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Summary:

As the Department of Justice pursues an antitrust case over e-book prices, publishers say they need “agency pricing” to prevent Amazon from increasing its monopoly and decimating the book industry. So who should we be rooting for, the giant retailer or the giant publishing houses?

As expected, the Department of Justice launched an antitrust lawsuit against Apple and several of the major book publishers on Wednesday, alleging collusion and price-fixing behavior on e-books as a result of the “agency pricing” model. As my colleagues Jeff Roberts and Laura Owen have reported, three of the publishers named in the suit have decided to settle while two have chosen to fight the charges, and the states have jumped into the fray as well. The argument from publishers is that they need to be able to set prices on e-books, because otherwise Amazon will increase its monopoly and decimate the book industry. So who should we be rooting for, the giant electronic retailer or the giant publishing houses?

As Jeff has explained before, this case revolves around an agreement that Apple struck with five of the “big six” book publishers — namely Macmillan, Penguin, Hachette, HarperCollins, and Simon & Schuster — when it was planning the launch of the iPad. Since Apple was coming into the e-book market late and was trying to mount an attack on Amazon’s entrenched market share, the deal with publishers to institute what is known as “agency pricing” seemed like a good idea: It gave Apple plenty of content (plus 30 percent of the revenue from each book sold), and the publishers got to control the price of their books, something they weren’t allowed to do with Amazon.

Who is acting in the best interests of book buyers?

Until that point, the traditional book-pricing model was the wholesale model, in which publishers simply cut a deal with book retailers for a certain number of books, and then the retailer was free to set whatever price it wanted. With e-books, however, the major publishers were afraid that Amazon’s dominance in the market — not to mention its desire to sell more of its Kindle e-readers — would lead to rampant price-cutting and that this would eventually erode their profit margins, destabilize the market for e-books, and result in Amazon’s amassing even more power over the industry.

None of the publishers — even the ones that have agreed to settle the lawsuit — have admitted to any collusion or price-fixing behavior. As Laura has reported, Macmillan CEO John Sargent has argued in an open letter that his firm has done nothing wrong and that agency pricing is a critical weapon the industry desperately needs in its fight against the market dominance of Amazon. But the Department of Justice has what amounts to an antitrust smoking gun of sorts in comments that the late Apple CEO Steve Jobs made. He told publishers:

We’ll go to [an] agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.

As I have described before with respect to antitrust charges that have been leveled at Google, the purpose of antitrust law isn’t necessarily to protect smaller companies from larger companies or even to prevent monopolies per se. The purpose is to protect consumers from the impact of a monopoly or collusive behavior. So when Tim O’Reilly and others argue that the Department of Justice should be going after Amazon instead of the “big six” publishers, they are missing the point to some extent. A case against Amazon wouldn’t make any sense unless it could be shown that Amazon’s behavior was causing higher prices. The reality is that the publishers are the ones whose behavior is leading to higher prices (the publishers who settled get two years of “modified” agency pricing).

Agency pricing seems like another roadblock to adaptation

In a debate that Laura and I had recently about the value of agency pricing, Laura argued that this model gives publishers — particularly smaller, independent publishers — more control over their businesses and that this is fundamentally a good thing for the book industry as a whole. And as I admitted in a post following that debate, I can see how this argument works for smaller publishing houses, but I am less convinced that it is justifiable for the “big six” publishers, which are giant entities, just as Amazon is. They may want to make the case that agency pricing means a healthier book industry and that this is better for readers as well as publishers, but is that true?

Imagine if paper producers decided to play the same game with Wal-Mart and agreed to a pricing model with another large retailer that allowed them to set the price of toilet paper and other products, and Wal-Mart had to capitulate. That might be a good deal for paper producers — and they might even argue that consumers would ultimately benefit by having higher-quality toilet paper or a greater variety of products — but does that justify their behavior? If I’m a reader, don’t I just want to pay less for books?

One of the things that complicates this entire question is that Amazon isn’t just a retailer: It also publishes books, both through the Kindle self-publishing platform and through its own in-house imprint, which has been adding authors and growing in size over the past year. That puts it in head-to-head competition with publishers and makes it harder to say that the company simply wants what every retailer wants — namely, the ability to sell products at whatever price it thinks is necessary. Amazon also clearly has an interest in promoting its Kindle ecosystem, and cheap books are part of that equation.

