Antitrust enforcement gone wild, eBook edition

Antitrust enforcement gone wild, eBook edition

Summary: The Department of Justice is breaking up a conspiracy. The only problem is that the whole point of this conspiracy is to defeat a monopoly. So the DOJ winds up supporting a monopoly. Nice.

TOPICS: Amazon

If you've been reading along with this blog, you know that I think antitrust enforcement has gone too far. New examples pop up every day, but perhaps none more bizarrely circular than the one that has reentered the news cycle today: the eBook antitrust lawsuit, wherein the United States Department of Justice (DOJ) is beating up on book publishers for working together to get some leverage against Amazon.

Don't get me wrong, I'm a proud member of Amazon Prime and the UPS guy is the most frequent visitor to my home. But Amazon is the closest thing to a monopoly that the world of books has ever seen.

Yet, if the reports are to be believed, DOJ uncovered a conspiracy by several book publishers to chip away at Amazon's market dominance. They didn't conspire to set specific prices. They did, at least allegedly, agree over dinner at the excellent New York restaurant Picholine, to use an "agency model," where the publishers can dictate retail prices.

Again, to be clear, the publishers -- HarperCollins, Simon & Schuster, Penguin and Macmillan -- conspired to break Amazon's near monopoly in the eBook sector. When you put aside all the technicalities of the antitrust laws, what you get in the end is the government acting as a tool on Amazon's behalf. To its credit, Barnes & Noble is speaking out loudly against the DOJ on this.

Maybe next year the DOJ will try to break up the Amazon monopoly it propped up this year. Anyway, the publishing industry is dying on its own and doesn't need any assistance from the DOJ.

Topic: Amazon

Steven Shaw

About Steven Shaw

Steven Shaw used to be a litigation attorney at Cravath, Swaine &gMoore, a New York law firm, and is now the online community managergfor and the Director of New Media Studies at thegInternational Culinary Center.

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  • What's wrong with each of these publishers offering their wares on their

    own book/ebook websites? Oh wait nothing. Google would still find their books and lead everyone to them. They can completely outsource the hosting. Yeah no, there's a lot more to this than just breaking amazons monopoly. It is fixing price ranges if not absolute prices. And apple getting in to add 30% markup for no value add? I think not.
    Johnny Vegas
    • Outsource the hosting?

      When publishers choose an agency model isn't that EXACTLY the same as outsourcing the web infrastructure for selling their books? Of course it is! And this is precisely why ebook publishers chose the agency model over Amazon's wholesale model.
  • It is not illegal to have a monopoly

    Antitrust investigations are used to regulate anti-competitive conduct.

    If Amazon (or Apple) was using its market position to restrict competition (deny access to books, threaten new market entrants, leverage monopoly part of their business to enter new related markets, etc) then they should be investigated.

    In this case book publishers got together to discuss prices and selling model. Price collusion (or conspiring to) is generally illegal, for good reason. The proposed agency distribution model would have undermined Amazon's wholesale pricing model, most likely rising prices for consumers - not good under the Sherman Antitrust Act.

    I've some sympathy for the publishing industry. Much like the record industry (and printing industry before it, and...) they're under massive pressure to change resulting from modern technology, in particular the internet.

    Whilst change is unstoppable, rapid change is difficult to manage. Attempting to slow change through anticompetitive practices is often a managers first choice, but it carries significant risk.
    Richard Flude
    • But inspite of higher prices, the agency model results in less profit..

      for publishers.. so it was definitely not about making more money.. it was about

      a) breaking amazon's control of the industry
      b) not undermining the pricing model of physical books, which the ultra low pricing of eBooks by Amazon was doing
  • Wrong in this Particular Case

    From a consumer's perspective, obviously we benefit from the Amazon "monopoly" because the prices were lower than what has become the norm. That being said, forcing a model that raises the price is anticompetitive. They agreed on a price for all parties of 12.99, 14.99, or 16.99 based on the price of the book. So they did collude in prices, and then this was forced upon Amazon.

