The Collusion Case Against Publishers

I was asked what my thoughts are about the US Justice Department telling Apple and five major publishers (including Macmillan, where my Tor books are published out of) that it plans to sue them for collusion regarding ebook prices. My immediate thought is that if all of them were in fact stupid enough to have colluded, then sue away, United States Justice Department. If they were dumb enough to collude, then they get what they get.

My next thought, however, is that I’ll be interested in seeing if the case can be proven, because I don’t think they had to act in concert. That Apple would be aware that publishers would be desirous of agency pricing in a general sense is not hard to imagine; Apple doesn’t enter a market without knowing the players and how to leverage themselves to make a maximum splash and receive a maximum benefit. Once Apple made it known it would accept agency pricing (but not selling books at a higher price than other retail competitors), the publishing companies didn’t have to act in concert, although one of them had to be willing to bell the very large cat called Amazon by moving to the agency model.

I’ve long had a personal hypothesis — not based on any inside information, but simply my own read on the matter, I should be clear — that the reason it was Macmillan that challenged Amazon on agency pricing was that Macmillan is a privately held company, and thus immune from being punished short-term in the stock market for the action. Once it got Amazon to accept agency pricing, the other publishers logically switched over as well. This doesn’t need active collusion; it does need people paying attention to how the business dominoes could potentially fall.

Again, maybe they all did actively collude, in which case, whoops, guys. Stop being idiots. But if they did not, I suppose the question is: At what point does everyone knowing everyone else’s business, having a good idea how everyone else will act, and then acting on that knowledge, begin to look like collusion (or to the Justice Department’s point, actively become collusion)? My answer: Hell if I know, I’m not a lawyer. I do know most of these publishers have a lot of lawyers, however (as does Apple), and I would imagine they have some opinions on this.

The Wall Street Journal article I point to above notes that there has been discussion of a settlement, and specifically that “One idea floated by publishers to settle the case is to preserve the agency model but allow some discounts by booksellers.” I would not be entirely surprised if in the end, for what everyone involved would claim is for entirely practical reasons, and with a canny rhetorical nod toward “creating a vibrant market and protecting consumer choice,” there is a settlement along these very lines. I suppose we will see.

The Justice Department is nominally working in the interests of the American people in this case, but this is also something of a proxy battle between these five publishers (and Apple) against Amazon; a continuation of the fight, by other means, regarding agency pricing, begun in 2010. With regard to that aspect, I know people wonder whose side I’m on, not with just this but in a wider “publishers vs. retailers” sense. I think this is a fundamentally silly question, because we’re not watching a football game here. People who view this somehow as a binary “us against them” argument likely have a view of the publishing world that is most politely described as “charming.”

Look: I have work at Macmillan (my Tor books) and at Penguin (my Rough Guide books), and at HarperCollins (an anthology I contributed to). I also have several works at Audible and Brilliance Audio, which are owned by Amazon (Amazon has also recently launched several publishing imprints, becoming a “traditional” publisher itself). Concurrently, a disproportionately large percentage of my sales (relative to authors in general) come through eBooks, and Amazon sells the majority of those, and sells a fair number of my print work, too. I also sell a very healthy number of books, electronic and otherwise, through Barnes & Noble and independent bookstores, who have their own set of concerns about both Amazon and publishers. On top of this many of my publishers, large and small, also have direct retail sales channels complementing their sales through retail. My work sells through all of those channels.

I have obvious professional and economic interests with everyone above. From my point of view, who are the publishers of my books (and the books of others) and who are the retailers is already jumbled, in a way that’s not necessarily obvious to outside observers. No matter who “wins” a particular argument up there at the level of the corporate and governmental titans, there’s going to be fallout for me as a working writer. There’s also going to be fallout for readers and customers, since however you classify a corporate entity, as a publisher or a retailer, their corporate bottom line does not always (or sometimes even often) coincide with your own interests.

The question of whose side I am on is simple and obvious, to me at least: I’m on my side. My side wants my work available to readers in a way that that is affordable and easy to get in whatever format they prefer while at the same time allowing me to make a living doing what I do. In a larger sense, I’m also on the side of other writers, so that the end result of all this punching back and forth is not that authors are obliged to take contractual or retail positions that are detrimental to their interests, either as businesspeople or rights holders. Basically, my side doesn’t want anyone else to screw up what I see is the actual goal of all of this as a working writer, namely, connecting my words to readers, and their cash to me.

So my side is watching all of this with interest, as it does with every publishing event that has an impact on how it does business. If any of you thought the life of the writer was just sitting in a quiet room spinning stories, I say unto you: Ha. You crack me up.

75 thoughts on “The Collusion Case Against Publishers

  1. Hi John,

    I’m just curious. As it seems many e-book prices rose on Amazon after this agency model switch, did you, as a writer, see any extra income? A lot of the articles I’ve read about this give me the potentially erroneous assumption that the publishers are just pocketing the extra cash.

  2. My typical eBook contract has my royalties based on a cut of the net to the publisher, not from a straight percentage of the list price. Thereby, if the price goes up, my royalty goes up. Of course, if the price goes down, the royalty goes down, too.

    In a very general sense my ebook royalties have gone up recently, but the the price of my ebooks (mostly pegged to the paperback edition price) has remained constant for years (Fuzzy Nation, which is in hardcover, has not earned out and so I don’t receive royalties for it yet). So in my case the increase in royalties from eBooks has to do with additional sales in the format, not a rise in their price.

    This brings up the point that, incidentally, that the switch to the agency model didn’t automatically raise the price of most ebooks, many of which were already below the $9.99 price point of contention, such as mine were. The majority of my eBooks are priced $9.99 or below.