That said, however, the fact remains that virtually every major disruptive or innovative move the book-publishing industry has seen over the past decade has come from Amazon and Google, rather than from the mainstream publishing houses. They seem to have spent most of their time dragging their feet and throwing up roadblocks to any kind of innovation, whether it’s e-book pricing or Google’s book-scanning project (Matt Yglesias at Slate argues the antitrust case is irrelevant because publishers are doomed anyway). Their defense of the agency-pricing model feels like yet another attempt to stave off the forces of disruption. Why not try to adapt instead?

Post and thumbnail images courtesy of Flickr users Abysim and Frederic Della Faille

  1. >>That said, however, the fact remains that virtually every major disruptive or innovative move the book-publishing industry has seen over the past decade has come from Amazon and Google, rather than from the mainstream publishing houses.<<

    Apart from, apparently, agency pricing. Think of it this way – the more direct the relationship between the initial creator and the final consumer (i.e. the fewer reseller intermediaries) the more efficient, responsive, flexible, and fair the market will be. We had to historically tolerate resellers for logistical purposes, but not any more, and certainly not with digital goods.

    Wal-Mart is the wholesale model. Kickstarter is the agency one. The case for ebooks is even clearer.

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    1. That’s a fair point — except that it implies the best possible relationship would be if Amazon dealt directly with authors and cut publishers completely out of the picture, which I guess is kind of what is happening anyway.

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      1. Hah!

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      2. Absolutely, provided that Amazon acted as an agent and not as a wholesaler, allowing authors full flexibility to set their own prices without any unilateral discounting by Amazon.

        Actually, as long as the agency model becomes widely adopted, I suspect this is exactly the direction the market will go in. So the publishers are shooting themselves in the foot long-term, for the short-term benefit of greater pricing power. But the agency model is an innovation, and it is a benefit to both creators and consumers. The wholesale model preserves the market structure, the agency model changes it.

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      3. @aepxc,

        The agency model isn’t an innovation. It’s a desperate bid to remain relevant by adopting the business model of, wait for it, literary agencies.

        The only problem is that literary agencies can now provide end to end services for authors, from editorial to publishing, all with very low overhead. I’m involved in helping authors convert their backlists for e-book publication and know of several long-time literary agents who’ve grown their operations into full service operations that leave the Big Six on the sidelines.

        Some authors, who see a very high e-reader adoption among their prime demographic, are increasingly viewing printed versions of new works a capital intensive legacy market. POD options exist to bridge that gap for those who must have something that takes up shelf space.

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    2. This whole thing seems like a non-starter … Apple isn’t the leader in e-book sales. They should be thought of more as a shipper and marketer than a retailer. All they are doing is providing a conduit for a publisher to sell their wares. How is this different from consignment? What about minimum price agreements … lot’s of companies use those as well.

      Collusion does not mean we all agree to do business under a set of understood rules … it means working together to fix a price for a commodity.

      Apple isn’t doing that. They are setting the rules for transactions in their market, not “The Market” … if we were talking about producers of coal holding coal back from the market and buying out other producers to guarantee a minimum price for coal, that would be collusion.

      The publishing industry is really in a very difficult position and will face departing revenue from Authors self publishing … who does the DOJ think they are helping here? Don’t they have bigger fish to fry?

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  2. Mathew, I believe one of your recent posts said that newspaper publishers are forced to concentrate mostly on their traditional business (because that’s still their primary source of income) so they don’t/can’t give much attention to developing new online businesses. Is that also true of book publishers?

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    1. That is true — and if they continue to focus mostly on that, they will be in just as much trouble as newspaper publishers are. Thanks for the comment.

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  3. Thanks for the cogent analysis, Matthew. I don’t have a view yet on which side I support. But one comment you made struck me as being at the crux of a lot of issues today.

    “If I’m a reader, don’t I just want to pay less for books?”

    The obvious answer would seem to be yes. Why pay more than I have to? But that mindset, that we should always be able to get something cheaper, somewhere somehow, has to led to unsettling consequences, in my view. With the emergence of big box stores such as WalMart, and the digitization of goods that once were physical, and the creation of Amazon and iTunes and Netflix, etc. etc., consumers have come to expect continual downward pressure on the price of goods. I went to buy a pair of Levi’s at Target the other day, and was surprised (pleasantly) that they were only $20—less than what I used to pay for them in college many, many years ago.

    The value that we place on goods is now so small, driven by price reductions by companies that sell at scale and at a loss (Amazon), that we bristle at the notion of anyone making a respectable profit for their work. I don’t know where all this is headed (sweat shops), but for all the people involved in the creation of goods, it can’t be good.

