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?

Thoughts on eBook Pricing

With all the buzz about the agency model, the Justice Department, allegations of collusion, etc., I figure the time is right for a post about ebook pricing. Here are some quick thoughts as both a consumer and a publisher:

Eliminating waste is always a good thing -- Walmart has mastered this for years. They squeeze every bit of waste out of the supply chain and generally end up with the lowest prices. I'm a frequent Walmart customer and I greatly appreciate this. In fact, the only people who don't like this are (a) other retailers who can't match those prices and (b) ecosystem players who are part of the waste that's being eliminated, including suppliers. 

Loss leaders are a great retail model -- Selling some products at or below cost is a great way to bring customers in the door, regardless of whether that door is physical or virtual. I'm sure I've bought many cartons of milk at a loss for the retailer who made it up by selling me other items at a nice profit. It's a model that works, but have you ever seen a store that sells most of their products at a loss, every day?

Taking loss leadership to a new level -- Remember when Amazon first launched the Kindle and pretty much every ebook was $9.99? It's no secret that Amazon was losing money on the majority of those sales. In fact, they still are. Prior to the agency model Amazon was free to set whatever customer price they wanted for ebooks, even if it meant they were selling every single one of them at a loss. That brings up the razor/blades model, where it's not unusual for the razor to be sold at a loss but the profit is made on the sale of the blades. So if ebooks are the razors what are the blades? The ereader device? According to iSuppli, the Fire's manufacturing cost is slightly higher than its retail price. How long can a retailer stay in business when they're losing money on both the razors and the blades? Presumably they're making some money on other products they're selling (e.g., shoes, electronics, etc.) Perhaps. Then again, if they have deep enough pockets they can continue selling all their products at a loss till the cash dries up. In the mean time, competitors will find it difficult, if not impossible, to compete, so they'll disappear. What happens after that? Do prices remain low as products are still sold at a loss? Not if that company wants to stay in business.

The agency model prevents brand erosion -- Think of the premium products you've bought or admired. Oftentimes their prices are higher than most of the competition's. What would happen if those prices were suddenly significantly reduced? Would those products retain the full value of their premium brand? Highly unlikely. And shouldn't the owner of that brand have a say in what price is associated with it? Again, it's OK for a short-term loss-leader model but I'm talking about selling something at or below cost for years and years, not just for a day or two. Over time the value of that brand is affected. That's why I think publishers should definitely have the option to go with the agency model so they can manage retail prices and not let their brand lose value. Btw, consumers will ultimately vote with their wallets. If they feel the publisher's prices are too high they'll stop buying and that publisher will either need to make adjustments or go out of business.

Fixed prices vs. price-fixing -- In the U.S. we're so used to competitive retailer discounts that we're surprised to hear of the fixed price models used in other countries. For example, in Germany the price you pay for a book doesn't change from one retailer to the next. They're all required to sell them at the same price. Obviously there's a huge difference between Germany's fixed price law and the price-fixing the Justice Department is alleging. Germany's model doesn't lend itself to squeezing out waste like the U.S. model but I'll bet it prevents one deep-pocketed retailer from putting their competitors out of business.

I don't work at a big six publisher but I believe publishers should have the option to choose between the agency and wholesale models. The key issue though is that the Justice Department has suggested that Apple and a number of publishers colluded to keep prices high. I think this article by Gordon Crovitz in The Wall Street Journal sums it up quite nicely, particularly in the closing two paragraphs. Read that piece and ask yourself if the Justice Department's efforts will actually fix or merely add to an existing problem.

What's your opinion of the pricing questions and allegations currently facing the book publishing industry?

Kindle Device License Limits Are Stupid

There, I said it. I'm betting most consumers and quite a few publishers don't realize that Amazon has limits in place to prevent you from loading one Kindle ebook on more than 6 devices within the same account. You're probably wondering why I have so many devices connected to the same account. The answer is simple: I like to test new devices and the old ones become hand-me-down's to family members. They all remain on the same account though.

Amazon has a default maximum of 6 devices for any given Kindle ebook. Once you try to get it onto the 7th device you're greeted with an error message saying, "License Limit Reached", and they nudge you to buy another copy of the product. No way. I already bought it once and I'm not buying it again.

