Like so many in the industry, we’ve been closely following the Department of Justice’s investigation into e-Book pricing. For those of you haven’t been following along, the Department of Justice has been looking into whether or not five of the “Big Six” publishers (HarperCollins, Hachette, Simon & Schuster, Penguin, Macmillan) colluded with Apple to use the agency model when selling e-Books to retailers (such as BookPeople, indie bookstores across the country, Barnes & Noble, Amazon, etc.)
What does the agency model mean? How is it different from the way print books are sold? Print books are sold on the wholesale model, which means that the book publishers sells their books to retailers at a price discounted from the retail price printed on the book. The agency model under which publishers have been selling e-Books is commission-based. When a retailer sells an e-Book, it receives a percentage of the retail price from the publisher. This percentage is determined by the publisher, as is – and this is key – the retail price of the e-Book.
Before the agency model took effect, retailers were free to sell an e-Book at any price they wanted to, even if that price meant they lost money on the sale. For some online retailers, pricing e-Books at 99 cents or $1.99 was a way for them to make the e-Readers they were also selling more attractive to consumers.
What the Department of Justice was concerned with was not the legality of the agency model itself – the model is a perfectly valid and legal way of doing business; DoJ was concerned with how publishers came to decide that this would be the way they sold e-Books. DoJ believes they have evidence that the publishers colluded with Apple (also part of this law suit), which means they all got together and said, “We agree that this is the way e-Books will be sold from now on,” a violation of the Sherman Anti-Trust Act.
Publishers continue to deny this charge, as does Apple, but yesterday the DoJ went ahead and filed the lawsuit, and three of the publishers (Simon & Schuster, Hachette, HarperCollins) settled. Macmillan and Penguin have chosen not to settle. Among other stipulations, those publishers who settled must now allow their e-Books to be discounted (within limits) by any retailer who chooses to do so.
So why is this a problem? Low prices are a good thing, right? Not when you have a retailer who is willing to lose money or not make any money at all on e-Book sales because books are not their sole commodity. This is the position the book industry is in on many fronts – one retailer is using the entire industry as a loss leader to entice people to its site to buy other, more expensive, products.
Our CEO Steve Bercu, who went to Washington along with other board members of the American Bookseller Association to argue against the DoJ’s lawsuit, explains:
“The settlement and lawsuit are both troubling. I believe that they will prove to be anti-competitive, anti-consumer, and bad for authors as well. It is a well-documented fact that the average price for e-books has fallen about 10% ($1.00) over the last two years (since the Agency Model took effect). I am sure that some e-books cost slightly more now, but very many cost much less due to the fierce competition that has arisen among the numerous providers who have entered the market.
The market share of the largest retailer of e-books has dropped from around 92% to about 62%. The 30% has been captured by players who are offering better, cheaper, and more attractive products for sale. The settlement will cause some of this to change for the next two years. The largest retailer will get the chance to price below cost or at cost in a renewed attempt to capture market share. If they are successful then they will control entry into the market and, more importantly to them, have these consumers to sell other products to (like TV’s, shoes, diapers, etc.)
It is my hope that the many publishers who use the Agency Model and who are not parties to this suit will continue to do so. That way in two years we can return to a fully competitive market where we will be able to deliver the best service at the best price to our customers.”
Steve also spoke to the Austin American Statesman and YNN about the issue.
Macmillan CEO John Sargent sent a resolute email to authors and employees explaining why Macmillan is not settling. Penguin also issued a statement. We stand with them in their belief that the Department’s decision, contrary to its intent, will negatively affect the market for e-Books and the market for books in this country as a whole.
BookPeople 