  3. A very technical legal case, I would think, bringing in issues like collusion and price fixing. One of the things I thought when it all started in 2010 was how difficult it is for companies to deal with paradigm shifts, especially ones that involve technology like we’re seeing with ebooks. Publishers want to apply an old pricing model on a new technology. Booksellers/retailers and self-published writers want flexibility to adjust prices as they see fit. And it’s no secret that book publishers were trying very hard to force a higher price onto ebooks in general just so the public wouldn’t get used to the concept of cheap books. In that respect, I think we’re seeing their efforts at an agency pricing model as a complete failure in the marketplace.

  4. Semirelated question. Is there a reason that agency pricing makes sense for e-books but not for print books? Or, I guess, since there is obviously a reason, what is it? and since tone is hard to read in email/comments, these are actual questions asked in a “where’s the bathroom?” tone of voice, not a “why did you vote for [X]?” one.

  5. As a scientor, maybe you could answer a question a bunch of us keep kicking around: It makes sense that e-books should cost less than hardcopy books, since there is not material or printing costs and vastly decreased distribution costs,not to mention warehousing costs for the seller. Approximately how much does this save the publisher? Just how much should I reasonably expect to pay for an e-book, allowing the writer and publisher a reasonable return on their work?
    By the way, I love the thingsI learn from your blog beyond SF. And your cat is GREAT!

  6. As another example of this, I posted a blog entry about a similar topic (though my focus is different than yours – mostly about Amazon’s maneuverings) about forty minutes after this went up… but I wrote mine on Tuesday.

    Good analysis, as always.

  7. Angie Boyter:

    “Scientor”?

    The cost question has been asked and answered constantly, and the answer is a) printing and distribution are a smaller share of overall production costs than people suspect, b) electronic distribution is not actually entirely zero-cost, it does require infrastructure, c) if a sufficient number of people will pay “x” for something, you price it at “x” regardless of production costs, as there is no law that says objects for sale must be priced in relation to their production cost. A larger expansion on this discussion would be largely off-topic, however, so let’s stay focused, please.

    Brian Ledford:

    You’ll have to ask an actual publisher about why they chose an agency model. My assumption is they chose it to have some control over pricing.

  8. @Angie – I publish a series of anthologies – The Crimson Pact – in both print and digital formats. For me to sell it at Amazon in print (see note below) and keep the author’s cut the same, I have to sell it for approximately $12-$15 more. That varies because of page count – which doesn’t make as big of a dent in eBook costs. (See second note)

    Note 1: That includes the cost of having it listed on Amazon. Getting it directly from the printer to me would be cheaper… but then I would be warehousing and shipping… yuk.
    Note 2: AMZ *does* charge a delivery fee based on file size.

  9. @Angie & @John – To elaborate on John’s point, if I were a bigger operation, I *would* do product fulfillment myself, in which case each print book would be less. And I’m also paying a lot of folks – including myself (I pay for advertisement, eBook conversion, etc) – on a purely royalty basis, which skews the model a LOT.

  10. Very silly question: what is agency pricing?

    Google reveals a lot of arguments *about* agency pricing, but so far only one attempted *explanation* of it – and not a good one.

  11. I was working at a New York City publishing company (not one of those the Justice Department is considering action against) in early 2010, when the agency model situation played out, and my limited experience matches Scalzi’s hypothesis: People knew that Apple was talking to publishing companies, and they knew that the agency model was emerging as a topic of discussion, and while they may have been curious about what was going on between Apple and other publishers, they didn’t strategize with each other, because they didn’t have to.

    OTOH, I know somebody who used to work at one of the companies being looked at who swears that there WAS active collusion. So we’ll see.

  12. My interests and side on this is for me as well. I am not concerned that publishers or authors get more money, I want the product as cheap as it can get. So, when Apple and all did their thing I noticed that many if not most ebook prices went up. Of course I fall on the side of Amazon in this case. I am sure JS can appreciate it this in that when he buys other products and services he wants them as cheap as he can get them and if a outside angency gets together with the providers of those products and services and the result is a raising of prices…..

  13. I like to buy my books, because I like to support the authors whose work I enjoy. I don’t really want to get into my views of ebook prices, because I too don’t want too spark the same tedious ranting, although I suspect it might be coming John. I’m interested to see how this plays out. I would welcome more discounts on ebooks, obviously, but not at the expense of the writers. That includes anything that would adversely affect publishers ability to publish and pay the writers. I will say I don’t really trust or like amazon’s business model. which seems to me to be, “We want to sell everything to everyone everywhere, and we are willing to sell things at a loss to us to drive our silly competitors out of business.” This might be good for consumers in the short term, but not in the long term. I know this thread isn’t really about Amazon’s business model, but that’s gotta be at least partly where this is coming from, right?

  14. @Scalzinator:
    You wrote, “At what point does everyone knowing everyone else’s business, having a good idea how everyone else will act, and then acting on that knowledge, begin to look like collusion (or to the Justice Department’s point, actively become collusion)?”

    I’m almost certain the DOJ has to show explicit collusion, not just implicit. That is, parallel pricing, and parallel price moves (think of airline prices, and the constant articles about “all the carriers out of Pittsburgh raising fares by $10) aren’t illegal. Looking like collusion doesn’t cut it. But if one carrier calls another and says “we’ll raise prices $10 if you do,” that’s illegal.

    The fact that the DOJ is bringing this case probably means they think they have that evidence. The DOJ can hand out “get out of jail free” cards to colluders who turn state’s evidence, and they do things like bug hotel conference rooms (http://en.wikipedia.org/wiki/Lysine_cartel), so they have some effective ways of gathering such evidence.

  15. Yep:

    “I am sure JS can appreciate it this in that when he buys other products and services he wants them as cheap as he can get them”

    Actually, I frequently buy books at my local independent bookstore for a price that higher than I could get them elsewhere, because I believe in the long-term utility of having a bookstore near me, and I like the idea of keeping my retail dollars local when I can do so. In a general sense, price point is a consideration for me when purchasing goods and services, but it’s not the only consideration, nor is it, many times, the primary consideration.

