When Amazon.com went live in the summer of 1995, selling mostly Dilbert comics collections, sex guides, and computer manuals, few imagined the impact the company would end up having on the book business. But with the November 2007 introduction of the Kindle digital reading platform, Amazon not only established a consumer e-book market, it cemented its role as a force in the 21st-century book business.
The birth of the modern e-book market did not come quickly or easily. Unlike the music industry, which had its digital future brutally forced upon it with the arrival of Napster in 1999, e-books were a slow-moving train. Visions of a mainstream digital book market had begun to proliferate in the 1980s. By the late 1990s, a handful of forward-looking ventures had emerged in the e-book space: Palm, Everybook, SoftBook, Voyager, NetLibrary, and in the early 2000s, the headline-grabbing Rocket eBook Reader. Meanwhile, efforts like Project Gutenberg were busily putting free text editions of classic public domain books online.
Unlike music, where MP3 technology enabled users to swiftly upload, find, and download songs, getting printed pages onto screens suitable for immersive reading provided something of a welcome speed bump for the book business. And despite “print is dead” becoming an annoyingly common refrain among some pundits, e-book hype in the early 2000s was still vastly outpacing reality.
That all changed when three of the tech industry’s biggest players— Google, Amazon, and Apple—turned their gaze to books. Their efforts would succeed in finally moving books into the digital age. But they also resulted in two of the most contentious legal battles in publishing history, whose federal court records detail the publishing industry’s winding path to the digital world.
It’s usually a big book deal or an important speech that makes headlines at the Frankfurt Book Fair. But at the 2004 event, it was a young technology company with the motto “don’t be evil” that garnered attention. Just weeks after its successful August IPO—which staked the company with a $23 billion market cap—Google was at the Frankfurt Book Fair, where it unveiled Google Print, an ambitious plan to work with publishers to scan print books and index them online. Still rattled by Napster’s effect on the music industry, publishers reacted coolly to the project.
Just two months later, however, in December, Google’s potential game changer became a shockwave when the company announced another plan: Google Library, a program to scan and index millions of out-of-print books from partner libraries and making short extracts Google called “snippets” available surrounding a user’s search term—copying and displaying, all without seeking permission from copyright holders.
For Google, the seeds of its book-scanning plans began quietly, in 2002, as a personal project of cofounder Larry Page. Page understood that centuries of human history sat locked away in printed books moldering on library shelves. And he recognized the enormity of the current moment in the world’s cultural history: if these hundreds of millions of books didn’t get online quickly they risked being swamped by the exponential growth of new online sources and would be lost forever.
Google executives also understood that the publishing industry was in no position to address the problem. Already surviving on the thinnest of margins, publishers had no incentive to create online editions of books that were not commercially viable. Complicating matters, publishers didn’t even have copies of many of these long out-of-print works, and changing copyright laws and decades of mergers and acquisitions meant that rights ownership for millions of these books was unclear and in many cases unknowable.
With its technology and resources, Google was in position to act. And in libraries—institutions invested in at least part of Google’s mission, to preserve and offer wider access to their rich collections—Google found a group of willing (if uneasy) partners. The University of Michigan, Page’s alma mater, was one of Google’s first library partners. At an initial meeting, UM president Mary Sue Coleman reportedly told Page that it would take libraries 1,000 years to digitize their collections at the current pace. Page responded that Google could do it in six.
Publishers and authors groups, however, were alarmed by the plan. For one, Google couldn’t just copy this trove of copyrighted works and profit from them without permission, could they? Authors and publishers believed they deserved a piece of whatever value this project created. Furthermore, they wanted some measure of control. After watching Napster upend the music industry, authors and publishers were understandably wary of seeing their books converted into unlicensed online editions against their will.
As controversy swirled around the plan, Google executives eventually agreed to a brief pause in scanning to allow for talks with publisher and author groups. But soon arriving at an impasse, the Authors Guild filed a massive copyright infringement suit against Google in September 2005. Weeks later, in October, a group of plaintiff publishers, organized and supported by the Association of American Publishers, also sued.
