We have all been waiting for decisive action by the U.S. Department of Justice, mostly in redressing the catastrophic wrongs of Wall Street that precipitated our current economic morass. So there was mild surprise when the DOJ turned its attention instead to a largely defenseless and almost moribund book publishing industry, filing a recent lawsuit for price fixing by five large publishers. The lawsuit also included defendant Apple, an almost insignificant player in the universe of bookselling. Conspicuously missing from the DOJ lawsuit was our own Seattle-based Amazon, which has been sitting silently on the sidelines while the U.S. government in effect does its dirty work.
Ironically, it was the iconoclastic Steve Jobs who allegedly set this monopolistic ploy in motion when he urged a group of book publishers to move to an "agency" model of bookselling, which protects the right of publishers to set the retail price of their ebooks while the distributor takes a flat 30 percent in the transaction. This was created to do an end-run around Amazon, who was dictating a mandatory $9.99 selling price for ebooks without exception. Publishers and booksellers were overwrought about Amazon’s pricing scheme, but their protests went unheard.
Technically the five publishers are probably guilty of the charges (three have already admitted as much), inasmuch as they met and discussed what action to take. And while the DOJ may have hit a target that qualifies as restraint of trade, it missed the real elephant in the publishing room, Amazon, which has been turning publishing practices upside down, ultimately threatening the art and vitality that readers value most in books.
With the advent of digital books and their $9.99 pricing, Amazon had quickly commandeered 80 percent of the ebook business. It was exercising its first-mover business practice, a willingness to lose money in support of steering readers to its new ebook reading device, the Kindle cum Fire cum Conflagration.
Amazon had learned and practiced this tactic when it first started its online business, selling deeply discounted books in the 1990s. Jeff Bezos’ rule of thumb was that he who was first to market would ultimately own the market and recoup the initial years of lost profits. For the book publishing industry, a co-conspirator since Amazon’s inception, the new ebook tactics were déjà vu all over again. It’s reminiscent of the old joke about the farmer who lays eggs. When his wife is asked if she doesn’t want to do something about this problem, she answers meekly, “Well, frankly, we need the eggs.”
And for Amazon, who better than hapless book publishers to exploit for their necessary content to build the online empire before quietly strangling the meager profits out of an industry that had become the weaker co-dependent in the relationship? Publishers were caught gasping for air as they watched the underpinnings of their business get sideswiped by technology and a ruthlessness not seen since the rise of the book chains, Barnes & Noble and Borders.
Book publishing, which I practiced for many years as head of Sasquatch Books in Seattle, is a marriage of art and commerce. Publishers are akin to midwives, who bring an author's creation to full artistic flower and then commercially breathe success into the printed words through good editing, public relations, wide distribution, and royalty payments back to the author. Publishing was regarded as a "gentleman's" business with deals consummated over tete-a-tete lunch meetings. Ironically, the DOJ complaint accuses the five publishers involved with fixing prices for the agency model at a swank New York bistro. They are probably still wondering how else they were expected to conduct business.
And as for the prerogative of publishers to set the retail price of the books they publish, well, this has always been the industry practice, as it is for almost all manufacturers. Just not in collusion with each other, thank you very much. Not until Amazon demanded the $9.99 set price for ebooks had publishers ever been dictated the value of their goods. Amazon knew it could withstand the losses. The publishers could not.
Book publishing is a strange and counter-intuitive business as well. Early in the 20th century the industry created a returns policy, which while initially helping sell many more books into stores, eventually became an albatross around the neck of publishers. Most pro forma book projections have to include the fact that 35 percent of the books sold will be returned to the publisher. On top of narrow margins, this returns policy has plagued book publishers unlike almost any other business.
The book chains were one of the next calamities to befall the industry. While promising mega-stores with space for far more inventory than a typical independent bookstore, the chains became another thorn in the side of publishers as they dictated terms and steered publishing decisions toward books that would work in the chains first. Much like its cousin Walmart, the book chains squeezed out countless independent stores in their march toward hegemony. And then these same chains squeezed the publishers who had no business without them.
Len Riggio, the founder of Barnes & Noble, was quoted as telling publishers that if they were finding it difficult to make as much money dealing with his stores, just raise your prices. Meanwhile, the buyers at B&N refused to buy books that were believed to be overpriced. Now in the blink of an eye the book chain stores don’t know what hit them with the advent of Amazon. Borders has already declared bankruptcy and there have been rumors that Barnes & Noble is on the block.
Amazon’s reputation for tight-fisted business practices is little known outside the industry. A recent four-part series in the Seattle Times looked at monopolistic tendencies that Amazon has taken on as a function of its size and industry dominance. It turns out the Amazon has carved out a number of advantages. Its political influence has kept it and its customers free from the collection of sales taxes, a huge disadvantage to other bricks-and-mortar retailers. Amazon sponsors almost no civic causes in Seattle, which is almost unheard of in our otherwise generous corporate community. And Amazon warehouses have been cited for harsh working conditions.
Now publishers once again are trying to manage their way through the biggest revolution since Gutenberg. Ideally, the advent of digital books would be a boon to publishers, distributors, readers, and the environment. Indeed recent statistics show that book reading has increased overall since the introduction of ebooks. Take away the physical manufacturing of the book and you eliminate the biggest cost faced by publishers. This would be of great benefit if the pricing of ebooks were self-determined and managed to overcome the other existing costs born by publishers. Amazon's $9.99 price did not allow for the margins publishers needed to compete. Furthermore, when consumers saw the Amazon price juxtaposed to the publisher's list price of, say, $24.95 for the hardcover edition of the same book, they flocked to the Amazon deal just a click away. Publishers were getting killed at both ends.
When book publishers suffer financially it is art that suffers first. Forced to cut back due to sagging revenues, publishers start trimming editors and artists, and reluctantly ask authors for reductions in royalties. Yet a presence on Amazon is a must for every author’s book. Should a publisher withdraw a book from availability on Amazon, they will surely suffer the wrath of its author. But many of these same authors fail to see that Amazon’s low pricing puts a stranglehold on the publishers and ultimately on the author’s earnings.
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