Friday, September 14, 2012

The DOJ Lawsuit Debate Explained: What's the Big Deal?

The Department of Justice vs Apple and Five Major Publishers lawsuit (and settlement) is a big issue in the publishing world right now. It touches on many aspects of the industry, deals with issues that have no clear answers, and has sparked a lot of arguments.

This lawsuit claims that the traditional publishers colluded to raise e-book prices by changing their bookselling model to the agency version, all at the same time. When they changed their model, Amazon was forced to raise their prices too. That meant Amazon was no longer capable of selling the books below the cost it took to produce, store, and distribute them, which Amazon had been doing for a while with the result of taking a loss while undercutting brick-and-mortar stores that sold for profit.

Those are the basic facts of the lawsuit, but it’s also about more than that. This is a look at the different aspects of the argument, the implications and possible implications of the lawsuit, and what’s got people arguing when they talk about the lawsuit and settlement.

What the DOJ Lawsuit Is Really About

The DOJ lawsuit is about how much voice traditional publishers have in setting the prices of the books they produce. Another way to say this is that this lawsuit is a debate on whether or not Amazon (or other booksellers) should be allowed to price books below the cost of producing and distributing the book.

(Point of argument #1: Some people call this below-cost pricing honest competition, because it brings books to readers at lower prices and allows the consumer to drive the market through choosing the lowest-priced book. Others call it predatory pricing, because it undercuts competitors and pretty much forces them out business when they either have to sell at a loss or lose all their customers.)

The debate could also be described as whether or not we, as buyers, want to move from having brick-and-mortar stores such as Barnes and Nobles and Borders to buying books entirely through online vendors that sell many products, who can afford to take a loss in books (at least in the short-term) because of the profits they make in selling other things. Brick-and-mortar bookstores cannot offer the same low prices, because books are the only things they sell, and anyone with basic addition/subtraction skills can tell you that if you constantly sell all your products at a loss, you'll run out of money really quickly and have to go out of business. Especially since brick-and-mortar stores also have to do things like pay their employees to know books well enough to help customers and to keep their showrooms well-stocked and pretty, while online merchants can throw books in an ugly warehouse between "body socks" and "bungie-jumping rope" and use formulas to recommend and sell books.

(Point of Argument #2: Brick & mortar bookstores may be replaced by online-only stores. Books would then only be sold online or in places that don’t specialize in books, thereby limiting selection and possibly eliminating the bookstore experience. Some people think this is a natural progression of business, while others mourn the loss of the bookstore and the bookstore-browsing experience, which is still one of the main ways readers find new authors: by the 2011 RWA readership statistics, the 3rd most common way.)

Where Traditional Publishers Fit In

It ends up sounding like traditional publishers really have no business interfering; it's a price-war between Barnes and Noble and Amazon, right?

Not quite, because both places get their books from the publishers. And Amazon has, in the past, forced publishers to sign contracts that favor Amazon, by virtue of threatening to not offer the product. Amazon is a major source of revenue for publishers, and the publishers can't afford to have all their books removed from the site. So Amazon gets some books at a lower price than B&N or gets terms that are more favorable to it than B&N gets. (Note that publishers have successfully also used the reverse tactic of not allowing Amazon to sell their books until Amazon agreed to their terms.)

How Self-Publishing Fits In

Why would publishers keep trying to sell through B&N, when so much revenue comes through Amazon anyway? Because the publishers are already suffering due to the competition from self-publishing, with the rise of the cheap self-published e-book.

This is the only place that self-publishing is involved: the timing of the lawsuit comes at a time when publishers are already struggling.

Where Authors and Readers Fit In

Books published by traditional publishers are more expensive than self-published books because the publishers invest more in the author and the services for the author, such as professional editing and cover designs and advances. Yet, as the traditional publishers have to tighten their belts because of the increased competition, they also end up cutting corners. The tighter the belt, the less they can offer authors.

Meanwhile, Amazon, with its larger pool of resources, has begun to offer traditional publishing services. So Amazon suddenly has an interest in other traditional publishers taking a hit. If other major traditional publishing companies fail or appear to be failing, then new authors who want to go the traditional publishing route will be more likely to go to Amazon than to the struggling publishers, because Amazon--thanks to its diverse markets--can continue to offer the services the other publishers are starting to skimp on.

The more quality and best-selling authors Amazon signs, the more readers will consider them a legitimate publisher. The more readers who begin to look for the Amazon Publishing releases for new, high-quality, traditionally-published writers, the more Amazon takes over the role that the Big Six of traditional publishing used to play.

