Macmillan CEO on the Justice Department Suit Against Macmillan, Apple, et al

First, the news story on the antitrust suit the Department of Justice is bringing against Apple and several publishers, including Macmillan, who owns Tor, which publishes my novels.

Second, Macmillan CEO John Sargent’s letter on the suit, directed at authors, illustrators and agents.

Third, my comments from a month ago regarding the then-possible, now-apparently in process suit. It still largely applies.

89 thoughts on “Macmillan CEO on the Justice Department Suit Against Macmillan, Apple, et al

  1. I’m a librarian. I’d be a little more sympathetic for Macmillan et al. if they allowed libraries to purchase ebooks for their patrons. I cannot buy your books for our patrons at any price.

    I don’t understand why this is so because there is a business model which closely parallels how libraries purchase and circulate snail(?) books i.e. books made out of paper. We buy one electronic copy which can only be read by one patron at a time. Our problem is finding books for purchase.

  2. Great news! Publishers should worry less about maximizing revenue per sale and more about maximizing sales. If I were a publisher, I would push e-books hard for the following reasons: 1 – no resales, ergo no lost sales to garage sales / used bookstores. 2 – no need to guesstimate consumer demand and risk ending up with a bunch of unsold books languishing in warehouses. 3 – the easier it is for impulse buyers to buy my books, the better. There is nothing like a book preview ending in a cliffhanger with a big link to drive sales. 4 – the less onerous it is to buy my books, the less sales I will lose to piracy.

    I have to admit to being biased. All I really want is to pay a fair price and for the people responsible for the book in question to be fairly paid for it.

  3. @silbey – The overall goal is maximizing revenue, yes? If the unit price is too high, then the sales volume decreases. For a given amount of profit, i would rather sell more e-books at a lower profit per book than less books at more profit per book. The more customers I have, the larger my pool of potential repeat customers is.

  4. @Liam
    My take on the library issue isn’t a problem with the libraries themselves, but with the patrons. I don’t think publishers are satisfied that it wouldn’t be an easy outlet for piracy. Then you get into a bunch of DRM issues and such that expand the scope of the infrastructure involved, regardless of the business model.

  5. 13enster: You are, so far as I can see, claiming that the publishers should be able to solve for two variables knowing only one equation relating them. And even that is a simplification since we’re already assuming books are going to fall into a relatively limited number of price points and we aren’t going to try to find the S/D “sweet spot” price for individual books.

    Also, no offense, but as soon as anybody starts talking about “fair” prices and/or “fair” pay, they immediately get at least a fifty-percent discount in my argument-tabulating scheme. The worth of a thing is what that thing will bring in a non-coerced transaction between a willing seller and a willing buyer. That goes for books, e-books, cruise ships, rides on cruise ships, sex, skilled labor, unskilled labor, and used french-fry oil. (Which is starting to become surprisingly valuable.)

    We may, as a society, determine that it is a net benefit to control the prices of certain things for reasons unrelated to supply and demand, including setting their prices to zero or, in effect, setting them to infinity by not allowing their sale. This doesn’t usually work very well, but it’s not inherently unreasonable. But that’s nothing to do with a “fair” price. There’s no such thing as a “fair” price. There’s only what a willing buyer will pay a willing seller in an uncoerced transation.

  6. “The overall goal is maximizing revenue, yes?”

    But you just said that shouldn’t be their goal, their goal should be maximizing sales.

    It’s an assumption not proven that eBook sales are extraordinarily price sensitive. George Martin and other authors sell hundreds of thousands of eBooks at a premium prices, while there are plenty of 99 cent (or less) e-books that sell only to friends and relatives of the author (and, to bolster the larger point, vice versa).

    Publishers already address price sensitivity by offering books at different price tiers at different times, so the argument that they should start their pricing at an arbitarily low tier is not one that their experience of consumer behavior validates.

  7. Amazon is doing exactly the right thing being amazingly quiet. It may or may not be a “Let’s you and him fight” situation, but drawing attention to Amazon’s position and the potential impact on Amazon, by Amazon, could not do anything but make the publishers look more sympathetic.

  8. Mr. Scalzi:

    In my experience, ebooks published on KDP/PubIt are extraordinarily sensitive to price, but only in that if you set your price to zero, you will get WAY MORE downloads. After that, the price sensitivity, at least in the smaller ranges, is minimal. :)

    Three dollars, five dollars, six dollars, doesn’t seem to be that big a deal. I suspect it would start to diverge pretty sharply again once you hit double digits and kept going, but I still think that ten dollars, eleven dollars wouldn’t make a lot of difference. Three dollars, twenty dollars, yeah, there’s some divergence there.

    M

  9. I for one support the DOJ and hope that the publishers and Apple get taken to the woodshed. Having been a ebook purchaser for a long time it was very obvious when Apple got into the game and causes the prices to rise.
    I support the idea of authors and publishers making money but from my perspective this (raising the prices of ebooks) could cause them to lose money. That is because I, and potentially others, am buying ebooks that in the past would be obtained via a second hand shop. I do this because I like to use my kindle and other devices. But at some point the convenience of using them will be outweighed by the costs and I will purchase books at Half Price Books or other second hand outlets; cheaper for me, no money for authors or publishers, too bad.
    Amazon for their part is sitting tight because they want to sell devices/software which in turn feeds the selling of ebooks. They were not a part of the deal that changed the pricing model. Apple wants to push the devices as well and take more of your money on the content. Apple invests in its’ own type of corporate greed.

  10. For a given amount of profit, i would rather sell more e-books at a lower profit per book than less books at more profit per book

    JS has already pointed out all the bad assumptions you’re making (as well as the goalpost shifting) but I’ll just point out that 50 books at $10 profit each is better than 100 books at $1 profit each.

  11. Yep:

    The thing is, that option (buying secondhand) will become less and less viable as ebook sales increase. :) Amazon and ebook publishers aren’t afraid of the resale market. They’re going to destroy it. Not even on purpose, but they are.

    As to the rest of your comment, in some cases, greed is good. It remains to be seen whether this is one of them.

