Source: http://www.nytimes.com/2012/04/16/business/media/amazon-low-prices-disguise-a-high-cost.html?_r=1
April 15, 2012
Book Publishing’s Real Nemesis
By DAVID CARR
The Justice Department finally took aim at the monopolistic monolith that threatened to dominate the book industry. So imagine the shock when the bullet aimed at threats to competition went whizzing by Amazon — which not long ago had a 90 percent stranglehold on e-books — and instead, struck five of the six biggest publishers and Apple, a minor player in the realm of books.
That’s the modern equivalent of taking on Standard Oil but breaking up Ed’s Gas ’N’ Groceries on Route 19 instead.
Last week, the Justice Department sued in United States District Court in New York, charging that Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster had colluded to fix e-book prices. (Hachette, Simon & Schuster and HarperCollins have already agreed to settle.)
The suit has its roots in 2007, when Amazon released the Kindle and began selling some of the most sought-after books for $9.99 in order to bolster sales of its device. Not surprisingly, booksellers and publishers hated this price with the force of 10,000 suns because it made physical books sold for $25 or more seen outrageously overpriced.
Under the wholesale arrangement with Amazon, the publishers received half of the list price, which yielded better money, but gave them no control over the pricing of their product. With the introduction of the iPad, publishers got a crack at remaking their deal because Apple allowed them to set the price and then took a cut of 30 percent.
That so-called agency model developed with Apple allowed publishers, not just Amazon, to set the price and in a move that caught the interest of the Justice Department, they all came up with pretty much the same price. (Why the crumbling book business is worthy of so much attention from Justice while Wall Street skates is a broader question we’ll leave for another day.)
Let’s stipulate that there may have been some manner of price-fixing here, perhaps even arranged in “private rooms for dinner in upscale Manhattan restaurants,” as the complaint darkly charged. The Justice Department is entrusted with, among other things, protecting the interests of American consumers and, given a narrow focus on price, its move on the publishers make sense.
But pull back a few thousand feet and take a broader look at the interests of consumers From the very beginning and with increasingly regularity, Amazon has used its market power to bully and dictate. It leaned on the Independent Publishers Group in recent months for better terms and when those negotiations didn’t work out, Amazon simply removed the company’s almost 5,000 e-books from its virtual shelves. The Seattle Times just published a series with examples of how Amazon uses its scale not only to keep its prices low, but its competitors at bay.
As low-margin companies trapped in a declining business with fewer outlets, book publishers face an existential threat. “If we are fixing prices for our benefit, we don’t seem to be very good at it,” said one publishing executive mordantly. (He declined to be named criticizing the lawsuit because of his involvement in the settlement.)
The deal struck with Apple also allowed other players into the e-book business, including independent bookstores. Previously, Amazon’s $9.99 subprofit price was a virtually impenetrable barrier to entry for anyone who couldn’t afford to lose millions in order to gain market share. Remember that it was only after agency pricing went into effect that Barnes & Noble was able to gain an impressive 27 percent of the e-book market.
Now Amazon has the Justice Department as an ally to rebuild its monopoly and wipe out other players. If the decision to charge the publishers was good for competition, why had the stock price of Barnes & Noble dropped more than 10 percent since Wednesday? Borders is long gone, and the possible loss of Barnes & Noble would be bad for consumer choice, online or off.
There are some ironies here. Amazon views e-books as cheap software sold to animate device sales, in this case, the Kindle. And who does that remind you of? Ah yes, Apple, which shrank music to a 99-cent single business to propel the sale of iPods.
This time, Apple is on the side of the angels, mostly because the company doesn’t have the leverage of a dominant device. Peter Kafka at AllThingsD dug out a throwaway line in the middle of the complaint from the Justice Department that said, “Apple also contemplated illegally dividing the digital content world with Amazon, allowing each to ‘own the category’ of its choice — audio/video to Apple and e-books to Amazon.”
The counterargument to the publishers’ position runs like this: why should consumers be saddled with paying an extra few dollars just to keep competition alive? In the short term, the answer seems clear. But Richard Epstein, a professor at the New York University School of Law, pointed out, “it is not clear that lower prices are necessarily in the long-term interests of the public at large.”
He said that lower prices work both ways, spelling “low costs to consumers and low royalties to authors.” Anyone who has written a book, including me, can tell you that book publishing has always been a bit of a clubby business, with uniform practices in realms beyond pricing. Among many other standards: sell your book to any publisher you wish, but you will never get more than 15 percent of net royalties on the hardcover edition.
Robert F. Levine, a lawyer with an extensive practice in publishing, said there’s a practical reason for all that uniformity. The book business is both hermetic and dwindling.
“There is not a drop of new capital coming into this business,” he said. “The margins are low and there is almost no growth, so you end up with a rather small industry, with a handful of companies and a handful of players.” Scott Turow, a big-time author who is president of the Authors Guild, worries that the club is going to get a lot smaller. “It is breathtaking to stand back and look at this and believe that this is in the public interest,” he said. “The only rationale is e-book prices will go down, for how long? What happens when there is no one left to compete with them?”
I’d be lying if I said I didn’t get a little thrill when I found out on Amazon that I could get an e-book version of “Fifty Shades of Grey,” the No. 1 book on the New York Times best-seller list, for just $9.99. But after a week of watching the Justice Department and Amazon team up, I’ve learned that low prices come with a big cost. Maybe I’ll order it at my local bookstore instead.
carr@nytimes.com; Twitter: @carr2n
[Editor’s note: you can find additional entries on this subject, by clicking on e-book listed below.]
Booker's Blog 