This is yet another example of why DRM sucks. Someone decided 6 was a magical number and so no title can be read across more than 6 devices. Sure, I could de-register or maybe even just delete the book from one or two of my older devices but why should I have to?!

Limitations like this, including DRM in general, are evil and should be done away with. Amazon and publishers, please start trusting your customers and eliminate stupid barriers like this. You're not protecting your revenue stream this way but you're doing a terrific job of irritating your customers and reminding them that you don't trust them.

TOC Podcasts: Now in iTunes

600x600_toc_podcast A month or so ago we decided it was time to extend TOC's reach with industry news, interviews, etc., in the form of video podcasts. I've already featured many of those segments here on the 2020 Publishing blog but now you'll be able to retrieve them in a more convenient manner.

Head over to iTunes and subscribe to the TOC podcast series using this link. Four of the first sessions are currently available via iTunes and more will follow shortly. Going forward we plan to create 1-2 new segments every week.

We're always on the lookout for new and interesting people, products and platforms to cover via this podcast series. If you know of any be sure to send them my way and I'll make sure the TOC team follows-up on them.

The Changing World of Digital Rights & Publishing Agreements

Changing World Digital Rights I originally planned to attend our TOC webcast last week but wound up running into a schedule conflict. If you missed it as well you can stil catch the archive of it with me.

I'm talking about The Changing World of Digital Rights and Publishing Agreements. TOC co-chair Kat Meyer arranged for Dana Newman and Jenny Bent to present on these thorny issues. Again, I wasn't there but I saw a summary of attendee feedback and it obviously was a great discussion followed by a number of terrific viewer questions. I plan to view the archive in the next few days as I decompress from both OSCON and miniTOC Portland.

Speaking of miniTOC Portland... What an outstanding day that was! I had a wonderful time meeting all the local publishing professionals (and students!) who joined us for our first miniTOC event. If you missed it you can catch some of the highlights via a search of the Twitter hashtag #TOCPDX. Thanks to Kat (again!) and all our speakers and attendees.

Why DRM Is Like Airport Security

While flying home from Bologna for our TOC event I couldn't help but think about some of the similarities between digital rights management (DRM) and airport security.  Here are a few common points that come to mind:

False sense of security -- Seriously, does anyone today still believe any DRM system is hackerproof?  Heck, even books that have never been legally distributed in any e-format are out there as illegal downloads.  Just Bing the phrase "harry potter ebook downloads" and you'll see what I mean.  Scanners are everywhere, so if physical books can be illegally shared what makes you think a DRM'd title will never appear in the wild?  On the airline side, I feel like we're always focusing on the last attack (e.g., underwear bomber, shoe bomber, etc.) and not focusing instead on what the next idiot will try.

Treats everyone like a criminal -- It's hard not feeling like a convict when you're going through airport security or coming back through immigration/customs.  The assumption is you're guilty till proven innocent by way of xray machines, full-body scans and patdowns.  On the book side, the fact that I can't treat my ebook purchase like I can my print book ones (e.g., can't be resold or lent to a friend indefinitely) makes me feel like the retailer and publisher simply don't trust me.

Highly inefficient -- DRM is such an enormous waste of time.  The only players coming out ahead are the DRM technology providers!  I now have two Kindles and an iPad.  In order to move content from one to the other I have to go through Amazon so they can make sure I'm not breaking the rules.  What if I don't have a web connection at that moment?  I'm stuck and can't shift that book from my battery-depleted iPad to my Kindle.  What's wrong with just connecting the two devices via Bluetooth?  Not an option.  And look at the crazy lines at the airport as well as the inconsistencies from location to location (e.g., take your shoes off here but not there, remove your iPad here but not there, etc.)

Introduces silly limitations -- The best airport example is the simple bottle of water.  Remember the good old days when all you had to do was take a swig of your water bottle to show TSA it's a harmless liquid?  I miss those days.  Here again, the bottled water industry must be laughing all the way to the bank as we toss half-full bottles on one side of security and then have to buy new ones on the other side.  In the book world DRM means that lending a copy, something easily done in physical world, comes with way too many restrictions in the e-world (e.g., two-week max, can only be done once in the life of the title, etc.)

