could take no more than 40-45 days with them. (Each retailer can be on its own clock.) That should liberate Amazon from most pricing constraints on the three settling defendants’ books by the middle of September.

There’s a bit of confusion in the settlement language here. In the same paragraph, IV-B, that lays out the 10-day, 30-day, and 30-day requirements as described above, it also says that 30 days after “entry of the Final Judgment” (the starting gun for everything), the Settling Defendants take “each step” required to terminate or not renew or extend the agreement. Or maybe the language makes sense to a lawyer but I’m just confused. It seems like they’re asking for results before the first 30-day period would have expired.

The settlement, which ostensibly does not eliminate agency agreements (although it clearly eviscerates them), requires that any new agreements not allow publishers to dictate final sale prices by the retailers, except to cap them (in an unwieldly way we’ll consider below in more detail) and also disallows any “most favored nation” (MFN) clauses protecting any retailer from the impact of other retailers’ pricing decisions. These restrictions are specified to last for two years for each retailer, starting from the date the old agreement’s price-controlling clauses are mooted, whether by the agreement being terminated or by the publisher notifying the retailer, in writing, that the offending clauses will not be enforced.

It is back to the drawing board for new agreements. Ostensibly they can be “agency” agreements by which the publisher sets a price and pays a commission for sales based on that price. But since agency agreements were actually attractive because they achieved what is now deemed illegal price parity across the marketplace, these publishers must be rethinking the efficacy of the model. I would be.

So new contracts will be needed between the three settling publishers and all the retailers. And they’ll need to be crafted, negotiated, and signed within a maximum 70-day window.

Anybody responsible for this who remembers what a combination marathon-and-sprint these negotiations were in 2010 won’t be planning any 2-week vacations over the next few months.

There is one big fat joker in the settlement. The publishers are allowed to negotiate agreements limiting the retailers from discounting from the publishers’ (now) suggested prices. The settlement allows the publisher to prohibit discounts on their books which in the aggregate over one year exceed the margin the retailer has earned on those books.

In principle, that isn’t complicated. Retailer A sells ebooks with a retail value of $1 million in a year and would earn $300,000 in commissions. They have to charge customers at least $700,000 for those ebooks, or they’d be in violation of a contract that the settlement allows the publishers to negotiate.

In practice, monitoring and enforcing that might be a nightmare. It requires either reporting or tracking of ebook sales and the prices at which they’re transacted which is far more robust than what has been required or done so far. But even with perfect data, it’s still extremely difficult to assure compliance, particularly if a retailer is inclined to “spend” its whole allotment of discount margin. The wording of the settlement would seem to require allowing discounting that exceeded the margin earned over the course of the year, as long as the cumulative discounts were under the stipulated cap at the end.

What that also means is that retailers can’t work with price-matching bots alone. It isn’t sufficient for Retailer A to monitor Retailer B’s pricing and automate meeting or beating it because Retailers A and B aren’t selling the same quantities of each publisher’s other books and therefore don’t have the same “budget” for discounting. This is a game of three-dimensional tic-tac-toe. The retailers have to watch each other and, at the same time, watch how their discounting to consumers stacks up against the allowances they are earning through above-cost sales for each of the three settling publishers.

And the publishers need to watch the sales of each of the retailers, presuming they are provided with data they don’t now get to allow it, to make sure each one is staying under its cap.

We can’t make too many assumptions here. The settlement rules allow a publisher to negotiate a discounting cap based on total margin, but they don’t require a retailer to agree to it. And there is no acceptable punishment specified for a retailer breaking the cap, so that will have to be worked out in the negotiations about to take place (if they haven’t already started).

One thing the DoJ was completely right about is that the whole agency idea breaks down if it isn’t applied across most of the Big Six. Random House demonstrated that for the first year of agency when they stayed out and reaped an immediate double bonanza. By sticking with their wholesale pricing model (by which the retailer gets 50% off a wildly unrealistic ebook price that would be almost impossible to sell very many copies at), they got more money for each copy sold than they would have under agency (by which the retailer only gets 30% but of a much lower, realistic, selling price). And, at the same time, Random House ebooks benefited from the aggressive discounting (led by Amazon but matched by other ebook retailers) at which their high-profile titles, alone among the Big Six competitive set, were offered to the consumer.

In fact, it was made clear by Apple to the publishers when they were recruited for the iBookstore that the store would only open if at least four of them signed on. Apple was probably thinking that without having a critical mass of top-flight titles, their store would have no appeal and not be worth operating. What publishers may have been thinking about is that if were a lot of Big Six titles being discounted because they weren’t covered by agency rules, the ones that weren’t would be at a tremendous competitive disadvantage.

It seems that the necessity for concerted action to make agency work is a core element of DoJ’s thinking that collusion was required to implement it. But the specific allegations of collusion (the Picholine meeting that took place long before anybody was thinking about agency or an Apple bookstore and the various instances where publishers are alleged to have told each other whether they were in or out of the program) seem very weak, particularly when you acknowledge that they all knew “four or no store”.

Something that one comes away with from reading the settlement language is that we might see some very different terms in the replacement contracts. DoJ’s suspicions were aroused by the great similarity among the agency contracts and they seem to be asking that they not look so similar when they are renegotiated.

This could drive any number of changes. Publishers could return to a wholesale model. Publishers could try to change the agency commission, now uniformly fixed at 30%. It even seems like publishers are being told that the commissions don’t have to be uniform across retailers (although negotiating different terms would seem to violate the spirit of the Robinson-Patman Law that a previous generation of publishers grew up believing required them to give the same terms to all like sellers. There is a R-P exception for contractual relationships, however.)