“Authors and publishers know how useful Google’s search engine can be,” said then–AAP president Pat Schroeder, in a statement announcing the publishers’ suit. “But the bottom line is that Google is seeking to make millions of dollars by freeloading on the talent and property of authors and publishers.” Google’s general counsel David Drummond responded by insisting the program was legal, and beneficial. “We look forward to the day that the program’s opponents marvel at the fact that they actually tried to stop an innovation that, by making books as easy to find as web pages, brought their works to the attention of a vast new global audience,” he countered.
Over the next three years, as the wheels of justice ground slowly, Google moved quickly. It added a host of new library partners and scanned millions of books from library shelves. Then, in October 2008, representatives from the publishing industry, the Authors Guild, and Google announced a surprise settlement. In what Authors Guild executive director Paul Aiken called a solution as “audacious” as Google’s scanning project, the parties unveiled a $125 million deal that would compensate some rightsholders, create a groundbreaking Book Rights Registry to track digital rights, and eventually turn Google’s universal digital library into a subscription-access database and, potentially, even an e-bookstore as well.
“We realized that we could light up the out-of-print backlist of this industry for two things,” Bertelsmann’s Richard Sarnoff, one of the deal’s chief architects, told PW in a 2009 interview. “Discovery, and consumption.”
The ambitious settlement quickly drew opposition from a range of stakeholders, however, including U.S. regulators. At a February 2010 final fairness hearing, U.S. attorney William Cavanaugh urged judge Denny Chin to reject the settlement. The parties, Cavanaugh argued, had grossly overstepped by “grafting” a forward-looking business deal onto a case that turned on a narrow legal question: whether Google’s “copying and snippeting” was copyright infringement.
Some 13 months later, on March 22, 2011, Chin did reject the settlement. It was now back to litigation—and one of the most fascinating copyright cases in publishing history: fair use applied on an industrial scale.
Six months later, the Authors Guild doubled down. It filed a second copyright infringement suit of its own in September 2011—this one against a coalition of Google’s academic library-scanning partners known as the HathiTrust. Just over a year later, in October 2012, the HathiTrust case was the first to return a verdict on the fair use question at the core of Google’s library-scanning program. In an emphatic summary judgment, federal judge Harold Baer found the HathiTrust’s scanning program with Google to be legal, even lauding the program as an “invaluable contribution to the progress of science and cultivation of the arts.”
Seeing the writing on the wall, the publishers struck a deal with Google to drop their suit just days later. While the details of that agreement have never been fully publicly disclosed, then–AAP executive director Tom Allen acknowledged a new reality. “Basically, the case was filed seven years ago, and the world has changed a lot,” he told PW in an interview.
The Authors Guild, however, vowed to carry on with its litigation. Some 13 months later, on Nov. 13, 2013, Chin also found Google’s scanning to be fair use. Like Baer, Chin too offered something of a ringing endorsement of Google’s program.
“It preserves books—in particular, out of print and old books that have been forgotten in the bowels of libraries—and it gives them new life,” Chin wrote of Google’s scanning efforts. “It facilitates access to books for print-disabled and remote or underserved populations. It generates new audiences and creates new sources of income for authors and publishers. Indeed, all society benefits.”
Baer and Chin were both upheld unanimously by the federal Second Circuit Court of Appeals. And in a final act, the Supreme Court on Apr. 18, 2016, declined to hear the Authors Guild’s appeal, officially ending the litigation after roughly 11 years.
“The great irony is that books have become something of an afterthought for Google,” observed James Grimmelmann, attorney and a PW special correspondent, in a May 2016 PW article wrapping the long-running legal drama. A conflict that had once captivated the publishing world, he concluded, had in the end proved to be “a decade-long distraction from the genuine tectonic shift taking place in digital publishing.”
Amazon
Meanwhile, as publishers and authors were battling in the courtroom over Google’s scans of out-of-print library books, Amazon executives were in the boardroom, cutting deals that would finally crack the e-book market wide open—and would eventually spark another epic legal battle.