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    1. Actually Michael, the kind of arrangement that authors have with Amazon through the Kindle — where they can publish and sell their own books at whatever price they wish — can put substantially more money in a writer’s pocket than a standard publishing deal, even with a lower price for the finished book. Just because the current model is what we are familiar with doesn’t mean there isn’t a better one.

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      1. But at what point does all this disruption totally destroy us, our society, our country? There’s no way the “knowledge” economy with streamlined productivity can employ all the people that have been disrupted.

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      2. Very, very true.

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      3. @PXLated People have been saying this about the IT industry for 50 years. The point is that most work in publishing is routine drudgery, and it will be better for everyone when the people involved do something more constructive – as has always happened with other tech changes. The creative jobs – like authors, editors and marketers – will actually increase, to the great benefit of our society.

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      4. @PXLated,

        Who knows? Hasn’t happened yet. I surely don’t want to live in a static world of protected jobs. Imagine if that had been done twenty years, forty years ago, a century ago? It wasn’t that long ago that the vast majority of humans were employed in some form of farming. 41% in 1900. US farm employment lost 4 million jobs between 1870 and 1900. Over 10% of the 1870 US population!

        Yet most of those people found work elsewhere as new industries developed, with new products unknown to a previous generation. And many of those same products are long obsolete and no longer made, bringing unemployment to yet more people in another era.

        Several of the jobs I did earlier in life are gone or on their way out. But I wouldn’t want to live in those eras again.

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      5. Travis Butler Friday, April 13, 2012

        Except that a) Amazon reserves the right to lower the price authors set, and b) has the equivalent of the ‘most favored nation’ clause that people point out with Apple.

        See https://kdp.amazon.com/self-publishing/help?topicId=A36BYK5S7AJ2NQ

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    2. Richard Lamsdale Thursday, April 12, 2012

      Totally agree. Just paying less for books is not what’s best for readers – a diverse and vibrant choice of books at a good price is surely better than just ‘paying less’. If price is the only factor then the whole market is finished.

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  4. I am led to think of new (dead-tree) paperbacks. The price is printed, by the publisher, on the back cover. I bought the book in, say, Borders (remember Borders?) and, yes, they had their own price sticker covering the publisher’s printed price. But invariably (in my experience), the two prices were identical. Yet I saw no trouble from the DOJ about collusion for the many booksellers who honored the publisher’s printed price.

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    1. if many booksellers together decide to markup the price of all books by 50%, it will be collusion. Border independently are free to sell it for whichever price they want.

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  5. I’m with you. Somehow Amazon comes away here as benevolent. The enemy of my enemy is my friend.

    Phil Simon

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  6. Good summary, Mathew. There is also an argument for a middle way. It isn’t necessarily the case that the agency model is evil, but the publishers’ questionable decision to overprice ebooks came along with it. The agency model is popular with retailers because they make higher margins (no need to discount to compete with Amazon). Consumers–and the DoJ–would never have cared, if the prices had remained reasonable.

    The real issue seems to be: why don’t publishers want to sell ebooks for less than the hardcover editions? Most people don’t seem to be buying the justification that physical books and stores must be artificially protected for the good of all. As you say, it just appears to be an obstructionist tactic by an industry that is unwilling to cope with change as long as it has the leverage to avoid it.

    In the meantime, publishers are creating a lot of animosity and sabotaging a growing market to protect a declining–and doomed–one. It seems they should just be happy that reading is still so popular and should not want to do anything to antagonize consumers or dis-incentivize them from purchasing books–in whatever format they choose.

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    1. Actually, publishers are/were selling ebooks for substantially less than hardcover prices. More than 50% less even under agency pricing. In fact, publishers willingly chose to lose money under agency pricing (while authors made more) in order to stabilize pricing and win control over the value of their product.

      The fact that books are being compared to toilet paper, and that you think ebooks have been “overpriced” (because they are no longer being sold as a loss leader for Amazon’s ereader) just shows their instincts were right.

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      1. Jonathan Briggs Wednesday, April 18, 2012

        Publishers may be setting wholesale prices of hardcovers at less than ebooks. But when it arrives at the retailer and gets put on sale for 20% – 40% off, the hardcover often becomes cheaper. And that is ridiculous.

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  7. Anti-trust law is meant to serve consumers’ interests. But this case will hinge not on who is actually doing so, but rather, whether publishers broke the law.

