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Summary:

It’s been a week to forget for publishers after both the Justice Department and the European Commission announced investigations into e-book…

Crime City

It’s been a week to forget for publishers after both the Justice Department and the European Commission announced investigations into e-book pricing tactics. Meanwhile, dozens of law firms are steaming ahead with a class action to reclaim money for customers who allegedly overpaid for books on the iPad. So what’s going on – is this an illegal conspiracy or much ado about nothing? Here’s a guide:

Who Is Investigating the Publishers?

Before Congress today, the head of the Justice Department’s antitrust division reportedly confirmed months of rumors by stating that the federal government and state attorneys general are investigating the electronic book industry. Earlier this week, the European Commission said it has begun formal investigations to follow up on raids of publishers’ offices that took place in March.

What is the Conspiracy?

The case turns on “agency pricing,” a scheme under which the publishers set the price for e-books on the iPad. In return, Apple (NSDQ: AAPL) collects a commission.

What is the Point Of Agency Pricing?

Publishers watched in horror as Amazon (NSDQ: AMZN) decided to build up its market share in e-books by selling prized titles for less than $10. Amazon sometimes sold at a loss. This set a low floor for e-book prices and also threatened the sale of more expensive hard cover books. The agency model lets publishers set higher prices and ensure customers don’t become used to cheap e-books.

What’s the Problem with Agency Pricing?

The class action suits complain that agency pricing is an illegal cartel. Here is how one complaint describes it: “As a direct result of this anti-competitive conduct as intended by the conspiracy, the price of e-books has soared. The price of new best-selling e-books increased to an average of $12 – $15 — an increase of 30 to 50 percent.”

Is Agency Pricing Against the Law?

For decades, it was illegal for manufacturers to impose prices on retailers. That’s why you used to see “Manufacturers Suggested Retail Price” on many items — companies could suggest a price but not impose one. This changed after a 2007 case called Leegin in which the Supreme Court said it wasn’t illegal for a handbag maker to control prices. Now, the analysis is done on a case-by-case basis to see if pricing is fair. In this case, the publishers are the manufacturers and Apple is the retailer.

What will happen with the Government Investigations?

The Justice Department, along with the FTC, conduct these sort of investigations all the time. They typically take place behind the scenes but the U.S. may have announced today in response to the European news. If the government concludes the Apple e-book scheme is anti-competitive, it can file a complaint which would typically lead to a settlement. But the government may also conclude nothing is amiss. As for Europe, all bets are off given the continent’s tougher regulatory standards and zeal for punishing US companies.

What about the Lawsuits?

These are private actions taking place separately from the government investigations. According to lawyer Douglas Thompson, 25 or 26 different class action suits are in the process of being consolidated. Some of the suits name Amazon and Barnes & Noble (NYSE: BKS) as part of the “conspiracy.” The law firms were in court last week to argue over whether the case should take place in New York or California. A decision will appear in the next week or two.

Who Stands to Gain from the Lawsuits?

If a court decides that the pricing scheme violates anti-trust laws, Apple and the publishers would likely agree to pay a small reimbursement to people who bought an e-book (and a healthy fee for the lawyers). The class actions will be stronger or weaker depending on whether or not the government concludes the publishers broke the law.

  1. Excellent article, thank you for clearly and eloquently explaining what’s going on with this investigation.

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  2. It would be a sad day for authors, publishers, readers and online bookstores if agency pricing was overturned, because it could allow one or two well-funded companies to sell books at below cost and effectively drive every other ebook retailer out of business.  That would lead to *less* competition in the ebook retailing market, not more, would prevent the development of indie ebook retailers in smaller markets, and would ultimately lead to less competition and higher prices.

    What critics of agency pricing forget is that these large traditional publishers are becoming less and less relevant each year as more authors independently publish and distribute their own books.  At Smashwords, we distribute over 90,000 of such indie ebooks, and we let our authors and publishers set their own prices. We only distribute to agency retailers.  These indie authors benefit from the higher royalty rates enabled by agency pricing, and they set the average price of their book under $5.00.  Why do they price low when they have the power to price high?  Because they know they can sell more copies at a lower price, and since they’re earning 60-70% of the retail price under agency vs. 42-50% under wholesale, the author can still earn more at a lower price to the consumer.