Back to Competition

In my evaluation, Amazon can out-compete other traditional publishers. I don't really see any way around that outcome unless traditional publishers successfully change their business plan to something new and entirely different. Specialized companies usually do get out-competed by diverse operations; diversification is a financially sound business decision. Amazon's biggest competition worry with this business plan is that another supergiant retailer will start picking up the same tactics (although none have so far*).

*Purely personal prediction, but I'd say that Apple is probably the biggest threat, having already tested the waters of offering self-publishing and being a major retailer of devices on which people can read e-books. Other digital media companies are probably close-runners up, and I wouldn't be terribly surprised to see, say, Google stepping into the market in the future.

(Point of Argument #3: Authors aren’t sure whether or not their current publishers will survive. If there are no other publishers besides Amazon, authors may not have any choices on the terms of the contracts they sign. While the terms may be great right now, if Amazon becomes the only option, writers fear the terms will become unfavorable in the future, because there will be nowhere else writers can go for traditional-style publishing. Others argue that of course new publishers will crop up, or old publishers will finally change terms that many have felt were unfair to authors anyway.)

What the Lawsuit Is NOT

What the lawsuit isn't, is a comparison of self-publishing and traditional publishing. Self-published authors always set their own prices (within certain bounds). Amazon doesn't go around habitually offering the same self-published book on KDP cheaper than Barnes and Noble does on PubIt!; most authors sign contracts agreeing to not offer lower rates on other mediums, so the price is more or less consistent among the different markets.

Yes, the two issues are tangentially related. The coincidence of their timing makes a very large difference in the traditional publishers' resources. But it’s not the argument involved in the DOJ lawsuit.

The Real Argument: What’s Best in the Long Term?

The DOJ lawsuit is actually a case that is trying to interpret the definition of competition. Is allowing one company to offer the lowest prices by subsidizing their losses through other sales good for competition? Or does it hurt competition by cutting out other companies' ability to thrive?

I don't question that allowing Amazon to offer lower prices to consumers is better for consumers in the short-term, or that the publishers forcing Amazon to raise their prices through switching their business model was irritating. Heck, I like saving money. I certainly don't like when prices go up. But it's not the short-term consequences that have people riled about the issue.

What all the points of argument are trying to get at is this: Whether or not it benefits consumers and authors in the long-term remains to be seen.

If Amazon never raises prices, other diversified companies enter the market, or traditional publishers work together with non-Amazon book retailers to create alternate business plans that allow both to make a profit while offering prices as low as Amazon (and assuming Amazon does not lower their prices even further), then yes, the settlement and the DOJ winning the lawsuit against the publishers might be best for the consumers. Any one of those three options might turn the short-term benefits to consumers into long-term benefits. But none of those scenarios are guaranteed, and there's no hint that they are happening yet. And that's what has people up in arms about the DOJ lawsuit.

What do you think about the DOJ's lawsuit? How do you think the publishing industry will change? Would it be good for consumers in the long run if the DOJ wins, and why?


  1. Remember the old Borders back in our college town? The local bookstore moved in there. They've diversified their sales, so they're now a combination bookstore and yarn store. It was a pretty smart move for them in terms of both having a better location in the mall and in diversifying their sales.
    I like that the DOJ lawsuit is happening. It would have been nice if something like that happened back when Wal-mart was just starting to kill mom-and-pop stores. Like you, I like low prices. However, I also love browsing in actual bookstores. Heck, that's how I found my favorite author. I've taken to looking at the price difference between Amazon/Half and the local bookstores. If it's less than $5, I buy from the local place. If it's more than $10, I buy from Amazon. If it's somewhere between $5-10, where I buy depends on how much I have in the bank at that time.
    I not really certain what kind of outcome I hope for. A limit placed on how much big companies can undercut their sales? Some isolation imposed on individual departments such that each department at a big and diverse company like Amazon has to be somewhat sustainable under its own power? What if bookstores started selling used books under consignment, which is how Amazon makes a lot of its money? I just don't want brick-and-mortar bookstores to die.

    1. I'm glad the space has gone to a local bookstore! Very nice. :)

      I think I'd also be pretty devastated if the bookstore experience disappeared entirely. While I think local bookstores might still have a niche, it's often difficult to find some of the books I read in them--romance is frequently not offered, for example, and I like my well-written paranormal romances. I know I still buy from Amazon on occasion myself, especially when an author I know only sells through Amazon and I want to support him or her. And, yeah, that's about the same way I decide where to buy on Amazon vs. local.