    M

  12. Marc:
    I agree that secondhand will become less, as long as ebook sales increase. Which will happen unless they keep jacking up the prices of ebooks sales. I frequented second hand shops (Half Price Books to be exact) because I mostly wanted to save money and occasionly it was because I wanted something out of print.
    Greed certainly is good, almost a foundation of capitalism one might say. It is only bad when it is your cheese that gets moved….

  13. I chuckle when someone claims Amazon is the good guy for wanting to undercut all other retailers and drive them out of business. It seems to me, that Amazon might be a driving force behind this. But, I don’t know enough about this to comment beyond my impressions. Plus, the whole situation iratates the hell out of me. I really don’t see anything wrong with being charged around half the cover price for an ebook of a hardcover. That Amazon is sometimes willing to discount a hardcover so much that their price is lower than the ebook, by a few cents, should not have anything to do with what the ebook costs. I feel quite strongly about this, and have very little patience for the whining about what someone might “feel” they should pay. You pay the price they are charging, or you don’t. If someone disagrees, that’s fine, but I won’t argue with them about it. Like I said, very little patience, and I don’t want to end up insulting or offending someone.

  14. I hope Macmillan will successfully defend itself. I don’t agree with everything they do, but the Agency model is actually a good idea in view of the current market powers.

  15. I hope ebook prices do come down a lot as a result of this. At the moment with costs the way they are, I wouldn’t have made enough savings on ebooks cost to offset the price of the reader before the reader becomes obselete and has to be replaced. With the increased risk of damage, and hassle-of-use, of the ereader the savings would have to be substantial to move me over. Ebooks are just much less convenient to me than paper, and although I can understand them being much more convenient to publishers I am not prepared to be the one paying for their convenience.

  16. Crypticmirror:

    While your argument is a valid one, I don’t have a lot of concern myself about losing my ereader or having it become obsolete. All the major publisher/ereaders have apps for major OS general-purpose devices like smartphones, tablets, and PC’s, as well as web-based cloudreaders

    I’ll grant you that twenty years from now when I can’t find an app that will work with the DRM on a particular book, I might feel differently about the matter, but in terms of “if I drop my Kindle in the lake I’m out a thousand dollars worth of books,” that’s just not a real problem.

    M

  17. @Liam Hegarty
    I work at a library as well, in the Collection Development department. What I understand, from talks with our selection librarians, is that the details of library lending are very much a work in progress, and that some folks are drawing lines in the sand and getting stubborn about it. That doesn’t make the books available to our patrons in the short term though. Hopefully it won’t take years for them to hammer this out. Meanwhile you might talk with your selectors, or what equivelants you might have at your library. They will likely be able to provide more details. Anymore I could say now is very much secondhand, and could be outdated.

  18. I defer to my son, who earned his J.D. from the University of Southern California, specializing in Intellectual Property, at age 21. He’s a big fan of John Scalzi novels.

    My parents were both book editors in New York City in the late 940s through the 1980s, in my dad’s case, by which time he was an executive in a multinational which owned book, magazine, TV, and film divisions.

    They both had degrees in English Literature, cum laude and Magna Cum Laude, from Northwestern and from Harvard.

    They were quite unhappy at how the book industry had shifted away from love of literature to the book as “product.”

    Litigation at this level was inevitable.

  19. @scalzi – Actually, I said less about unit sales price and more about sales volume. I am not a professional wordsmith, such as yourself, so it seems I have failed to properly frame my remarks in the context of price-fixing.

    I wouldn’t say that there is an extraordinary correlation between price and sales. I would say that there is a correlation, but that other factors such as author identity, cultural resonance, etc. have a much larger impact on sales. Furthermore, I would say that the correlation between price and sales is also dependent on those other variables.

    I don’t think that starting at an arbitrarily low price point makes sense, either. My initial post was intended to be read as “here is why I think e-book price-fixing is short-sighted” but I failed to convey that. Sorry!

    @Marc Whipple – It’s funny, you say that there is no such thing as a “fair” price, and then go on to describe exactly what I have in mind when I think of one. The perils of going for brevity over clarity, I suppose.

  20. I personally found that the Agency price resulted in me spending slightly more on books, since distributors could no longer offer ‘deals’, (I used to purchase on Fictionwise which often offered half-price deals), but that overall ebook prices went *DOWN* (high end ebooks were in the upper teens, now they are 9-14). In addition I can now purchase a wider selection of ebooks, previously certain books were not available in electronic form now that is almost never the case.

    Between the slightly higher aggrgate price, and more availability I’m spending more, but not a lot more. However my choices are far greater.

  21. @crypticmirror – Ebooks may be much less convenient to you than paper, but for many the opposite is true. For me, it is the fact that I travel 16-20 weeks a year and I read when on the plane and in the hotel room in the evenings. It is much more convenient to carry my nook as opposed to four paperback books each week. For those who have limited space to store/keep their books, ebooks are a convenient way to have more books without having to get rid of the ones you already have. A third convenience of ebooks is the ability to obtain the book instantly from whereever you happen to be – don’t have to go to the bookstore./

  22. @ Marc Whipple the problem with a reader becoming obsolete isn’t so much the books (although transfering them certainly adds to the hassle factor, especially since I barely use a regular mobile phone and certainly not a smartphone or website ruiner [as tablets should be known]), its the fact I have to fork out another £100 for a fresh ereader. If I haven’t offset the £100 for the first one before I have to pay for the next then it is a cost I’m not prepared to bear. If publishers want me on that model, they’d have to make it worth my while and cover at least the access costs.

    Also, and tying in with the cost of the reader, the risk factor isn’t so much in losing the books if I lose the reader (although, again, adds to the hassle factor and also that I’d have nothing to read until a fresh reader could be procured). Its that I’m walking around with a piece of kit worth a non-negligible amount of cash that some greasy little toerag will find it worthwhile bopping me over the head and nicking. Until the ereader does what cheap mp3 (and before that cheap cd players, and walkmans) did and become virtually worthless, so that it does not become a theft target, it is too dangerous to carry a reader to the places an ereader might be worthwhile taking.

