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DOJ Ebook / Apple / Publisher Lawsuit First Thoughts - Arrghhhhh!!!

Apr 18, 2012   [permalink]

As an author, small publisher, and long-time ebook reader — indeed, a pioneering ebook evangelist — all I can say is Arrghhhhh!!!. The real monopolistic, anti-competitive player in the ebook space is Amazon.

Amazon dominates the ebook market like nobody else, and furthers their hold by effectively locking people into a walled garden with their devices. As a publisher, I can report that 75% of our sales come via Amazon, a mere 10% from B&N, and the rest from our own web site and a smattering of other channels (including Apple, Sony, etc.). Amazon owns the market.

While Amazon makes it easy to get their ebooks onto their Kindles, I've worked with readers trying to get ebooks they purchased elsewhere onto their Kindles, and it requires a certain level of geek ability that essentially excludes your typical reader. Apple does the same thing, don't get me wrong, and it's also very annoying. (Not having to use that horrid itunes is the primary reason I use an Android tablet and phone instead of an iphone or ipad.) Walled gardens are, by design, anti-competitive. Now, if the DOJ wants to go after companies that mandate walled gardens for their otherwise-multi-purpose devices, I'd cheer loudly!

Without the "Agency model" that has become prevalent for authors and publishers to use when selling their ebooks, you'd have Amazon as an even more dominant and anti-competitive 1000lb gorilla. It was in response to Amazon's anti-competitive behavior of trying to drive all other ebook sellers out of business that the agency model was adopted. Amazon had to be dragged kicking and screaming into accepting it, because it was hindering their monopoly powers.

As a publisher and author — and reader -- I can say I'm head and shoulders in favor of the agency model over the prior cover-price-plus-discount scheme. In a word? It sucks. Amazon was taking a deliberate loss on ebook prices in order to drive the other distributors out of business. Amazon could afford to lose the money since they're so huge; the other players couldn't afford match below-cost prices. Now that's anti-competitive. Egregiously so.

So the DOJ wants to return to that??? Um, who pushed the DOJ to do this? Amazon perhaps?

Amazon already is unyielding and non-negotiable in pricing for us publishers. They stand up on Mount Olympus and say, "We take 30-65% of the price based on this, this and this, take it or go away." Which, bad as it is, is actually better than it was before. Given that restriction, publishers pick a price that they can live with and that they think the market will bear.

So let's not kid anyone that this lawsuit benefits readers or small ebookstores. Ha! For the short duration while Amazon sells ebooks at a loss, until it kills off the competition, yes, ebooks would be somewhat cheaper than now. But once they've killed their competitors — and they can't keep running a loss for ever and ever — prices will rise, probably higher than now.

Especially since publishers and authors need to earn a certain amount, and Amazon controls that too. Let's nobody pretend that Amazon isn't as cutthroat with demands on publishers. Witness the fact that they recently cut off a publisher because they refused to accept Amazon's demands for a steeper discount.

The whole cover-price-plus-discount scheme that the DOJ seems to want to force on everyone is a ridiculous and aggravating one. Amazon sets the terms. If you don't like them, you can't realistically sell your books is what it amounts to. Selling only other than on Amazon means we'd have our revenue slaughtered by 75%. That's not gonna work. So we'd have to play a silly game with prices. Suppose for a certain title the publisher and author need to receive $5 per sale to make it worthwhile to produce that ebook. If Amazon says, "We demand a 60% discount from the "cover" price" then we'd have to set the (otherwise pointless) "cover price" at $12.50. (So we receive 40% of "$12.50" = $5, which we split with the author, cover our costs, etc.)

So now Amazon could sell that "$12.50" ebook for whatever price they want. They could sell it for 99 cents, pay us the $5, and take a $4 loss on it if they wanted, since they have deep pockets. So that "$12.50" is a price nobody actually pays. It's a meaningless number except as a contortion to play the silly game to get the net income the publisher and author need. (Well, unless Amazon wants to disfavor a given publisher, and sell the book at the $12.50 price nobody really intended for it to be sold at.)