    If an author wants to earn $2.00 for each book they sell, they’d set the price to customer at $2.86 under Agency and $4.00 under wholesale.  In this new world of indie publishing, Agency facilitates lower prices.

    The book market is extremely competitive, and that’s a good thing.  If publishers make the mistake of pricing their books too high, readers now have 90,000+ lower cost alternatives.

    The EC and US Gov’t should butt out and let the marketplace take control.  If publishers price their books too high, consumers have the freedom to find lower cost content elsewhere.  It’s already happening.  Take a look at the top 100 ebook sellers at any major retailer and you’ll see indie authors scaling the charts.

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  3. I think it is a joke that some publishers are charging over $15 for an eBook. That is way too much for what is one digital file. The big publishers are making the same mistake which the music labels made when CDs then MP3 hit the market ie charging way too much. The public are not stupid. They know there are no printing costs or distribution costs. As Mark said indie authors and small publishers are leading the way.

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    1. The way I see it the only unreasonable price is the one people are unwilling to pay.  If a specific book is worth it to readers to pay $15 even for a digital version then so be it.  The average price of the Kindle books I’ve bought since the Agency model went into affect hasn’t really raised the price on most of the books I’ve been interested in.  And in those cases that it did I’ve enjoyed the book enough that I can deal.  Will be interesting to see how this plays out regardless.

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  4. Just wanted to say, nice use of the game image “Crime City.”

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  5. John F. Harnish Thursday, December 8, 2011

    Shame on publishers for imposing their asinine “agency model” pricing on their ebooks, the unrealistically high prices are only being done in their self-serving interest of corporate greed as they flounder in their failing efforts to fix a crumbling publishing model that’s as outdated as the typewriter.
    Perhaps those most senior executives raking in the mega bucks from the giant publishing corporations didn’t get the memo that consumers are fed-up with paying grossly inflated prices that only serve to increase the corporate bottom line.   
    The big six publishing dinosaurs failed to acknowledge the fact that bookstores don’t buy ebooks—regular folks with ereaders are the omnipotent consumers of ebooks.  Ebook consumers are more knowledgeable of pricing and very selective about the quality of content. Corporate America has a unique ability to grossly underestimate the intelligence of the masses.
    Ebook reading folks typically purchase mass-market paperbacks for less than ten bucks. Paperbacks were traditionally released several months after the hardcover that retails at $30 or more—but now there’s a simultaneous release and the ebook is for sale at a download price in the neighborhood of $15. Fifteen bucks to download an array of electrons—no printed-on-paper costs to produce physical content and no fuel consuming delivery charges to pay, but instead the ebook is zapped from the book vendor’s expanding ebook inventory directly to the customer.  
    Basically they’re trying to sell an overpriced ebook to a customer base with a history of waiting for the lower priced paperback. The royalty paid by Amazon on ebooks priced higher than $9.99 is 35% so the royalty earned on a $15 download is approximately $5.25, however, the 70% royalty paid on a $9.99 ebook is in the higher neighborhood of $6.99.
    Thusly I fail to see how the higher pricing at a lower royalty percentage is a financial benefit to the publisher and the author—especially when there’s an ongoing customer boycott strongly opposed to ebooks priced higher than $9.99. In this 2011 sluggish economy, the pricing difference of a few bucks causes frugal customers not to buy—regardless of who the publisher and author are.
    Another fact about ebook publishing, Amazon and B&N are dealing directly with thousands of authors uploading their content for automatic conversion, and then these two giants are selling affordable downloads directly to their massive customer bases of billions and billions. Of course the wide array of authors using direct publishing range from first book novice authors to professional authors with pages of publishing credits and decades of experience. In the interest of creating goodwill and increasing the profit for authors, I would recommend extending royalties of 70% to ebooks priced between $0.99 and $2.98 while retaining the 35% royalty for ebooks priced higher than $9.99.
    I am the ebook author of “An Affordable Ebook about Writing and Publishing Ebooks and Digitally Printed Books” naturally priced at $2.99 and available from Amazon and B&N.
    Enjoy often… John

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