  23. @Phil Royce
    Plus all the evil stares I don’t have to direct at innocent bookstore clerks. When I’m there first thing in the morning, on the release date of a book I’ve been anticipating, and it’s still in boxes, or most frustrating, no copies were ordered for the store.

  24. @crypticmirror: If I haven’t offset the £100 for the first one before I have to pay for the next then it is a cost I’m not prepared to bear. If publishers want me on that model, they’d have to make it worth my while and cover at least the access costs.

    And that’s your opinion, which you’re totally allowed to hold. However, there are many people for whom the extra cost of an eReader is worthwhile as a convenience fee. I, personally, really enjoy knowing that I just have to have my Nook when I get on the train in the morning. It’s not going to get dog-eared in my bag and it’s certainly easier to carry around than several books would be.

    Also, too, the free sample factor is great. If I’m thinking of a book I just have to download the sample to the Nook and I can read it when I get around to it, then decide whether I want to own or not.

  25. I think a lot of people are thinking that this suit is all about the agency model and only that. In the NYT article (http://mediadecoder.blogs.nytimes.com/2012/04/11/justice-files-suit-against-apple-and-publishers-over-e-book-pricing/?hp) it is specifically called out that it was the favored pricing given to Apple that started the investigation:

    “The five publishers made agreements with Apple for selling e-books, and Apple, which was about to introduce its iPad to the market, insisted on the “most favored nation” clause.

    It is that clause that came under scrutiny by the Justice Department.”

    It’s not the agency model per se. It’s that Apple used it to get five publishers to agree that they wouldn’t let anyone sell e-books for less than Apple was selling them. That smells like collusion to me.

  26. There are hordes and hordes of minimum/uniform retail price agreements. Amazon’s Kindle for example cannot be undersold by Walmart, Office Depot, Best Buy, or wherever. Oh noes! Amazon colluded with Best Buy to price fix the Kindle! (Similar examples for iPods, Xboxen, Wii, etc.)

  27. It’s not generally a good idea to use revenue and profit interchangeably, though I’ll grant in the case of eBooks, once you’ve paid the costs of preparing the book and providing the distribution system that the marginal cost of selling eBooks is pretty close to zero.

    @13enster
    I suppose one might argue that for a given profit, that selling more units at lower price means I have more customers that might give me repeat business, but could I also not argue that all of those extra customers won’t buy this other book that I’m selling because they are all busy reading the first one? A reader might buy two $10 books instead of 1 $20 book, but he won’t buy 2000 $0.01 books.

    I suppose what these arguments do tell us is that we now assume that publishers are economic rational actors with fiduciary responsibility to their shareholders. We don’t much hear about publishers publishing stuff with a less broad appeal because they happen to like it.

  28. @Ron Mitchell – Oh yes, yes. That has happened to me several times. You get to the bookstore, excited to “Oh, we’ve got it here somewhere, but we haven’t unpacked it yet. Can you come back tomorrow?” A number of years ago, I actually helped my local bookstore owner unpack and shelve an entire shipment of many different books just so I could get my new book. Also, as you said, sometimes they didn’t order/get any copies of the new book. You get to the store, excited about the new Scalzi book, and then find they didn’t order any! Oh the disappointment!

  29. Not sure what happened on that previous post, but I think you get the idea. John, I am getting a message about script that is running, and also I am finding that the comment box isn’t giving me wraparound after about four lines. I have not experienced these problems before. Is it me, or is it WordPress, or who knows what?

  30. if I understand the case correctly (IANAL) -it seems like a clear cut case of collusion, the publishers all agreed to give apple the same deal and to make apple’s deal better than amazon’s/B&N’s – that takes the “free” out of free market. and they seem to be AWARE that they were doing wrong- meeting in private, no lawyer oversight, double-deleteting emails etc. The cover up points to motive- now what the effect will be?? I dunno

  31. @crypticmirror: Count me in the group that considers eBooks more convenient than paper. And I don’t even travel much anymore, so it isn’t portability so much as the fact that I have a finite amount of shelf space and the cost of adding more shelf space is MUCH higher than the cost of my eReader and the extra money I sometimes have to pay to get an eBook. To add more shelf space, I’d have to add on to my house.

    I also like the fact that I can make notes and highlights without offending the inner librarian I have apparently inherited from my father (who was an actual librarian). I can’t bring myself to write in books. Besides, the electronic highlights are better, because I can go to a list of them and then jump to the one I want, instead of thumbing through the book.

    As for the eReader becoming obsolete… not really. All that happens is something flashier comes along and you want it. I have a Kindle that is about 3 years old now, and while I’ve seen the newer ones, and they are indeed nicer… my current one still works just as well as it did 3 years ago. It is not obsolete. (I did buy a Kindle Fire, though, mostly as a toy to share with my kids. The unanticipated benefit was that I can now easily lend a book to my husband- I just tell him to read it on whichever device I’m not using.) Maybe they will all be truly obsolete- as in no longer usable- some day. But that day is a long way off. Even if I can no longer get new books on my device, the ones I have there will keep being readable. Unless we change electricity systems, I suppose, making it impossible to charge the thing.

    Long story short, I don’t think devices become truly obsolete on a timescale that matters for most people.

  32. I figure anytime the DOJ goes after Apple, that’s probably a good thing….but I don’t really have a dog in this hunt, since the first time I buy an e-book will be when I can give it away to whomever I want, just like I do all my other books.

  33. Sorry if I don’t know all the ins and outs. But as a purchaser of ebooks and traditionaI books, am I wrong to think that there’s a higher profit margin on ebooks? They require no printing costs. Little waste. No shipping. No storage fees. Not the kinds of those required by traditional paper books anyway. I’m sure ebooks have a middle man much the same as paper books do. So why is the price to the reader generally the same between the two formats? If the profit margin isthe same, what are the extra expenses that make selling an ebook cost as much as selling a traditional book? I don’t understand.

    I’m not saying publishers, writers and illustrators shouldn’t make their fair share on book sales. They should! For sure! I want them to keep making good books. But sometimes it feels like the prices are about the same simply because publishers can do that. It feels like they think selling an ebook at a lower price means that the ebook is competing with the very same title of a traditional book and they just don’t want to do that. Why? It’s not like we can even trade, sell or donate ebooks after we’ve read them. 

