The government views its settlement with, and continuing litigation against, publishers and Apple over e-book pricing as a great victory for consumers. The overwhelming reaction in the book industry, however, is one of bewilderment, with many members believing that the government has no sense of how the book business really works or what the impact its actions will have long term. In his prepared remarks announcing the settlement and ongoing litigation, Attorney General Eric Holder declared the actions to be the “latest progress in protecting American consumers from anticompetitive harm, ensuring fairness in the marketplace, and making certain that cutting-edge technologies are available at the lowest possible price.” Yet industry members outside of Amazon view the ruling as a dangerous decision that, in the long run, could mean less competition in the e-book and print book markets and fewer places to buy books.
What follows is a breakdown of how this pivotal moment affects the various industry players and consumers.
For the Settling Publishers
First, the agency model is not dead. This case was never about the agency model, but about how these five publishers got to the agency model. And the settlement is not designed to force fundamental reform on the e-book market, but to sanction publishers for their alleged improper conduct.
The three “settling publishers” (Hachette, Simon & Schuster, and HarperCollins) can still use the agency model, but for a period of two years they cannot dictate final consumer prices. In other words, retailers must be free to offer discounts to consumers off the price publishers sell to them. It is not clear if the three houses will modify the agency model (they need to terminate the contracts they signed with Apple) or move back to the wholesale model. The three houses are also forbidden to include any “Most Favored Nation” clauses for at least five years.
The real pain of the settlement is in compliance. Each settling publisher will have to engage in a number of compliance measures, including the appointment of an Antitrust Compliance Officer; training for relevant staff delivered by an attorney; an annual compliance audit; “maintain[ing] and furnish[ing]” a log of all oral and written communications, excluding privileged or public communications, between any employees involved in e-book strategy. The DoJ can also visit the publishers’ offices with written notice, and the publishers must furnish copies of all “books, ledgers, accounts, records, data, or documents” relating to the settlement upon request. DoJ officials can also interview employees or agents of the company.
The settlement also forbids the settling publishers from “retaliating” against e-booksellers, but does “allow” them to continue to supply co-op funds. It isn’t clear what retaliating covers, but e-tailers could conceivably argue that difficult negotiations over discount terms is a form of retaliation.
For the Fighting Publishers
A long legal battle is likely ahead, as Macmillan’s CEO John Sargent acknowledged in his letter. “The costs of continuing, in time, distraction, and expense, are truly daunting,” Sargent noted. “But the terms the DOJ demanded were too onerous.... It is also hard to settle a lawsuit when you know you have done no wrong.”
Penguin CEO John Makinson said the company has not discussed a settlement with the DoJ. “We have done nothing wrong,” he stated flatly in a statement. “We have had the opportunity to study the complaint released by the DOJ today and nothing in this lengthy document causes us to veer from that position. The document contains a number of material misstatements and omissions, which we look forward to having the opportunity to correct in court.”
Penguin and Macmillan could very well still be fighting the government by the time the DoJ provisions concerning the agency model expire sometime in 2014. And if they lose, penalties are likely to be stiffer than those levied on the settling houses.
Apple remains defiant. But while the case laid out by the DoJ is all about the publishers, does anyone believe this isn’t, at its core, about Apple? The press conference held by Eric Holder and his attorneys on April 11 spoke volumes. After an impassioned talk about a victory for consumers, the press pool had just two questions about e-books before changing the subject to the Trayvon Martin case. The fact is, most consumers don’t know about this e-book case or don’t care. Apple, on the other hand, has long been rumored to be under the DoJ microscope. It is beginning to look an awful lot like publishers, in something of a panic over what they saw as an erosion of their pricing power, stumbled into the crosshairs.
While publishers pay the price for some questionable actions, this suit seems confirmation that Apple’s practices are being closely scrutinized by government regulators.
