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Summary:

A surprise ruling last week will force publishers to tear up their e-book contracts with retailers. The ruling is scheduled to go into effect in the next few days and, if it does, Amazon and others will be allowed to slash the price of e-books. A prominent lawyer has filed a Hail Mary brief to stop the process.

Just days before a court ruling forces major publishers to tear up ebook contracts, a prominent attorney has asked to suspend the proceedings until an appeals court can weigh in on a price-fixing settlement between the U.S. Department of Justice and three publishers.

In documents filed late Friday, Bob Kohn asked U.S. District Judge Denise Cote to stay her ruling on the grounds that consumers will be irreparably harmed by new e-book prices if the settlement goes forward.

Cote approved the settlement last week as a means to fix what she concluded to be blatant price-fixing by Apple and the publishers. The arrangement calls for Simon & Schuster, Hachette and HarperCollins to truncate their contracts with Apple by this Friday and to notify other ebook retailers that they are no longer bound by contracts that set a minimum price for ebooks.

What this means in practice is that, within weeks, mega-retailer Amazon will be able to resume selling ebooks at bargain basement prices, including below cost.

Kohn, Apple and two other publishers had urged Cote to hold off approving the Justice Department settlement until the price-fixing issues could be addressed at a trial next summer. In a surprise move last week, however, Cote threw aside planned court hearings and said the settlement could go into effect.

Kohn, a prominent entertainment industry lawyer, now says that the process should be halted until it goes before the Second Circuit Court of Appeals. If Cote doesn’t grant a stay, he says, “consumer welfare” will be harmed immediately as the new ebook prices will take effect and shift pricing power to Amazon. He also points out that, if the Second Circuit ultimately sides with the Justice Department, ebook buyers will not be hurt; they can simply collect more money under a proposed compensation scheme that proposes to pay them between 25 cents and $1.32 per overpriced ebook.

In an interesting tactical shift, Kohn appears to acknowledge that the publishers did in fact collude to fix prices but that the price-fixing was not illegal. Until recently, publishers have denied that they conspired.

This suggests that the publishers who did not settle are now putting all their hopes on a Supreme Court decision that held that price collusion is not illegal in the case of market failure. The argument is based that on the idea that Amazon, with a 90 percent ebook market share, was a monopsony (a single buyer with all the power) and that publishers had to take a one-time step to fix that.

Kohn first made the argument in a remarkable comic-strip he submitted to the court last week:

Judge Cote will rule on Kohn’s request for a stay in the next few days. According to Peter Toren, a veteran federal court litigator, Cote will almost certainly turn down the request. Toren added that this will pave the way for the settlement opponents to make an urgent request for a stay to the Second Circuit.

If the Second Circuit also rejects the stay, it’s effectively game over. This is so because it would take the Second Circuit many months to address the settlement itself — and, by that point, the new ebook prices will have gone into effect and changed the market.

Here is Kohn’s stay request with some relevant parts underlined:

Kohn Request for Stay

  1. 1. I fail to see the harm to public welfare caused by lower prices.
    2. How does this guy have any standing anyway?

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    1. Thanks for the comment, vnagia. Both good questions.. My understanding is that:

      1) Kohn is arguing that predatory discounting will harm the overall publishing eco-system and, ultimately, the consumer

      2) Re standing: Judge Cote gave him leave previously to file a ‘friend-of-the-court’ brief (can’t recall why) .. I’m not sure but I think he’s relying on that to submit the current filing

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      1. Ah, I see. So to put it another way – their insistence on DRM has caused a situation where they’ve lost power to negotiate because they’ve created a monopsony that can now push back?