In his Nov. 22, 2007, review, New York Times technology guru David Pogue called the Amazon Kindle the e-reader that “just may catch on.” Not because of the device itself—the $400 Kindle e-reader had the “design panache of a Commodore 64,” Pogue sneered, and it used the same E Ink display as the competing Sony Reader introduced over a year earlier. What set the Amazon Kindle apart was the addition of free cellular broadband that connected readers to a well-stocked proprietary Kindle Store.
Amazon had figured it out: devices would change—they always do—but the success of the e-book market rested upon consumers’ ability to get the books they wanted, conveniently, at an attractive price point. And with the Kindle, readers for the first time had exactly that: instant, easy, affordable access to all the most popular titles—some 90,000 at launch—including nearly every title on the New York Times’ various bestseller lists. By contrast, the Sony Reader offered access to 20,000 titles, which had to be downloaded through a hardwired connection.
For Amazon, getting there required significant time and investment—including paying for the digital conversion of some of the publishers titles. But when the Kindle launched in November 2007, its sales were so brisk that the device sold out within hours, with a monthslong waiting list. And over the next two years, Amazon built a thriving, dominant e-book business, posting gaudy triple-digit growth rates.
For publishers, however, there was a serious problem: Amazon had capped its Kindle e-book prices at $9.99—a low price that publishers saw as destroying the perceived value of books. After all, if readers could buy new releases for $9.99 without having to leave the sofa, how would bookstores continue to sell $30 hardcovers?
As Kindle sales soared, the major publishers complained bitterly—but there was little they could do. And it was partly a problem of their own making. That’s because the major publishers had set up their nascent e-book businesses to work much like their print book businesses, on a “wholesale” model. Under a wholesale model, publishers set the retail prices for their books and offer resellers a standard discount, usually 50% for trade titles. For e-books, publishers set it up the same way—except they lowered e-book list prices by 20% to reflect costs saved by not having to manufacture, ship, and warehouse physical books.
As their Kindle negotiations with Amazon unfolded, publishers were so preoccupied with other digital concerns, Amazon executives recalled, that they didn’t really think about what Amazon planned to charge for Kindle e-books. “The publishers were mostly concerned about issues such as clarity on copyright ownership, implementation of DRM, and whether the files would be secure,” said Amazon director Laura Porco, part of the Kindle launch development team. “In fact, several of the largest trade publishers had publicly available e-book terms that we simply accepted.”
When the Kindle launched, Amazon’s math looked roughly like this: An e-book version of a new-release $30 hardcover book would be reduced by 20% to create a digital list price of $24. With a standard 50% trade discount applied Amazon paid the publisher $12 per e-book. At $9.99, Amazon was eating a loss of about $3 per sale. But those losses represented nothing more than a classic loss-leading strategy, Amazon executives later claimed. Overall, $9.99 was sustainable because Kindle users were also buying a high volume of backlist titles where the margins were positive.
Publishers, however, saw Amazon’s $9.99 strategy very differently. By selling popular e-books at a loss, Amazon was accruing power in several ways. For one, cheap new release e-books were killing Amazon’s bricks-and-mortar competitors. As the Kindle was ascending, the nation’s largest bookselling chain, Barnes & Noble, was closing stores at an alarming rate, and the second-largest chain, Borders, would soon collapse. Furthermore, Amazon’s pricing discouraged competition in the nascent e-book space. After all, who could compete with deep-pocketed Amazon’s below-cost e-book prices? Barnes & Noble was trying, but its Nook platform was bleeding cash trying to keep up with Amazon’s cut-rate pricing.
By the end of 2009, concern among the major publishers had reached a fever pitch. And despite a few skirmishes (publishers eliminated the 20% digital list price discount, for example, and some threatened to delay new releases to Amazon, a practice known as windowing), the publishers recognized that they were frustratingly ill-equipped to move the increasingly powerful Amazon off its price point.
In a September 2009 memo to herself, the late S&S CEO Carolyn Reidy outlined her predicament: Simon & Schuster’s core business with Amazon was $55 million, with another $20 million in Kindle sales—business that Amazon would likely “cut off entirely” if S&S tried to change its e-book terms, she noted. Without the cover of other publishers changing their terms as well, Reidy surmised, there was “no chance of success.”
