What’s Next for eBooks After the DoJ Settlement?

Today was a big, big day for eBook fans! The Department of Justice agreed with everyone who has been screaming for three years that the “agency model” was unfair, anti-competitive and anti-consumer. They settled with several publishers, though Apple and Macmillan are still fighting the DoJ in court.

So, what did the settlement today do? And how will it impact the future of ebooks? Read on for my thoughts!

The Settlement:

I am going to defer to Wired here, as they quickly had an excellent breakdown of what the settlement states:

  • Terminate its current contracts with Apple within seven days of the court’s acceptance of the settlement;
  • Terminate any other contracts with e-book retailers that restrict the retailer’s ability to set final prices for books or contain a “most favored nation” provision prohibiting price competition, as soon as possible;
  • Renegotiate contracts with Apple and other retailers, with a two-year prohibition on any contract that prevents retailers from discounting retail prices (see below);
  • Notify the Department of Justice before entering into any joint ventures between it and another publisher related to e-books;
  • Designate an antitrust compliance officer and provide the DOJ with a copy of its agreements with any e-book retailers quarterly for five years.

Basically, the agency model isn’t dead or illegal. What the Department of Justice attacked was the “most favored nation” clause, as well as the price fixing. There is nothing inherently wrong with setting a split between publisher and retailer instead of a wholesale price. The problem is when the publisher/distributor dictates that the retailer cannot cut into their own profit margin to be a loss leader. In English, this means we will probably see discounting again soon, though it will probably be limited right now to the publishers renegotiating post-settlement, and not all agency-related titles. We are going to need a chart, and possibly an advanced degree, to untangle what will and will not be discountable for the foreseeable future!

For the news junkies, you can read the full press release from the Department of Justice here.

Where does Apple go from here?:

All joking about the non-sales of iBooks aside, I really don’t know what this means in the short term. The publishers who settled will all need to renegotiate with Apple. But Apple is currently fighting the entire lawsuit, so I am honestly unsure if Apple can or will renegotiate while that is an ongoing concern.

Practically, this means three major book catalogs may disappear from iBooks. If Apple feels so strongly that their terms (including the “most favored nation” clause) is legal, they won’t accept contracts with anything less. And if they do, does that weaken their argument that they didn’t do anything wrong? If there are any legal experts reading this, please let us know your take in the comments!

Lies, Hypocrisy, and a Dying Industry:

The proponents of the agency model in its original form claim that it was not only legal, but necessary. If they didn’t take action, Amazon was going to put them all out of business! Instead, they cut Amazon’s market share and saved the day! Except this is a specious argument that uses Amazon as the straw man, so that no one notices there is nothing supporting this theory.

Yes, in 2009 Amazon had a much bigger slice of the eBook pie than they do today. But to claim that is entirely from price-fixing eBooks is absurd. It ignores the release of the NOOK and NOOK Color, Kobo’s fight for market share and eventual acquisition by Rakuten, and the fact that the overall market for eBooks has grown tremendously. Amazon had a first mover advantage, but the agency model appeared literally months after the release of the original NOOK. Saying the agency model is the sole reason for B&N’s success is to deny the success of the NOOK as a product all by itself, and to imply that without even pricing no one would have even considered it. That is ridiculous, as we have seen B&N offer strong competition against Amazon on the hardware side, and there’s no reason they would not have been able to compete with eBook prices. Especially when you consider that B&N would have loved to get all those membership card toting shoppers to use the NOOK, but the agency model robbed them of that opportunity.

Also, there’s a satisfying feeling to see the hypocrisy of these big publishers catch up to them. They complained and whined that Amazon was too successful, and that it would eventually become a monopoly. So they attacked the basic concept of competition, stacked the deck against Amazon, and then were shocked that this didn’t go over well with the Department of Justice…the very same people who would have gotten involved if Amazon really WAS a monopoly! There is nothing inherently illegal about being successful, nor is it illegal to be a loss leader. It is, however, illegal to sit around in restaurants and make phone calls discussing how to actively prevent another company from doing business. Something Simon and Schuster, Hachette, and HarperCollins have learned painfully from this DoJ settlement.

I hate to say it, but this just exposes that publishing is rotting from the head. Editors will always be needed, but the publisher is becoming less centralized and important. I think the most important lesson that comes from this is that old publishing doesn’t know how to respond to new ideas. They didn’t innovate, they bullied, right up until they were caught. The history of commerce is full of companies that failed to respond to new ideas and changes in the world, and publishing is fast headed down that direction. Adapt or perish … choose wisely!

Are cheaper eBooks coming?:

Eventually, but I doubt it will be an immediate turnaround. However, keep your eyes peeled. I would not be surprised if Kobo, B&N and Amazon all throw big sales as these contracts are renegotiated. More importantly, I am excited to see what B&N and Kobo do with more pricing flexibility. B&N has their membership system, and they have the old Fictionwise membership as a model as well. Plus Kobo loves coupons and contests. Between them we could easily see some serious price competition, but in ways that won’t immediately hurt their margins or bottom lines.

I would also not be surprised if we see bundles, whether they are “buy the book, get the eBook” type deals, or simply more “free eBook with hardware purchase” deals. These are areas where B&N can be price-competitive with Amazon, and really leverage their physical stores. None of these things were possible, at least not easily, under the agency system as it existed. If B&N wanted to give away a title, they had to get the publisher to agree to give everyone a shot at a free title, because otherwise it would have tripped the “favored nation” clause that protected Apple. No matter how you examine this, this is a win for consumers and for retailers.

The Future:

I have no idea what will happen as the various pieces of the DoJ settlement expire. But I do think that in two years, the eBook market will have matured immensely, and even if Amazon is still the dominant player it will be a different book selling landscape. I don’t see anyone gaining the illegal upper hand that they gained in the original agency model, as that was the product of a specific player (Apple) entering the market at a vulnerable time.

