Foretelling the Future of the Book Business; Turow says leverage comes at too high a cost for the literary market

A student of the publishing industry would be amazed at the transformation which has taken place in the last decade. According to the Association of American Publishers, “[t]he eBook phenomenon continued in 2011 with eBooks ranking, for the first time, as the year’s #1 individual format for Adult Fiction.”

This transformation comes at a time when the battle over tablet readers has suddenly heated up. Apple’s lead in tablet computing has slipped to a paltry 50.4% – still the global majority, but a 15% decline in the last quarter. Which of course is before the new Microsoft marketing push for its competing Windows 8 products. Using Google’s Android OS, Samsung has taken away the majority of that market share away from Apple.

An increase in book reader form factors to include Apple, Microsoft, Google powered Samsung (and maybe Sony) does not suggest a fragmented market. (Both Amazon and Barnes & Noble are pushing branded tablets as well.) Instead it suggests that the dominant computer companies are rolling from video games and music distribution into consumption of the publishing industry.

Perhaps this is why antitrust actions continue. The Department of Justice plans to press its case against Apple and publishers MacMillan and Penguin over restraint of trade in the pricing of ebooks on the iTunes platform. Former publishing defendants Hachette Bok Group, HarperCollins Publishers and Simon & Schuster have settled identical charges.

Notably absent from the list of defendants was Random House. Instead of arranging pricing structures with its competitors through a standardized iTunes license, Random House instead elected to grow more powerful by acquiring Penguin. As the New York Times describes the merger, it “narrows the business to a handful of big publishers, and could set off a long-expected round of consolidation as the industry adapts to the digital marketplace.”

The merger combines two European publishing giants – Bertelsmann’s Random House and Pearson’s Penguin, reducing the “big six” by at least one. It may trigger even more. Again from the New York Times:

[T]he major publishers have been expected to join together, getting smaller in number and bigger in size. The other four houses among the so-called Big Six are also owned by larger media conglomerates: HarperCollins, which is part of News Corporation; Macmillan, owned by Georg von Holtzbrinck of Germany; Hachette, whose parent company is Lagardère of France; and Simon & Schuster, a division of CBS. They could all now face increased pressure to consolidate in response to a combined Penguin Random House.

In the blog from Authors Guild (of which I am a member), Scott Turow had this to say:

“Survival of the largest appears to be the message here,” said Scott Turow, Authors Guild president. “Penguin Random House, our first mega-publisher, would have additional negotiating leverage with the bookselling giants, but that leverage would come at a high cost for the literary market and therefore for readers. There are already far too few publishers willing to invest in nonfiction authors, who may require years to research and write histories, biographies, and other works, and in novelists, who may need the help of a substantial publisher to effectively market their books to readers.”

Still, the lesson may be that big wins. The Google Book scanning project has been in litigation for seven years with apathy and partial settlements derailing most of the importance of the litigation. In October 2012, the publishers capitulated and settled. The arrangement involved the Association of American Publishers, along with McGraw-Hill Companies, Pearson Education, Penguin, John Wiley & Sons and Simon & Schuster. The Authors Guild continues to fight, though the relevance of the litigation seems to be waning. The actual use of the digitized books has become more constrained and falls into fair use activities like text searches and archival backups. As a result, the Authors Guild was handed a stunningly lopsided defeat in its action against the HathiTrust, the partnership between Google and the university libraries that allowed digitization of their collections.

These concerns are a far cry from the monopoly concerns leveled at national book retailers a decade ago. In 2011 Borders Books was the latest mega-book retailer to disappear in bankruptcy. (Waldenbooks was a subsidiary disappeared as well.) Crown Books, once the third largest retailer, collapsed a decade earlier. This leaves only Barnes & Noble and Books-A-Million as bookstore retail chains, though Walmart, Costco, and Target sell mass retail. Online Amazon, Barnes & Noble, and Books-A-Million dominate sales.

It has never been easier for an author to publish materials for the world to see or even to place works into national distribution. The only thing the new publishing order lacks is infrastructure to support nurturing talent and carefully editing works. Larger publishers rely more on backlists and less on new authors. Fewer editors spend less time on more manuscripts. Research and factual works are mined by researchers using word searches and shoddy research that diminishes the need to acquire actual copies of those works.

Arbitrary legal barriers to the transformation are irrelevant or even counter-productive. Antitrust suits will simply change who will dominate the new, concentrated landscape. Nonetheless, it is important to note the passing of an era even if nothing can be done save mourn its passing.

So, in keeping with the season, sing along – with feeling:

Five major publishers, four ebook sources, three mass market chains, two national bookstores … and just Amazon for all our online needs!

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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.