Will e-book prices go down? Perhaps, but again, neither the DoJ action nor the settlement does anything to fundamentally alter the e-book market. The agency model still exists, and Random House, which was not part of the suit, as well as Penguin and Macmillan, are likely to continue to use that sales approach. And most publishers outside of the Big Six have been using the wholesale model. The final settlement, which is still months away, includes a clause that prevents e-tailers from selling e-books at a loss, or from discounting by more than their commission (which has been 30%). That restriction, however, is on a cumulative basis and frees e-tailers to price titles on an individual basis. In the government’s own words, e-tailers could discount some titles by 50% and not discount other titles at all. Most publishers believe e-tailers will look to discount e-book bestsellers, a tactic likely to cut into the sales of hardcovers through bricks-and-mortar stores.
Drew Herdener, a spokesperson for Amazon, called the DoJ’s decisions “a big win for Kindle owners,” adding, “We look forward to being allowed to lower prices on more Kindle books.” Barnes & Noble had no comment. Taking the opposite view of the decision, Authors Guild president Scott Turow said the DoJ action would actually hurt consumers. “Today’s low Kindle book prices will last only as long as it takes Amazon to re-establish its monopoly,” he said in statement. “It is hard to believe that the Justice Department has somehow persuaded itself that this solution fosters competition or is good for readers in the long run.”
Meanwhile, some consumers may see small rebate checks. Sixteen states have reached an agreement in an antitrust lawsuit with Hachette and HarperCollins that calls for the two publishers to pay $51 million to compensate e-book buyers who were overcharged. Apple, Macmillan, Penguin, and Simon & Schuster have not settled with the states. And a consumer class action over e-book pricing, led by the firm Hagens Berman, still looms. “While Attorney General Holder’s actions, if successful, will put an end to the anticompetitive actions,” noted Steve Berman, lead counsel, “our class action is designed to pry the ill-gotten profits from Apple and the publishers and return them to consumers.”
A provision in the settlement requires a settling publisher to notify the DoJ “before forming or modifying a joint venture between it and another publisher related to e-books.” It is unclear if this would somehow affect the launch of Bookish. Attorneys believe that the provision pertains to future joint ventures, but that is not a certainty. Two of the settling publishers, Hachette and S&S, are founders of Bookish, with Penguin the third partner. In its complaint the DoJ repeatedly referred to publishers discussing the formation of joint ventures, which the government took to mean finding a way to raise prices. Publishers contend those references are to the creation of Bookish as a way to create more competition to Amazon.
For the E-book Business
In its complaint, the DoJ touts all the things e-books do for consumers, but fails to note the things they limit. Indeed, there are many places where the government could intercede to make a more competitive digital book market—copyright reform, orphan works, limiting DRM limitations, regulating odious click-on licenses, allowing consumers to re-sell e-books or share them, giving libraries the right to lend e-books. That Amazon’s proprietary platform can lock in consumers is something that poses a potentially much greater competitive issue than price. All of this makes the DoJ’s pricing suit look a lot less like a “consumer” victory.
At the same time, this is also an indictment of publishers: there were other ways they could have tried to foster more competition. For example, they could have removed DRM from e-books, but instead, they went right to price.
Price matters. But at this stage of the game, there are bigger issues. The e-book market is new and evolving, and to view the e-book market detached from the overall book market, to ignore the licensing and platform lock-in strategies of retailers, to look at the market only through the prism of price, may not be the most effective approach to ensure a robust market for consumers. DoJ officials said the action would level the e-book playing field, yet the boundaries of that field are far from chalked off.
The action could help spur innovation. During an interview early this year, attorney William Patry noted that it was always important to pay attention to definitions—and in the DoJ complaint, an e-book is defined as not audio and not an “app.” Why is that important? Because, in theory, it could lead publishers to truly innovate in the e-book space—whether bundling digital and print, or adding audio or other components. Creating a truly new digital product, rather than a simple text recreation, could give publishers more pricing power.