OK, I admit that I don't have a solution to offer the airline industry.  I don't want to board a plane with a terrorist any more than you do.  A pilot friend of mine made an interesting comment about this awhile back though.  He pointed out that one of the results of 9/11 is that passengers are no longer willing to be helpless victims.  The shoe and underwear bomber events are examples of just how true this is.

IOW, passengers are stepping in to fill the holes that will always exist in even the best airport security system.  I suggest we follow a similar approach but take it a step further in the publishing world: Eliminate DRM and trust our customers to not only do the right thing but also ask them to turn in anyone they see making/offering illegal copies.

Amazon's Next Move

Amazon blackLet's say you're Jeff Bezos and you're heading into the office this morning.  It's the first day back to work since the iPad launch.  We're talking about the most significant gadget launch since, well, since the iPhone.  Suddenly the feature set of your ereader, the Kindle, looks pretty lame.  No color display.  No wifi connectivity.  Approximately 149,999 fewer apps than what the iPad supports.

What do you do?  My advice: Turn the Kindle for iPad app into the most exciting reader app in the industry.

You might have noticed that Amazon has released several "Kindle for..." apps up to now.  There's a Windows one, a Mac one, an iPhone one, etc.  They're all intended to complement the Kindle, not replace it...and that's the problem with the iPad version.

It only took a couple of hours of iPad use to realize I'll never touch my Kindle again.  Ever.  All my Kindle books are now on my iPad.  Do I mind that the iPad's backlit display isn't as easy on my eyes as the Kindle's?  No.  I read off that iPad display for about 10 hours on Saturday and my eyes felt the same as they did the day before.

And while I love the Whispersync technology Amazon uses to keep my place across devices, I really don't see myself reading books across devices now.  I can't put the iPad down.  I used to read a bit in bed on my iPhone but now I'll just do the same with my iPad.  The Kindle for iPad app is brain-dead compared to the iBooks one though.  Even the dictionary feature on the Kindle is missing from the app.  Then there's the glaring issue with no sample support.  That's right.  I can't preview Kindle books through the iPad app, so how do they expect me to buy anything from them?!  (UPDATE: I stand corrected.  You can download Kindle samples to the iPad app.)  Amazon has apparently also conceded the newspaper/magazine segments to Apple as there's no way to read your Kindle subscriptions through the iPad app.

As long as this app is nothing more than a bare-bones reader Amazon is giving me zero incentive to buy ebooks from them.  Why would I make my content investment in a dead-end technology when I could probably get the same title through the iBookstore?

So Jeff, resist the temptation to limit the functionality of the Kindle for iPad app.  Make it as rich as possible.  Make it extensible so that new types of content can be added to it.  Reach out to the community and see what features excite them.  Experiment and innovate!  Don't let it rot on the vine like the "Experimental" features have on the Kindle.

Kindle sales are already going to take a hit because of the iPad.  You'll continue selling to people who are convinced the Kindle offers a better reading experience than the iPad.  It doesn't though.

You can afford to lose the hardware battle but you really don't want to lose the content battle.  Focus on your reader apps and make them world class, OK?

P.S. -- The iPad is great but it's not without its flaws.  Click here to read the details of my first day with this very promising device.

The Great Text-to-Speech Debate

Dunce cornerRarely do I get so worked up about an issue but few are as strangely controversial as this one.  I'm talking about the text-to-speech feature of Amazon's Kindle 2.  (Again, in the interest of full disclosure, I own a Kindle 1 and I have no plans to buy a Kindle 2. I think Amazon's closed platform is a huge mistake and I hate how they're alienating their Kindle 1 early adopters with no discounted upgrade offer.)

Let me come right out and say it: I strongly believe text-to-speech is a good thing for everyone.

Earlier this week, Roy Blount wrote this misguided article about the feature in The New York Times.  This industry is looking for innovative ways to get people to read more book-length works and this knucklehead takes a swing at one of the few interesting developments that shows promise.  Did Blount just wake up from a 10-year nap at an RIAA meeting?!  Seriously, dude, please don't encourage authors and The Author's Guild to start acting like the music industry!