    As far as the monopoly is concerned though, this was before the Nook took off and much more importantly, before the iPad was even released. Now that the iPad has such a large market share of the tablet market the ability for Amazon to be a monopoly is challenged. Based on the document from the Department of Justice, and the non denial by Apple (insisting that price fixing broke up an Amazon monopoly), I think the case is pretty tight.
  • It's about more than just the price today

    The DOJ, FTC, and armchair quarterbacks like me are not really knowledgeable enough about the publishing industry to devise a meaningful regulatory scheme. Nor should we. But if I had to sketch out the future I'd say that protecting Amazon against being forced to raise its prices should be a very low priority. Amazon's deep discounting of content is likely to speed the destruction of the publishing industry quicker than anything else. It may be that in the short term the publishers' scheme raises consumer prices by a few dollars a book. But in the end this will at least make it possible for more books to be published for more time to come. Focusing narrowly on the price-fixing aspect (and really only a business model was agreed on, not actual prices, as far as I can tell) ignores the likelihood that the DOJ's strategy will bolster Amazon and in the end either kill off book publishing or, once Amazon has true monopoly, allow for radical price hikes.
    • What's the future relevance of publishers?

      It costs very little to produce ebooks, unlike their physical versions. The marginal cost is practically zero, the billing and distribution channels are the internet (using well established estores).

      The historical book publishing model is collapsing. Anyone could write a book and self publish, as they can for software.

      This new model might price out the publishers; known authors will make more money selling direct, new authors will have to take on the marketing burden (assisted by social networking sites). Publisher's margins maybe squeezed to a point where the industry becomes unprofitable. Alternatively they might come up with new ways to justify their value add.

      The publishing industry (as is the news industry, as is book retail, as is...) is at the start of a massive transformation. Whilst difficult to predict where it will go, I wouldn't be investing my money in the sector.

      As consumers we're likely to see greater choice (varying quality) at much lower prices. This I welcome.
      Richard Flude
      • "It costs very little to produce ebooks, unlike their physical..." WRONG!

        even an infant can figure out that this is a completely bogus argument.. the price to physically manufacture and deliver a physical book is a tiny portion of the price to produce a book.. $1-3 depending on the size of the run..

        whether it's an ebook or physical book the majority of the price is from..
        paying the writer, paying editors, artwork, advertising, page layout etc, etc, etc.. and eBooks have cost that physical books don't have... i.e. paying for someone and for the servers to transfer and maintaining files in all the varied file formats for each eBook store...

        I thought people had already realized by now that this argument is completely bogus and had stopped making it.. there is almost no difference in the price to produce a physical book and eBook..
      • Deja Vu

        The argument was made for CDs, massive saving from digital distribution now destroying physical distribution.

        $1-$3 physical cost per item is infinitely greater than zero. Then add distribution cost and retail mark-up.

        When exactly the same challenges were experienced by another publishing industry only a few years ago you'd think people could learn something from the experience. So bogus is the argument it's revolutionising an industry.

        If price isn't the factor maybe the adults can point to what is;-)
        Richard Flude
      • "distribution cost and retail mark-up"

        $1-3 is included in that cost.. and Apple, Google take 30% off the eBook sales...

        $1-3 does not equal to the $10 difference that Amazon took off of eBook price...

        the other thing is that the price of goods is based not on cost of production, but on consumer perceived value.. that's how you price a product.. by how much your customer values your product.. there is no real difference in the amount that it costs to mine for diamond and gold compared to steel, but diamond and gold command a higher price because people value them more.. likewise, eBooks rival physical books in many ways, why shouldn't they cost more than physical books.. you can carry a huge library of them with you at any time, they don't take up huge amount of room in your house to store.. can view them, re-download them on any number of your devices etc, etc

        bottom line is that the price of book will be set by what buyer are prepared to pay in the end.. no matter what publishers may try to do with the price.. if the price is too high, no one will buy them and the price will go down.. that's how a free market works..
        • the collusion prohibited free market, that is the point

          "bottom line is that the price of book will be set by what buyer are prepared to pay in the end.. no matter what publishers may try to do with the price.. if the price is too high, no one will buy them and the price will go down.. that's how a free market works.."

          The price fixing is not allowing elastic pricing and the free market to work. That is the point. For ebooks the sweet spot on the supply-demand curve is at $6, not $10-13. The publishers are not interested in a free market...