In fact, there is language in the settlement agreement which seems aimed at stopping publishers from even revealing the details of these agreement in case one of their competitors could find out. (One might assume an agent with clients at more than one house would be able to figure out the commercial terms from their royalty statements. Actually, one would assume that a responsible agent wouldn’t be waiting for a royalty statement to find out.)

So the settling publishers have to negotiate new deals. The other agency publishers (Macmillan and Penguin who are fighting the legal battle and didn’t settle and Random House, enjoying one more big delayed benefit from having stayed out initially which is that the collusion argument certainly can’t be stretched to cover them) will have to rethink their pricing as they see what happens in the changed marketplace.

It is a safe prediction that one of the stories of Christmas 2012 will be the extent to which the agency publishers dropped prices from what they were permitted to charge to meet competition, driven by Amazon.

Remember that the permissible discounting constraint is an annual number. There are any number of strategies Amazon could pursue (and I wouldn’t presume to be smarter than they’ll be about choosing the right one), but if they chose to press their opportunity to the max this Christmas, they could cut prices to the bone – way below “cost” — and figure to make up the margin in the 9 months that will remain the first year of the contract.

Whatever they do, the agency publishers will have to respond in their pricing too.

It’s an equally safe prediction that a consequence of that will be that fledgling authors living at the lower price points will lose market share. That will not be obvious and nobody will actually notice.

Of course, B&N and Kobo also have to figure out a pricing strategy and a means to execute it.

Apple has to completely rethink what it will do as a retailer because publisher price-setting has been severely crippled and they never seemed to want to do it themselves.

And I have to think again about whether my conviction that publishers need to sell direct to the end consumer stands up in a world where Amazon is free to turn its pricing guns on any competitor and make them look like extortionists no matter what price they charge consumers for their ebooks.

According to Bob Kohn, an attorney and the CEO of Royalty Share, the Tunney Act very clearly requires that the Justice Department publish (and it was thought originally that this meant “print”) all the public comment they got within the alloted comment period. Kohn says that’s what the law states clearly, as upheld in a prior Court decision.

That period ended on June 25, a deadline which the government missed. Kohn wrote a letter to the court on Monday to keep the DoJ accountable to the public. It looks like the DoJ backed down yesterday, asking the Court to give them until July 20 to publish comments, at least two weeks before the government files a motion with the judge on August 3. This was acceptable to Kohn, as it was consistent with what he asked for. But he still maintains that the DoJ has been in violation of the law since June 25.

To DoJ’s response that what is asked is too demanding — that they need time to review the responses and prepare them for publication – Kohn says “the DoJ can’t have their cake and eat it, too.” He points out that the law allows an extension for DoJ to publish the responses, but only by asking for and receiving an extension in the public’s time to submit responses. If the DoJ didn’t like the law as drafted, Kohn says, they have had 30 years to ask for changes in the law and they never have.

Since it appears that the vast majority of the 800 letters received came near the end of the public comment period, it would seem that an extension might have served the public interest.

But it wouldn’t have served the DoJ’s interests. And it wouldn’t have served the interests of those who want to use what looks to me like a trumped-up allegation of collusion to ratify the settlement agreed to by three companies (two of which have parent companies that own TV stations and have very good reasons to avoid picking fights with the government that licenses them).

(At the time of a publishing industry fundraiser for Obama on June 18, it had been reported that there were 150 responses. Reasonable people at the event disagreed about whether that number was impressively large or not. That apparently four times that many came in during the last week should grab anybody’s attention.)

I said a “trumped-up allegation” of collusion. Two points stand out to me in making that characterization.

One is the inclusion — nay, the trumpeting — of the Picholine dinner in September 2008 as evidence of the conspiracy to implement agency pricing. The evidence in favor of DoJ’s contention is that all six big publishers were in the same room. But the evidence against it is that, at that time, nobody except perhaps a small number of people at Apple knew there would be an iPad, an iBookstore, and an agency model implemented 18 months later. In a word: this “evidence” is ridiculous.

The second is the juxtaposition of the fact that Apple told the publishers “unless there are four, there will be no store” (my attempt at memorable phrasing) with the “allegation” that publishers were asking (and telling) each other whether they were in or not. If Apple told them that — which I contend was only revealing to trading partners a pretty obvious and sensible business decision — then the publishers had no need to confer with each other. So suggesting these reports of what one publisher might have said to another proves “collusion” is only slightly less ridiculous than the Picholine “evidence”.

Since these two elements comprise the most frequently-reported and -cited elements of the collusion case, I think the characterization of the collusion case as “trumped-up” is a reasonable one

Perhaps it is because I’m a Democrat, but I don’t see “collusion” between DoJ and Amazon as the most likely explanation for the suit and the disaster the settlement could engender. What I see is a failure of understanding of what the publishing business is and does, the role publishers and retailers play in it, the impact the Internet is having on it, and what the inevitable impact of forbidding publisher-set pricing will be.

I tried to lay that out clearly in a talk I gave last Monday at George Washington University’s fifth annual Conference on Ethics and Publishing. I think the slides are pretty self-explanatory. I hope you’ll give them a look.

I want to repeat only one point from that speech here. Amazon’s behavior is self-serving, but it is not evil! It is both futile and wrong to blame something in Amazon’s character for the industry’s troubles. Amazon’s shareholders are not primarily interested in the health and well-being of the book publishing ecosystem; they are primarily interested in the growth of Amazon’s value. It is the job of everybody working there to do what they can to enhance it, within the limits of the law and their interaction with their trading partners.

But it is our job as a society, and the DoJ’s job, to think about what the rules of the road should be to deliver what is best for all of us. I have no doubt that if the rules, for example, required retailers to respect all publishers if they wanted to sell on the Agency model and not pick and choose which ones can, Amazon would still do fine.

