What is an electronic book worth? You may have thought your $9.99 best seller was a good deal, but according to the US Department of Justice (DOJ), you’re paying too much. U.S. Attorney General Eric Holder, speaking at an E-book Press Conference on April 11, 2012, alleged that the price for e-books published by several of the largest publishers has likely been fixed and unduly inflated due to a blatant conspiracy at the highest executive levels between Apple and several publishing titans. While e-books are born of new technology and their pricing paradigm may be dramatically different than their printed cousins from pre-Kindle print publishing world, this DOJ litigation alleges that Apple and the publishing titans were really doing business in a very old fashioned way.
Holder announced that the DOJ will continue to pursue litigation against Apple, Macmillan, and Penguin. Hatchette, HarperCollins and Simon & Schuster agreed to a proposed settlement that would allow retailers the freedom to reduce the consumer price to any value that suits the retailer. Pennies above the price they paid publishers to acquire a book, or even below wholesale as a loss leader? Contrast this with the pricing scheme these publishers enjoyed with Apple. Holder alleges the publishers agreed to fix the price and Apple would guarantee a 30% “commission” on the sale of each book. The “agency model” replaced the standard “wholesale model” where booksellers could set their own price and discounts from list pricing.
The settlement requires the three publishers to grant retailers the freedom to reduce e-book prices; to terminate the “anticompetitive most-favored-nation agreements” with Apple and other e-books retailers; and, to prohibit the publishers from placing constraints on discounts for two years (so, get them while you can now). Also, the publishers will be prohibited from conspiring or sharing “competitively sensitive information with their competitors for 5 years.” They must each implement a strong antitrust compliance program.
The DOJ referred to the “egregiousness” of the alleged antitrust behavior at the executive level. Publishers were concerned about the “wretched $9.99 price point.” The alleged conspiracy was to “force [Amazon] to accept a price level higher than $9.99.” Even Steve Jobs is alleged to have been directly involved in this conspiracy and to have said “the customer pays a little more, but that’s what you [referring to the publishers here] want anyway.”
All of this taking place in the summer of 2009, in the established era of Sarbanes-Oxley corporate governance and compliance legislation, as well as the Federal Sentencing Guidelines introduced in 1987 and recently updated in 2010. How was this possible? Where is the minimum corporate governance we expect of corporate America? Consider that Apple posts its corporate governance and business conduct policy online for investors and consumers to consider in their relationship with the company. As the case evolves, we will have the opportunity to judge whether its CEO complied.
So why did the DOJ settle – wouldn’t this case have been more appropriate to try with all defendants? Perhaps it is simply because the defendants were willing to settle. Perhaps they agreed to provide valuable testimony. Perhaps because it is truly difficult to determine how an e-book should be priced.
Indeed, e-book pricing is mysterious – perhaps more so for publishers than consumers. The digital era has turned book pricing upside down. A digital book basically saves publishers the underlying expense of manufacturing anything tangible. No need to determine the initial print run. Doesn’t matter if the book is leather bound or with gold leaf pages. No shipping costs. Even returns, the bane of publishers, are essentially eliminated. Similar to the era of albums and CDs moving to iTunes, the e-book is written and duplicated with simple keystrokes online. The wholesale or retail price is definitely not based on the actual cost of digitizing the book. Kobo Books offers millions of free e-books, as do many others, including the DOJ’s adversary – Apple.
Pricing is really based on what the market will bear. Smaller presses frequently have far less volume in sales and can’t afford to set a low price. Any publisher wants to ensure reasonable royalties for authors and for pricing to help cover the real risk of investment in any new work or author with, at least, a modest expectation for profit. Here is some comparison pricing on three print books and their e-book versions.
- Girl with the Dragon Tattoo, by Stieg Larsson, published by Knopf Doubleday Publishing Group. The Kindle version price is the “wretched $9.99.” The same price for the paperback. New hardcover versions are on sale for $30+. Not sold by iBookstore. Barnes & Noble: $10.98 hardcover, and $9.99 for Nook version.
- In Spite of the Dark Silence, by Jorge Volpi, published by independent Swan Isle Press sells in hardcover for $21.28 (discounted off the list price of $28) at Amazon and $20.28 at Barnes and Noble. The Kindle version sells for $9.60 (with a digital list price of $12.00). Not sold by iBookstore or through Barnes and Noble Nook.
- Going Solo: The Extraordinary Rise and Surprising Appeal of Living Alone, by Eric Klinenberg, published by The Penguin Press. $14.99 Kindle. $14.99 Apple iBookstore. Hardcover is now discounted from $27.95 to $17.17 at Amazon.
The “wretched $9.99” can just be a good cash cow. Consumers don’t complain about the price. The Girl with the Dragon Tattoo sold more than 1 million e-books by 2010. The word “margin” does not enter this equation in any meaningful way.
With this litigation, the DOJ is telling us that “the antitrust laws are flexible and can keep pace with technology and a rapidly changing industry.” The DOJ’s focus is on “ensuring an open and competitive marketplace [that] allows for innovation, which is good for businesses participating in that marketplace and is good for consumers.” However, this antitrust case really isn’t about whether the publishers are charging too much. The issue is whether the prices were fixed in total disregard of antitrust laws.
U.S. and global antitrust laws are not new. Virtually every global business has been dealing with corporate compliance, conducting training of its board, officers and staff for more the past couple of decades, with increased efforts further since Sarbanes-Oxley and Dodd-Frank. The irony of this litigation is that it would appear that all the involved defendants were able to keep pace with technology, but not the simple evolution of corporate governance and compliance expectations.