          Their plan has been to shift the supply-demand curve. Their theory is that if the ebooks are priced higher, eventually we will value them at that higher price and the demand will eventually increase at those elevated prices.

          Also the publishers want to safeguard their real money making machines: hardcovers. The collusion was not successful in shifting our perspective about what an ebook should cost, but it was in protecting hardcover revenue which remained stable while ebooks have cannibalized the paperback market.

          Ebooks have less value than pbooks because you can't resell them, trade them, borrow or lend them (except for a very under very limited conditions), or donate them. Most people perceive ebooks as having inherently less value which is why actual free-market supply/demand elastic pricing would set the prices on ebooks significantly cheaper than they are currently.

          Furthermore the distributor cost (what amazon makes on ebooks) is similar for pbooks as well! You can't claim that as a difference to level the playing field because after that the pbooks still have printing costs, shipping costs, storing costs and unsold copies returned or pulped.

          FunkDoctor Spoc, in every way your arguments are deeply uninformed, superficial and flat out wrong.
      • Back in the real world

        "the other thing is that the price of goods is based not on cost of production, but on consumer perceived value.. that's how you price a product.."

        I don't believe you've ever priced a product. Demand for most products is elastic, ie demand increases as prices decrease. Profit is maximised where margin and demand is highest. It is very difficult to accuracy predict demand, which is why cost plus method of pricing is often employed.

        The above method is shown in the wholesale pricing model offered to Amazon for eBooks, and the savings passed onto consumers. This is done in most markets, for most products everyday.

        You also misunderstand free market operation. The price of books is in large part set by the publishers, as they control the copyright. Retail book prices don't fluctuate as they do in very competitive markets (eg Stock Exchange) because it isn't one. Copyright limits the supply of directly competitive products, longer term challenge is supply of substitute products.

        You offered the suggestion that because of the benefits of eBooks, and here are many, that an argueemnt can be made that they should cost more than physical books. The reality is they aren't, and the saving are quite large. The real world experience is opposite of your theory, typically a time to reassess.
        Richard Flude
  • I have to agree with the others...

    Apple wanted the monopoly all to themselves and they went ahead and conspired with the publishers to break Amazons Hold on the market...

    Amazon represents the single biggest threat to the Apple ecosystem and their $9.99 pricing for new releases was fair but the publishers would rather have their books stolen than offer them at a decent price!
    • I disagree about Apple

      Apple didn't want a monopoly in the eBook industry, they just didn't want to compete with Amazon on eBook pricing. So they pushed for a retail method that would abolish Amazon's price advantage. The method ended up being agency model, which forced an eBook to be priced the same across all retailers.
      • Missing Price Agreement

        Fit the fact Apple cannot be undersold by agreement with the publishers into your post.

        Takes on a bit of a different meaning.
      • no..

        that Apple cannot be undersold does exactly what nab123 said it ensure that Apple will compete.. they didn't asked for a lower price.. they asked for the same price.. that means that all Apple has to compete with is user experience to get users to their store..
  • Repeal the Antitrust Laws

    As I seem to write here about once a week now, our anti-trust laws are ill-conceived, arbitrary, ex-post-facto laws that should be repealed. There are no objective criteria that distinguish legitimate competitive actions from so-called "anti-competitive" actions. The guiding principle here, as in all government action, should be the use of physical force or fraud. Any business action that does not constitute the use of physical force or fraud should be legal. A group of companies deciding to consult with one another before setting prices is a perfectly legitimate action and violates nobody's objectively-defined rights. A business that becomes a monopoly, not because of governmental restrictions on competitors but because people chose voluntarily to buy their products, are not harmful or dangerous, nor should the business choices available to them be different because everyone chose to buy their products.

  • A different way to think about this...

    might as competition between the "channel operators", Amazon and Apple. If you look at it that way, it makes a lot more sense.

    Remember, to begin with the publishers have a legal, monopoly right to control where, how and for how much their books are sold - they do, after all, control the copyrights for the books they publish (in most cases). Further, publishers do sell different books for different prices all the time, and always have.