    So, no.

    Incidentally, Yep, strictly as a rhetorical issue, you have now had an example of why assuming that everyone agrees with your baseline assertions as a method to bolster your argument is not necessarily the best way to make an argument.

    Marc:

    “The fact that the DOJ is bringing this case probably means they think they have that evidence.”

    Speaking as a taxpayer, I would certainly hope they have that belief, otherwise this will be an expensive fishing expedition. However, believing they have the evidence is not the same as a) actually having the evidence, b) being able to use the evidence effectively in a court of law. Both of those are significant factors in this case.

  16. Yep, inasmuch as you’ve already shown that you’re a poor modeler of my decision making, why do I care that you doubt what I’ve said? Doubt it all you like, you’re still wrong. And now you’re wrong twice.

    You’re also not paying attention to what I actually wrote. As I said, price point is an issue, but it’s one among many and not always the primary one.

  17. @ brian ledford
    My own assumption is that it has to do with book-keeping, money flows and risk management.
    With books I assume money flows from seller to publisher for the stocks they receive, and the consumers pay the seller to receive the book. The seller also has stock which costs money to maintain which is an incentive to move it.
    With ebooks, there is no stock and less incentive for the seller to sell any specific book. At the same time money first flows from the consumer to the seller, from which the publisher is subsequently paid its share.
    If I am correct in this in the ebook market the publishers (and authors) carry nearly all the risk, while in the physical book market the retailer at least shares some of the financial risks. Which could even be true with Amazon keeping minimum stocks and offloading as much of the burden as possible to others.

  18. Fair enough, I was wrong in assuming you ever shop by price looking for the cheapest price. My bad. Whether I am alone in this or not, I do shop by price, finding the products and sevices I want at lowest price that is convenient. Just call me crazy I guess. ;-)

  19. @Scalzi:
    I agree entirely with your caveats. Might the DOJ sue, or threaten to sue, when all they have is shaky evidence, thinking they can force a settlement? Seems possible.

  20. So the publisher picks the list price, and the retailer gets a standard cut? I think I’ve got it.

  21. @Yep,

    Your error seems to lie in assuming that the only two positions are “never” and “always”, and when someone says “not always”, you take it mean “not ever.” Since most of us make more than one purchase in our lives, there does lie some middle ground between those two points.

    For example, I’ve bought several books this month. In one case, I bought an ebook for $12.99, knowing full well that it’ll eventually be available cheaper in paperback, because I wanted the ebook version and wanted it immediately. In another case, I bought a hardback for around $25.00, knowing that I could get it faster and cheaper as an ebook, because I wanted to support my local bookstore. And in a third case, I bought an ebook for $9.99, because the price had finally dropped enough to make it worth my while.

    Three choices! Different reasons for accepting the price point on each! Amazing!

  22. Yep — You’re not crazy, just potentially short-sighted maybe in not applying the “what is the outcome when everyone applies this principle” question. The result is usually a race to the bottom in quality through corner-cutting, downward wage pressures, etc. resulting in a depressed local desert, and lower quality goods sourced from the places with the lowest workers rights and environmental protections.

  23. To the extent that this is a legal issue, I set aside my 15 years as a paralegal, where I specialized in researching & writing California State Appellate Court and Supreme Court motions and Writs, and my years of training on Copyright issues by the National Writers Union and my years at $110.00/hour consulting (with my wife) for major Patent Law firms.

    I now delegate all legal questions to my son, who earned his JD and passed the California Bar at age 21, and was a university Adjunct Professor teaching Advanced Business Law at 22. Also, he’s a huge John Scalzi fan. And Mr. Scalzi was kind and attentive to him, at a LosCon where Mr. Scalzi was GOH, which to this day makes me grateful.

    To the extent that I’m a novelist and short fiction author with oodles of self-promotional stuff to say, which I don’t at this moment, I am keenly interested in seeing what happens. There’s no point in making a prediction; I reserve that for my published fanzine column of the future of Intellectual Property Rights when humans and computers co-create, which my son is rewriting for a law review, anyway.

    Then I have two law firms retained to get my teaching job back. I was massively attacked for reporting sexual harassment and, as you may have seen in major media. the Los Angeles Unified School District is astonishingly unwilling to fire teachers who are sexual predators. Then the student I reported severely injured me, and was convicted of criminal Assault & Battery. I am in pain as I write this. But retaliating against me as a whistleblower, that gets priority treatment by the nations’ 2nd largest school districts head of HR, personally. Go figure.

    But the latter rant has almost nothing to do with ebooks. Except that collusion keeps cheap ebooks out of classrooms. Except that I was illegally audio recorded in my own classroom. My Union Reps were startled.

    Makes me wonder. Whose novel am I in?

  24. A: don’t feed the trolls JS. This might be one of “those” threads. . .

    B: I would say Occam’s Razor would dictate that they didn’t actually have to collude in this case to create a situation that is wholly indistinguishable from collusion as you touched on.

    C: While printing and distribution of physical books might actually be a smaller share than we think as you mentioned, I am not sure you are correctly calculating carrying costs. If there needs to be 1 book on every shelf in every bookstore and then .5 books in a warehouse for every book store to resupply the shelves, those books still cost money. You would do a WACC calculation to see what those books cost the supply chain every day. Accounting will tell you who is carrying the cost here, but either way, someone is certainly. It gets pretty expensive.

