DOJ and Macmillan

Most people know that the U.S. Department of Justice has sued Apple and five publishing companies for “price fixing.”  One of those companies is Macmillan, the parent company of Tor, which is my publisher.  The DOJ suit focuses on the use of the “agency model” as a way to keep e-book prices higher than the prices that Amazon was charging consumers for e-books. Obviously, the entire lawsuit bothers me, but one of the principal reasons why it why it bothers me is that the Department of Justice lawsuit is, in effect, a lawsuit in support of price fixing and predatory pricing by Amazon. I’ve seen comment after comment about how Apple and the publishers were ripping off readers.

And I’ll admit that, in the short run, allowing Amazon to continue to sell e-books at a price below their cost, which is what Amazon was doing, would have resulted in temporarily lower prices for e-books.  There’s absolutely no question about that.

But… doesn’t anyone think about the longer term?  At the time that Macmillan insisted on the “agency model,” Amazon was selling 91% of all e-books.  That’s a far, far, greater market share than Standard Oil had a century ago when the federal government insisted on breaking the Rockefeller Standard Oil trust as a monopoly.  In addition, Amazon was subsiding its losses on e-books not just from its book-selling business, but from its other more profitable online businesses.  None of the independent booksellers nor Barnes and Noble, nor Borders, nor Books-a-Million had such a source of cash. Amazon’s practices, which the DOJ lawsuit effectively supports, were the very definition of both monopoly and predatory pricing… and DOJ did nothing to stop Amazon.

Does anyone in his or her right mind really believe that once Amazon consolidated a true monopoly that Amazon would continue to lose millions of dollars on e-books?  No, two things would have happened.  First, Amazon would have pressed the publishers to lower prices for e-books… and once Amazon had control of the market most of them would have been hard-pressed to resist.  The publishers’ costs, like it or not, wouldn’t have gone down, and that would have pushed many more authors out of publication.  That would limit just how much prices could be reduced, and prices would have crept back up, but with Amazon having a larger share, and in the end, readers wouldn’t end up paying much less for e-books, and there would have been no competition at all… and fewer authors.

As for the DOJ claim of collusion, as far as I can see, Macmillan colluded with no one.  In fact, Macmillan insisted on the agency model alone for weeks.  I know, because Amazon retaliated by refusing to sell ANY Macmillan books for those weeks, not just e-books, but all titles, and I and all the other Macmillan authors took hits, as did Macmillan.  Now… the other publishers did finally join the push for the agency model, but they joined Macmillan. And I think it’s rather interesting that most of the other publishers immediately settled with DOJ.  To me, that suggests that, if there was any collusion, they were doing the colluding. So in the end, DOJ is prosecuting the one publisher, it seems to me, that was NOT colluding.  Now… I could be wrong, and if this goes to trial, we’ll see what actually happened.

What I do find interesting is that, now, something like two years later, Borders has gone bankrupt and vanished, but Amazon only sells a little over 60% of all e-books, rather than more than 90%… and DOJ is targeting the companies and the model that resulted in increased competition and more e-book outlets.

Could it just be that the administration is pandering to the “I want it cheap now” mentality in an election year?  I also find this deplorable in that publishing is a very low margin business, and the administration is taking on a struggling industry when DOJ has done very little in terms of dealing with extensive and real corruption in the investment banking and financial sector… which had a far more devastating impact on the economy and the consumer.

Politics and more hypocrisy, anyone?


16 thoughts on “DOJ and Macmillan”

  1. Alan says:

    While I freely acknowledge my lack of complete understanding of the motivations of the companies involved, it seems that the push for results that show right now is what tends to drive many people. That poor example of a run on sentence aside, I doubt that any organ of the government thinks quite so far ahead as you, or anyone else would like to believe. The notion that any politician is a benevolent leader looking out for our best interests is both ridiculous and foolishly naive.

    It may be that a closer look at contributions for the leading parties involved in the suits, and those with the ability to leverage the powers affecting the DoJ’s actions would be a more likely source.