If this settlement is accepted, I’m pretty sure very few of their trading partners or competitors will.

There’s a lot at stake. It is bad enough that DoJ has pushed the industry in a direction that strengthens the strongest player. It is worse that they’re doing it in a way that is tending to stifle and reduce the impact of public comment. And if, as Kohn alleges, they are doing it in a manner that clearly violates the letter of the law, that would be adding considerable insult to devastating injury.

We had our first free Publishers Launch Conferences webinar yesterday previewing our Publishing in the Cloud conference that will take place on July 26. What was really cool was that a huge percentage of our audience stayed through the entire hour. That tells us that the subject of cutting costs and extending capabilities through Cloud service offerings is one that many in publishing need to know more about.

We’re still offering a deep discount ($150 off the $495 full price) through the end of the day on Friday. An impressive roster of speakers and sponsors, most of whom will be available for the “Conversations with the Experts” session, means that all our attendees will be able to get personalized answers about whatever is their concern.

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. 

The Wall Street Journal reports that the Justice Department has notified the Agency Five (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) and Apple that it plans to sue them for colluding to raise the price of electronic books. I have no standing to comment on the law here. But if this does mean the end of the agency model, it would seem to be a cause for celebrating at Amazon and a catalyst for some deep contemplation by all the other big players in the book business.

Agency pricing, for those who have not been following the most important development in the growth of the book market, enabled the publishers to enforce a uniform price for each ebook title across all retail outlets. This was Apple’s desired way to do business, and it addressed deep concerns the big publishers had about the effect of Amazon’s loss-leader discounting.

Although the WSJ article and Michael Cader’s follow up in Publishers Lunch make no “agency is dead” declaration and there are quotes from publishers and others indicating that there are a range of possible outcomes, including a version of agency that is modified to allow some discounting, everybody in the industry now has to contemplate what it would mean if the agency model is legally upended.

To Amazon, it would mean they would be free to set prices on all books again, including the most high-profile and attractive ones that come from the big trade houses. That is an opportunity they are likely to seize with loss-leader discounting of the biggest marquee titles.

To Barnes & Noble, it would mean they have to devote cash resources to ebook discounting that they might have preferred to dedicate to further development of the Nook platform, maintaining the most robust possible brick-and-mortar presence, and improving the user experience at BN.com. Unconfirmed stories abound that B&N is about to announce an international expansion. Whether that will produce cash flow immediately or require it for a while is not yet known. For B&N’s sake, it would always better if it were the former, but if they’re about to fight discounting wars, it might be critical.

To Kobo, it would mean that they also will need to devote cash resources to subsidizing price cuts to match Amazon. With their new ownership by Rakuten, they should have the capital they need to fight this battle. They must be glad that deal got done before agency was upended.

To Google, it would mean that the bookstore service piece of their ebook business will suddenly be highly challenged. Many independent stores might be pushed out of the ebook game completely; it certainly would be extremely difficult for them to support competition with Amazon’s prices. To Google itself, with their new Google Play configuration, it means they will have to both spend more margin and more management energy to be a serious competitor in the retail marketplace. There’s no clear evidence that they have the interest at the top to do that, although they certainly would have the resources.

To Apple, it would mean that their entire iBookstore model is in question. They apparently didn’t want to take on all the normal responsibilities of a merchant, which would include setting prices. Now they may have to.

To all the big publishers, including Random House (the one of the Big Six not being sued, because they stayed out of agency for the first year and therefore were not considered part of the “collusion”) it would mean that they will have to painfully reverse the re-pricing and systems adjustments they went through to implement agency in the first place.

Smaller publishers and distributors might be beneficiaries if agency is eliminated, but they might not. The agency model is a great advantage for those publishers who are able to fully implement it. But that is only six publishers — the Big Six — because Amazon has simply refused to let anybody else sell to them that way. That creates problems for the smaller publishers but an even more threatening one for distributors. All but the Big Six, if they want to sell to both Amazon and Apple, must operate a “hybrid” model, selling Apple on agency terms and Amazon on wholesale terms. The two are inherently in conflict. What is ultimately a threat to the distributors is that distributees that desire agency terms, and many would. might seek distribution deals from one of the Big Six. (It might be coincidental, but it is worth noting that IPG, the company having a fight with Amazon at the moment over terms, is a distributor.)

Of course, we don’t know how the Big Publishers will respond if they’re forced off agency. It’s long been my opinion that the 50% discount for ebooks is unworkable. It leads to ridiculous and unrealistic retail prices. (Publishers operating on the hybrid model have to have two retail prices: one on which to base the wholesale discount and another at Apple operating agency-style. It’s crazy.) Would the big publishers, if they couldn’t do agency, keep the 30% discount and their current prices? Would they go back to the 50% discount and jack the suggested retail prices back up? If they did the former and nothing else changed, the smaller publishers could be at a much greater disadvantage than they are now.

Over time, the biggest losers here will be the authors. The independent authors will feel the pain first. Agency pricing creates a zone of pricing they can occupy without much competition from branded merchandise. When the known authors are only available at $9.99 and up, the fledgling at $0.99-$2.99 looks very attractive and worth a try. Ending agency will have the “desired” effect of bringing all ebook prices down. As the big book prices are reduced, the ability of the unknowns to use price as a discovery tool will diminish as well. In the short run, it will be the independent authors who will pay the biggest price of all.

But, in the long run, all authors will just get less. They will join the legion of suppliers beholden to a retailer whose mission is to deliver the lowest possible price to the consumer.

Seth Godin has recently made the argument that this is simply inevitable. Perhaps it is. The laws of supply and demand would support that contention. But from my personal perspective, I don’t like seeing the government hasten the process along.