  25. I’m of two minds. One, I think the agency model pricing is bad, and I think the publishers colluded among themselves and with Apple. Two, I think that Amazon is acting in Amazon’s interests, not my interests, but I believe my interests and Amazon’s intersect at this moment. However, I also know that my interests and Amazon’s are almost certain to diverge. So, do I back Amazon, knowing it gives them enormous ability in the future to act contrary to my interests? Or do I back publishers, whose interests do not intersect with mine now, and I don’t see it in the future? I lean towards Amazon, for that reason. Publishers are embracing ebooks the way the music industry embraced digital music, inefficiently, distrustfully, and sometimes with active hostility.

    I know that publishers wanted windowing, I’m against that. I don’t generally agree with the way publishers price ebook editions, best sellers aside. The bottom line is, the only reason I would err on the side of publishers is that they most closely align with the interests of authors, whom I want to support.

  26. My impression is Amazon STILL discounts ebooks (even ones by publishers using the agency model). Am I wrong? I mean it’s not practical to pull up every ebook by those five publishers to see, and apologies if it’s a stupid Q….

  27. We are all on the side of the law, and justice. It is not necessary to prove intent in order to prove that a crime was committed. The evidence will show whether they are guilty or not.

    IIRC, the DoJ slowed down drastically in antitrust activity during the Bush administration, and have recently become tougher on things like collusion in pricing. It will be interesting to see how this shakes out.

  28. In reading the article more carefully, I see that in order to gain access to the iPad, Apple required publishers to agree to its agency pricing model, and also that publishers must require other booksellers to conform to its price. HOW IS THAT NOT COLLUSION?

  29. Hm… Here’s the thing for me: at first I wanted to *excuse* any (potential) collusion as “…but they were actually protecting the book market! If Amazon had continued to build on its 90% e-book share there would already be one and only one major bookstore and e-bookstore in the US, and the move to agency ensured that Amazon’s deep pockets wouldn’t be allowed to simply buy this dystopian future into existence.”

    But regardless of whether the intent and outcome was to stop an abusive monopoly, monopolistic collusion is still bad.

    So, the question remained: “Was there illegal monopolistic collusion?” There are two prongs to that. One, as our esteemed host points out, is that you have to actually prove collusion. But the other prong is showing it to be the illegal act of a monopolistic cartel. (I can collude with two of my friends to boycott a film, but there’s nothing illegal about that.) But I don’t see how the show fits here, as Amazon had the 90% e-book market share, and a monopsony buying position for both e-books and online book sales. (A position it has abused more than once, without apparent DOJ interest.)

    Amazon.com’s PAC doesn’t look too interesting:

    http://www.opensecrets.org/pacs/lookup2.php?cycle=2004&strID=C00360354

    But its lobbying activities are more significant and interesting:

    http://www.opensecrets.org/lobby/clientsum.php?id=D000023883&year=2011

    More than $2 million in 2011 alone in lobbying. I guess they might be getting what they’re paying for, here. (Down from the $8.5 million in 2001, when they were fighting state sales tax issues, but fairly steady growth back from a low in 2002.) I didn’t see any lobbying activity from Macmillan.

    Anyway: the thing which really strikes me as I think more about this is that the DOJ seems to be focusing on the clause in the contract with Apple which says that nobody else can have a lower price. The reason this strikes me is because I have at least some remaining functional short term memory, and know that Amazon itself includes language in its KDP agreement that penalizes authors whose books are available elsewhere at a lower price. (Or even when Amazon’s computers erroneously think this is happening, as appears to be the case for Jim C. Hines recently.)

  30. My problem with ebook pricing is that the pricing isn’t predictable enough for me to be able to make choices about when and how to acquire a particular book. In paper I know. I buy hardcover if it’s sure to be a keeper or I can get it signed or regift it (it’s fine to read a book before giving it as a gift in my family). I know it will be less in trade paperback if I wait a year or so.

    Ebooks don’t seem to have the same price point levels. The “hardcover” ebooks are about the price of a trade paperback, but the “trade” ebooks don’t drop down to the mass market pricing. In fact, the ebook price is often higher than a discounted trade paperback.

    I like ebooks. I commute by bus and train. I love that I can just keep my kindle in my purse and always have something to read. I love downloading The New Yorker every Monday to read on the way to work.

    What I would like is for the ebook to come with a coupon for a discounted copy of the hardcover. And to be able to pay some sort of transfer fee to be able to give something I’ve read and am done with to my mother or another friend.

    And on the collusion – my guess is that it went down like you said, but that there was some sort of contact to confirm details before things were announced to make sure that no individual party was going to blow the whole deal for everyone.

  31. @Kendall, I am not sure if Amazon still discounts them or not. I suspect there are some that they can. But others they clearly say the price was set by the publisher. As a consumer I noticed that many prices inched up after the Apple ordeal.

    @Sam, I suspect pricing on ebooks will not lead to an evironmental crisis but I do agree with what your saying in general.

    And to be clear, I do not see it as a black and white issue either. This is not a name-brand vs generic pricing issue. This is about the pricing of the same name-brand, in this case a novel and wanting to buy it as the cheapest price possible.

    In one major regard the whole ebook thing has to be benefiting publishers and authors in ways that they did not exist before. How? Simply because there is not a second hand market for ebooks. Before ebooks took off for me I would typically buy my books used at Half Priced Books. Buying used books does not benefit the publishers or authors. If I am wrong here let me know. I have found myself buying books on my kindle that are 10-15 years old or older than I am sure would be readily available at the used book store. But I like having the book in ebook format. Having noticed this “problem” I have starting balancing between buying a used paperback and buying the ebook. However, if ebook prices continue to inch up I will lean more to buying the cheaper used book, which ultimately does not profit the publisher or the authors.

  32. Catherine: “I see that in order to gain access to the iPad, Apple required publishers to agree to its agency pricing model, and also that publishers must require other booksellers to conform to its price. HOW IS THAT NOT COLLUSION?”

