Problems With the DOJ E-Book Price-Fixing Settlement (and Its Detractors)

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As expected, the Department of Justice came out yesterday with a strenuous defense against issues raised by about 800 public comments with its e-book price-fixing settlement with Hachette, HarperCollins and Simon & Schuster.

Publishers Lunch has a nice breakdown of the DOJ’s lengthy filing, including some responses to the response by specific parties who left particularly compelling arguments (Bob Kohn, I’m looking at you).

Regrettably, I was off yesterday and didn’t get the opportunity to cover the news live. So, I’m just going to bring up some thoughts and problems I have regarding the back and forth between the DOJ and its detractors in this case:

1. “Unfettered competition.” The phrase jumped out at me when I read the filing. Here is how it appears there:

Many critics of the settlements view the consequences of the conspiracy—higher prices—as serving their own self-interests, and they prefer that unfettered competition be replaced by industry collusion that places the welfare of certain firms over that of the public.  That position is wholly at odds with the purposes of the federal antitrust laws—which were enacted to protect competition, not competitors.  See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962).

It might also be worth noting here that the U.S. District Court is to determine, according to the DOJ, “whether the proposed Final Judgment provides effective and appropriate remedies for the antitrust violations alleged in the Complaint, with respect to the Settling Defendants.” (Also from the filing.)

If I can engage a little logic here:

If preventing unfettered competition is at odds with antitrust laws and the settlement remedies the antitrust violations alleged by the DOJ then the settlement must promote unfettered competition.*

The problem here is that the settlement as proposed does not promote unfettered competition. E-book retailers will be allowed to discount, but only to the point where they are profitable on the settling publishers’ catalogs. And those publishers are not going to be allowed to enter into agency contracts with any e-book retailers for two years. That’s pretty fettered, if you ask me.

Now, don’t mistake my point here and think that I’m advocating the opposite (unlimited discounting, some other version of limiting agency or whatever). I’m just saying that the settlement is patently silly based on the stated parameters above. It’s not restoring the balance of “unfettered competition” but replacing the current state with a market controlled by the rules set by the DOJ and the settling publishers.

(By the way, looking at the settlement this way strikes me as an attempt at having two wrongs make a right.)

 

2. Prices have come down. There seems to be some disagreement as to whether e-book prices have gone up or come down in the past two or three years and why. Mark Coker of Smashwords demonstrated fairly convincingly that they have come down. Publishers Lunch cites Bookstats as a source for prices having gone down between 2010 and 2011.

The DOJ, on the other hand, says that e-book prices spiked after the implementation of agency pricing but provides no evidence.

First, DOJ, provide evidence. It should be pretty easy to put together some evidence showing how prices have changed over time for a subset of books. I’m sure Amazon has the numbers — go get ‘em.

That aside, it seems that prices have come down overall. But is that really what this is about, whether average prices have come down or not? My guess is that for most books by publishers on the agency model, prices were increased after agency was implemented.

 

3. Amazon’s monopoly. There is thinking going around that if agency pricing is struck down, Amazon will discount the other e-book retailers out of business. I don’t buy this argument.

Once Amazon and other e-book retailers gain control of the ability to price e-books from the biggest U.S. publishers however they want to (if the settlement goes through), all the retailers will begin competitive pricing practices. To say that Amazon will be able to discount everyone else (Sony, Google, Barnes & Noble, Kobo, Apple, et al) out of business is insulting to the capable retail executives at those companies.

Further, price isn’t the only reason people buy e-books. Someone who buys an iPad might be inclined to just buy books through the iBooks platform just because it’s easy and it’s right in front of them. The same may be true of Nook and Nexus buyers. I know that’s how I operate.

Aside from convenience and price, readers might make their e-book buying decisions from a whole host of factors:

— Reading experience, including social reading and gamification of reading (Kobo’s shtick)
— Social discovery, such as what Zola plans to offer
— Connection to a whole host of other content services, like Gmail, Google+, etc.
— Loyalty to an in-person experience, like what Barnes & noble offers

 

I think part of the reason there were so many comments arguing against the e-book price-fixing settlement (and so many people in the publishing industry dismayed with the DOJ’s actions) is that the case is not as cut and dry as the DOJ makes it. And, if it is, the solutions proposed are, at best, dubious.