But what about the reader? The reader gets lower prices, cheaper reading. What the reader won’t see is that s/he’s not getting what s/he won’t pay for. Some of the best books won’t get written and the biggest casualties will be in the area of highly-researched non-fiction, like major biographies, in my opinion. Twenty years ago they used to say that a conservative was a liberal who’s been mugged. I’m not about to become a conservative, but I sure see how easy it is for the government not to understand how their decisions might affect the dynamics of a business. Or, in this case, a culture.

Readers who have been following publishing’s digital transition for two years or more will recall the situation in 2010 when five of publishing’s Big Six switched over from selling their ebooks on wholesale terms, by which the retailer sets the price to the consumer, to agency terms, by which the publisher sets a price that prevails across all retailers. Random House stayed out.

That decision seemed to puzzle many observers despite the realities for the publishers. Making the change required actually reducing per-unit revenues to the publisher (and author) while at the same time making each unit more expensive to the consumer, so it was done by what was then called the “Agency Five” at some sacrifice (in their view) for the greater good (in their view) of the industry. Agency protected weaker ebook retailers — Barnes & Noble, Kobo, and Google as well as independents — from having to compete with the deep-pocketed Amazon’s loss-leader pricing strategies. The immediate payoff was the opportunity to sell through Apple’s fledgling iBookstore.

As we explained at the time, Random House’s choice was transparently in their short-term self-interest. It was understandable that their competitive cohort, who saw themselves making a sacrifice on behalf of the industry’s long-term future, were unhappy that the biggest player among them was staying out. But it was a bit hard for me to understand what was so hard for everybody else to understand about why Random House did what they did. (Random House switched over to selling on the agency model in March, 2011.)

Those times are recalled for me by the recent round of indignation and analysis over the jockeying among the retailing competitors over the titles published by Amazon. Everybody is just acting in their own best interest. There really isn’t much mysterious about anybody’s behavior.

We could say the most recent set of events was begun by Amazon’s escalating efforts to capture titles for ebook rendering exclusively on the Kindle platform. They were apparently doing this two ways: by signing up authors directly for their own imprints and by offering self-published authors financial incentives — such as paid participation in their lending library program — for making their ebook a Kindle exclusive.

For the books they signed directly, Amazon recognized that it might not be the most comfortable sales call in the world for any rep to pitch these books to B&N’s buyers. Representing the books of every bookseller’s biggest competitor would be a challenge but it was one that Houghton Mifflin Harcourt decided to attempt. Last year it was announced that HMH had taken the opportunity to license the Amazon-originated titles in paperback. Major publishers had often expressed the view that publishing in print without ebook rights was a non-starter for them. HMH hoped that their efforts wouldn’t be viewed in that light since it is not considered unusual (although I’m not sure how often it has happened) for ebook rights to remain with the hardcover publisher when paperback rights are licensed.

More heat was generated when the Kindle Fire debuted with some graphic novel content delivered exclusively to it. When Barnes & Noble pulled the paper versions of those books off their store shelves, they explained that their policy would be to refuse to stock the print version of something not offered to them for sale “in all formats”.

The message at the time seemed clear. If Amazon wanted to sign up books directly and sell them broadly, they couldn’t maintain a Kindle monopoly on those titles. Undoubtedly, it was becoming clearer and clearer to Amazon that getting broader distribution for printed books was an important element if they wanted to sign up important books. Let’s remember that Larry Kirshbaum had been brought on board in June to sign up big titles. He was the first person to work at Amazon who had the relationships and the experience to tell them what it would take to succeed in those efforts.

But things were dynamic at B&N as well. With Borders gone, they have become the only player at scale able to offer print book merchandising. There is an increasing awareness of how important print display still is to “making” a book. It is very likely that inside B&N there has been increasing appreciation of the power of their position.

There is complementarity here. Amazon had a dominant position with Kindle before the Nook arrived that has been eroding since then due to increased competition. They’re still more than half the ebook sales in the US, but they want to shore up their position. Using their strength to get Kindle exclusives is a sensible way to do that.

At the same time, the leverage Barnes & Noble has from its print store dominance is perhaps at its peak. In their case this isn’t because competition in their channel is likely to erode their share. It is a continuation of the consumer trend of shifting to online buying and ebook reading that will dilute the importance of brick-and-mortar even if B&N’s share remains very high. So they too want to use the leverage of that position to strengthen themselves while they can.

Both Amazon and B&N demonstrate the power of their position by looking for an increased share of the book sales revenue from publishers.

Anyhow, Amazon continued to work on this problem of getting the books they acquired directly from authors into broader store distribution. In January, they expanded the first-look licensing deal they had with HMH and announced the New Harvest imprint there to deliver paperback editions of their books to broader distribution. And, proving they’d been listening to what Barnes & Noble said earlier, they announced that New Harvest books would have ebooks made available in formats that would enable their sale in all ebook channels.

It took Barnes & Noble less than a week to respond. Ignoring Amazon’s willingness to make the new imprint books available as ebooks, they instead focused on the continuing programs Amazon had that kept other titles as Kindle exclusives. B&N announced that they wouldn’t carry any Amazon-originated titles in their stores, although they would make them available online and as ebooks. Of course, that “offer” gave Amazon precisely what they didn’t care about (BN.com online sales) or didn’t really want (Nook availability) and denied them what they were really after (bookstore shelf and display space).

Pretty quickly, both Daily Finance and Time Business found fault with Barnes & Noble’s move. It was seen as boneheaded for a retailer in the declining brick-and-mortar space to decline to stock some books that might sell. It was even suggested by some that this was an “opening” for Barnes & Noble’s terrestrial competitors to carry attractive Amazon titles, with the implication that this could help them steal customers from B&N.