    It’s a little more nuanced. Apple’s terms required publishers to not allow their books to be sold for a cheaper price elsewhere. Macmillan, wanting to sell its e-books on the iPad, agreed. So, Macmillan approached Amazon and said, “Sorry, but we are now contractually not allowed to sell you our books at the previous terms. Some options we still have are to 1. offer you the books on the same retail pricing terms as Apple’s or 2. delay publishing to Kindle for a few months after release in order to prevent being in breach of our contract with Apple.”

    Amazon responded by pulling all of Macmillan’s books — print and e-book, both — from being for sale. Then Amazon eventually chose option 1, and has since raked in huge profits from its 30% commission. (In contrast to the many millions it wanted to lose to buy a market monopoly position.) The net result has been: Nook, Kobo, iPad, and other tablets and readers making for a more robust and competitive e-book market. (And also Amazon deciding to spend its money on starting up publishing imprints, and picking smaller targets for its bullying, such as most recently IPG. And by copying the move by including “no lower prices” language in its KDP agreement.)

  33. I’m really curious to see their evidence in this case.

    My grandfather worked for Shell Oil back in the day, and price fixing was rampant in the industry, but when one of his friends became a whistleblower, they simply fired him and their lawyers ran circles around the guy.

  34. If the supplier sets the retail price by the seller, that is a monopoly. I have been waiting for this shoe to drop.

    When are we going to get POD (print on demand) books ? I thought that POD was going to be all the rage a couple of years ago. Have ebooks killed the POD books, I hope not ? Or is it the cost of POD books is much higher than expected ? I have already not purchased a couple of books because they are ebooks only.

  35. Sam M-B: you haven’t answered my question. You’ve just rehashed a bunch of irrelevant history that everyone already knows. If one retailer makes an agreement with all major suppliers that a product can’t be sold at a lower price by other retailers, that’s price collusion, right? How could it not be? What is the definition of collusion that makes this ok.

    Also, there is no such clause in the KDP publishing contract, and even if there were that would be a separate case. As a courtesy to its customers, Amazon will price match its books with competitors, if the customer brings this to their attention. That’s not price collusion.

    I don’t even see the question as being “was there price collusion?” It seems obvious that there was. The question is will it bring about meaningful change in the publishing industry. It seems unlikely, and that anticompetitive practice will continue to be business as usual.

    In many ways, this looks a lot like off-label marketing enforcement against the drug industry. The companies pay huge fines–they don’t really care how huge–and keep doing what they do. Apple wants to settle this case. They settled another antitrust case just a few years ago, and they’ll settle this one, as well, once they find the right set of numbers. Big corporations tend to view these kinds of enforcement activities as a cost of doing business, not a discouragement. In the pharma industry, it will take execs going to jail to effect any kind of change. I expect the publishing industry is no different. They will pay off the DoJ and continue doing as they like.

    Yes, this is a little awkward for writers who came out strong in favor of the agency pricing model in 2010. I don’t think writers under contract with a publisher are necessarily all that objective when it comes to business practices of the publisher that they believe will enhance their bottom line. Nonetheless, the writers are innocent. They don’t make the decisions in the board room. That’s not on them.

  36. As someone who actually does some antitrust law, I’d like to shed a little bit of light here (with Our Gracious Host’s permission, I hope) and go into more detail on my blawg (clicking on my name should get you there, although you might have to scroll down to an entry for 08 March 2012).

    (1) There’s a complex antitrust doctrine called “conscious parallelism” that fits in the space between “market forces made me do it” (which, if the evidence supports it, is not an antitrust issue under either the Sherman Act or the Clayton Act… but may still be unfair competition under state law) and “yep, we colluded” (which is probably an antitrust violation under federal law). Remember that the Department of Justice cannot enforce state laws; those are for the respective Attorneys General of the states, who have already announced their own inquiry. (Since they’re states, they’re allowed to “collude” in their investigation.)

    Thus, the short answer is that there is no short answer; it doesn’t require outright collusion to be an antitrust issue. Instead, “conscious parallelism” has a different, and usually higher, evidentiary barrier… but it is not an insulation from antitrust regulation.

    (2) It’s not an “agency model.” Calling it such is a deceptive trade practice in and of itself. It is, instead a “resale price maintenance agreement.” Until a few years ago, RPMAs were considered “per se” antitrust violations — that is, if you prove the existence of an RPMA, you need not prove anything else. However, in a relatively recent case called Leegin Leather, the Supreme Court reversed a century-old case (ironically enough, one also involving leather, called Dr Miles) and held that an RPMA is not a per se violation, but one subject to the illogical Rule of Reason. That means that an RPMA can be an antitrust violation, but that one must demonstrate that the RPMA in question actually has an adverse effect on competition that is provably distinct from the operation of other market forces. For those of you who don’t have a headache yet, that means “whoever has the more-expensive lawyers wins” in practice; it should remind anyone with a long memory of US v Int’l Bus. Machines, Inc. from the 1970s, because it’s exactly the same framework.

    (3) This also, indirectly, relates to the Justice Department’s refusal to regulate anticompetitive consolidation among both the media conglomerates themselves and among distributors of printed products, starting in the early 1990s. In short, blame Ed Meese and the Reagan justice department, along with some really misguided thinking from a Richmond lawyer who rose to become the President of the American Bar Association… and then the swing vote on the United States Supreme Court.

    That’s right, kids: Context matters. And in this particular dispute, part of the “context” is the Reagan Administration’s ideological predisposition that “all government regulation is doubleplusungood” (except when it involves building up military hardware and paying military contractors).