    And on libraries, Liam @1 above, I totally agree. Why are some ebooks unavailable to libraries? Many that are available have ridiculous wait times. What is the problem there? Surely there a better way.

  34. @ Liam Hegerty

    Another librarian weighing in: there are a few services that let libraries offer ebooks, but they generally range from those that are affordable with a limited selection (such as Freading) to those with a decent selection but which are ludicrously expensive (such as Overdrive).

    Just to throw some numbers out there, I have around 10,000 patrons, maybe 50-100 of whom own ebook readers of any brand (so between 0.5 and 1%, and that’s not likely to increase soon; I’m in a poor, rural area), and the “discounted” yearly rate Overdrive quoted me is 77% of my entire book budget.

    The Freading model is a lot more reasonable; you pay a $150 setup fee, then purchase “tokens” for $0.50 each, and your patrons can then redeem the tokens for ebooks (one token for something from the backlist, and between two and four for a new book or bestseller). Only a few publishers have contracts with Freading, but it’s still better than nothing. (Library Journal’s review is here: http://www.libraryjournal.com/lj/communityala/891114-448/ala_annual_2011_new_ebook.html.csp ) I’m hoping that they’ll take off, and that more publishers will sign on with them, because right now that’s the only way I can see affording ebooks at all.

  35. The part of the NYTimes article I found interesting:
    A sixth major publisher, Random House, did not join the agency model until March 2011, and it was not a focus of the investigation, a signal that investigators were zeroing in on the way agency pricing was adopted, not on the pricing model itself.
    So the problem isn’t the agency model, but the remedy is to get rid of the agency model? I’m confused.

  36. And I realize I probably don’t even get a small fraction of what the suit is about. So can anybody explain the agency model thing? Favored pricing? My post above is generally questioning ebook prices versus traditional. I’m pretty sure there’s more to it than that and i’m still confused on that. Thanks.

  37. coolstar-“I figure anytime the DOJ goes after Apple, that’s probably a good thing….but I don’t really have a dog in this hunt, since the first time I buy an e-book will be when I can give it away to whomever I want, just like I do all my other books.”

    Very good point, that is one reason why ebooks should be great thing for authors/publishers regardless of the price, people have to buy them from the publishers (via retail) and cannot buy them “used”. Currently the situation is such that you cannot share, sell or pass down your ebooks like you would a real book. I strip all the DRM off of what I buy but with no intent to resell or share the file. It is more so that I can read it on any device I want in the future.

  38. @Deb The production costs of an e-book vs. a printed book are a bit less, but not significantly so. (ie they save money on paper and shipping, but have additional costs for producing an electronic version).

    The agency model, in short, is that the publisher sets a fixed price and the seller gets a fixed cut of that price. The current split is 70% publisher, 30% retailer. One reason for this model is that the retailer isn’t incurring most of the risks/costs that they would with a physical book. Namely, when all the retailer does is list the book on their website and then let the publisher know when an electronic copy is sold, they aren’t having to take as much risk as a retailer that has to allocate shelf space, order books in advance, and worry if the books they purchased aren’t selling.

  39. What I don’t understand is why the Agency model is being forced on Amazon via this collusion (and if you read the complaint, it’s pretty clear that there was collusion assuming they prove it). If the wholesale model is good enough for bookstores, why is it so wrong for Amazon to prefer it? Is it simply because paper books and the bookstore agency is less scary to these traditional publishing companies than the new fangled ebook idea? It’s very clear that Amazon was deeply discounting ebooks for the same reason Apple deeply discounted music downloads. They wanted the whole market to go to digital distribution rather than physical.

    The publishers need to learn from the music and movie industry. Overpriced digital works will just drive more people to piracy. If people are given a price that they feel is a good value, they would much rather honestly purchase the work rather than pirate it. If there is anything that iTunes has taught us, it’s that.

  40. * I’m not sure where the phrase “bookstore agency” came from. My crazy brain, no doubt. I meant “… paper books and the bookstore way of selling books…”

  41. @Josh Ferguson- Amazon had the only major e-book reader when agency pricing began. They wanted cheap ebooks to be loss leaders for people to buy the Kindle. Publishers, for various reasons, wanted to make sure that mental value of books didn’t get eroded by Amazon’s price cutting (ie that a book is only worth less than $10) and wanted to increase competition. The agency model does so by allowing companies without deep pockets (ie B&N) to not have to worry that Amazon will just cut the prices of e-books to kill any competition.

    Also, the wholesale model works well for physical books, where there is an actual item being shipped etc. There are major problems with it where the product is electrons and the retailer doesn’t do much beyond make the product available. Further, it’s not clear that e-books are overpriced, since cannibalizing your hardback sales with e-book sales is a bad idea with the current e-book market penetration.

  42. Let’s be careful about deciding guilt and innocence at the moment. All we’ve seen is the government’s case which, shockingly, is aimed at proving guilt.

  43. @Deb: Someone answered your question earlier, but to put my 2 copper in: Author Commission + Composition costs + Printing and Distribution = Paper book costs. eBooks only eliminate the third part of the equation, and may add somewhat to the composition costs (depending upon how efficient their comp system is). The bookstores didn’t want to continue with Amazon because instead of being able to recoup any savings in eliminating the third part of the equation, Amazon was basically forcing them to pass the difference onto either the consumer or to Amazon.

    And also, though this is a side issue in my mind, they were priming the consumer to assume all eBooks were worth $9.99, when the price difference between books is largely determined by the paycheck the author gets. If you are charging the same price for a Stephen King book as a Joe Schmoe book, and the actual production costs are already pretty close to $9.99, then you don’t make as much per unit from the Stephen King book since the rights to his books cost much more, and it takes you a long time (if ever, assuming a dud) to make your money back. But as someone mentioned, consumer prices are relatively elastic around certain points.

    The question of whether what they were doing was 100% legal is almost a side issue as it gave time for B&N and (to some extent) Apple to come up with something that could compete with the Kindle. Which benefitted the publishers in the short term as they have more ability to negotiate with Amazon.