But Barnes & Noble’s competitors actually saw things the same way that B&N did. The independent store and publisher, Melville House, was quickly supportive. A few days later, the Canadian chain Indigo (which occupies the same dominant position there that B&N does in the US) and the second-ranked US chain, Books-A-Million, announced that their policies would mirror B&N’s.

The day that B&N announced they wouldn’t carry the Amazon books, a reporter called me for comment. This reporter clearly expected me to castigate B&N for shortsightedness. I think he was surprised when I told him I thought the policy made complete strategic sense for them.

The bottom line here is that as Amazon’s power to sign up books away from the major publishers grows, the retailers who depend on publishers for a flow of commercial product suffer along with the publishers. B&N saw — and Indigo and Melville House and Books-a-Million saw — that Amazon wanted bookstore distribution to enable them to sign up more titles directly. Even though those titles would be made available to them, they see themselves as strengthening their enemy when they stock those books.

B&N’s decision seems to me like the right move for them. Most very regular bookstore customers aren’t really surprised if any particular store doesn’t have any particular book. Indeed, the impossibility of stocking everything anybody might ask for in a store is part of the reason that online bookselling is such a useful service. In this day and age, most people who want a particular book don’t go to a bookstore to buy it; they just order it online. They go to bookstores to browse and shop and choose from what is within the store. So, yes, there may be some disappointed customers if B&N doesn’t have a high-profile Amazon title, but I don’t think that disappointment will be widespread.

On the other hand, authors and agents who might have considered an Amazon publishing deal will have to think twice if they know very few bookstores will carry it. Amazon can do some remarkable things to sell books to their mammoth online customer base and that won’t change. But there is both a practical and a vanity aspect to getting store display that will still be seen as indispensible by many authors and agents who otherwise might have taken the leap to sign with the newest big checkbook in town.

Amazon still has the biggest forces, and time, on its side. eBook reading will continue to grow and Kindle will remain the most powerful platform as it does. More and more print buying will shift from stores to online and nobody has mounted meaningful competition to Amazon in the online print channel. The Amazon online experience for search and selection and delivery remains — in this consumer’s opinion — far and away the best. Their reach beyond books to so many other product lines gives them further advantages in many ways, including fueling their Amazon Prime program, which is an unmatched tool to encourage customer loyalty. The shelf space for books at B&N will almost certainly continue to decline and the leverage that comes along with it will do the same.

This tactical decision will not change the overall course of history. Neither did Random House’s decision to postpone moving to agency for a year after everybody else did. But, just like Random House’s decision, everything Amazon and Barnes & Noble (and the retailers that followed them) have done is actually perfectly sensible when viewed from the perspective of their own self-interest. There are a lot of smart people engaged in a pitched battle here. Outside observers would be well-advised to keep that in mind as they evaluate the moves they make.

Almost two years ago, I wrote a post which continues to be one of the most-read in the history of this blog, the point of which was that the business model disruption (called “agency”) prompted by the iPad would have more impact on the ebook ecosystem than the device itself. I’m happy to repeat that statement today because I think events have proven that hunch to be correct.

This week Amazon announced their new tablet, the Kindle Fire. (Mine’s on order. I gave the original Kindle I had to my wife, who still uses it. I also own an iPad but never read books on it. As everybody who reads this blog regularly knows, my ebook consumption is all iPhone, largely purchased through the Kindle store, sometimes through Nook, Kobo, or Google, but never through iBookstore.)

The Kindle Fire announcement has unleashed a spate of stories in the tech press about the battle between Apple and Amazon. Who knows what Apple’s rejoinder will be, but it would seem that Fire offers much more than half of what an iPad delivers to a media consumer for much less than half the price and about two-thirds the weight. It appears it will fit in the hip pocket of a man’s suit jacket. That sounds like a competitive formula. It already was for Nook Color, and Amazon seems, at least for the moment, to have done them one better.

Books are not the central focus of this Amazon-Apple battle even from Amazon’s point of view and they are certainly are not from Apple’s. Apple is a device company and their content offerings, and their control of their content offerings, are intended to reinforce the unique experience their devices deliver. Amazon certainly knows from their Kindle experience that offering the right device can propel content sales and secure the content customers’ business (a lesson B&N has both learned and demonstrated quite successfully with Nook as well). The Fire is as much about video content as it is about books.

But in the book business, we look at these two titans in a different way because they force publishing into managing two completely different commercial models simultaneously. That’s not something most of the tech community has paid any attention to in the prolific “Amazon versus Apple” commentary following the Kindle Fire announcement. But it reinforces the point made in the post from two years ago: the fact that Amazon and Apple have different approaches to acquiring and pricing content offerngs is the most important aspect of the battle between them to the book publishing community. Who “wins”, as in “who sells the most devices?” (or even “who sells the most ebooks?”), is really quite secondary since both are significant and neither is going away.

Amazon wants to acquire its book content with the ability to control the selling price so they can continue to burnish their reputation as the lowest-cost provider and exploit other advantages that their huge customer base and extraordinarily deep pockets provide them. Apple wants a margin-guaranteed commercial model that also assures them that they won’t be embarrassed by having their customers see the same content for a lower price elsewhere.

Apple assumed they’d be able to move the most devices and, with price neutrality, create enough advantages to their device owners to shop in the device’s “home” store to satisfy their competitive requirements. That is, Apple’s content-selling strategy was to maximize their market share among their own device owners. They do nothing to move the content onto other companies’ devices.

But Amazon is a store first; the devices are in service to the store, not the other way around. Price competition is a key component of their competitive toolkit. And they are relentless at using their tools to take market share and margin away from their retailing competitors.