    From a consumer’s point of view, I don’t know that the end result will ever improve, which ever model is used. Steadily the number of both real and online book stores are shrinking. The number of towns with book stores goes down every month. Between economy pressures on small stores, over reaching by larger companies (Such as Borders), and the effort to build larger, more all encompassing media shops (similar to the effort by BAM) the ability of a reader to acquire their favorite books are reduced all the time.

    The prices of e-books is a constant thorn in my side, as a bibliophile. I understand the cost to the publishing agencies are minimal but the bottom line to me, the consumer, is that an e-book’s cost is nearly exactly that of a hardback, when first released. My preference is to receive something with a physical worth, some intrinsic value felt by laying my hands on it. To hold the book in my hands, and turn the pages beneath my finger tips provide me with a pleasant reward for the money spent. Especially when the same, or nearly the same, cost for an e-book does not result in a tangible object. I find it difficult to sympathize with publishers when they are trying to set the cost of e-books equal to hard copy, because of that lack of material, transportation and equipment costs. Thus, if Amazon, or any other agency, wishes to sell e-books at a loss, I am quite willing to support those endeavors.

    It may be short sighted and in support of the immediate savings for a long term cost due to monopolizing the market by a single company. But with the declining number of book stores how long will it be before that market is truly monopolized to only online shopping? A market controlled by two or three major book sellers.

  2. Sam says:

    Here in Australia we have a relatively independent – from political interference – statutory authority called the ACCC – Australian Competition & Consumer Commission – whose mandate is to strive to ensure competition in the marketplace.

    However they only have so many resources to pursue said mandate so they tend to pick their battles. Over the years I’ve listened to a number of interviews with their former chairman Graham Samuels and he struck me as someone who took the mandate of his organisation seriously even personally at times.

    Even in his last interview after retiring he was still going on about issues that he hadn’t been able to resolve in his years as chairman and his concerns for competition in the marketplace in future.

    Earnest as he struck me as being he still received criticism over his tenure not just for what he tried and failed to do but for what he didn’t do as well.

    I don’t really understand the ins and outs of this agency model business but if the DoJ is concerned perhaps they have reason to be.

    In the end these issues could be more ones of law than what is the best outcome. Even if laws are poor or lacking in foresight of changing circumstances, institutions whose job it is to enforce the law don’t usually get much discretion as to which laws they enforce.

  3. Under the “agency model,” the publisher sets the price and the margin for the distributor, usually 35%.For an e-book priced at $14.99, the distributor gets roughly $5.25. For a %7.99 e-book, it would be $2.80. Under the “wholesale model” that applies to hardcovers, paperbacks, and trade paperbacks — and ebooks prior to January 2009 — the publisher would sell the books to the distributor at a price slightly about 50% 0f the list cover price, and the distributor could sell the book at whatever price it wished. Amazon chose to sell e-books at prices below their cost, and at prices no one else could afford. What the agency model does is to keep Amazon from charging prices that would drive everyone else out of the business, and I suspect it was adopted precisely because DOJ wouldn’t do anything about Amazon’s predatory pricing.

  4. Mikor says:

    The allegation is that Apple and several publishers have colluded to fix prices. Of course, it’s possible that the DOJ is incorrect, but assuming it has evidence, it has no choice but to go after the companies that broke the law.

    It may be that Amazon need a closer oversight because of the market share in ebooks they have — but I am not convinced. After all, Baen is selling their ebooks directly at $6, so clearly there is competition that can beat Amazon’s prices. But regardless of that issue, the price-fixing is illegal, and has to be stopped. Or tested by the courts, as the case may be.

    1. I don’t have a problem with DOJ going after illegal behavior; I have problem with DOJ ignoring the initial illegal predatory pricing by Amazon to illegally gain market share and THEN going after publishers who fought back in the only way they saw open to them.

  5. AMos says:

    I had a similar reaction to Mr. Modesitt when I first read of the lawsuit: DOJ is punishing businesses who were struggling to succeed in the face of a much larger, more powerful business who was willing to lose money in order to gain a monopoly. Amazon seemed a more likely target for an anti-trust suit in this model.

