As expected, the Department of Justice launched an antitrust lawsuit against Apple (s aapl) 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 (s amzn) 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(s wmt) 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(s goog), 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?