Publishers see their interests more closerly aligned with Apple’s strategy than with Amazon’s. After all, Apple is perfectly comfortable with the idea that others will need to provide content to whatever non-Apple devices are out there. Amazon wants to dominate content sales to all devices. Publishers want an ecosystem with as many contact points for consumers as possible to protect them from being disintermediated by somebody downstream (namely Amazon). And they like the necessity of managing a lot of resellers because it protects them from being disintermediated by somebody upstream (the agents or authors).

Amazon found out in a battle with Macmillan very shortly after I wrote the piece cited at the top that they couldn’t bully the Big Six publishers into abandoning agency pricing. So they gave up the effort to do that, and the Big Six now apply agency across the ebook supply chain, creating uniform prices through all outlets for most of the biggest commercial titles on offer.

But Amazon did not find it necessary to back down from their insistence on wholesale for everybody else. And that means that, except for the Big Six, all publishers that want to offer their ebooks through both Amazon and Apple are forced into the “hybrid” model: agency with Apple, wholesale with Amazon, and a choice between the two for everybody else.*

The models are ultimately incompatible and create anomalies (an example of which with a high-profile title not published by one of the Big Six we reported on recently.)

And that, not the device war itself, is the most important component of the Amazon versus Apple battle to the book publishing community. With the recent move by Apple to end direct-linking to their proprietary stores out of the apps of other ebook sellers, they are undoubtedly increasing the market share of iBookstore (even though their title selection still lags way behind their competitors.) There’s a price in lost sales to pay if an ebook isn’t available in all the places customers might shop for their next read.

But to make an ebook available through both Amazon and Apple, a publisher must set two retail prices: one to sell to consumers at through Apple and one to base a discount on for sales through Amazon. Publishers will continue to see titles flagged by Apple on a weekly basis because they were on sale somewhere (presumably Amazon) at a lower price than the publisher set for Apple, allowing Apple to lower the price (and to proportionately decrease their payment to publishers for sale of that ebook.)

The advantages of agency, including the ability to raise and lower prices to generate promotion or to take advantage of stronger demand, will continue to be reserved to the Big Six. So will the potential advantage (not yet realized, to our knowledge) for the Big Six of being able to sell from within apps or off their own web sites because they have the ability to do that without competing with their retailers on price. And so is the protection against the possibility that an agency reseller will lower the price to meet a wholesale reseller’s competition, thus cutting the revenue delivered to the publisher and, ultimately, to the author.

I have not yet explored the ramifications of agency versus wholesale or hybrid with an agent from the author’s commercial point of view, but it would seem to be an advantage for the Big Six publishers in signing up major authors that they alone can enforce agency. And with the device battle now joined and bound to be going on for many years to come, it would appear that the division between Apple and Amazon will perpetuate a division between the Big Six and all other publishers which will last for the foreseeable future.

* Writing that asterisked sentence (several grafs above) made me realize what I didn’t know. How do publishers set their two different retail prices, one of which is the basis fo 50 off and a retailer-set customer price and one of which is the basis of 30 off and that is the price? Who decides on which basis the other ebook retailers — B&N, Kobo, and the rest — do their purchasing? (I know they all benefit from agency, so presumably they buy agency with the same assurances of price-protection Apple takes, but do they have a choice?) And how many publishers just refuse to sell to Apple so they can put all publishers on wholesale and let the discounting occur as it will?

I know people to ask about all this, but not on a baseball playoff weekend. It will likely be the subject of a future post.

There are no links in this post. I refer to searches done in several ebookstores, but the pages reporting results would be dynamic, so creating a link wouldn’t assure you’d see the same results as I saw. You can replicate the searches and you may or may not see the same thing because the facts might change.

Here’s what the ebook marketplace looks like without agency pricing.

Having just polished off Phil Pepe’s “61″ about Roger Maris’s great home run season of 50 years ago, I was ready for my next read. No book has gotten more press on my radar over the past week than the new memoir from Jacqueline Kennedy, transcriptions of interviews she did with historian Arthur Schlesinger just a few months after JFK’s assassination. That looked like a good next choice for me.

(I have learned through the exercise described herein that the book is actually billed as “by Caroline Kennedy”, who controlled the property, edited it, and contracted for its publication and also “by Michael Beschloss”, the historian who wrote the introduction.)

Although I have several readers loaded on my ereading device (the iPhone), I have found myself recently defaulting to the Kindle store because it is the best place for me to browse. It allows me to search very granularly by category and sub-category (which the others don’t) and to array the choices in inverse order of publication (which the others don’t, or if they do, they don’t make it obvious enough how). That’s how I found “61″ and “The House That Ruth Built”, my two most recent reads in baseball history (my favorite subject.)

However, when you know you want a very specific book, all the ebook services are pretty much equivalent. They all let you search by title or author and deliver what you’re looking for. Since I like to spread my reading around to keep up with what the various experiences are like, I decided to search Nook first for “Jacqueline Kennedy”.

And the search engine found 22 items matching my search, the first two of which were what I was looking for.

Sort of.

Match number 1 was the book I wanted (“Jacqueline Kennedy: Historic Conversations on Life with John F. Kennedy” by Caroline Kennedy), but only available for pre-order, delivery taking place on January 3, 2012. The list price is $29.99 and the NOOK price is $9.99. Obviously, not agency, Apparently B&N will accept about a $5 bath on each copy, presuming they get these $29.99 ebooks at 50% off from the publisher, Hyperion.

But I want to read it now!

Match number 2 is the same book. However it is a “NOOK Book Enhanced (eBook)”. It is available right now. The list price is $60.00 and the NOOK price is $32! That’s thirty-two dollars! List price of SIXTY dollars? WTF?