    In response to Alan, and in defense of what I just said, I’ll point out that the actual costs of a physical book v. an electronic book are almost negligible. Sure there are transportation, printing, and materiel costs–but for most books those are a fraction of the cost for the publisher to actually get the book out there. The vast majority of books do not sell enough copies to make printing costs an important factor in their pricing–because the other costs are front-loaded and all too often not recuperated. Those costs involve paying all the people responsible for making a book what it is: author, editor, copy editor, proofreader, copy writer, artist, art director, typesetter, etc….

    Mr. Modesitt mentioned above that publishing has a very narrow profit margin, and data shows this is absolutely true. He has also shown, in previous posts, how the rise of e-books, and the concomitant rise in piracy of those books, has actually reduced sales. This pushes more authors out of writing, and more publishers closer to bankruptcy.

    The truth is, if you don’t want to pay $14.99 for a brand new e-book, you do the same exact thing that you used to do when you didn’t want to pay $25.99 for a brand new hardcover: wait 6 months, perhaps a year, and buy it for $8.99.

    Perhaps information will come out and collusion will be proved. Until then, I’ll continue believing this is misguided, short-sighted, and will only hurt the world of books, not help it.

  6. Alan says:

    Just a quick rebuttle for Amos, and a side line question for LEM who I know has more information and knowledge on the subject at his finger tips. Do hardback sales of a book for the first year, at say $25 per copy, make up enough of the cost of the book that there is a significant difference in the final income of the book if it had been released in paperback? If so, given that everyone agrees that the actual cost in terms of materials, shipping, etc is very tiny, then what you’re looking at is a rough profit of %400. That’s assuming that a paperback book sold for $8 a copy is much closer to the actual cost of distributing the book.

    For Amos, the follow on is thus: If hardback sales are so much more profit across the board, then during that time when the cost of the brand new hardback and the e-book are the same, there is a significant difference in cost to provide the book verses the price paid. In order to increase initial sales of the book’s digital copies, wouldn’t it make sense to shave some of that price down? There would still be a huge profit in that run, but the difference of $25 for a hard copy or a digital copy, and a $25 hard copy and a $20 digital copy might both make the consumer more inclined to purchase the book new, and make the consumer feel he’s getting a better ‘deal’, since he’s not paying quite as much.

    I believe that the bottom line on book pricing comes down to much the same bottom line as the gasoline arguments. I’m fairly confident that most people believe there is a steady price fixing going on at the pumps. Oil companies will charge whatever they can get away with, which the consumer is willing to pay. Having travelled the world, literally, I’ve seen the price all over for gasoline. Each market area charges what the people there are willing to pay, over and above the cost of gasoline. I think the book industry is fallen to the same capitalism ideal, but in this case it will mean that fewer authors can be published, distributed and made available in general. The digital market will expand as ever would be and true writer spreads his or her writing across the internet.

  7. Joe says:

    Put simply, you’re criticizing free market capitalism. The idea is that competition will lead to companies providing precisely what their customers want. And customers want cheap prices, which may not be in their long term interest.

    Note I’m not disagreeing with you: competing over cheap prices leads to poorly engineered products that break after a few years and leads to less choice. And these factors actually hurt the customer in the long term since they end up dependent on (for instance) grocery stores that run out of produce the moment there is any disruption to their logistics.

    In a “free market” system, the government is not allowed to determine what is in its citizens’ interest. Imagine the government mandated that only refrigerators that lasted 100 years could be sold. That would be good for the environment, but there would be an outcry about governmental interference driving up prices that poor Americans could not afford. So the government is limited to doing the popular thing: breaking up any form of collusion which leads to higher prices.

    This leads to a very particular situation: to survive, companies have to reduce quality. If company A produces a good cheaper than company B, even if the quality is lower, company A gets the advantage because they can reduce their prices to drive company B out of business. It’s a first-mover advantage. Moreover, lower quality goods require more purchases, actually extracting more value from consumers.

    Good capitalists will state that if there’s a demand, a competitor will arise to satisfy the market’s needs. However they discount barriers to entry (in particular patents, but also compatibility, training costs, the costs of building a distribution network, and so on) which all mean that the additional cost of higher quality is no longer commensurate with the value gained.