    * * *

    I have a lot more to say on this, but that would be hijacking Our Gracious Host’s blog for matters better stated on my blawg, where nobody can mistake them as official (or even unofficial) positions of the organization of which Our Gracious Host is currently the chief executive officer and chairman of the board of directors. Which, ironically enough, would raise antitrust concerns…

  37. @scalzi and @Yep:

    The importance of price-point considerations fluctuate wildly depending on your income bracket and the product you are buying. An income above $100,000 in West Central Ohio makes paying an extra $5-10 for a book is a relatively minor cost increase to absorb in order to help fund something you believe in–your local bookstore. However, a family living in the same area making $25,000 a year (which accounts for nearly 35% of the families in that region) will obviously value price-point above everything else. Amazon is a hero to one, and simply another market to the other.

  38. Catherine: “If one retailer makes an agreement with all major suppliers that a product can’t be sold at a lower price by other retailers, that’s price collusion, right? How could it not be?”

    Several reasons:

    1. if the retailer makes the agreement individually with each supplier, and the suppliers do not collude with each other, then it is not collusion
    2. a long, long history of this practice (recent examples: cell phones, gaming consoles, etc. are the same price at Best Buy, Wal-Mart, Target, etc. — Wal-Mart cannot offer the iPad or Kindle at a discount, because Amazon sets the retail price for the Kindle) — see Jaws’s comment for more explanation of “resale price maintenance agreements”
    3. the Leegin case: http://scrivenerserror.blogspot.com/2010/01/a131a.html

    On Amazon’s KDP — minimum price controls are absolutely in the agreement. The price is not merely “matched” as a service to the customer; the author’s royalties are reduced simultaneously as an automatically enforced penalty. But if that is too gray an area, there is the fairly clear case of the Kindle retail outlets, where Amazon uses the exact same kind of “resale price maintenance agreement” to set the retail price of the Kindle whether it is sold in Best Buy, etc.

    The question remains whether Macmillan and Penguin (et al) are competing with each other or colluded together with Apple to fix prices.

  39. @Yep

    I want authors to make money, enough money to quit their day jobs and write more books. I want my favorite authors to make enough money that they don’t just give up and go back to corporate gigs, or move to the video game industry. I want there to be enough money in the game that talented people take a shot at writing. I want publishers to make enough money that they can afford to hire good editors, copy editors, cover artists, and the other folk whose work goes into producing books (ebook or otherwise). I wish enough people bought books that the industry could support as many rock stars as the music industry does. I’d like to see speculation on TV by talking heads as to whether a particular best novel Hugo award is really for a specific work, or general career achievement. I wanna see Harlan Ellison punch a photographer. To that end, I’m not with the crowd that wants e-Books to all be a couple dollars.

    I own some hard cover books. The reason I own them is because I didn’t want to wait a year for the paperback. I’m willing to pay some premium for an eBook that I buy during that year, though I’d like to see the price lower when the paperback comes out. Once the paperback does come out, I do favor it over the hardcover, largely because it takes vastly less room in my basement. By that yardstick, eBooks are even better yet.

    @ some of the John Scalzis in the alternate worlds theory of quantum mechaincs
    Sorry about the photographers on your law.

  40. Catherine Shaffer – “If one retailer makes an agreement with all major suppliers that a product can’t be sold at a lower price by other retailers, that’s price collusion, right? How could it not be? What is the definition of collusion that makes this ok.”

    Catherine, Apple has made independent agreements with six different publishers. It’s only collusion if the six publishers talk to each other and agree that they will fix prices. Do you have, or have you seen, evidence that they did so? Obviously the DOJ believes they have, but they may have difficulty proving it.

    Apple, like any retailer, has a perfect right to sign a contract with a publisher that the publisher sell through their iBookStore at the lowest price available anywhere else. They even have the right, like any other retailer, to tell publisher B that publisher A, or A, B and C, have already agreed to this, assuming they don’t an agreement with A not to tell anyone else the terms. It’s only collusion if A and B (or more) talk to each other and make an agreement with their fellow publishers. And it’s only *illegal* collusion if the agreement they make prevents competition between them. i.e. it would be illegal for them to agree to not pay editors more than X amount per year, so that they wouldn’t have to compete for good editors by paying them higher salaries, but it wouldn’t be illegal for them to agree to pay editors a minimum salary of Y, admittedly unlikely, or to agree to offer all editorial employees health insurance, because those agreements wouldn’t prevent competition between them for good editors.

    I don’t know that the big six didn’t collude, and a negative can’t be proven anyway, but even if they did talk to each other about preventing Amazon from cornering the market in ebooks by selling the publishers books at a loss I’m not sure that would constitute *illegal* collusion anyway.

  41. You know, I really need to go back and read the comments that have been posted while I was typing out a lengthy comment of my own. Because once again someone (Jaws) has posted something much better informed while I was composing it. Sigh.

  42. @Ghayenga:

    Regarding one of your hypothetical notes, it might be illegal for publishers to set a minimum salary for editors. It is not per se illegal (after Leegin) to do so, but would be judged under the Rule of Reason. Unless, that is, the editors were unionized, in which case they’re exempt from antitrust law for that aspect of their collective action. If they were not unionized (and they’re not, at least not at present), an agreed minimum pay scale could be an antitrust violation if, under the Rule of Reason, one was able to prove that more probably than not this element resulted in a significant restriction on choice in the consumer market. For example, if that minimum salary was set at $125,000 for an acquiring editor, one could argue that creates a significant entry barrier to other potential publishers who would pay less to editors and sell equivalent products for less.

    If you don’t have a headache yet from the circularity of this business, you’re not paying attention. As a related matter, this is why an organization like SFWA cannot enforce a rule that says “All publishers must pay a minimum $25,000 advance for every novel, or SFWA members may not publish through those publishers.” SFWA may have initial eligibility criterea that say members must have achieved a certain level in the existing market, but it cannot prohibit its members from participating in “noncompliant” members of the market. Unless SFWA is a union, and (by law) it can’t be, because authors are independent contractors and not true “labor.”