    My opinion is that in the long run, major publishers are going to go the same way as major music studios where they get a smaller share of a market that is fragmented with more numbers of self publishers and small publishers out there. And it’s not Amazon’s pricing that derails them, but the fact that you no longer need a $1 Million printing press and a huge ad budget to be in the same league as the large publishers. It may not be better than what we had before, but it will be different, which equals *bad* if you’re a large, entrenched player in a mature industry.

  44. it is matter of debate how much cheaper ebooks are. It really depends on sales volume., since Author Commission + Composition costs do not increase on a pure-unit-sold basis.

    The big six publishers are pure evil and need to burn.

    The only problem is Amazon and Apple are also pure evil and need to burn

  45. If all of the above are evil and need to burn, where do I buy my books? Gutenburg Archive will keep me going for a while but the what…

    I’m sorry but I don’t get the inference that any and all publishing is bad. Or is it that large corporations are inherently evil in and of themselves and should be dissolved. Well, maybe I would agree that large corporations are evil but for other reasons.
    I actually equate this lawsuit with the one that was recently brought against Boeing when they moved some of their manufacturing to a “right to work state”. All of a sudden, the supposed evil went away when a new contract was voted on with the unions in Washington state, and the suit was dropped.
    Full disclosure: I live in the Seattle area but do not work for Boeing.
    I see this as similar also to recent DOJ settleing out of court with big banks and investment firms paying penny on the dollar fines and no one being sent to jail.
    It looks like you’re doing something for the public, but what you’re doing is creating cash flow by fines and still preseving the status quo for the big campaign contributors.
    Oops, slight derail there.
    If this goes through, Amazon wins. That’s scary enough in it’s own right

  46. Publishing is not bad. Monopolies are bad. Collusive cartels are bad. Dinosaur Fortune 500 companies try to resist change and protect profits at the expense of the consumer is bad. Huge tech conglomerates trying to corner the market and then milk the consumer is bad. Exploting artists is bad.

  47. The Europeans regulators are looking into the same issue, it will be interesting to see which way they fall.

    It does sort of bother me that John Sargent writes about making the choice for Macmillan in his basement, all alone. Which comes across as a more than a little disingenuous. He obviously spoke to others at Macmillan, consulted with lawyers over the contracts etc. I am willing to bet that, as an American subsidiary of a larger German based corporation, Georg von Holtzbrinck Publishing Group, the Mr Sargent is suppose to report Chairman Stefan von Holtzbrinck and the rest of the board on all key matters. It might have very well been Mr Sargent’s final decision to make, but however lonely it is at the top, the decision making process goes far beyond his basement.

    I don’t know whether there was collusion or not as far as cartels, etc. But I do know that Mr Sargent is full of BS.

  48. Scalzi: But you just said that shouldn’t be their goal, their goal should be maximizing sales.

    No. His remarks were quite clear. He stated the simple proposition that maximizing revenue “per sale” is not as important as maximizing sales. That’s in no way saying you shouldn’t maximize revenue. In fact, it’s saying just the opposite. Maximizing revenue is the goal, and attempting to reach that goal by maximizing revenue “per sale” is not the best approach. It’s an opinion, not a fact, but it’s hardly a controversial one.

  49. @Jon M and @MyName

    Thanks for the explanation on the paper book costs versus ebooks! I think there’s definitely a perception among some of us readers that it must cost a good bit less to produce and sell an ebook. It certainly feels like we get less since we don’t get to hold a chunk of paper and words that could likely last longer than we do. I doubt my ereader will last that long. But I love ebooks for convenience sake! The space saving! The bookmarks that don’t fall out by accident! I even spilled a marinade on my ereader, and while it smelled yummy for days, the pages didn’t yellow at all!

    It all helps put into perspective some of what Amazon was doing with regard to pricing. As well as understand more of the risk/costs for other sellers.

  50. @bryan broyles – You say maximizing revenue is the goal. Well, sort of, as a means to the true goal, which is to maximize profit. Maximizing revenue doesn’t always maximize profit, because if the margin between cost and sale price is too thin, all the revenue in the world won’t generate enough profit to satisfy management.
    Management of many corporations these days do not run the company in the best long term interest of the company, or even in the best long term interest of the shareholders. Many corporations that have been profitable, but have seen their profit margin dip below 10%, have been run into the ground to extract all the short term money possible and then been sold or gone out of business – not because they weren’t profitable, but just because the profit margin wasn’t high enough to satisfy some people.
    Getting a little off topic, so will stop here.

  51. Phil: Well, no, I’m not taking a position. I was summarizing a position that had been mischaracterized. In fact, I think the original poster was making your argument, that is, that profit is maximized not by max revenue per sale, but by increasing sales at efficient revenue levels. I tend to agree with that, and your stated proposition. For me, there are separate arguments in this discussion…one, whether the position of the publishers was a good thing for consumers and two whether they colluded. I believe they colluded, and illegally. That doesn’t mean, necessarily, it was to the long term detriment of the market. On the other hand, I don’t find convincing those who argue the publishers were looking out for their customers. Quite the contrary, actually.

  52. Maximizing revenue is the goal, and attempting to reach that goal by maximizing revenue “per sale” is not the best approach.

    Why?

  53. Silbey: Why? The argument would be that there is a point at which increasing price lowers sales. There’s also a point at which the lower price point would no longer encourage sufficient increased sales as to make it worth it from a revenue perspective. In the middle is the mythical “ideal” price where the number of increased sales causes revenue to increase more than an increased price on lower sales would. The thing is to remember, it’s not “maximizing revenue by sales” that is criticized, but maximizing revenue per sale as a stand alone goal.

  54. The thing is to remember, it’s not “maximizing revenue by sales” that is criticized, but maximizing revenue per sale as a stand alone goal

    That’s not what you said. What you said was that “maximizing revenue ‘per sale’ is not the best approach.” You’re (or the person you’re making the argument for) making that into a general truism. The problem is that I can think of a fair number of examples where that’s simply not the case, even in publishing. A specialty book, for example, that has a limited but wealthy audience would reward a per sale revenue maximizing price strategy (reducing the price would not increase the audience, but would reduce the overall income. Another example would be a book that is required for licensing of some sort, also with a limited audience. Textbooks. Those are just the few things that spring to mind.

