Justice Department Taking on Antitrust Activity in Digital Books While Scott Turow Asks them to Stop

According to published reports, the U.S. Department of Justice has informed Apple and five leading publishers that they face probably antitrust lawsuits stemming from the pricing arrangements and possibly collusive conduct to set the prices for eBooks on the iPad and other non-Kindle devices.

Huffington Post reports that “U.S. and European officials have been investigating whether publishers and Apple acted together to drive up prices in the booming electronic book industry, blocking rivals such as Amazon from offering cheaper e-books.”

The Huffington lists the five publishers facing possible Justice Department action as “Simon & Schuster Inc, a unit of CBS Corp; Lagardere SCA’s Hachette Book Group; Pearson Plc’s Penguin Group (USA); Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH; and HarperCollins Publishers Inc, a unit of News Corp.”

The eBook pricing changed radically when Apple entered the market. Amazon.com had opened the window on eBooks, purchasing the books at wholesale and setting its own prices. In 2010, it typically sold the books from the major publishers for $9.99 – a price below that of the wholesale cost. Authors and print book sellers complained that the price was often below wholesale, set at a price to drive the print booksellers out of business. For Amazon, this was a win on both fronts, giving it dominance in the new digital book market and undermining its print competition.

Apple was heralded as a white knight for the publishers. It established an agency model of pricing – exacting a 30% charge for distribution and letting the publishers set their own prices.  Prices shot upward and many of the publishers refused to deal with Amazon until it agreed to increase the prices at which it sold books.  It is likely that the combination of agreements with Apple and concerted activity among publishers to force Amazon to raise prices resulted in the actionable antitrust activities.

Authors Guild President (and former lawyer) Scott Turow has lamented the Justice Department action in a blog post. “Let’s hope the reports are wrong, or that the Justice Department reconsiders. The irony bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition. This would be tragic for all of us who value books, and the culture they support.”

To Turow and the popular commercial authors the leadership of the Authors Guild represents, the success of Amazon has undermined the old structure of the publishing industry – complete with windows for hardback, trade paperback, paperback and eventually digital distributions. Each version was slightly less profitable than the preceding window, so to maximize profits, the windows had to be protected.

As Turow explained:

Just before Amazon introduced the Kindle, it convinced major publishers to break old practices and release books in digital form at the same time they released them as hardcovers. Then Amazon dropped its bombshell: as it announced the launch of the Kindle, publishers learned that Amazon would be selling countless frontlist e-books at a loss. This was a game-changer, and not in a good way. Amazon’s predatory pricing would shield it from e-book competitors that lacked Amazon’s deep pockets. …

Amazon quickly captured the e-book market as well, bringing customers into its proprietary device-and-format walled garden (Sony, the prior e-book device leader, uses the open ePub format). Two years after it introduced the Kindle, Amazon continued to take losses on a deep list of e-book titles, undercutting hardcover sales of the most popular frontlist titles at its brick and mortar competitors.  Those losses paid huge dividends.  By the end of 2009, Amazon held an estimated 90% of the rapidly growing e-book market. Traditional bookstores were shutting down or scaling back. Borders was on its knees. Barnes & Noble had gamely just begun selling its Nook, but it lacked the capital to absorb e-book losses for long.

Enter Steve Jobs. Two years ago January, one month after B&N shipped its first Nook, Jobs introduced Apple’s iPad, with its proven iTunes-and-apps agency model for digital content. Five of the largest publishers jumped on with Apple’s model, even though it meant those publishers would make less money on every e-book they sold.

The irony should not be lost. To flee one monopolist – Amazon – the industry embraced another – Apple. Amazon and Apple each sought a lawful monopoly by building exclusive control over their own market segment. Amazon knocked Sony and its inferior products (and service) out of contention. The Authors Guild also sued Google from trying to use its own advantage to enter or control the market. (And the ongoing lawsuit over the Google book search project has additional allegations of predatory price fixing by the publishers.)

Turow is correct that the Justice Department should be looking to provide competition rather than picking sides among monopolists. But any collusive pricing strategies by the publishers – whether through Apple or Google or just amongst themselves – is harmful to the public and to the authors.

The publishers are more worried that they are being disintermediated by Apple and Amazon. Authors can publish directly, without a publishing house. The editorial assistance can readily be purchased elsewhere and the marketing support is illusory to all but a fraction of the authors on each publisher’s list.

So the Justice Department should use the litigation and resulting consent decrees to prohibit exclusive publishing agreements by retailers. Both Amazon and Apple have created exclusive distribution terms on some of their author-to-ebook agreements. This exclusivity will be a far greater threat to the authors and the public. The Justice Department should also remind the publishers that they will lose both market share and the public’s good will if they collude to fix prices. Not every best seller needs to be the same price. As both Amazon and Apple have established, lower prices and more fans is just as attractive a pricing strategy as fewer fans paying higher prices.

Turow doesn’t get it. Although he posted that  “an antitrust lawsuit against five large trade book publishers and Apple is grim news for everyone who cherishes a rich literary culture,” the lawsuit could be welcome new for anyone outside the victory circle of the present publishing monopoly – a circle that includes very few.

The Authors Guild is rightly worried about fewer book stores and market dominance by Amazon, but it should not lose sight that shifting power to Apple or Google will not help in the end.  It should foster competitive contracts for its members and all authors and should work against any agreements that require authors to distribute their books exclusively with one or another of the retailers.  The Authors Guild should think about the public, rather than the publishers when it laments about the demise of the old book business.

Disclaimer: I am a member of the Authors Guild but I have been critical of their position with regard to the Google book search class action litigation.