Let's be clear.  The text-to-speech feature is only going to make Kindle editions more popular and usable.  Will it cause some fence-sitters to make a purchase?  Probably.  Will it really hurt the audio book market?  I seriously doubt it.  And so what if it does?!  How many people really buy both the print/written version of a book and the audio version?  That number has got to be incredibly tiny, a rounding error on a rounding error.  Don't forget though that Amazon owns now.  Maybe they want to "eat their young" with this feature, but I'll bet Amazon isn't too concerned about cannibalization of the Audible program.

I tweeted this earlier but if you're not on Twitter you ought to read James Turner's insightful response to Blount's column.  (And if you're not on Twitter, what the heck are you waiting for?!)

O'Reilly's Tools of Change (TOC) Conference Starts Tomorrow

ScreenHunter_02 Feb. 08 13.35I've been counting down the days for this one and tomorrow it will finally be here.  I'm talking about O'Reilly's TOC conference, which starts bright and early tomorrow in NY with a series of tutorials.  I'm heading there tomorrow afternoon and plan to attend a conference-related Tweetup that's scheduled for later in the evening.  Then it's two full days packed with great sessions from morning till evening.

I've been tipped off to several exciting product announcements that will be made at TOC this week, two of which that have really caught my eye.  I can't say anything more about them just yet, but stay tuned for upcoming blog posts and Twitter tweets over the next 3 days.  Actually, I'll probably spend more time Twittering than blogging, so look for more of the former and not so much of the latter.  I also have a search panel set up in my TweetDeck feed, searching for #toc entries; there are already a lot of tweets piling up there, so if you can't make it, be sure to watch the stream from attendees.  And, if you see me tweet from within a session and have a question you'd like to ask the speaker, send me a direct message and I'll do my best to get an answer.

Finally, I'm already keeping an eye out for some of you, but if you're a Publishing 2020 reader and would like to say hi at TOC, be sure to pull me aside between sessions. The Magazine Industry's "Napster Moment"?

MygazinesLet me start off by saying that I firmly believe is a blatant copyright infringer and deserves whatever penalties it might eventually receive.  I say "might" because it's an offshore operation which means it will be tough to hunt down and hold anyone accountable for the website's activities.

My concern isn't about whether mygazines is legal or not (it's not), but rather about how the magazine industry should respond to it.  The music industry crushed Napster because the major labels couldn't come up with any other solutions.  I tend to agree with most of the points made by both Ian Da Silva in this Wikinomics blog post as well as what The Motley Fool has to say in this article (although I certainly don't agree with the Fool's suggestion that this is "the end of publishing as we know it"!)

This is a golden opportunity for the magazine industry to see how a Napster-like platform for periodicals could and should work effectively.  Mygazines is essentially doing e-content R&D for the entire magazine industry; I just hope the industry takes the time to study and understand the results before they look to kill the service.

I took a quick look at mygazines and immediately felt like it would be worth paying a subscription for, provided all the content was legal.  I've been letting most of my magazine subscriptions lapse because I find more up-to-date info online and I can't justify the price.  That's one more set of eyeballs each of those magazines just lost for their advertising income.  So in addition to possibly getting mygazines shut down, why not figure out how this model could actually help rebuild readership and advertising income?

If a coalition of magazine publishers managed to intervene and kill mygazines, but take it over in the process, would that be a good thing?  Possibly.  Would I pay $5/month to have access like this to several magazines I'm not currently subscribing to?  Absolutely.  In fact, if they build in the right social networking capabilities it could easily become an extremely popular alternative for a lot of customers.  I just hope the magazine industry takes the time to learn what it can from this before they focus on crushing it.

P.S. -- Speaking of magazines, I have a short update to the BusinessWeek subscription I let lapse earlier this summer.  They stopped sending issues shortly after I posted that note back in June and I have to admit that I miss the service.  I'm greatly disappointed that it's not offered on the Kindle but a renewal offer I received over the weekend has tempted me to return.  The deal is $20 for a full year's worth of issues.  I'm pretty sure I can't say no...

P.P.S -- Well, it turns out the slick folks at BusinessWeek were simply trying to pull a fast one on me.  Upon closer inspection this new $20 deal is only for six months, not a full year.  When I balked at $40 for a year some wisenheimer there apparently decided to toss a "$20 for six months" offer at me instead.  Silly me...I almost fell for it!