Let’s note here that B&N is apparently making very little margin on this, if they’re paying 50% to Hyperion. But since I’m the biggest spendthrift I know on ebooks (I happily bought and read both “Fall of Giants” and “George Washington” from Penguin for $19.99 without blinking; some years ago I bought an ebook bio of Grover Cleveland for $28) and this price stops me, I wonder if anybody would buy it.

So I kept shopping.

My next stop was Google eBooks. The book I’m after was not in the first two pages of results returned in a search under “Jacqueline Kennedy”. (However, there was one book called “Inventing a Voice: The Rhetoric of American First Ladies of the Twentieth Century” that is on sale for $42.36 and another called “The Kennedy Family: an American dynasty, a bibliography with indexes” for $55.20).

So I tried Kobo. By the time I got to the bottom of the first page of results, we were on to other Jacquelines. And the book I wanted, the one getting all the publicity, wasn’t shown.

I almost never use the iBookstore because the selection is more limited. But I decided to try it for this. I found something cool immediately: it gave me an auto-complete choice for “Jacqueline Kennedy” when I had typed a few letters of her first name. Helpful on an iPhone.

Here I found a variation of what I’d found on NOOK. The first listing was for the plain vanilla ebook, only for pre-order for January 3, 2012 delivery, for $14.99. (iBookstore, unlike NOOK, doesn’t list a publisher’s list price.)

The second listing labeled “Jacqueline Kennedy The Enhanced Edition” offered that book for $19.99, also without telling me what the publisher’s list price was.

One thing was odd. iBookstore says that the “print length” of the enhanced edition is 400 pages and the print length of the vanilla edition is 256 pages! Since I thought most of the enhancement was video and audio, that’s a bit of a headscratcher too.

So, finally, I went to Kindle. The number one listing there, available now, was “Jacqueline Kennedy (Kindle Edition with Audio/Video)” for $9.99. The book’s page says the list price is $60 and the Kindle price is a saving of 83%. (Of course, I bought it, and I can tell you that my iPhone progress bar says there are 349 pages in the book!)

What that suggests is that Amazon could be subsidizing sales of this book to the tune of a massive $20 per copy sold! (Next time I’m with a person from Amazon, the cup of coffee is on me.) I’m assuming that Amazon is paying half that $60 retail price to Hyperion.

People’s deals are private and I don’t claim inside knowledge, but my understanding is that all publishers sell to Apple on what amount to agency terms (publisher sets a price with Apple and Apple remits 70% of it) but that part of the commitment is that iBookstore can lower its price to meet competition and adjust remittances accordingly. Perhaps what happened here is that Hyperion set its Apple price at $19.99, figuring that nobody else (meaning Kindle or NOOK, in this case, since apparently Google and Kobo don’t have the enhanced book and aren’t listing the vanilla one for future sale) would drop the price more than that. But Kindle did. So, if I’m right about terms, iBookstore will shortly see this, cut its price to $9.99, and Hyperion will find themselves getting 70% of $9.99 from Apple rather than 70% of $19.99. And still Kindle and NOOK will be paying $30 a copy with Amazon Kindle choosing to lose $20 a copy to sell them and B&N NOOK choosing not to subsidize and probably hardly selling any.

Amazon’s strategy before agency was to aggressively discount the most high-profile books, the ones that the reading public would most often search for, in order to send the strong signal that their prices are the lowest and to force less-affluent competitors to engage in costly price competition. In this case, that strategy is being applied successfully, although both iBookstore and NOOK can respond. Whether one thinks it is a good thing or a bad thing that the deepest-pocketed retailer can spend $20 a copy on a big book to promote a price perception depends on your point of view but this clearly demonstrates what the publishers, the retailers, and the consumers face when a high-profile, high-demand book is sold without the price discipline of agency terms.

Clearly, something has to change here. Perhaps Google and Kobo aren’t listing this title because they can’t or don’t want to sell an enhanced ebook. Perhaps Hyperion didn’t offer it to them. We know that Apple insists on agency-like terms and Amazon is just as determined to stick with wholesale terms. My understanding is that B&N will work either way although they have made public statements that seem to support agency. In cases like this, though, I’d expect B&N to pursue the same terms as Apple gets (which, because it includes publisher price control, Amazon doesn’t want). B&N certainly doesn’t want to be selling an ebook for $32 their competitors are selling for ten and twenty dollars less than that and they also don’t want to lose $20 a copy on a high-volume title. (Perhaps by the time you read this, there will have been price adjustments already made.)

But if B&N and Apple both had terms that allowed them to cut to Amazon’s discounted price and just pay less for each ebook, it is hard to see how Amazon could accept that!

I am sorry there is no way to present this as anything other than confusing. Maybe one of the service providers or experts at our “eBooks for Everyone Else” show will be able to explain it better!

Anybody who doesn’t find the publishing business interesting in its time of digital change is simply not paying close enough attention. No matter what story we’re focused on, scratch the surface (or scratch your head) and you find you are pondering something else. This was a week for the press to be asking me (and many others) about the lawsuit against Apple and the publishers surrounding the implementation of agency. I have little expertise to comment on the suit’s legal merits, but a week of thinking about agency has made me (and others) realize implications that hadn’t been evident to us previously.

As I was reviewing my last blog post before publishing it, I had the new thought (referred to in a brief postscript) that Amazon was actually doing the Big Six publishers a favor by denying agency terms to everybody else. Since big authors have a common interest with big publishers in maintaining retail prices for ebooks that don’t undercut print and which deliver a per-copy revenue flow comparable to print, there is reason for a big author to prefer a publisher that has the power to maintain the ebook price across the retail network. Full-fledged agency publishers have that capability; the others do not.