Apple
Meanwhile, a new player was preparing to enter the e-book fray: Apple. Although the idea of launching an e-bookstore had been periodically discussed by Apple executives, one key voice had stood in its way thus far: Steve Jobs. Jobs believed that Apple’s current devices—the Mac, the iPhone, and the iPod Touch—simply did not offer a good enough reading experience. But with the iPad in the pipeline, here was Apple’s chance.
In November 2009, Apple senior v-p of services Eddy Cue once again raised the prospect of an e-bookstore with Jobs. This time, Jobs was receptive. But he tasked Cue with a Herculean challenge. For Jobs to sign off, the Apple e-bookstore would have to offer “a wide selection” of popular titles—meaning at least four of the then–Big Six publishers had to be on board at launch. And unlike Amazon, Apple would not tolerate losing money on any e-book sale. Furthermore, Apple’s e-bookstore contracts would have to be drawn with uniform basic terms for all e-book providers. The kicker: the e-bookstore had to launch with the unveiling of the iPad on Jan. 27, 2010.
Cue had just over two months to strike a deal unprecedented in publishing history, setting off a whirlwind of meetings, phone calls, and intense, simultaneous negotiations with executives at the Big Six publishers. Finally, just days before the iPad launch, Apple and five of the then Big Six publishers (Random House was the lone holdout) struck a groundbreaking deal that would ultimately change the e-book business from wholesale to “agency” pricing—a model by which the publishers would keep a measure of control over their retail prices, although within “tiers” negotiated with Apple. Apple in turn would take a 30% commission on each sale.
Under the agency model, the publishers’ e-book math suddenly changed. On the plus side, Amazon’s $9.99 prices on new releases were history. For a new-release hardcover priced at $30, publishers could set their consumer e-book prices as high as $14.99. The downside: even at $14.99, publishers netted significantly less money than they made from Amazon under the wholesale model. A $14.99 consumer sale under agency paid publishers about $10.50 after Apple’s 30% commission. A $9.99 consumer sale from Amazon still netted them $15.
But while it cost money in the short term, the agency switch gave publishers what they believed they needed most: the ability to balance their print and digital businesses. And a tool with which to move Amazon off the wholesale model, which came in the form of a “most favored nation” clause in Apple’s individual but uniform contracts with the publishers.
A fairly common tool, Apple’s MFN simply gave the company the right to match any competitor’s retail price for e-books. But in this case, it also worked to guarantee that each publisher would move Amazon to agency pricing, too. After all, if a publisher allowed Amazon to stay on wholesale and charge $9.99 for e-books, Apple could then match that price and pay the publisher only 70% of $9.99—a financial hit no publisher would accept. Apple’s MFN thus cleverly assured each publisher that they’d all be moving Amazon off wholesale, a united front that blunted the threat of Amazon retaliation that had until now kept each publisher from acting individually against the e-retailer.
On Jan. 27, 2010, Steve Jobs personally unveiled the iPad at a glitzy event in San Francisco. Jobs debuted the iBookstore by purchasing an e-book copy of late Massachusetts senator Edward M. Kennedy’s bestselling autobiography, True Compass. He paid $14.99. But Wall Street Journal columnist Walter Mossberg had a question: Why would customers pay $14.99 for an e-book from Apple, when they could get it from Amazon or Barnes & Noble for $9.99? “That won’t be the case,” Jobs responded. “The prices will be the same.” Antitrust regulators would soon home in on that statement as evidence of a price-fixing scheme.
On Jan. 28, 2010, Macmillan CEO John Sargent was the first to give Amazon its new agency terms, at a meeting in Seattle. The tense meeting was over in about 20 minutes. Hours later, in a move that made national headlines, Amazon showed its displeasure by disabling the buy buttons for all of Macmillan’s titles—print and digital.