    Prior to Apple entering the book distribution business, Amazon dominated this industry because they had the most widely used ebook reader. Amazon insisted on a wholesale model for ebooks that paralleled their model for physical books. When Apple introduced their iPad, they already had in place an agency model for distributing software (apps) to their iPhone customers and intended to extend this agency model to their new iPad as well. Apple then offered ebook publishers essentially the same agency distribution for ebooks that they had in place for apps. Apple did require MFN pricing from the publishers, something that is rather common in the retail sales industry.

    Once Apple had their agency model in place, publishers could effectively choose between a wholesale or agency model for distribution of their ebooks. They chose the agency model and Amazon was forced to offer publishers similar terms or loose their copyrighted content. With the agency model publishers control book prices, something that their control of the copyrights certainly entitles them to do.

    To suggest that the agency model, even with Apple's MFN terms, restricts competition between books in the marketplace based on price is obviously untrue. Books, including ebooks, have always been available at a variety of prices. If you want to read a cheap book, plenty are available. Apple even offers some 30,000+ Project Gutenburg titles at a price of 'free' on the same storefront that sells publisher books with the agency model. Now, if you want to read a particular book title for which a publisher controls the copyright, you will have to pay what the publisher demands (or maybe check it out from your public library...). Isn't this exactly the kind of pricing control that copyright is supposed to protect?

    As for the ability of Amazon and Apple to compete for the business of distributing publishers' copyrighted ebooks, there is nothing that prevents Amazon from, for instance, offering an agency model with a smaller agency cut to get publishers to sell their ebooks through Amazon instead of through Apple. And vice a versa.
  • Consider the creators...

    First, a book needs an author. And somehow I can't imagine a John Steinbeck or Ernest Hemingway groveling for a 35-cent royalty on an Amazon 99-cent eBook. That pricing model works for genre authors who can knock out a series of titles at the rate of six a year. But important literature can take years of work on a single title. The price structure needs to allow for this, which is where perceived value becomes a factor. But wholesale pricing conditions buyers to expect cheaper prices for everything, and that results in a race to the bottom in literary quality.

    To give an example, because of its acceptance of self-publishers, Amazon easily can list and sell 100,000 eBooks of the 99-cent variety. Selling one each, Amazon makes $65,000. But each of those 100,000 authors makes only 35 cents.

    This is why Kathryn Stockett was turned down by 60 publishers before "The Help" became one of the most highly praised books and movies in recent memory. It's why I believe authors and publishers should be free to control how their products are priced and delivered, and the agency model is better suited for that.
  • We're confusing the issue here......

    Amazon, Apple, etc. are just distribution methods (albeit popular ones) for selling content. The copyright holder has the right to charge whatever he wants for his work. Colluding with others to price fix similar types of content is only anticompetitive if it excludes another from being able to offer their own content of a similar quality at whatever price and profit margin they want. An example would be if a publisher used its large size and cash reserves to artificially lower prices to the point where no other publisher could afford to compete and ultimately would be driven out of the market. That certainly isn't the case here. If anything, by setting prices high, they are creating the opportunity for someone else to come in and steal their market share. If their content is so much better (or their reputation/marketing is) then customers will be willing to pay their prices.

    It is actually a combination of factors that is making it really difficult for a new author to make money off their work. Neither type of model (agency or wholesale) by itself is the cause. Traditional publishers are very risk conscious about spending money on marketing new material that does not have an obviously high chance of selling well. When they choose to sell that material at high retail prices, it is justified by the high quality of the content (or high marketability anyway). That is why it is so difficult for an unknown author to convince a publisher to take them on. But while it is fortunate that there is now an easy alternate way for the author to "self-publish", that option has its own set of obstacles to be overcome. Set the price too high and you run the risk of making very few sales. Set the price too low and consumers may begin to devalue your work. Being forced into a wholesale pricing model in this circumstance removes the ability to adjust the price and find the right balance. Also, the benefit achieved through making the content more easily accessible is offset by the difficulty in differentiating the product enough for it to be found amongst all the arguably "garbage" type content cluttering up the same space. When the distribution channel forces high quality material to be artificially priced at the same level as garbage, the consumer is left to sort through it all and a lot of good content will never be seen. While self-marketing through social media and other low cost methods is always an option for these authors, a publishing deal is often still the best way to bring great new material to the mass market.