Disappointed by Google
What if DRM Goes Away?

DoJ: Consumer Hero or Predator Enabler?

Last week I got a better sense for why Clay Johnson, author of The Information Diet, recommends gathering the facts as close to the source as possible. When the DOJ released the final judgment with settlement terms for three of the big six publishers I was on a plane and was formulating my opinion based on what I was reading in the tweet stream.

By the time that plane landed my mind was made up. Or so I thought. At that point I felt the DOJ’s settlement terms were over the top and taking us right back to square one. It appeared that the agency model was going away, the deep-pocketed Amazon could continue selling ebooks at a loss, drive the competition out of business and create an ebook retailing monopoly.

I was also confused and led astray by this Wired article which reported, “Publishers can enter into one-year agency agreements that stipulate that the retailer can sell individual titles at a loss, but must show a profit overall for all the books it sells from that publisher’s catalogue.” That seemed vague since the article didn’t say how much of a profit had to be generated.

Then I read the relevant sections of the settlement terms (see section VI, Permitted Conduct, paragraph B).

The settlement document actually says that there are some restrictions in customer discounts going forward, but that “such agreed restrictions shall not interfere with the E-book Retailer’s ability to reduce the final price paid by consumers to purchase the Settling Defendant’s E-books by an aggregate amount equal to the total commissions the Settling Defendant pays to the E-book Retailer.”

In other words, the retailer doesn’t have to generate a profit on ebook sales and the agency model isn’t really going away. But the DOJ is altering agency so that it once again tilts the scales in favor of the deep-pocketed retailer. According to the settlement terms, Amazon will be able to forgo their cut of the transaction and pass that discount along to customers. So let’s say the agency model includes a 30% cut for the retailer. Instead of the publisher being able to set the final consumer price, as they can under the original agency model, the retailer is now able to discount the consumer price by as much as their 30% cut.

That might seem harmless because it doesn’t let Amazon sell ebooks at a loss under the new terms of the agency model. Once the terms kick in it seems certain Amazon will reprice all these agency titles from settling publishers to 30% off, thereby forcing their competitors to do the same and not make a nickel on ebook sales. That’s OK for Amazon because they’ve got loads of cash and sell a bunch of other products they can make money from. What does it mean for other ebook retailers though?

The wholesale model was accelerating the death of other ebook retailers. Amazon could sell all their wholesale model ebooks at a loss until the last competitor was run out of business. The agency model took control away from Amazon by not letting them sell at a loss. This new agency model is somewhere in between but will definitely put other ebook retailers at a disadvantage, especially if they’re not as diversified as Amazon and unable to make a profit somewhere else. We’re not quite back to square one, but we’re painfully close.

So while the DOJ feels they’re solving a price-fixing problem what they’re really doing is paving the way for a monopolist retailer. And don’t think Apple or Google with their deep pockets are going to save the day. Neither of them are selling that many ebooks, Apple will probably lose interest now that the agency model has changed and Google has already started their retreat.

Even though my employer, O'Reilly Media, doesn't use the agency model, I think it’s perfectly reasonable for a publisher to set the final consumer price, especially if they’re trying to prevent one retailer from selling at a loss to drive competitors out of business. I was also inspired by the letter Macmillan CEO John Sargent wrote about the situation. He feels Macmillan has done nothing wrong and that they plan to fight the accusations.  That makes me wonder about the publishers who have already settled. Either they’re guilty of collusion or unwilling to take a stand at this very important moment. Neither scenario casts them in a favorable light.

When I was on that plane I was ready to grab my own torch and join the lynch mob because the agency model was going away and Amazon could revert to selling those agency titles at whatever loss they wanted to. Now that I’ve read all the facts I’m not so much angry as I am disappointed in the DOJ. They haven’t completely nuked the agency model but they’ve changed the rules enough to all but ensure Amazon’s dominance.

There’s one question I’d love to ask Attorney General Eric Holder: When Amazon’s ebook market share climbs back to the 90% level it once was, and competitors are run out of business, will he consider these settlement terms a success?

Comments

Aaron Pressman

I don't agree with much here but I wanted to ask you about an inconsistency. In your post last week about Google pulling the rug out from under independent booksellers, you blamed Google for not investing enough -- and that was under the agency pricing regime. Agency pricing did not provide Google with an incentive to invest, by your logic. Today, you've implied that Google ending the program can somehow be blamed on the DOJ lawsuit or something. I agreed the first time and find the citation here odd.

Also, I would be shocked and amazed and eat my hat if Apple stops selling ebooks when the current agency pricing contracts with 3 of the big 6 get canceled in a few months because of the settlement. New business arrangements are on the way.

J.N. Duncan

This has kind of been my thought on the whole thing as well. I get tired of hearing the "free market" rhetoric and how Amazon's methods are just the capitalist, American way, and you either adapt and survive or go away.

While I can't say that I have huge sympathy for the publishers either, who have dropped the ball in a major way with digital publishing, I'm certainly not glorifying Amazon's cut-throat business practices either. Amazon has one goal with books (in my opinion), which is to drive consumers to the store so that they will use their spending power on more profitable items. Books are a great gateway product. They realized this a long time ago and have used this fact to great advantage. It is no small advantage to be able to eat profits when your competitors can't.

Bezos claims to want to transform the publishing industry, to bring it into a new age. I'll be really curious how this plays out when the transformation doesn't really change the landscape so much as wipe it clean. While new forms and models might rise out of these ashes, Amazon will be in the wonderful position of owning the landscape and being able to dictate its future. If I were to guess, I'd say that at some point, when big publishers start filing for bankruptcy, Barnes and Noble is gone, and nobody can afford to get into the book retailing business, we might find the DoJ moving in a different direction than they have now and regretting they stepped into this whole mess in the first place.

Joe Wikert

Hi Aaron. I never said anything about the agency model in that Google post. My point there was that Google simply wasn't investing in an ebookstore. The post had nothing to do with agency vs. wholesale models.

Do I feel that Google's announcement to end their reseller program is a sign that ebooks aren't that important to them? Absolutely. Google's announcement preceded the DoJ's though, so I'm not saying one led to the other.

And when I said "Apple will lose interest" I'm not suggesting they'll shut iBooks down tomorrow. What I *am* saying though is I'm not convinced Apple will be all that interested in selling ebooks at a loss just to match Amazon's prices. Apple only has a tiny share of the ebook market and this certainly isn't going to help them.

carmen webster buxton

Everyone keeps talking like Amazon is the ebook player with the deepest pockets when in fact, Apple could buy Amazon out of their petty cash drawer. They haven't done that, and they don't seem to be doing terribly well at selling books, either, even with agency pricing. I think the Big 6 should stop fighting a holding action and look to the future. Do what O'Reilly is doing: sell direct to customers (you know who your customers are that way), and ditch DRM. The O'Reilly books I have bought are on my Kindle but they can also be on my iPad as epub books (if I buy an iPad). What a great incentive for readers!

And if you're going to talk to competing publishers, don't leave an email trail.


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