Then again, according to Courtney Milan, a romance author and publishing industry observer, “Every industry that has been socked with a price-fixing complaint has argued that it is special, and if only the court understood how special it was, the court would agree that it should have the capacity to fix prices. Every industry. I don’t know why every industry feels it has to make this argument, but they all lose—every single time.”

Read more in her post, Your Unspecial Antitrust Snowflake.

* Please let me know if this logic doesn’t follow.

Jeremy Greenfield

About Jeremy Greenfield

Jeremy Greenfield is the editorial director of Digital Book World. Opinions presented here are his own. Read more of his work here.

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5 thoughts on “Problems With the DOJ E-Book Price-Fixing Settlement (and Its Detractors)

  1. Your logic does not follow, perhaps because you didn’t read the sentence in question very closely. Replacing unfettered competition with collusion is the position that is incompatible with antitrust laws. Read that again. There are many versions of \fettered competition\ that are compatible with antitrust laws. Collusion among participants with substantial market power isn’t one of them.

    The issue is that Apple and its publishing partners illegally intervened in a functioning market. Restoring the status quo ante is impossible. In an effort to get the publishers to settle, the DoJ gave them something they said they wanted.

  2. And to address point #2. One should not ask whether or not ebook prices in general have come down under agency pricing. Every ebook publisher is not party to this case. Mark Coker’s Smashwords site does not sell the defendant publishers’ titles, so I doubt he has pricing information on those titles. Hence, his data is wholly irrelevant to this case.

    The relevant information is the pricing status of the defendant publishers’ titles — period. The DoJ can, and I imagine they will, subpoena that information from the retailers. However, they will not reveal said data until the discovery phase of the trial, else they would put their case at a disadvantage (ask Apple or the non-settling publishers if they plan to introduce their evidence before they are required, and you’ll certainly receive a definite NO!).

    If you wish to see data on the relevant title prices, I suggest you read the class-action complaint available on the Hagens Berman site. They break down the defendant publishers’ titles and show a clear price spike.

    • I think you’re right about this, Al. I would think, however, that the judge and the DOJ would consider the effect the alleged actions had on pricing on the whole e-book marketplace. Is that not the case?

      • Possibly, but the relevance to the case using those charts would be hard to demonstrate, and I could tear those numbers to shreds because I know how they will be presented and how they will be misleading. First off, the agency five (the defendants) have a large combined marketshare (by dollar amount sales) of all ebooks, which are priced on the higher end of the spectrum compared to the average price of all ebook titles. However, the agency five do not have the majority of ebook titles. The total units of self-published books in addition to all the other non-agency titles is greater in number than the agency five titles. This is where the numbers will be misleading.

        When we take the number of titles that are competing in non-collusive means – which typically leads to a price drop of those titles – and add them to a smaller sample of titles that are relevant to this case, then the average price will appear to drop simply because the majority of titles irrelevant to this case dropped. It would be like Ford and Chevrolet colluding to raise prices on cars and then offering a defense that because prices dropped at Mazda, Mitsubishi, Kia, Nissan and Hyundia (who collectively have a smaller dollar market share but more car models than Ford and Chevy), then Ford and Chevy did nothing wrong.

        For example: The defendant publishers, before agency, have ten ebooks for $10 each, and non-defendant publishers have ninety books for $5 each, for an average ebook price of $5.50. However, the defendant publishers sell a thousand copies of their ten books, while the non-defendant publishers sell 500 copies of their 90 books. After agency, the defendant publishers’ titles increase to $15 each, and the non-defendant publishers drop their prices to $4 a book. For the sake of this example, say sales volume remains the same. The average price of our sample may have dropped to $5.10, but the total economic impact is very pronounced – $14500 vs. 18600. The average price paid by the consumer before agency was $9.67. After agency, it was $12.40.

        The charts completely ignores the average price PAID and focuses solely on the average price at which all books are offered for sale. This is a case of economic impact of five publishers through illegal means, not a comparison of their title prices versus less-selling but greater quantity titles. So yes, the effect on the entire ebook market is relevant, but it won’t be demonstrated by a chart that neglects to include average price paid by the consumer.

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