  55. @bryan broyles – Thank you, kind sir. I was surprised at the responses to my comments. Maybe I gave some people the impression that I was an “OMG ebooks cost too much” troll or something. All I was trying to do was list my reasons why I thought price-fixing e-books would be counterproductive.

    @silbey – I think it is abundantly clear that you disagree with my opinion, so it might be best to let it go. I enjoyed the Big Idea post about your book on the Boxer Rebellion, by the way.

  56. @bryan broyles – Bryan, thanks for the clarification. Like you, I am not convinced that the publishers were looking out for their customers. There is the issue that a monopoly (Amazon) can result in reduced choice, and even reduced quality. We’ll see how it all shakes out. The danger Amazon was creating is to drive others out of business, leaving no or little competition. That would be bad, as Amazon could then raise prices on a market they have cornered. Whether that would really happen is dubious, but I do not have that crystal ball. I do know that when we lost the second cable TV company in our area a few years ago, the prices for cable have more than doubled in the past 6 years, as there is no competition. Of course, colluding to fix prices is antithetical to competition as well.

  57. The publishers are saying, “We don’t want Amazon to be the only entity that can set eBook prices because that will hurt consumers.”

    That’s a lie.

    What they really mean is, “Using the same model we’ve sold under for years, where the retailer sets the price after buying the books from us at a fixed cost, Amazon will set prices lower than we want. This helps the consumer, but hurts us, so we gang up to keep Amazon from having access to this sales model.” (Remember under that model the author gets a cut of the price Amazon pays the publisher. That cut doesn’t change when the sales price changes.)

    This leads to what happened to me last year when I wanted to buy “On Stranger Tides” and found the eBook price was higher than the paper price. There’s no way that would happen in an unconstrained market.

    The publishers are trying to protect an outmoded business model. They clearly decided to use Apple’s entry into the eBook market to pressure Amazon to accept a new pricing model. This clearly has made prices higher for consumers.

    Whether there was illegal collusion involved is a question for the courts to decide. I consider it to be more likely than not, but that’s not particularly important.

    If this lawsuit results in the existing pricing agreements getting voided we’ll see lower prices at retail. That helps consumers. Anyone who says different is lying to you.

  58. I question whether Amazon’s primary motivation was to drive everyone else out of business and be the one source of all books. I think that Amazon was learning from Apple and iTunes. I think they wanted to convert a large percentage of people away from physical books towards digital books. I doubt the kindle was ever a huge profit center for them and especially now where they’re basically being sold at-cost. In my opinion, one of Amazon’s biggest expenses is inventory, the warehouse, and delivery of physical products. In a lot of what Amazon sells, you can’t avoid that, but with movies, music, and books, you could completely eliminiate that expense.

    So how do you do this? You create a device like the Kindle (which wasn’t the first one of its kind but the first one with a great reading experience with eInk). Then you give people a huge incentive to stop buying and storing books and instead embrace the convenience of having everything in your one device. In fact, they even made apps for every platform so that they can sell books to anyone that wants to read books electronically.

    This is the ultimate dream of businesses like Apple, Amazon, Netflix, and so on. Complete digital conversion delivered over the internet. In every case, who stands in the way? The established players that are frightened of the paradigm shift and don’t know how to adapt. Record Labels, Movie studios, and publishers. What happens in every instance? They’re dragged kicking and screaming into doing what they’re customers wish they would have done in the first place and by so doing they lose goodwill and potential profits by not adapting.

  59. Silbey: Well, to be specific about what I think, to be clear, I do believe the “general” argument (damn my inability to use italics) is “generally” true. I agree with you that there are exceptions, and even agree with the exceptions you cite.

  60. @ Josh Ferguson
    “I question whether Amazon’s primary motivation was to drive everyone else out of business and be the one source of all books. I think that Amazon was learning from Apple and iTunes. I think they wanted to convert a large percentage of people away from physical books towards digital books.”

    Ah but on whose terms? Most publishing houses seem to be ok with the idea of e-books and how to sell them. It’s the details that are the tricky part (and the negotiation of contracts that were signed before e-books were important). Why should publishing houses have to go with the model Amazon wants rather than the model they prefer?

    And I don’t think they’re being “dragged kicking and screaming” into e-books. More like trying not to screw over their existing outlets which sell a majority of books, ie physical bookstores, while working on an e-book process.

  61. That’s the thing that’s always made me go “huh?!?!?”, when the price for an e-book is higher than a paper copy. I understand that some costs are noncompressible, and that everyone involved needs to make at least some money, but the idea that it is cheaper to print, warehouse and ship a physical book rather than move electrons does not compute. I would find it logical if the price point for an e-book by a popular author would be the same as a paperback.

  62. MadLibrarian:

    I think it’s because publishers are trying to forestall the ebook business. There every action seems designed to slow down/damage that market. It’s that that is anti-consumer, moreso than the pricing alone.

  63. MadLibrarian, I haven’t heard that anyone is actually saying that it is cheaper to produce and store paper books than ebooks. I would be surprised if that were anyone’s rationale for that particular price difference. Don’t forget the factors on the demand side. Many identical products are sold at different prices, such as supermarket brand foods that are produced by the same companies that make the brand names. The corporation marketing the brand name *could* justify the price because it costs more to market the brand name product, but they don’t have to. They just have to know that some people will pay more for the brand name product for reasons of perception–often the feeling that a brand name is somehow more trustworthy, for instance. Then the corporation can charge what their research tells them that the market is likely to bear, which doesn’t have to have a direct relationship to how much more it costs to produce the brand name version of the product.

    In the case of ebooks, it might be (NOTE: I AM NOT SAYING THAT IT *IS*, just one factor that publishers may research in setting prices) that customers would be willing to pay more for the convenience of immediate gratification (I can download this in a couple of minutes! while I sit here and surf pr0n, er, work on this brief/my taxes/whatever) compared to having to swing by a bricks-and-mortar store on the way home, on the weekend, or whenever convenient. If the consumer feels that there is value-added in a higher price, the consumer may be willing to pay the higher price.