    Net result: appliances that last 5 years, TV shows that appeal to dumb people, bad books, etc. It is very likely that writing books will soon no longer be a full time job, but that one will need a day job to support oneself. Most entertainment may well be computer generated prolefeed, as suggested by George Orwell, and as augured by Narrative Science’s computer programs writing much of the sports news in local papers. Paul Krugman’s “White Collars Turn Blue” story rings somewhat true.

  8. Twenty years ago, mass market paperback books constituted a major proportion of a book’s revenue. Forty years ago, paperbacks in the F&SF field generated over 90% of the revenue. Today, unless an author is a huge bestseller, I’d be greatly surprised if paperback book revenue constitutes much more than 30% of most books’ revenue, and that’s extraordinary high in some cases [since some books aren’t even issued as mass market paperbacks any more].

    Currently, the “discounted” hardcover price of my books runs $1-$3 more than the initial e-book price, while the “average” production cost differential between the e-book and the hardcover is about $2.50. [These figures are approximate, but based on what I’ve been able to determine.] I get roughly 25% less in royalties from that initial e-book sale than from a hardcover sale. The distributors, under the agency model and current wholesale practices net less from a discounted hardcover than from an e-book.

    1. Mayhem says:

      To be fair, 20 years ago, it was still highly unusual for many authors in genre fiction to even get a wide hardcover release. In Australasia, the only people who bought hardcover were libraries and the occasional collector with contacts in the industry. I certainly remember the novelty of trade paperback softcovers, I think Eddings was the first one I saw with one of those with the Diamond Throne in 1989.

      These days, most authors with a title or two under their belt get the full hardcover treatment, with 12 month delay for the paperback.

      That being said, I would expect ebooks to essentially replace the MMPB in the next couple of years, although the UK seems to be moving towards large format paperbacks now for reasons I don’t understand, unless the larger page size is balancing out an expansion in word counts.
      Plays merry hell with my bookshelf regardless.

  9. Alan says:

    Thank you for the figures. I’ve no idea where to get accurate values for those particular subjects. And I understand that you, as the author, get less royalties. That may be something to do with the industry, definitely beyond my experiences. Perhaps it has to do with the various author’s contracts?

    But I think the last line there proves my point as a consumer about e-books. If the distributes make less from a hardcover (Where ever the cost difference is generated), and make more off of an e-book, then it would hardly kill the distributes to market the e-book at a reduced price. Say, to the same profit margin they have from hardcover book sales?

    That would entice me to further my commitment to e-books, knowing that I got a better ‘deal’ on the cost of my entertainment.

  10. But the catch is that only the “big” distributors make less on the hardcover, because they’re the only ones with enough volume not to suffer, and that’s not on all of the books. There’s a tiered discount on hardcovers. In essence, only books on the best-seller list, or books by authors on the list,are sold at 58% [roughly]of the list price. Decent sellers are sold with less of a discount, around 62%, which means there’s more profit for the distributor on the hardcover, and often midlist or other hardcovers are only discounted 10-20%. Most of the prices I’m giving apply largely only to B&N and Amazon [and Borders, before its demise].

  11. Tim Twineham says:

    To all the above. I view myself as purely a consumer as I read for relaxation, needing this after a work-day and deciding to not have a TV.

    I tend to look at both e-books and music similarly in that I decide on the price I wish to pay, sometimes, i will admit, modified by the quality of wines I have previously consumed. iPads have a lot to answer In that regard.

    However, generally I purchase e-books as I use my iPad now as the reading medium (which also drives my hi-Fi) when i need to relax. So it is a market thing and depends on both my interest, my budget and the author. So for example, I recently read and re-read the Imager series, so am willing to pay the premium for the e-book for Scholar and it’s (apparently many) sequels.

    Is that not what it is all about?

  12. Todd says:

    Mr Modesitt,
    You have discovered the problem that has been eating away at the poor working man for a couple 4 decades now. Big business wants everyone working for Slave labor rates.

    The business of intellectual property is going to go through many changes in the future and will experience many growing pains in the process.This includes Movies, Video Games, Music, and Creative Writing.