    There are all sorts of theories of what might have happened, and the court will apparently get to hear them and decide whether Justice is better served. by slapping down the Apple deal or letting the publishers find a way to band together to get equal market power and prevent Amazon from taking over. (To my casual eye, Amazon is quite happy to increase its prices once/when it achieves sufficient dominance in a market.)

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    1. What is your evidence? A number of publishers completely ignore Amazon and B&N as outlets for their products. The most prominent is probably Baen. You can buy a Kindle book from them but you must download it and put it on the display device yourself rather than having it magically appear. So long as the Kindle and nook remain open in that respect, Amazon cannot crank up prices without inviting their customers to get direct to the authors or publishers.

      But what other market has Amazon ever achieve sufficient dominance that it could raise prices unopposed? The only products exclusively sold through Amazon are handled thus only by agreement of the suppliers.

      More importantly, I believe Amazon understands the strength of a good product at the right price. Ten $2.99 e-book is a better profit source than four $4.99 e-books. Lower prices reduce friction and induce customers to spend more.

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      1. Evidence to what? Theories that might be used in the case? Simple speculation.

        As to whether Amazon would happily raise prices if there were no effective competition: my “casual eye” referred to other consumer goods (cameras). Amazon seemed to ALWAYS have the best prices for a while, but the last I shopped for a lens to give a semi-pro relative, Amazon predictably came in 5% or 10% above others: $75 higher, IIRC.

        There are many ways a retailer gets higher prices, mostly legally. The most reliable way is to make sure that the effort to compare prices is unlikely to be worth the effort. Selling best-sellers below cost, as Amazon has confirmed doing, forms the idea in consumers’ minds that they’re probably the low-cost seller, driving other sellers out. (It’s not exactly trivial to set up a store from scratch.)

        I have no problem with low-cost products and I carry no brief for the publishers. I am just noting that should Amazon manage to drive out competitive e-sellers, they get the opportunity to do with books, what they have done with other products. And what virtually EVERY other retailer does when it has no effective competition. (Sorry, that direct download story doesn’t work for anybody whose time is worth more than minimum wage.)

        So yes, Amazon completely understands the strength of a good product at the right price. And is quite happy to make it impossible for competitors to challenge their margins.

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  8. I’m horrified to find myself in agreement to an extent with Ysglesias. The Big Six are toast. They’re just struggling to keep their perks until the old guard retires. The younger editors of any real ability will becomes agencies themselves. Many writer need strong guidance and input to beat a book into shape and this is a worthy career. What isn’t needed is the massive infrastructure and Manhattan offices. A good editor can live anywhere with a decent internet connection.

    A good editor can be the difference between a mid-lister and a bestseller. But such a job requires a very low overhead. That means a home office and little of the prestige big publishing execs are accustomed to enjoying.

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  9. You raise some great points about why people don’t like retargeting. In the interest of full disclosure, I work for an ad platform that specializes in retargeting, ReTargeter.

    I think behavioral targeting is a good thing both for the advertiser, who can spend money more effectively by only showing ads to a relevant audience, and for the consumer, who is only shown ads for products they are actually interested in. I am a fan of retargeting both as a marketer who uses it and as a consumer who likes seeing relevant ads.

    That said, I think you are pointing directly to the biggest problems in the retargeting space. Though sales may go up in some instances, I think more times than not, inundating your site visitors with retargeting ads is a terrible idea. For every success story, there are many more people who feel the way you do: creeped out and annoyed.

    From a privacy standpoint, I just want to add that retargeting does not actually track any personally identifiable information. The cookies used to track users are 100% anonymized and we cannot track any specific data. Furthermore, all the bidding on ad space is automated and completed in real-time. That is to say, technology serves the ads, there is no human sitting, watching your movements online, bidding on ads as you appear around the web.

    You said the following — “it’s really annoying that the ad content doesn’t appear to have any thought given to sequencing.” I would agree 100%, but I would also argue that this isn’t the hallmark of a good retargeting campaign. A good campaign shows different ads to people who have already been to the site, because they are at a different stage in the buying process and should therefore be treated differently. Significant thought and strategy should be put into a retargeting campaign, as there is no one size fits all strategy.

    Your comments provide the best example of why frequency capping, and working to create a positive experience for the customer should be the bottom line of any retargeting campaign. Any tactic that makes customers uncomfortable or angry is neither good for the business nor the advertising department.

