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Apple, publishers and ebook pricing – what does it all mean?

Answer: Champagne corks popping at Amazon

Internet Security Threat Report 2014

Analysis Aren’t monopoly watchdogs supposed to bust monopolies rather than create them? That question is fairly widespread today after the US Department of Justice’s intervention into the nascent ebook market.

You’d need to be Solomon to regulate ebook pricing wisely at this stage in the market’s development, and it isn’t clear whether the wonks at the DoJ or anywhere else have the necessary wisdom. The regulators intervened yesterday to halt what they allege is a cartel, but the move could eventually create a dominant retail monopoly. Amazon will be celebrating – it couldn’t have dreamed for more.

There’s also some irony in producers responding to the challenge of digital publishing by coming up with a "business model" – something they’re always being berated to do – only to be told they’re not actually allowed to do it. The DoJ has quite emphatically intervened to restrict how producers set the price for their goods.

A beef with no beef?

Two documents were published yesterday: one alleges a conspiracy by Apple and six major publishers. The publishers wanted to strengthen Apple, a rival distribution channel to Amazon and a new entrant into the ebook retail market. Apple can't be competitive if Amazon aggressively discounts titles, so the "agency model", by which publishers take a proportion of the retail price rather than sell at a wholesale price, was devised. The second document is more immediately significant, as it outlines the proposed settlement and what the DoJ will permit the book industry to do – in some detail.

Three publishers have settled, and three more will fight on. Given the quality of evidence offered of alleged collusion, you may begin to see why.

The DoJ case relies on innuendo, and there’s no smoking gun. While the Microsoft antitrust trial provided some vivid detail (“knife the baby”) and warehouses full of emails, the alleged ebook conspiracy revolves around CEO pow-wows at The Chefs Wine Cellar, a private room in the Picholine Restaurant where we’re told "business was discussed". It’s quite astonishing to learn they weren’t discussing Chef Brennan’s 16-course tasting menu – a midtown Manhattan bargain at $195 (£122) per head.

Pearson-owned Penguin is so unimpressed by this it hasn’t even held settlement talks. Penguin CEO John Makinson said the conspiracy allegation is “material misstatements and omissions” and added that moving to an agency model – where it mandates the retail price – has been costly in the short term. But this, said Makinson, was necessary to prevent the long-term destruction of the business by predatory pricing.

And that’s the core of the complaint. If Pearson can persuade the courts that the ebook market is young and fluid and that it is being prevented from doing business, then the entire case looks very vulnerable.

What's the deal on the table?

For its part, the DoJ thinks it has a workable compromise. It hasn’t outlawed agency pricing, but outlines restrictions on publisher-set pricing, neatly tying the industry’s hands, which it thinks it can pull off without overstepping its authority. The vital section can be found in the final judgment’s "permitted conduct" (section VI.B).

This proposes that an ebook retailer will not be permitted to sell books at a loss cumulatively over a 12-month agency contract "as long as the total dollar amount spent on discounts and promotions did not exceed the aggregate of the retailer's full commission from the settling defendant over a one-year period".

So Amazon can still aggressively discount bestsellers, but it can’t retail the backlist catalog at a loss. The DoJ hopes that:

This provision... allows a settling defendant to prevent a retailer selling its entire catalog at a sustained lost. Absent the collusion here, the antitrust laws would normally permit a publisher unilaterally to negotiate for such protections.

In other words, it hopes the compromise permits retail pricing flexibility and maintains the margins publishers want. We shall see.

The proposal also wants to be tough on collusion: ebook retailers can’t negotiate with more than one publisher at once. In a world where rolling negotiations take place with everyone, it’s difficult to see how this one can stick.

There’s no doubt that this proposal is designed to cut ebook retail prices, and shackle the ability of publishers to negotiate. Quite whether this is the wisest intervention to make - the ebook market is still at an early stage of development - isn’t clear.

One observation from the many years of Microsoft antitrust litigation is that when there was competition – which Digital Research Inc provided for MS-DOS - prices were low. When competition was removed, prices shot up. By handing Amazon a retail monopoly, why would we expect anything else? ®

Bootnote

While Foxconn installs suicide nets for its workers, Amazon has on-site ambulances for workers who drop from heat exhaustion. Then it's heigh-ho, and back to work they go.

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