The High Price of Cheap E-Books
You got the e-mail from Amazon, Barnes & Nobles or Apple: if you bought e-books from us at some point in the past, you're getting a refund, gift certificate or credit for your past purchases.
Is Santa Claus coming early this year? Did Amazon CEO Jeff Bezos wake up with a fit of benevolence? Did pigs fly? No, the refund is a rare result in the complex, tedious, slow-moving world of antitrust legislation: consumers will see money back and lower costs, but the cost to the publishing industry will likely be far-reaching.
It began with a jump in e-book prices: consumers, used to spending at most $10 on Amazon e-book titles, saw a sudden jump in prices in 2010, with bestsellers rising to $13 or even $17.
The jump confused a lot of people -- how can digital cost as much as paperback? After all, e-books are booming, and analysts applauded the publishing industry's transition. The results are concrete: revenues and sales from e-books are surging, surpassing hardbacks -- and soon paperbacks. The price jump just seems greedy.
Consumers weren't the only ones who noticed. The Justice Department, one of the major antitrust watchdogs of the U.S. government, began investigating the shift to higher prices, uncovering alleged collusion between Apple and five major book publishers to raise e-book prices at the launch of the iPad and its e-bookstore. The DoJ claimed Apple came to an agreement with publishers to let them set their own price on e-books sold on iPads. In return, Apple would take a 30-percent cut, therefore squeezing out retailers, which use a wholesale pricing model, and overall, raising prices for consumers. In short, the agreement dramatically stunted a retailer's abilities to set prices, generate sales and respond adroitly to market forces and customer demand.
Of course, it's perfectly legal for publishers, or any product-maker, to set their own prices and give a commission to sellers. But the DoJ's issue is that Apple entered into an agreement with publishers to switch to this pricing model, a major anti-competitive practice that forces an artificial shift in the market, rather than natural response to forces of supply-and-demand. Happenstance is okay, a plan is not.
The regulatory body said it "uncovered significant evidence that the seismic shift in e-book prices was not the result of market forces, but rather came about through the collusive efforts of Apple and five of the six largest publishers in the country," according to a federal court filing in New York. With evidence on hand, the DoJ filed a lawsuit against Apple and five of the six major book publishers in the spring of this year.
A Major Turning Point
The significance of the lawsuit wasn't lost within an industry grappling with the transition to digital. The book-selling and publishing industry had done well in managing the shift: it had foreseen the importance of e-readers and adapted considerable libraries of assets for the digital market. It planned ahead and instituted strict digital-rights management systems to prevent piracy, ensuring it wouldn't walk down the same destabilizing path as the music industry.
And its strategies paid off: e-books are selling well, to the point of eclipsing traditional books like hardcovers. Most consumers will read e-books in the future.
But publishers have one major worry: Amazon has accrued immense power within the publishing industry, particularly in its low-cost pricing strategies. Amazon had instituted a $10 e-book price, even though it often lost money on each sale, to establish its store as the destination of choice for digital content. And it slashed prices and profits on e-book titles to stimulate sales. Meanwhile, publishers worry their digital products are devalued, and customers will come to expect $10 on all e-books in the future, capping its earnings potential.
Publishers complained, claiming Amazon's held a monopoly in e-book distribution, dangerous in its own way, especially as brick-and-mortar powers like Barnes & Nobles and Borders struggled to compete. So they welcomed Apple as a counterbalance to Amazon, pitting major powers to level the playing field, and hopefully regain some control over the pricing of their e-books.
The DoJ lawsuit, however, creates an opportunity for yet another seismic shift in the e-book industry, centered on questions of value, price and the power to determine these. If the DoJ wins, consumers will see lower prices again. But Amazon will be left alone with ever-increasing powers over publishers. If Apple and its partners win, publishers will be able to set their own margins, which will undoubtedly lead to higher prices, leaving consumers to decide whether pony up for the latest e-bestsellers. Publishers will regain a modicum of control in a rapidly shifting industry that is still searching out ways to stay viable and profitable.
Where will the dice fall? Wherever it lands will influence and shape publishing for years to come, and affect how consumers buy and read e-books and how publishers sell them.
In the end, the resolution came unexpectedly quickly: almost immediately after the DoJ filed suit, some of the publishers named as defenders in the suit began negotiating settlements, rather than enter into an expensive and protracted legal battle. In September, U.S. District Judge Denise Cote approved a proposed settlement offered by the DoJ to these publishers, resolving allegations of collusion and price-fixing.
The settlement required the publishers in question -- HarperCollins, Hachette and Simon & Schuster -- to terminate their agency contracts with Apple as well as agreements with other retailers, like Amazon, "as soon as each contract permits," i.e., when the contract expires, with an option for retailers to terminate the contracts themselves earlier. Then settling publishers and retailers can enter into new contracts, adhering to the DoJ stipulations.
Consumers are already seeing the benefits of these new contracts. Amazon has lowered prices on many titles by HarperCollins, for example, and with the holidays approaching, customers can expect the lowering of even more titles so retailers and publishers can take advantage of the shopping season.
And then there's compensation for past e-books. The three settling publishers have agreed to pay $69 million into a settlement fund, which will be disbursed to consumers through retailers. Stores like Amazon have begun notifying eligible customers by e-mail about refunds, which is expected to range from $0.30 to $1.32 per e-book either in account credit or as a check if requested. They won't arrive until February next year, subject to court approval. But consumers can find out more at EBookAGSettlements.com.
