Wednesday, April 11, 2012

Thoughts and Explanations of the Lawsuit against Apple and Publishers

So. This is happening: U.S. Sues Apple, Publishers Over E-Book Pricing (goes to the Wall Street Journal, so the link may expire).

For those of you who don't engage in regular discussions about the business side of publishing books, this is probably a case out of left field for you, but it's probably going to affect the consumer just as much as it does the companies involved.

By way of brief summary, here's what's going on:

Amazon sells books cheap.
Apple doesn't want to compete.
Publishers fear monopoly.
Apple and publishers accused of price-fixing.

If you want the slightly larger story, I elaborate:

(BIG FAT WARNING NOTE: I am not a lawyer. I am merely well-read. All of the information I'm giving to you has been condensed from other articles and essays and blogs elsewhere on the internet. Do not take what I have to say, word for word, as irrefutable truth. This is simply the situation as I understand it.)

In 2010, several of the major publishers began using a practice that can best be described as setting a non-negotiable consumer prices for ebooks. Before this change, an ebook seller could offer their own price to their customers and would then pay the publisher a set amount for each book sold, keeping the difference as profit. From 2010 on, however, these publishers have been declaring a price and the bookseller has had to follow suit.

Now, if we go back to our Econ 101 classes, we may remember that price is (usually) dictated by the balance between supply and demand. If there's a high demand, but a low supply, the price will be high; if there's a high supply, but a low demand, the price is likely to drop.

In other words, price is dictated by what people are willing to pay for it, and that's different for every consumer. (I'm cutting off a long digression into explaining consumer price threshold influences. Do you see me showing restraint? GOOD.)

Back to the case.

Many distributors (for this post, we're defining "distributor" as "someone who provides products to consumers") will adjust the price of the items they're selling in order to maximize their profits by striking a balance between profit margins and quantity sold. While one store might charge full-price for an item because that way they make the most money off of the individual sale, another store might charge 25% less (or some other equally arbitrary number) because they think the increased sales of their product will increase overall profits for the entire store. You all understand this concept already.

What has been happening for the past ten years or so in the bookselling business is that (and others, I'm sure, but they're the biggest target in this discussion), has been significantly reducing their book prices, to the point where many new releases come out at 30% off or more.

Apparently this wasn't an issue in the past, because enough people still bought books in person at independent bookstores, Barnes and Noble, Wal-Mart, the airport, or wherever. Amazon offered lower prices at the cost of delayed gratification, that was about it.

Fastforward to 2010 and Amazon is suddenly the dominant distributor in this new ebook revolution. Granted, ebooks only made up a small percentage of total book sales at that time (and still do, by some estimates), but Amazon commanded over 90% of that small percentage.


Well, there are likely several reasons, the most obvious being that they were the first to popularize a dedicated reading device (the iPad had yet to be announced in early 2010 and the original Nook had just been released in late 2009). But another significant factor is that they were applying the same discounting attitude to ebooks that they had been giving to print books for years.

This was where Apple and others were having trouble. Because Kindle titles were so cheap (by comparison to titles on the iBookstore and similar places that wanted to offer titles at full price), the Kindle titles sold the best. And because everyone is on a level playing field when it comes to distribution of ebooks (as they are not bound by a physical space, geographic concerns have less of an impact), stores that couldn't match Amazon's prices without dipping into no-profit zone couldn't compete.

Hence the decision in 2010 by publishers to force all ebook sellers to play at the same price. They were trying to give other outlets a fighting chance in a market dominated by Amazon. (For those of you who have seen those snarky "This price was set by the publisher" messages on Amazon: Yeah, this is what that's about.)

So today, the United States Department of Justice issued a lawsuit against five of the biggest publishers as well as Apple itself under accusations of having colluded (worked together in secret, basically) in price-fixing -- which is, apparently, completely different from simply looking around and doing what everybody else does.

Three of the five publishing companies have taken a settlement with the DoJ, while Macmillan and Apple are planning to fight it out. (You can find a letter about the case written by Macmillan's CEO to its authors, illustrators, and agents here and form your own conclusions.)

That's what's happened as I see it. Find a more personal take below.


There has been A LOT of discussion about this case, both leading up to it (the DoJ has been threatening to sue the lot of them for weeks) and today, in the wake of an official announcement. Opinions range from "Why hasn't Amazon been sued for monopoly yet?" to "Ebooks aren't worth $15" and all kinds of other observations in between.

What do I think? Well, I'm mostly with John Scalzi on this: I want an environment where those who work in publishing (from writers to artists to editors and so on) have a chance at earning a living from the work they do. We can argue all night on what that looks like, but the bottom line is that I don't want my favorite storytellers (and those that help them deliver those stories) to lose money doing what they love and I enjoy.

That being said, as a consumer (and a college student at that), I'll often look for the best deal when I plan on buying something. I regularly order my books from Amazon (both physical and electronic) because of their lower prices. If I don't need a book immediately for a class or something (and sometimes even then, especially now with 2-day shipping), I'll gladly wait a little in order to save 5-10 bucks on a book. The same is true for games, I'll order online or in bulk rather than pay full price at a local game shop in order to save money.

That doesn't mean I'm completely rational in my decision-making, though (if only, *sigh*). As many of my friends and family will tell you, I probably have at least a hundred books I've never read, and a dozen or so that I'm midway through at any given time. And I've got more games than I can ever play in a full day -- or even a full week. Yet I still buy more of both.

So while a particular market might not make as much on me on each individual item, I'll return for more from a product I enjoy and a store that offers me competitive prices.

How does all this tie in with the case above? Well, here we get into the politics of capitalism a bit and I start wading in a little too far for my comfort, so I'll keep it short.

I don't have an easy answer to the following dilemma, but I think it's worth considering.

On the one hand, I believe it is a company's right to conduct business as they think best, so long as they bring no active harm to anyone by denying an individual their rights as a human being. (Obviously, the reality of this belief is MUCH more complex than how I present it here, but the core of my belief is in there.)

Because of this, on the surface, I'm not a fan of agency pricing. I think Amazon and others should be free to provide their product at a price that fits their business model. The competition brought on by open pricing is what's best for the consumer.

(And for all of you who keep saying that Amazon will drive everyone out of business with their low prices, establish a monopoly, and jack their prices up, thus ending in a terrible outcome for the consumer... No, just... no. That's not how economics works. That's not how business works. If -- and I mean a HUGE IF -- Amazon drives everyone else out of business and if -- and I mean IF -- Amazon then jacks up its prices, someone else will rise up to offer an alternative and fit the customer's needs. Competition, people. It happens.)

On the other hand, if we go back to our above discussion of Supply and Demand, I realize that this new world of electronic publishing breaks most of the old rules. In a world of infinite potential supply (it costs next to nothing to reproduce an ebook once it's been made, after all), how do you measure demand? If you can't measure demand, how do you establish price?

Some rather extreme theorists have posited that publishers and authors in the future won't make money by selling books. Instead, books will be free for all and authors/publishers will make money by selling advertising space in those books, or adaptation rights to film companies and such. I find this to be a ridiculous notion, but the question it hints at is still something to consider:

Will infinite supply eventually drive prices down to zero?

I doubt it, and the current data lies more in favor of the average ebook price rising instead of falling. But that's right now and doesn't indicate where the industry will go in the future. So I throw out that question of supply/demand for you to consider.

Until next time...
-joshua kehe

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