In a Feb. 4, 2010, blog post, Sargent tried to explain Macmillan’s switch away from a wholesale e-book market he described as “fundamentally unbalanced.” Yes, Macmillan would make less money on the sale of e-books under agency, Sargent conceded. “But,” he added, “we will have a stable and rational market.”
Amazon, meanwhile, understood what was happening. Within a week, the company restored Macmillan’s buy buttons—and on Feb. 5, 2010, signed its first agency agreement with Macmillan. Hachette, HarperCollins, Simon & Schuster, and Penguin followed. Other publishers also followed suit. By June 2010, the agency era for e-books was in full swing. In 2011, the lone holdout among the Big Six, Random House, switched—after Steve Jobs himself put the squeeze on CEO Markus Dohle.
The story was far from over, however. Just days after the publishers’ new agency agreements went into effect, Texas Attorney General Greg Abbott opened an investigation into the sudden spike in e-book prices. Weeks later Connecticut Attorney General (and future Democratic senator) Richard Blumenthal announced that his office, too, had opened a probe.
On Aug. 9, 2011, the Seattle-based firm Hagens Berman Sobol Shapiro filed the first class action suit in a Northern California federal court, alleging a conspiracy between Apple and five of the Big Six publishers to “fix” e-book prices. And five months later, on April, 11, 2012, Attorney General Eric Holder announced a civil antitrust lawsuit had been filed, charging Apple and five of the big six publishers with a conspiracy to eliminate retail price competition from the e-book market. Only Random House, which had rebuffed Apple’s initial overtures, was spared.
On the day the DOJ suit was filed, three publishers—Hachette, HarperCollins, and Simon & Schuster—announced they had already settled the federal charges, and shortly thereafter agreed to settle the state claims as well. Macmillan and Penguin resisted at first, but also settled. In all, the five settling publishers agreed to credit $166 million back to e-book customers, and submitted to a host of temporary oversight measures. All things considered, the settlements were excellent deals for the publishers. Because the funds were issued as e-book credits to consumers, most of the money flowed back to the publishers, almost like a court-ordered promotion. But more importantly, the charges did not fundamentally affect the publishers’ agency deals. Despite their penalties, the publishers’ scheme with Apple had successfully changed the e-book market.
Apple, however, refused to settle and went to trial in federal court. After 11 days of arguments and testimony in June 2013, it took judge Denise Cote just 20 days to return a verdict finding Apple liable for price fixing. “The totality of the evidence leads inextricably to the finding that Apple chose to join forces with the Publisher Defendants to raise e-book prices,” the judge held, “and equipped them with the means to do so.”
To settle the consolidated state, federal, and consumer class action cases, Apple agreed to refund consumers up to $400 million. But the agency model survived.
Coda
With the arrival of agency pricing, the publishing industry swiftly settled into a new equilibrium. E-book sales plummeted, a function of the higher price point. Print sales, meanwhile, began to tick back up. In a speech at the 2017 Frankfurt Book Fair, Penguin Random House CEO Markus Dohle celebrated that print to digital sales had now settled in to an 80/20 split in favor of print.
At the same time, many publishers were posting strong profits in their digital businesses—thanks to the advent of digital audio. A decade ago, no one could have predicted that audio would be leading publishers’ digital operations into profitability. But freed from CDs and wired headphones, audiobooks have become big business. Digital audio posted strong double-digit growth for much of the last decade, bringing a wave of new customers to publishers.
Still, in 2022, another wave of legal turmoil is roiling the e-book landscape. Libraries and publishers are clashing over equitable access to e-books. Hagens Berman Sobol Shapiro, the same firm that first sued Apple and the major publishers for colluding to fix e-book prices, has now filed another suit—this time accusing the major publishers of colluding with Amazon to fix e-book prices. And in the shadow of the Google case, a group of major publishers is suing the Internet Archive over its program to scan library copies of print books and then lend the PDFs under an untested legal theory known as controlled digital lending. While the Google case established the legality of scanning books for machines to read, how will the courts rule on a scan plan that enables humans to read? Another chapter in the e-book’s saga is now underway.
Andrew Richard Albanese is senior writer at PW.