    In the beginning those who are comfortable will resist the change ( human nature ) New Writers, Musicians etc never knowing the other side of the coin will not understand why some fight this change.
    In the end however, this change Will happen and it may not be a bad thing for the holder of that intellectual property. It will rearrange how business is done.

    Brick and mortar shops will disappear.Don’t believe me? Try to buy a Gibson or a Fender Guitar in a music shop in small town america..Any Non Metro area. It cant be done!!

    In the end, writers may end up with Only e-books and no hard or soft copies will ever be made.
    The tree hugger’s want to save paper, the government wants to monitor everything you buy/sell to control the money to the nth degree. The Corporations want to Own you and Discard you when you can no longer provide them with a record quarterly. They take your best years and find a way out of paying any retirement benefits.
    And worse yet, for the poor element, the full time job with benefits has been replaced by the Part time job with no benefits. Retailers have 5 part timers for every full time job.

    While your concern over the direction this issue is taking is justified the floodgates are already open. Change is coming fast and the question for us Older folks is this. Do we grab an Inner tube and go with the flow, or fight the current and in all eventuality, drown anyway??

    The way things are going, with a President who rules by Executive decision and not congressional mandate, A President who is Contemptuous of the Supreme Court, I will be surprised if we are not a Tyrant run Totalitarian Government soon anyways.
    And those who see this president as a beneficent Leader now should look a little deeper and then decide what he will be like with Absolute Power!!

    The Djinni is out of the bottle and there is no putting it back.
    There is a Book in there somewhere. What happens when Things happen too quickly and the Powers that be cant cope!!!

  13. AMos says:

    @Alan: If one only looks at Amazon, e-book pricing for brand new books is almost always below hardcover pricing, as Mr. Modesitt pointed out. I can usually find the books I want from publishers under the agency model for between $14-16, whereas the hardcover is listed at $25-30 and discounted to between $17-20. There’s a reason publishers have moved away from mass market paperbacks over the years, and the shift began before the rise in e-books: hardcovers and trade paperbacks have a better chance of making back the money invested into the book. You conclude by saying the digital market can expand across the internet, but you’re also implying it is the writer’s responsibility to do their own marketing. There is a reason the self-publishing wunderkind Amanda Hocking signed a book deal this year: doing your own marketing takes too much time away from writing. Same thing goes for editing, proofreading, art design, etc….

    In reality, most people’s objections to paying $15 for a new e-book stem from Amazon’s monopolistic practices. The expectation that e-books should be $9.99 or less is a complete invention by Amazon, and it has shaped the entire marketplace. It bears little to no relation to the actual process of bookmaking, and only to the economics of large scale book selling. The net result of this is fewer publishers, fewer books, and fewer authors, as Amazon drives profit margins lower and lower to scoop up customers. The writing was all over the wall, which is why Macmillan and others chose a model that profited them less in order to try to sustain their long-term survival.

    @Joe: I’m absolutely arguing against free market capitalism. So would almost anyone when faced with what an actual free market does. There’s a reason we broke up Standard Oil and AT&T: free markets very quickly become self-controlled and very much non-free. This was where Amazon was heading with its pricing, and at the time it controlled 90% of the market in e-books. That level of control is good for Amazon, and even (in the short term) for the consumer, but bad for everyone else–which the second half of your post points toward.

  14. Alan says:

    Just a quick blurb, because I think that this feeds into LEM’s next blog entry. Free markets, captilaism, socialism, and big goverment. All of these, as concepts, are useful. Workable, tools. But as we’ve discussed, none of them pay out reliable and workable end results in the real life application.

    Socialism ends up with people on the dole and communism breads a huge gap between the working serf and the fat cat wealthy. Capitalism breeds more nich markets and different strata of society, but results in major companies having a good chance at building those monoploies where they can control the market. Big goverment, I think most agree on this blog, doesn’t end well for anyone! Too much control, too much intrusion into our daily lives over things which are none of the goverments’ business.

    Surely it’s a balancing act with so many variables that no one individual or group can realisticly expect to come up with a working model to reliably predict what should be done?

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