A moment of explanation might be required for any readers who might be lost in the details of the agency, wholesale, and hybrid models of ebook-selling. Agency is the term for “the publisher actually sells the ebooks to the consumer, not the retailer; the retailer gets a cut but cannot change the price from what the publisher has set.” Wholesale is the term for “the publisher sells the ebooks to the retailer, based on the notional retail price set by the publisher; the retailer can then set the consumer price keeping all, part, none, or less than none — selling as a loss-leader — of the margin that the publisher’s discount provided.” And hybrid is the term for “the publisher has to agree to giving Apple a fixed percentage of the selling price; Amazon insists on a wholesale arrangement by which they set the price; therefore, Apple’s standard arrangement by which it can lower prices (and the publisher’s share) to match any other retailer on the web makes the publisher vulnerable to having its revenue from Apple readjusted downwards based on discounts offered by somebody else.”

The short story is that only under a total agency model does the publisher control price. In any other case, the price is effectively controlled by the retailer willing to offer the lowest price. That would be the retailer willing to live with the least margin and, as was amply demonstrated by the discounting that took place before agency came to publishing, that might be a negative margin. Retailers in the US (although not in all countries) can sell below cost if they think it is to their advantage to do so.

All the actors are rational here. Amazon extends agency terms to the Big Six publishers because, after the Macmillan dust-up of January 2010, Amazon has been persuaded that they could lose the ebooks of those publishers from their shop if they don’t. Losing the ebooks from one of the major houses would damage what has been one of Amazon’s main strategic advantages since the Kindle was launched: the widest selection of commercially-attractive ebooks in the marketplace. They take the gamble, which appears to be a winner, that publishers smaller than the Big Six will not want to withhold product from the world’s biggest ebook retailer, the one that still accounts for substantially more than 50% of the ebook sales for many titles.

And, in some cases, publishers have avoided the discomfort of the hybrid model — which requires them to commit to Apple that Apple will have the lowest price on the Web when they can’t actually control everybody else’s price  – by not selling to the iBookstore because Apple won’t buy on wholesale terms. So Amazon yields where they think they must (to the Big Six) and continues to enjoy the advantages of price control with the rest, while at the same time discouraging some publishers from making their titles available through a competitor. This all makes sense to me as I understand their point of view.

What I noticed while writing the last piece is that there is an unintended consequence here for Amazon way upstream from the ebooks sale: the policy is strengthening the Big Six’s already powerful grip on the biggest titles from the biggest authors. Amazon wants to compete for those authors and can offer a better royalty on Amazon sales to entice them (when Amazon pays 70% to the author, the author keeps it all; when they pay 70% to the publisher, the author does not get it all, even if s/he succeeds in negotiating something better than the industry standard of a 25% ebook royalty share.) But Amazon reportedly wants ebook exclusivity, which cuts out a big chunk of the ebook market, and they are seriously handicapped getting a print sale through brick retailers.

(If you want a more thorough explanation of the way ebook revenues get split up, I wrote in detail about ebook royalties under the agency and wholesale models here and here.)

Because print sales in stores still matter (and for as long as they do) there is a risk and a sacrifice for any author giving exclusivity to Amazon, although there are also clearly compensating considerations as well.

At about the same time I was noticing this, my friend Eoin Purcell in Ireland was noticing something else. Apple’s new policy on apps, by which you can’t sell through an app without giving Apple its standard 30% cut, also offers up a sparkling new opportunity to agency publishers that would be accessible only at some risk to any but the Big Six.

The immediate consequence of Apple enforcing this policy of theirs was to drive the direct-to-our-store connection from the Kindle, Nook, Kobo, and Google apps. Because those retailers only get 30% margin from the publishers, they can’t afford to give 30% to Apple for the privilege of in-app selling.

But publishers don’t have that margin problem. They already pay 30% for their sales, and if they put their own apps up with sales enabled through them, they’d only be paying what they already are to a retailer for the privilege. So apps for authors or genres or series of any kind could be offered as free downloads through the App Store with direct-purchase buttons inside. These could send you to the iBookstore, if the right kind of landing environment could be created, or to the publisher’s own landing page where sales commissionable to Apple could be made.

Of course, the same thing could be done as a Nook app in the B&N ecosystem, and it would be smart for the publisher to offer one, as well as a web app that constituted an Amazon version (which wouldn’t be offered through the Apple App Store but would have to get to you another way), to keep relative peace among its customers. But a publisher can only do this if it is sure its prices won’t be undercut, which would force a further margin reduction under Apple’s rules.

Like Eoin, I have no idea whether any of the Big Six publishers are working on this idea or whether any of the major agents have suggested the possibility. But we’re talking about literally hundreds of smart people here, so it would be surprising if nobody’s exploring this possibility (except if Eoin and I are both missing something that makes it a non-starter.)

The transformation of publishing is rich with circumstances to amuse anybody who appreciates irony. Cheaper ebooks, which consumers love, are making bookstores, which consumers also love, gasp for the breath to survive. The closest thing to a monopoly threat in the business, Amazon and Kindle, work to drive consumer prices down. Apple’s great success with new devices coupled with their very slow start at retailing, generates agency pricing and sales opportunities for other retailers that probably benefited Barnes & Noble the most. B&N, the brick retailer most skilled at logistics but only newly-minted as any sort of tech company, finds not one but two unoccupied niches in the eink product suite: color and touch-screen.

And now, Amazon’s policy limiting the publishers that can fully implement agency, designed to isolate the Big Six and enable discounting of everybody else’s ebooks, may be spawning a new opportunity for big authors and big publishers to work together that other publishers can’t compete with. Perhaps denying this capability to other publishers actually helps Amazon be alone as a 7th competitor, but it certainly has its ironic aspects at a moment when Amazon is putting on a full-court press to persuade big authors to work directly with them!