  43. I just want to give a quick shout out here to http://www.baenebooks.com (and I really do need to read the rest of the thread). I know, in the past at least, that Baen (and I don’t know if this holds true for John and Subterranean) pays hardcover level royalties on ebooks that are DRM free. In fact I bought God Engines from Baen’s site (excellent story by the way) for the same price as Amazon’s Kindle version–but in plain HTML.

    And on new books, Baen is $6.00.

  44. There doesn’t need to be a smoking gun email or a a wiretap to show collusion. The concept of price fixing via “price signaling” is well established in antitrust law.

  45. As has been pointed out, these sorts of price agreements have existed for a long time in other industries. Try buying a Vox AC-15 amplifier for a penny less than $599 /anywhere/.

    Amazon wasn’t pricing e-books the way they were out of some fondness for their customers, they were pricing e-books the way they were as a cuthroat method of driving their competitors into the ground.

  46. However, a family living in the same area making $25,000 a year (which accounts for nearly 35% of the families in that region) will obviously value price-point above everything else

    Possibly you should not try to speak for all such people. I don’t believe that they elected you their representative.

  47. Thanks for the take. The pressure to settle will indeed arise from cost considerations and, as you noted, what actions a court might possibly consider constitute collusion. I haven’t perused Bork on Antitrust, but proving collusion won’t necessarily require proof that Bob from Random House called/emailed Mary from Macmillan and said, “Hey, let’s collude.” Certain less-direct activities could be inferred to be collusion. And if that’s not vague enough . . .

  48. Anent @JAWS comment:
    It should not be necessary to show “conscious parallelism” or any of the complex “market signal” theories here if (as I suspect there are) memos inside of Apple saying things like “we need to get the publishers to agree to a pricing scheme that avoids us having to compete with Amazon on price.” At that point you have a classic “spoke and wheel” conspiracy. The fact that we are not getting the usual denials makes me think the game is already over on liability and all that is happening is trading leniency for campaing contiributions.

    -mca

  49. For the informed, what exactly is agency pricing and how is what Apple is doing different from Amazon? If there’s already a link to the answer somewhere, feel free to post instead of repeating.

    Also John, your buying at a higher price is perfectly rational. You’re paying extra dollars but you’re buying extra value (local revenue fueling local jobs and so on). I think people confuse price with value. Buying at the lowest price may not always end up being the best value. I do the same when I buy local at a small store or buy organic food at the farmer’s market. I’m paying more but I’m getting higher value.

  50. mcallen3:

    In the abstract sense, you’re right… but then the remedy would be limited to Apple as the instigator. In order to keep the publishers from independently pushing the RPMA as their “new default,” you’ve got to demonstrate that they’re independently engaged in wrongdoing, not just knuckling under to an antitrust violator. That’s where the conscious parallelism and market signal theories come in: Not in showing some antitrust concern, but in showing a remediable antitrust concern.

  51. Re: Baen: Yes, and they also sell $15 e-ARC ebooks:

    http://www.baenebooks.com/p-1614-1636-the-kremlin-games-arc.aspx

    It seems well established that it is fair to charge a higher price for time specific access. And in fact this is what we already see happening in the Kindle store, despite there being no Kindle ebooks older than late 2007 (the Kindle launched just 4.5 short years ago!) and many not released until 2009-2011. (Just last year for those keeping track.)

    A Game of Thrones is cheaper than A Dance with Dragons.

    The Stand is cheaper than 11-22-63.

    Ender’s Game is cheaper than Shadows in Flight.

    In 3-5 years, when early adopters aren’t happily snapping up everything in sight, and when the costs for re releasing backlists as ebooks begin to be recaptured, prices will have a more predictable degradation.

  52. @BillK:

    Interesting that you mentioned the oil industry. While reading this post, I was wondering how e-book pricing could be considered “collusion” when the airline prices are not. As a consumer, I am far more troubled by the lack of transparency in the cost of a plane ticket, and the way new fees pop up at one airline and then the next..

  53. Is this collusion? Or coercion? If Apple came to them and said, “Hey, if you want to be in the iPad, this is the pricing model you’ll use – for everyone.” What could they possibly say? “No, it’s cool, we don’t want to be on the iPad. That thing will never catch on.” But it sounds like Apple came to them and was like, “Hey, we’d like to stick it to Amazon and so would you! Let’s do this!” Which allowed them to turn around to Amazon and say, “We joined a club and you have to do what we say!” The guv’ment frowns on that. However, the publishers were caught between two giants about to wrassle. I’m not sure what they could have done differently other than minimize the appearance of impropriety.

  54. Well, they could have reported it to the DoJ. (And perhaps they did.) Whether this meets the legal definition of “collusion” so as to violate antitrust statutes, I dunno.

    Most of the law blog reports I’m seeing are branching off the WSJ article John cites, which doesn’t, as far as I can tell, refer to any source other than “according to people familiar with the matter”. There doesn’t appear to be any press or news release from the DoJ on it.

  55. In 3-5 years, when early adopters aren’t happily snapping up everything in sight, and when the costs for re releasing backlists as ebooks begin to be recaptured, prices will have a more predictable degradation — Sam M-B

    I’m less confident about that now than I was when publishers moved to the agency pricing model. I hope that it happens and that we will have an electronic equivalent of old paperbacks from the used bookstore for a couple of bucks apiece. I am imagining a worse case scenario where the used book market fades away as people buy more books in electronic form and hold onto their precious paperbacks longer. Then the e-books will be the only game in town and the publishers can charge a higher rate for them. In that case, I am assuming piracy will be only incentive for the publishers to lower their prices.