    The logical price point is the point at which the seller/producer believes he/she/they/it will maximize profit. Prices for many consumer products are not set on a strict cost-plus-markup basis. There are lots of variables.

  64. @Jon M
    “Why should publishing houses have to go with the model Amazon wants rather than the model they prefer?”

    The wholesale model is the same model the physical bookstores currently use. Is it any different than Walmart selling all of their new best sellers at cost just so people come in and buy their bread and milk at a higher profit margin? Why the double standard with ebooks?

    “And I don’t think they’re being “dragged kicking and screaming” into e-books. More like trying not to screw over their existing outlets which sell a majority of books, ie physical bookstores, while working on an e-book process.”

    Ebooks have been around for over a decade. I remember reading gutenberg books on my Handspring Platinum running Palm OS back in 2001. Sony has had ebook readers for a lot longer than Amazon. The biggest problem was that there weren’t a lot of books available in ebook formats especially new releases so it was never a big enough draw to get people to move to digital formats and distribution. The publishers were dragging there feet because it rocked the boat from their existing business paradigm. Amazon changed that by using its size to “encourage” (read: dragged kicking and screaming) the publishers to make huge amounts of books available digitally including new releases. In order to do this Amazon made an agreement with the publishers that was VERY favorable to them and authors by agreeing to pay the wholesale price of the print hardback books for the ebooks. Then Amazon, to make this push to digital possible, capped all books at $9.99 retail price to get consumers to go for it which was probably very close to at-cost if not under cost.

    The publishers and authors were getting a sweet deal. Were they happy? The authors probably were but the publishers were afraid. They were afraid of the paradigm shift. Who cares if physical bookstores can’t compete except for a few that can differentiate themselves like B&N is trying to do? We decry the Mom & Pop store when the mall comes to town. We decry the mall when the big box stores come into town. We decry the big box stores when the online retailers or Walmart come in. It’s all just nostalgia and fear of keeping up with the paradigm shifts that’s fueling this. In the end, assuming the DOJ has the proof they claim they have, the big 6 publishers colluded and fixed prices to protect themselves and their business plans to the detriment of the consumer and the authors.

  65. Josh Ferguson:

    “The wholesale model is the same model the physical bookstores currently use.”

    And? Just because one retail model work for one market doesn’t suggest it should be required for every market. This response doesn’t actually answer the question posed.

  66. @John Scalzi:
    “Just because one retail model work for one market doesn’t suggest it should be required for every market.”

    No it doesn’t, but it enforces the fact that Amazon wasn’t out with some obscure payment model that was being used to sneakily put everyone out of business. It was actually the same model they have been using for physical book sales with those exact same publishers. What is the rationale behind using the agency model just for ebooks and the wholesale model for everything else? It’s the agency model that’s the odd man out, not the other way around. That is what smells fishy to me.

  67. @John Scalzi

    Here’s my question to you: What are the publishers afraid of? There must have been extrodinary concern on the side of the publishers for them to (allegedly) collude in order to force Amazon into a model that actually brought in LESS money for themselves and authors than they were making with at the time. Holy cow! Why would they do illegal activities in order to make LESS money?

    This is the little red light that keeps flashing in my peripheral vision. They were afraid of something else and it’s my contention it was to protect their traditional business model rather than moving with the times. It was done purely in the PUBLISHERS’ best interest and not in the consumers’ nor the authors’. Otherwise why should anyone care if they get money via a digital format over a physical one? (In fact, I would argue that because of the doctrine of First Sale, they would love to sell ebooks over physical books).

  68. Josh Ferguson:

    “it enforces the fact that Amazon wasn’t out with some obscure payment model that was being used to sneakily put everyone out of business.”

    No, it was leveraging the existing payment model to attempt to create a monopsony and not-at-all-subtly put everyone out of business.

    I’m not sure why you appear to believe that such a business tactic is virtuous, or why companies should not be allowed to alter their terms of business if and when they believe the current model will do substantial damage to their industry.

    And it’s also not relevant to the original question.

    “What are the publishers afraid of?”

    How is this question at all relevant to the initial question of why publishers must go with a business model they do not prefer?

  69. I do not buy that the argument that Amazon was trying to put people out of business. Beat competition sure, then again so does Apple which is viewed by many as a wonderful company. It used to be that people felt amazon would put brick and mortar store out of business because they sold the exact same product for cheaper. Now it seems ebooks are the big bad wolf. Businesses and business models come into being grow, age and die just like everything else.
    Will publishers ultimately screw themselves by over pricing a commodity that many feel should be cheaper? Who knows. I suspect there are many more suprises to come for the traditional publishers. Most everyone I know who would be considered typical book purchasers and have not followed this story see the publishers in a very bad light on this one.

  70. Yep:

    “I do not buy that the argument that Amazon was trying to put people out of business.”

    And? Your belief is based on what, precisely?

    Likewise, intent is separate from consequence, and I rather strongly suspect consequence was the bottom line for publishers.

    I have the feeling that rather too many people are still looking at this like a football game, with an “our side” versus “their side.” I think people need to understand that neither Amazon nor the five publishers named in the DOJ suit are on anyone’s side other than their own.

  71. Well, to be specific about what I think, to be clear, I do believe the “general” argument (damn my inability to use italics) is “generally” true. I agree with you that there are exceptions, and even agree with the exceptions you cite.

    At a certain point, the general rule starts to look like Swiss cheese, with the exceptions playing the role of the holes. Tasty, but not really proof of much.

    Let’s not buy into the old quote about making the facts fit the theory…

  72. My belief is based upon the same thing that those who feel that Amazon intends to put people out of business…..opinion. It is not like Bezos said he wants to bury the bookstores or publishers. If amazon under prices products compared to competitors that does not mean their intent is to put them under. I would see it as they intend to win the business. A consequence of such activity could be the demise of a publisher particularly if they cannot find a way to adapt or compete.

    I do agree that everyone involved is on their own side and their opinions on the matter are colored by how it may impact them… author, publisher, consumer, etc.

