The E-Book War: the Stakes in the Fight for Readers’ Dollars

Why are Amazon, Apple and several major publishers locked in a bitter fight over the pricing of electronic books? In the wake of a major price-fixing suit from the Department of Justice, Andrew Albanese of Publishers Weekly spoke with Jeffrey Brown about the rise of the ebook as a publishing phenomenon and the financial stakes for the industry.

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    Next, How much for that electronic book?

    We look at the fallout from a price-fixing suit in the publishing world.

    ERIC HOLDER, U.S. attorney general: Good afternoon.


    The announcement in Washington yesterday rippled across the booming e-book market.


    As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles.


    The Justice Department accused Apple and five major publishers, HarperCollins, Simon & Schuster, Macmillan, Hachette, and Penguin, of colluding to raise prices.

    The target of the alleged conspiracy was online giant Amazon. It introduced the Kindle e-reader in 2007 and quickly became and has remained the dominant player in the market, often charging just $9.99 for an e-book, while fighting off challenges from Barnes & Noble reader, the Nook, and Apple's iPad.

    The lawsuit alleges that, starting two years ago, the publishers and Apple sought to break Amazon's hold using a so-called agency model, whereby the publishers set the prices of a book, rather than the retailers.


    During regular, near-quarterly meetings, we allege that publishing company executives discussed confidential business and competitive matters, including Amazon's e-book retailing practices.

    Now, our investigation even revealed that a CEO allegedly went so far as to encourage an e-book retailer to punish another publisher for not engaging in these illegal practices.


    Three of the publishers, HarperCollins, Simon & Shuster, and Hachette, have already agreed to a settlement. The lawsuit against Apple, Penguin and Macmillan will go forward. Soon after the lawsuit was announced, Amazon said it would lower its e-book prices.

    And we debate the issue now with Becky Anderson, president of the American Booksellers Association and co-owner of three independent bookstores in the Chicago area, and Steve Berman, a Seattle-based lawyer who's leading a separate class-action suit against Apple and the same group of publishers for their e-book pricing model.

    Becky Anderson, before we get to the fallout of this new lawsuit, step back in time a little and first set some context to help us out here. How much did the e-book, beginning with the Kindle, rock and change your world of publishing and bookselling?

    BECKY ANDERSON, president, American Booksellers Association: Well, I think, you know, digital books have been on the market for maybe — or been in existence for maybe 10 years, and it probably wasn't until 2007 that Amazon really got into it in the development of the Kindle.

    And then other players, big players, got into it, you know, Kobo and Borders and then the Nook and Barnes & Noble. And then independent bookstores got into this market, too. And it wasn't until 2010, at the end of that year, that we really got into the market. And then the formation of the agency model made it very possible for us to compete on a level playing field with the other big players in the e-book market.


    All right, so, Steve Berman, explain that agency model and then the case against Apple and the publishers. What is it that they did in 2010?

  • STEVE BERMAN, attorney:

    Well, in 2009, the publishers began meeting with each other to discuss their dissatisfaction with the fact that Amazon was selling books at $9.99, major stream books by well-known authors. And they were not happy with this.

    And they were afraid that it would erode hardcover sales, which is where they were making most of their money. At the same time, Apple wanted to enter the market, but they didn't want to compete with the Amazon based on price. So we allege that Apple and the publishers got together and they agreed to shift from what was called the retail way of selling books, where Amazon would set the price, to an agency model, where Apple or Amazon or another retailer would be acting as the agent, and publishers would set the price.

    And so they all agreed to enter and to shift, a dramatic business shift in their model, and they also agreed if anyone sold their books at a lower price than the price Apple is selling at, than Apple would also sell at that lower price. And so that in effect set prices, because there's no reason to compete based on price if Apple and Amazon are always locked into the same pricing structure.

    And what happened next was books that were $9.99 went up to $14.99, and there has been no price competition since that's happened. So we're all paying more for e-books than we should be.


    Well, Becky Anderson, what about — what's the response to that? Of course, that — the Justice Department says that this is — their suit is intended to make the marketplace more competitive.


    I think by them saying that it's more competitive, that's kind of not true, because in the guise of what the government is doing and saying that they're making it more competitive, but actually they're making the appearance of competitive, because by creating the agency model, it created a more diverse marketplace.

    So many more people were able to be in the e-book business. And by creating the agency model and setting the price like that, it made so many more players able to be in it, made a diverse marketplace, many people selling them, many people talking about books and getting the word out about books.

    But, actually, the price might have been set, but actually the prices of many e-books went down. The backlist what we call of all these major publishers that are not books that are not brand-new, that are new on the market, actually, those prices went down.

    And there were many offers and promotions put out by the major publishers, those five included in this, that they set some great pricing that put it out there from 25 cents up to $1.99, $2.99, $3.99, because they wanted to get the marketplace diverse, get many players into it, make books available at great places for a lot of readers.


    Well, Mr. Berman, that's the nub of the argument against the government's case and against your lawsuit, I guess, is that this lawsuit will just help one company. That's Amazon. It will make the environment less diverse and in the end hurt consumers.


    Well, there's a number of answers to that.

    Number one, there's no evidence that the environment will be less diverse. And, number two, the antitrust laws actually are there to protect consumers of the end product. They're not there to protect competitors. So, if someone can't compete with Amazon, because Amazon has a good device and they offered a low price, then they're just out of luck.

    And Apple and others will find a way to compete with Amazon. The market is just too big and there's too many players interested in getting into it. So the bottom line is that you cannot get together and fix prices in order to compete. And that's what they did here, plain and simple.


    Well, Becky Anderson, what is it that you're worried about? What do you think might be the impact in — specifically in your area, on independent bookstores? What's the fallout?


    Well, before the agency model took effect, Amazon had at least 90 percent of the e-book market. So that's considerably a monopoly of what's out there.

    After agency took effect, they now might have over 50 percent — between 50 percent and 60 percent of the market, which shows that much of the market has gone to a diverse amount of sellers. And what it has done is that it's allowed readers a wide variety of choice of where they purchase their e-books.

    With — taking the agency away, and if they go back to that pricing, then it will go back to a monopoly type of thing. And the thing is, people have to realize that Amazon is using books because they know that readers are great consumers and also that books are one of the consumer products that is bought at least by most people, or a lot of consumers, once in a calendar year, that once they get that person and using books at the cost at which the publisher is selling, that's basically net pricing or even below net pricing, that they're using that as a loss leader to get consumers to their Web site to buy a multitude of other products, not just books.

    So, I think what's happening here is that when one player is controlling the market, it hurts. It hurts literature. It hurts our culture.


    All right.

    All right, a brief last word from you, Mr. Berman? Do you see the stakes that way for the book, the world of books, as well as the industry?


    Well, people have more choice and Amazon's market share has gone down because there's no price competition.

    So, yes, if there's no price competition, there will be more players out there. But there's nothing wrong with being a monopolist. And if Amazon could gain a monopoly share by offering the lowest price, and consumers want that lowest price, they're enabled and allowed under the law to do so.

    If they abuse that monopoly share and they drive everyone out of the market, which is one of the threats people claim our lawsuit is overlooking, and they drive everyone out of the market by raising prices, people will enter and compete if Apple raises prices too high.

    If they raise prices too high, they can be sued for abusing the monopoly power. So the answer is not simply to allow Apple and the publishers to fix prices. That's just not allowed under the law. And it has hurt consumers, who are paying for books. That's the bottom line that the other side can't answer.


    All right, Steve Berman and Becky Anderson, thanks so much.