  56. mythago, I would but my library is a little weak on the stuff I like to read which is sci-fi. With fantasy all the rage it sort of pushes out traditional sci-fi. As for used, in a earlier post I mentioned that it was the traditional place I bought most of my books. But convenience and overall geekness of the kindle snagged me. But if the publishers insist on raising the prices of the ebooks then the difference in cost will become significant and I may go back to used books, which does not profit publishers or authors.

    I really blame the whole mess on Apple. It was Job who was using the publishers as a tool to get at Amazon, if you believe what the recent biography says and you lay that against how Job used to work against those who saw he saw as a threat.

  57. I bought a kindle a couple of years ago, now we have three in my house, and I have gotten to really like ebooks.

    I made a conscious decision to buy fewer books about 10 years ago, mostly because we had run out of space to store books in my house (bookshelves everywhere) and also my local independent bookstore went out of business. I used to actually talk to the owner and he actually sold books. I think I helped some of my favorite authors, because when I went to special order a title, he asked me how I heard about it, and he often would order a couple of extra copies for the shelf. This time of year he would have had a special display with all of the Nebula nominated novels at the front of the store.

    My library went online so I could reserve books from home and pick them up every week or so.

    Not sure how typical I am, but I am more likely to buy an ebook due to both price and convenience. I think they have potential to increase total revenue for a particular title. I don’t think every ebook purchased at a discount maps to a hardback book not sold…

  58. As for used, in a earlier post I mentioned that it was the traditional place I bought most of my books. But convenience and overall geekness of the kindle snagged me.

    Oh. So, you actually don’t put price as your #1 consideration over all? Then it would seem a little silly of you insinuate that other people who also may place other factors ahead of “lowest price are lying. For you, it’s “geekiness” and convenience. For others, it may be the long-term view of having a bookstore nearby (“convenience”, perhaps) or having competitors in the marketplace or having one’s favorite author be able to afford rent, instead of chucking it all to get a day job.

  59. As someone already mentioned, it is not a black and white issue (shopping by price alone). I insinuate nothing, you are assuming I meant I always do so. And your argument of “for others it may be the long-term view of having a bookstore nearby” is misplaced here. This is about ebook pricing, which has nothing to do with local bookstores. So yes, I want my ebooks at the lowest possible price. Since Apple got involved they have gone up for many titles. If price continues to rise then the difference between the cost of the ebook and the convenience it provides and the cost of a used book will make it hard to justify, to me. In which case, I buy used books which profits neither the author or the publisher. It’s really rather simply.

    I have no problem with authors making money, I want them to make a living doing it. Buying ebooks when I know that I could get a used paperback for less is justified to me in part by that line of reasoning. Otherwise we will get crap from a bunch of hacks. But there will come a point when the price becomes unreasonable and buying used books will be my chosen route. As another mentioned, piracy of the ebook could be option for some but not for me.

  60. One thing which it appears not enough people are noticing is that while yes, NOW, Amazon offers 70% royalties (if you price your book within their most favored marketing position so that they can sell more Kindles, $2.99 to $9.99, etc.) back before this move Amazon’s royalties were 35% across the board:

    http://www.huffingtonpost.com/2010/06/30/amazon-increases-author-r_n_630646.html

    That was at the end of June 2010, when Amazon doubled their royalty rates (again, within their prescribed price range, and by the way at least $2 cheaper than the cheapest print edition of your book) from 35% to 70%. Gee, what happened just prior to this? Macmillan (successfully) stood up to Amazon.

    Remove Macmillan and the other publishers, and Amazon is free to offer 35% royalty rates again. (Or 25%. With a max price of $5.99. Or whatever they’d like.)

    In my view, it is Amazon which is doing the lion’s share of price-fixing: by offering a 70% royalty on a $9.99 e-book, and a 35% royalty on a $10.01 e-book, they have put a strong, strong artificial ceiling on e-book prices for independent authors.

    (And before June 2010, when we entered the previous competitive era (June 2010 to KDP Select and Lending, which began the current era in December and November 2011, respectively, without competition from Apple, Amazon was offering 35% royalties, not 70%. Introduce Apple to the equation in April 2010, and Amazon doubled its royalties for authors in June 2010. GG, DOJ. Please see the forest for the trees sometime soon.)

  61. I don’t have a Kindle or a Nook. I prefer paper books. Hard back, paper back I don’t care which. I prefer to own most titles and as mentioned above, the library does not carry much in the was of SF. I prefer to shop at smaller “hometown” book stores but they are a rare thing. I do go to the local Barnes and Noble but there are times that it is difficult to get titles for which I’m looking.
    I don’t like much about the ebooks. Formats are all over the place. Pricing seems quite high when one considers what is needed to create this book. No printing, no paper, no shipping. I really dislike the grey background of the Kindle. I haven’t looked at the Nook that closely.
    Just a few rambling thoughts here:)

  62. “I’m just waiting for the lawsuit against Amazon as a monopoly….”

    This will happen the day after walmart is broken up for being a monopoly. And three weeks after we break up big oil again.

    Let me know when that happens.

  63. Great analysis of a murky situation. My own feelings are similarly conflicted: I love Amazon as a place to buy things, I love the Kindle format for ebooks (though I kinda sorta prefer iBooks’ fake paper design) and I generally approve of anything that gets more people reading–and I think, when all’s said and done, ebooks and Amazon will have done just that. On the other hand, I find Amazon’s tactics for expanding marketshare downright predatory, and this at a time when other essential cogs in the book producing/selling machine (i.e. publishers and bricks/mortar booksellers) are clearly struggling. Authors already aren’t compensated enough, and I don’t see price wars (and especially ones benefitting Amazon) as moving that in the right direction. A competitive playing field is a good thing; a playing field where only one company (or two, or three) can afford to compete is less good.

    What’s so bad, from the DOJ’s perspective, about an “agency model” that ensures a more even distribution of compensation?

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