More importantly, this a huge victory for the consumer. Most of us are not legal experts, but we aren’t dumb shoppers. It is easy to see when someone is stacking the deck against you, and the agency model was decried from day one as being anti-consumer. It feels good to see the government agree, and successfully defend shoppers from an unfair situation. Hopefully, as shopping, commerce, creation and publication change with the digital age, we will continue to see the Department of Justice step up and do the right thing!


Categories: eBooks, Editorials

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13 replies

  1. So why can’t the DoJ do the same thing to gas companies?

    When every gas station in town has the exact same price give or take 3 or 4 cents, regardless of brand, isn’t that price fixing as well?

    • I think it is because they all got together and did this at the same time, for the stated purpose of stifling competition and elevating one retailer (Apple) over everyone else.
      It isn’t the idea of prices being set, it’s the excess strings and clear collusion that came with it.
      Gas prices are terrible, but I don’t know enough about that industry to say why or how they work. :)

      •  Part of the problem with gas prices is the speculation on oil futures. This provides the means for a purchaser to essentially bet on whether oil will increase in price in the near future. So in the “contract” future buyers get the oil at the price negotiated, regardless of the laws of supply and demand. Since an oil futures buyer could in theory purchase sizeable amounts of oil futures, with enough of them they could affect the overall market. The reality is that this kind of speculation adds hefty amounts to the actual price of oil. You can thank Enron for lobbying to altering policy that reduced the Commodity Futures Trading Commission (CFTC) powers of oversight. That, and a few other trading changes in countries outside the US’s regulatory reach have also increased speculation and subsequent prices on oil.

        • That’s a really good point. Anything that’s a commodity is going to be a lot harder to regulate.
          The ebook situation, on the other hand, was the legal equivalent of the Yankees playing a little league team. This was a blatant case of collusion, where the DoJ had phone records, emails, and witnesses from restaurants all backing up the idea that these publishers specifically plotted ways to stack the deck and avoid lower prices. My dog could recognize that was unfair, and the extent of his daily mental exercise is remembering “paw” from “down” ;).

          • My point in bringing up gas prices is to take a general look at how the DoJ approaches everything. If they are going to weigh in on eBook pricing enough to get favorable results for consumers, which is admirable, they should weigh in even more forcefully on areas that affect consumers most critically.

            In a truly competitive market that didn’t involve price fixing, the smaller oil companies would sell their products cheaper than Exxon and BP or order to gain market share, then if they got too good at it, Exxon and BP would drop prices in order to regain their market share. There is no competition. What little the local gas store does to compete is pretty much a non-issue, because the markup on gas is just a few pennies per gallon. Some stores sell gas at a loss and it’s still not enough to notice.

            It’s great the DoJ cares enough about eBooks pricing models to take action when they violate the competitive spirit of business.

            It’s just a shame the DoJ doesn’t care enough to take on bigger industries where backroom deals are breaking us all.

    • If I understand this case correctly, part of (if not most of) the issue in this case was that Apple arranged a “Most Favored Nation” clause that guaranteed that the publisher would match the lowest price anybody else was retailing the same book in another market. So, if Amazon was able to continue to buy the books wholesale and charge $9.99, the publishers would have had to set that price on iTunes as well. Since they did not want to “lose” money, they all refused (at the same time!) to allow Amazon to have those terms on their store.

      Gas stations, on the other hand, are pricing their gasoline completely competitively – they are able to purchase their supply from anybody, and must set their prices based on their costs and on other gas stations in their area. And none of them are guaranteed that the wholesaler will cut their price to them if the neighboring station cuts their prices by a couple of cents.

      Publishers seem to be worried more than anything that lower ebook prices will devalue their bread-and-butter printed book market. Tough luck for them, I guess, but it’s an interesting point when Amazon uses their vast market share to manipulate the price of ebooks. Of course, Wal-Mart does this all of the time with lots of non-digital products…

  2. I think that the Times reported yesterday that Amazon announced plans to reduce their prices as soon as they possibly can, I think mostly for $9.99.

    • Not surprising. I think there’s a window before they can do it (once the settlement is approved by a judge) but I am sure there will be a huge $9.99 sale at Amazon, Kobo and B&N.
      Amazon is a given, kobo was pretty price aggressive before agency and will no doubt continue it, and B&N needs to for publicity reasons alone.

  3. Perhaps to make my point more effectively, I should have just reacted to the caption on the photo that accompanies this post.

    “Don’t mess with the DoJ”
    …unless you’re Big Oil, Big Unions, Big Insurance, or a number of other entities that continue to drag America down for every who lives here.

    • I get your point, and I don’t disagree, but this is a bit more simplistic than oil prices. It doesn’t sound like the DoJ had to work all that hard to prove the publishers were wrong. All the evidence was front and center. It’s not like the DoJ is a small town law firm-they can pursue more than one case at once. This one happened to be obvious and and easy “win” for them, so I am not surprised they are being vocal about their victory.
      Sent from my iPad

  4. I don’t know if Apple was part of the collusion or not – the legal experts seem to be stating that the case against Apple itself is weak at best, however, I DO believe that Amazon was guilty of dumping (in terms of price) to drive out competitors and their lower price were “falsely” lower and that (in general) consumers will see lower prices now, but those lower prices for consumers will end up in a smaller book market with fewer players for consumers, just as it did for music and I’m not sure this is a good thing in the long run.  My fear is that it will lead to a bland market driven by marketing types that churn out repetitive crap based on current market trends rather than a true variety of content.  This is EXACTLY what happened to the music market and it sucks.  Time will tell, however.


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