      I really don't know what the best solution is. Part of the problem is that finding a good solution is something that will take would require being able to predict the future... Too bad I'm not psychic!

  2. You've got an awful lot of very dubious assertions in here. Let me cover a few of them.

    First, there's this: "That meant Amazon was no longer capable of selling the books below the cost it took to produce, store, and distribute them" -- which is something that the Big 6 publishers have been claiming for a long time. It's also a hinge point of your entire argument.

    A few important facts:

    1) The cost to store and distribute e-books is, effectively, zero. They do take a trivial amount of memory storage, but that cost is so low -- far, far less than one cent per title -- that it can be ignored.

    2) This means that the per-volume cost of an e-book is also effectively zero, which means that the only costs are the up-front costs: author advance, editing, formatting, and cover design. The first of these is variable but comes out of author royalties anyway. The others, together, do not exceed $5,000 for any title, and at that I'm being generous. I know that you can get them all done for less than $1,000 and that's if you have all of them done professionally. So except for the author advance, which really doesn't count, the up-front costs to produce an e-book are also low (although not nonexistent), and certainly do not justify the assertion that Amazon's pricing is "below cost." (Bear in mind, too, that all titles published by the Big 6 are published in print as well, which means that the cost SPECIFICALLY to issue an e-book version do drop very near to zero -- all of the editing and nine-tenths of the cover design are already done.)

    3) If you look at the pricing of legacy-published e-books that are not current best-sellers, you can see that they generally fall within Amazon's preferred range, i.e. at or below $9.99. Clearly, then, the publishers' own pricing practices don't support their assertion that the lower pricing is "below cost." If that were the case, they would not sell most of their e-books at those prices.

    Next, you have this gem: "Books published by traditional publishers are more expensive than self-published books because the publishers invest more in the author and the services for the author, such as professional editing and cover designs and advances." Good grief. Do you honestly think that self-published authors don't invest in professional editing and cover design? How do you think I have an idea what these services cost, then?

    Self-published authors don't pay themselves an advance. Otherwise, they (or those of us who understand the necessities of successfully publishing anyway) invest as much in their books as a publishing company would, if not more. (Certainly more in the way of love and care and thought. Not necessarily more money -- but I've seen that happen, too.)

    No. Legacy-published books are priced higher than self-published books, in most cases because publishers think they can get away with it (which may or may not be true), and in the case of current best-sellers because they deliberately want to retard e-book sales so as to reduce competition with the hardcover books on which they still hold a distribution lock. It's a way to preserve the part of their business where their prior dominance can still be exercised, where barriers to entry are still high and any tiny start-up publisher or even a self-published author can't compete with them on a level playing field.


  3. (part 2)

    Which brings us finally to this: "What the lawsuit isn't, is a comparison of self-publishing and traditional publishing." Unlike the two statements above, this one is technically true: that's not what the lawsuit is about in itself. However, it IS what prompted the move by the Big 6 to try to fix prices in the first place. Or rather, it's a part of a larger trend that brought this on.

    In the old days, publishing was a capital-intensive enterprise. Some (low) capital costs still exist, but when you're not spending money on print runs and expensive shipping of bulky items like printed books, most of the costs disappear. What that means is that barriers to entry become low to nonexistent. The Big 6 publishers are being challenged by the availability of free self-publishing and by small publishing houses offering authors much better deals that are springing up like mushrooms.

    A world of print-run and bookstore publishing is one that the Big 6 can dominate. Authors go to them to get published because they have no choice. Readers buy their books for the same reason. Competitors need not apply, unless they come with deep pockets.

    A world of e-publishing, however, is one in which the entire phenomenon of the Big 6 cannot exist. There is no way for any single entity or small group of entities to dominate e-publishing; it's too easy to break in.

    The agency model for e-book publishing (as the Big 6 were using it) amounted to a way to protect the side of the business that they can dominate, in which self-publishing is effectively impossible, for a little longer, by doing what they can to stem the e-book tide. That's the only reason for the entire conflict.

    There's a place for publishing companies in the future, I am confident. A truly professional publishing company can provide authors a service, the biggest of which is marketing direct to readers, which is worth a reasonable share of the proceeds (although it certainly ISN'T worth the gouging the Big 6 take). But there is no place for a cartel like the Big 6. And they know that.