  73. @John Scalzi
    “I think people need to understand that neither Amazon nor the five publishers named in the DOJ suit are on anyone’s side other than their own.”

    Completely agree. What I find more “virtuous” in Amazon’s model was that I was paying a better price than I am now under the publishers’ model. Was this at the expense of the publishers and the authors? Absolutely not! They were actually making MORE money. I’m on MY side, after all. Just like you are on YOUR side. My side presently corresponds with Amazon. It won’t always be that way, but for this it does.

    What I’m trying to do is point out that the publishers are being disengenuous because what they are saying doesn’t add up. It’s fishy. It doesn’t pass the smell test.

    Companies of course have the option to renegotiate their contracts. All of them doing it simultaneously with the exact same terms after making arrangements with Apple beforehand also smells fishy and if the DOJ has the communications between the publishers that they say they have, then it’s absolutely illegal. So we have a fear of a company, someday becoming a monopsony vs. 5 companies operating in an (allegedly) illegal manor by colluding and price fixing. One happened. One was a fear of someday. In the end, the consumer lost. What’s virtuous about that? It’s a real tough position to defend.

  74. Oh, what an observaton John. I think you’re right about the “our side” versus “their side” views. I don’t think anyone who isn’t involved in the business planning of these companies can truly understand the motives. I form my opinions based on what the companies do. I also value professional publishing quite a lot. If the publishers colluded, then it is a crime, and they should pay the appropriate penalties. But, that has yet to be proven, and I’ve seen people saying the government doesn’t have a very strong case.
    This is how I see ebook prices. These are my observations and opinions.
    Hardcover cover price around 22-35 dollars. Ebook of hardcover always around half the cover price. Considering you get the content of the book, yet not the physical book, this seems like a very fair price to me.
    Trade paperbacks don’t get as much of a discount on the cover price, but it’s around 25%-30%.
    Mass paperbacks don’t get any discount under the agency model. But, noone ever discounts new mass paperbacks much if at all.
    These all seem fair and reasonable to me.
    I don’t think it’s reasonable for people to expect ebook prices to be based on what any retailer is willing to discount a physical book to. A discounted book from a retailer does not equal the ebook costs more to me. I have, in fact, seen amazon increase their already deep discounts, especially on the most popular books, since agency pricing came into being. My suspicion that they do this to further inflame and exagerate this situation are based entirely on my disdain for their predatory business practices.
    I’ve been ranting long enough, but I want to say thanks for saying that again John. I had a bit of frustration building following this discussion, and you popped that bubble. Again these are just my opinions, and I understand if somebody disagrees. I won’t argue with anyone about them, no one is going to change my mind about it, so arguing would be fruitless.

  75. Yep:

    “My belief is based upon the same thing that those who feel that Amazon intends to put people out of business…..opinion.”

    Saying your belief is based on opinion doesn’t say anything, Yep. Your belief is an opinion. That your belief is based on an opinion is self-evident.

    What your opinion based on?

    Josh Ferguson:

    So to sum up, you agree there is no problem with the publishers changing the business model to suit them rather than Amazon. Which was the question that was being asked, which you attempted to address.

    That there was alleged collusion, while interesting (and illegal if it is proven), is in itself neither here nor there regarding the fundamental agreement that publishers were not obliged to do business on Amazon’s terms.

  76. I do not believe John Sargent. Sure, he may have made the final decision alone in his basement on his excercise bike, but he did not make it in a vacuum. As Edward Brennan observed, he didn’t make the decision without consulting with the Macmillan lawyers, and his bosses at Georg von Holtzbrinck Publishing Group, and I’m sure that he knew that Apple was making the same negotiations with his counterparts at the other publishing houses. If Apple was informing him that the others were close to signing the same agreement, I’m sure the decision to go forward with the new model would be much easier to make than if he believed that Macmillan was going to be the only publisher to sign with Apple.

    Second, I’m still not convinced that the agency model makes less money for the publishers than the wholesale model. While the income received by the publisher for the ebook is usually several dollars less than income from the hardcover, the income received by the publisher when the ebook is a couple dollars more than the income from the mass market paperback, as the ebook price is usually at parity with the MMPB, but gives the publisher 20% than the typical wholesale price. Sure, this means the publisher gets less money upfront, but depending on whether the book mainly sells hardcover vs trade or mass-market, the total income for the book may well be greater for the publisher when the book stays in print for a long time. It’s probably too soon to know for sure, are there more total sales of a book because ebooks can’t be loaned and can’t be purchased used?

  77. Bruce:

    “I do not believe John Sargent. Sure, he may have made the final decision alone in his basement on his excercise bike, but he did not make it in a vacuum.”

    I don’t believe the suggestion is that he made the decision in a vacuum, only that he did not collude to come to that decision. Independent of whether he did collude, it’s not unreasonable to think a CEO of a major publishing company could reach the decision he did independent of collusion, knowing what he knew of Apple’s willingness to entertain the agency model.

  78. My opiinion is based up the fact that I have not seen any proof that Amazon’s intention is to drive others ourt of business.

  79. Yep:

    Leaving aside the question of whether you have spent any amount of time seriously examining Amazon’s business model, allow me to revisit a comment I made earlier: intent is separate from consequence, and I rather strongly suspect consequence was the bottom line for publishers.

  80. As they say on the internets, IANAL. I don’t know where they draw the line for collusion. I’m just saying that I’m not convinced that John Sargent would choose to change to a new sales model that would decrease Macmillan’s revenue if he didn’t believe the rest of the major publishers would go along with it. I’m not privy to the discussions between Apple and the publishers, but I can see where certain types of discussions would be considered collusion. If so, the time and location of his decision is immaterial, what matters is the manner of the discussion leading up to the decision. I don’t believe that it’s necessary for the parties to all come to an agreement in person at the same time for it to be collusion.

  81. Isn’t it every companies desire to drive their competitors out of buisness and take all the market share?

    and of course those competitors resist that.

    however they should not use illegal means to resist

    here is an idea. Maybe they should try making a better product at lower prices? Novel concept I know…

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