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    1. Thanks for the comment, but I think you have this post confused with another one :-)

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  10. I help authors publish their work on ebook catalogs and POD. The problem with the book industry with a free-for-all self publishing model that is only based on price is that the end product is crap. Ebooks are awash in bad writing now. There is almost no way to find the good books without the filters that traditional publisher used to provide for editing, art, layout, and selection of good stories.

    Of course the publishers were a monopoly and writers were treated like chattle many times. And plenty of crap gets published in the traditional model. It is just today there is no quality standards and with price the only factor there is nothing to drive quality.

    It is worth remembering also that most writers who love their craft are writers. They do not want to publish, promote, distribute, and hsutle sales of their work. They want to write – and writing is a very hard full time work, for introverts not extrovert sales types usually.

    Without somebody to enforce quality innovation dies too and you get one low grade choice at wal*mart and writer still do not make money because all their hard work is devalued and stuffed into the “cheap” bin.

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    1. I think readers are capable of deciding what they think is worthwhile content and what isn’t — one man’s crap is another man’s entertainment. Perhaps we don’t need publishers acting as filters any more.

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      1. Because you won’t ever see it if the publishers don’t publish it first. Very few authors have the determination or the skill set to produce the finished versions of the book themselves, let alone market it.

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      2. That is not the point, of course readers have different tastes. The problem is that with 200,000 new ebooks published every year there is no way at present for the reader to find the good ones in their style. There is no quality filter and no promoter designing the art and trailers to catch different demographics. There is no product placement, like newsstands in airports to browse and no bookstore managers to weed out the few good books for their customers. Sorry Amazon, B&N, and Apple just dump them all in a big steaming pile unless somebody pays to promote them – like publishers.

        Most readers just want to browse, not spend hours on social media, webpages, staring at thir tablet just to find something that looks good to read. Bookstores and publishers did that in the past – and somebody paid for it, not free you know. The ebook systems have not caught up to that at all.

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      3. Your point carries a lot more weight than the publishing industry wants to admit. The think about Amazon is it is driven by a huge user base that offers heartfelt reviews of content.

        This negates the monopolistic value of lists and popular critics. MonkeyT is absolutely wrong about publishers as the first half dozen authors I have read on my kindle have been self published and very good authors I wouldnt have been exposed to any other way.

        Publishing needs to learn the music industry lesson, because if they dont they flirt with an even bigger train wreck out come than all other content industries combined.

        As an example I know boycott McMillan and its very easy for me to do so. Even more importantly its very easy to spend my book dollars elsewhere.

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      4. Travis Butler Friday, April 13, 2012

        I sure as heck want them available to filter.

        I spent years in the fanfic community, before I finally got tired of wading through acres and acres of poorly-written garbage to find the few stories I enjoyed reading. I have a very good idea of just how low the low the quality level can sink when there is no filter in place. I also have a very good idea of the amount of work needed to trawl through a sea of sludge looking for occasional tidbits I like, and I have no desire to do so again.

        Some people like to point out books that mainstream publishers missed, as evidence that publisher’s filters do more harm than good; but I’d be willing to bet that for every Hunt for Red October or Harry Potter that hasn’t been picked up by the mainstream publishers, there are thousands – if not tens or even hundreds of thousands – of books on the slush pile that don’t meet basic standards of grammar, let alone entertainment.

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    2. My brother runs a bookstore, and he never depended on publishers for quality control. He made recommendations based on personal knowledge or feedback from customers. There are a number of bestseller lists for books, and I would assume the same kind of rating systems will develop for ebooks as well.

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      1. Of course there will be ratings and recommendation lists. There will be dozens of them. Hundreds of them. And any one of them that gains any traction at all in the mass market will be gamed and exploited to the point of being useless.

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    3. “The problem with the book industry with a free-for-all self publishing model that is only based on price is that the end product is crap. Ebooks are awash in bad writing now.”

      Traditionally published books aren’t any better. I just finished reading the ebook version of The Last Herald Mage by Mercedes Lackey. The publisher is Penguin. Clearly, no one involved in the project was told that “only” is not spelled with a number. I’ve seen “0nly” and “on1y” repeatedly. Is it that hard to proofread?

      Let me do this next part in voice, to really drive home the point.
      Macmillan published Fated, and the verb tenses changing, shifting, wildly mutating, to the point that, particularly after a parenthetic phrase cuts off a sentence mid-way.

      Most of the book reads like that. If publishers can’t even get the basics of spelling and grammar right, what value are they really proving?

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