Now that also means that if we, the publisher, want to sell the book ourselves, and we price it at $5 on our store (nobody would put it at that non-sensical $12.50), then Amazon has undercut us, and steered business away from us and anyone else daring to sell it for more than 99 cents. So B&N and Apple etc. would either (a) have to take a loss by matching that 99 cent price (who wants to sell at a loss except to drive out the competition??), or (b) go out of business (because they couldn't sell enough compared to Amazon eating the losses) or (c) try to sell it for, say, $5 and get very few sales. I don't see any way we'd continue to receive that 25% of our income that comes from non-Amazon sources. So that kills the other 25% of our sales, and our net revenue drops. We lose, the author loses, and when we go out of business, the reader loses. (We're in the business of producing ebooks that the authors don't want to produce themselves, so to the argument that "the author could put it up themselves," well, no, or they would have. Publishers have less of a role with ebooks than print books, but that role isn't zero.)

So if there is a return to this ridiculous model, it should come with a requirement that Amazon and the other distributors can't sell ebooks for less than their cost (wholesale cost of the ebook plus their internal costs). No anti-competitive selling at a loss.

What that really suggests is a third model: The publisher sells the book to distributors at a wholesale price chosen by the publisher (or author for self-publishing authors), and the distributors are free to sell it for anything at or above their own breakeven point.

Then the competition would be in full vigor: The distributors would compete based on keeping their internal costs down (costs of web sites, network costs, etc.) and competing to get customers. There could be some provision for a small amount of loss-leaders, but limited to a small percent of sales so it's prevented from being anti-competitive on a market-wide scale.

Now let's talk about this "we're trying to reduce the cost of ebooks" argument the DOJ is putting forth.

As to what the fair price of an ebook is — it's what the market will bear. If readers aren't willing to pay higher prices for ebooks — then they won't. There are literally millions of choices in books to read (Amazon's catalog of ebooks and new & used print books tallies close to something like ten million; with tons more new ones every day). If readers feel a certain price is too high, they won't pay it. That said, I've done a lot of surveys and price testing, and found readers seem fairly willing to pay around $10 for a novel-length ebook. That doesn't mean $12 is "too high" — it means the publisher will make less money if they aren't pricing it well. (I don't see the DOJ going after publishers for the $100 textbooks.)

Publishers are in business to make money, and there are so many publishers — especially now where any author can self-publish -- that competition among publishers is almost perfectly competitive, especially in ebooks. Market forces are doing their thing, perfectly pricing ebooks given the constraints. Those priced too high won't sell; those priced too low are simply losing money for their publishers and authors. Publishers shouldn't be penalized if people are willingly paying more for their product. If they price them "too high" then it's their own business that will suffer, and they'll either adjust or go out of business. The fact that people are willing to pay the asking price on a product, especially one with so many choices — ten million books to read — means the publishers are not anti-competitive. Geez, they can't be. People will read something else.

I'm very much a fan of competition, and the agency model seems fair to me. It completely levels the playing field for publishers, and puts all the distributors more or less in the same ballpark. The distributors can compete for business by offering better terms to publishers. Amazon actually pays a slightly higher percent to us than B&N, but we do best with sales directly from our own web site store. Which, by the way, is ReAnimus.com. :) So there's an existing vehicle for competition there too. (Amazon has plenty of anti-competitive tricks going for it, which is why I said "given the constraints.")

It's the alternative it replaced that was far more monopolistic and unfair, so I'm aghast the government wants to restore it. The DOJ has no business telling publishers they need to sell ebooks cheaper. There's nearly infinite competition in ebooks, so the "suing to reduce ebook prices" concept is frankly insulting. They don't force people selling houses to sell them cheaper. They don't force car makers to sell cars cheaper. They don't force breweries to sell bottles of beer cheaper.

As readers we all might prefer to pay 99 cents for the latest blockbuster novel, but then I'd like to pay 99 cents for a nice house and new car and all the beer I can drink too. Wanting something for nothing is human nature. But it shouldn't be where the law steps in to make it so.

It's irritating that Amazon has 75% of sales, and if anything is anti-competitive it's that Amazon gains and maintains that position because they effectively lock people into Amazon for Kindle ebooks. But is the DOJ suing Amazon and Apple for walling people into their garden? No? Why not? Why aren't they forcing Amazon to make it possible for any other bookstore to do 1-click loading of ebooks onto Kindles? Now that would be good for readers.

The government should interfere with markets when they're obviously broken or harmful to society. But the ebook pricing market is about as perfectly functioning a market as one could imagine, in light of and except for Amazon's anti-competitive practices that the DOJ isn't doing anything about. Using the government as a tool to hand Amazon an even bigger monopoly is just insane, and will only hurt readers, authors, publishers, and society as a whole.

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