        Hmm, where have I heard that before? *cough*itunes*cough*

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    2. I am a member of the public, a consumer. I do not want to buy from Amazon, and I do not want to buy e-books. I want to buy print books, preferably from companies such as Barnes & Noble that have physical stores. If Amazon is allowed to use unfair business tactics to drive these companies out of business, I am harmed, since I will be forced to either not buy or buy from a company I hate that I feel conducts business in an extremely unethical manner. If they harm the market enough, I may not be able to buy print books of many titles ANYWHERE, and e-books, which I despise, may eventually be the only reading option for many books.

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      1. Very sorry, but I think you’ve misunderstood. I was asking in this very specific instance how there is harm.

        Your argument is a broader concern about online retailers having significantly lower costs, which in turn translate to high competition that drives out a local business. That problem will exist as long as the internet exists, though I suspect nostalgia will keep a few high-priced boutique sellers alive.

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  2. What I like about the ruling is that it forces the Publishing Industry to have to re-organize itself and finally get into the 21st century. This is exactly what happened with the music industry when iTunes came out, and the amount of money that the RIAA makes is not only comparable, but in some cases better, than what it used to make. Every Industry that fails to keep up with technology and society, will ultimately have to evolve or become extinct. There are a great number of independents who would gladly take up all the business from Harper-Collins and others.

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    1. I am not sure why agency pricing is wrong. I understand that all the publishers meeting and deciding that they should do that is wrong since it is collusion, but why can’t they individually do so, even if after a few years from now? I am not convinced that in digital goods, a traditional retail model works. If Amazon sells 1 million copies of an e-book, they do not physically have 1 million digital copies of said book on their server, unlike the case with physical books. Each consumer that buys get the same digital copy, or rather a license to read the ebook. This lends itself to the agency model — it works for apps.

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      1. After 2 years they are free to sell that way again – the problem is that if Amazon drives other companies out of business during those 2 years, it will be impossible to bring them back, and customers such as myself who really hate Amazon and don’t want Amazon getting any of our money may find ourselves with far fewer buying options. I will be absolutely heartbroken if it turns out my tax dollars were used to help Amazon drive Barnes & Noble out of business. :(

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  3. As a publisher nothing drives sales more than lower prices. This is why Costco and Walmart are #1 & 2 respectively in physical book sales. As an author they have more sales with lower retails. And the consumer wins. So who loses? The big 6 publishers who lose control over the process. Amazon and Apple are the new Barnes & Noble and Borders. And don’t forget Walmart.com and Target.com who are getting into this. Can Staples.com and others be far behind?

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  4. Both sides of the issue on pricing have seemingly valid views. I have two (2) self-published ebooks on KINDLE Bookstore: BLOODGUILTY (a chiller-thriller) and SPOOKY MOON STORIES (for children and young adults). And since I set the price for my ebooks, both sides of the argument might not affect my marketing efforts. This is a distinct advantage for self-publishing authors.

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  5. You want collusion? Try to find a competitive price to PRINT a book from a book printer if you aren’t one of the big guys. It’s odd how they are always (when you obtain bids from multiple book printers) within ten cents or so of each other. It’s been clear for a long time that the print industry (from business cards to whatever) has been colluding on pricing, particularly in the book printing industry. Maybe as they start to go under from ebooks, they’ll start looking at being competitive again.

    As to Amazon, I remain incensed by Amazon’s GRAB for the rights to publish my books in foreign languages. Just because I publish with them in English doesn’t mean I should have to give up Spanish, Italian, et al as their agreement demands. It says something like by publishing with us in English you agree to publish with us in these languages, which effectively denies you the right to Sell those rights (as a package with paper print book rights) to a foreign publisher. Wish someone would look at this and cover it here….

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  6. I know of a retailer who sold products below recommended retail price under-cutting other competition. When its sales volume became the the largest (at the expense of lower margins/even at a lost), it demanded great discount from the supplier to offset the losses.

    So while publishers will receive the same amount per ebook for now, I’m sure Amazon does not intend to lose money on content and devices forever. It is just a long term strategy to gain market position vis-a-vis publishers, other ebook sellers and possibly physical bookstores?

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