In the future, consumers will see lower e-book costs, even from non-participating publishers, who will need to discount to stay competitive. Retailers will be free of most restrictions on pricing, so Amazon is expected to drop prices on many best-selling titles, and competitors like Barnes & Noble and Kobo are predicted to follow suit.
Since the lawsuit drops most major restrictions retailers have had put on them, consumers may see some dramatic changes in the selling of e-books. Bestsellers used to retail for about $10 per e-book, but Amazon can now theoretically sell books for much lower. Look for the e-tailer to experiment with book bundling, flash sales drops or even titles giveaways altogether -- in short, its e-books strategy may begin to mimic its music-selling strategy, in an attempt to consolidate power in the e-books business.
Prices for books bought on iPads, however, remain a wild card. Apple has rarely entered the world of competitive pricing, and has little experience with sales and competitive discounts. Unless Apple prices its e-books to compete, its e-bookstore will remain a sideshow, and not a powerhouse of revenue and profits, like its iTunes store has become through powerful alliances and hardnosed negotiations with record labels.
In short, consumers should rejoice as a result of the settlement: in this case, the system worked to prevent artificially high prices from taking hold in the market. Lower prices means more e-books sold, speeding the industry ever faster towards the inevitable digital medium.
Of course, publishing overall is in an uproar with the settlement, with many insiders worrying about Amazon's continuing consolidation of power. Some continue to stand firm against the DoJ. Apple, Penguin and MacMillan, for example, refused to settle and soldier on in a separate lawsuit. But many, fearing the writing is on the wall, are responding. The Authors Guild, for example, issued a statement condemning the ruling, saying it turns the clock back to 2010, when Amazon sold 90 percent of all e-books.
The judge's approval of the settlement "essentially handed Amazon a controlling share of the market," said literary agent Gary Morris of the David Black Agency to the Los Angeles Times. "I wish the beneficiary was not a rapacious monopolist."
Others believe that publishing will become more conservative in taste in response to a market where it's more difficult to eke out profits. Still, more say the ultimate destabilization of publishing will benefit Amazon's own heavily-invested and thriving publishing arm.
"Amazon might want to crash the industry so they can dominate from the rubble," said John Evans, owner of Diesel, an independent bookstore.
Even the DoJ acknowledged that the ruling will likely have an adverse effect on the publishing ecosystem, ranging from authors to publishers to booksellers. It said much of the criticism it received on its proposed settlement "expressed a generalM frustration... from the evolving nature of the publishing industry -- in which the growing popularity of e-books is placing pressure on the prevailing model that is built on physical supply chains and brick-and-mortar stores," according to Judge Cote.
However, the regulatory body remains unapologetic, ruling that its job is to eliminate "anticompetitive, collusive practices" in the market, and that antitrust laws can't be circumvented to protect existing business models. "Even if Amazon was engaged in predatory pricing, this is no excuse for price-fixing," wrote Judge Cote in her order.
Unpredictable Roads Ahead
With its back to the wall, there's no telling how publishing will ultimately react to the ruling's consequences as they play out, particularly in relation to Amazon's growing might.
Not everyone believes consumers see lower prices. Some like Michael Cader at Publishers Lunch believe publishers can raise the price of their products, as a method to protect the innate value of their e-books. Publishers still have the ability to set list prices for their books, and nothing in the settlement prevents publishers from raising them from $10 to $19, for example. Amazon can still choose to sell titles at a loss to beat the competition, but it forces the Internet giant to be more selective over what prices to slash.
"Higher list prices could 'use up' a retailer's annual discount pool more quickly," Cader said. "It could provide some protection against devaluation in the marketplace of a publisher's biggest properties."
However, publishers, authors and other parties in the industry may pursue more interesting pricing strategies, since previous contracts with retailers froze out models like subscription-based pricing. They could, for example, pioneer models where subscribers pay a monthly fee to access an entire library of back catalogs and future works, or join a Netflix-like service for current bestsellers. There is tremendous room for creativity and growth in the chaos created by the DoJ suit, for those who choose to take risks.
In the end, the uproar in the wake of the settlement reflects the anguish and confusion of an industry still struggling to make the transition to digital. It underscores a fundamental problem in the market: how to convince consumers that the value of its digital product is higher than its current perception.
Like music, consumers are used to low prices for digital products, so they balk at higher ones. The technology of e-books will need to raise the bar to justify those higher prices, perhaps taking full advantage of the multimedia nature of the e-book. With digital, value can now be created in terms of access -- creating a subscription to an evolving book tailored to finely attuned tastes, for example. Either way, publishers must change the way they create value for consumers -- and let go of the hopes of a traditional business by the book, so to speak, as it has done for centuries.
The settlement is just one major seismic shift in this process. "By putting the legal approval on this settlement, the district court has pushed us over a certain kind of cliff," said Jonathan Kirsch, a Los Angeles-based author and publishing attorney, to the Los Angeles Times. "In terms of the real-life experiences of publishers, authors and readers, this will represent a fundamental change in how books are published and sold." It is the type of pivotal moment where either businesses reinvent themselves for a new age, or consign themselves to the proverbial rubble of history. ♦
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