Technology: The Publishing World After The DOJ Lawsuit

I have already posted on this subject a couple of times (specifically here and here), but Nathan Bransford (who I’ve quoted on this blog) posted an update on the lawsuit against several major publishing companies over ebook pricing. Nathan’s experience in the industry gives him a good knowledge of the subject and a thorough understanding of the many variables to this equation. So, for anyone who doesn’t follow his blog (and if you’re a writer or in any way interested in publishing, you really should), here is what Nathan has to say about the digital landscape:

I guess there was some teeny tiny publishing news this week.

Let’s get the disclaimer out of the way first: I work for CNET, which is owned by CBS, which is the parent company of Simon & Schuster, one of the companies named in the lawsuit. All opinion here is entirely my own, does not necessarily reflect the opinion of CBS and/or Simon & Schuster and/or CNET, and is based mainly on my time in publishing as a literary agent where I was not privy to the inside discussions at publishers, and it doesn’t necessarily reflect the opinion of my old agency Curtis Brown Ltd. either. Cool?

So here’s what: The Department of Justice sued five book publishers and Apple for allegedly colluding on e-book prices. Yeah, wow.

How we got here

Here’s the elevator pitch summary of what happened:

In the beginning of the e-book era, publishers sold e-books according to the “wholesale” model. Every e-book had a retail price, publisher got roughly half the retail price, bookseller got half, bookseller could sell the e-book for whatever they want. Amazon discounted deeply, taking a loss on some titles, built early market share, made publishers nervous as they were running away with the e-book market.

Along came Apple and the “agency” model: They gave publishers the ability to set their own prices and receive 70%. Publishers jumped at this and raised prices, but actually received less money per copy sold than in the wholesale model. (The difference between agency and wholesale also is the reason behind why some e-books cost more than their print counterparts)

What the DOJ alleges is that some of the publishing executives met around this time and explicitly discussed moving to the agency model and raising prices. This, the DOJ says, amounted to illegal collusion.

Three of the publishers, HarperCollins, S&S, and Hachette, have already settled without admitting wrongdoing, and will allow variable pricing. Macmillan, Penguin Group, and Apple have not settled and apparently will fight the charges in court. The case against Apple in particular, my colleagues Declan McCullaugh and Greg Sandoval write, is unlikely to stick.

For a completely comprehensive look at everything, Shelf Awareness has a great summary (via Curtis Brown). I also summarized the issues in more detail a few weeks back in the post Why the DOJ’s Potential Lawsuit Over the Agency Model is a Really Big Deal.

And if you’re curious about why e-book prices are so high and why publishers would like to keep them that way, I wrote an article for CNET that goes a bit more in depth.

Were publishers right or wrong?

I blogged about the switch from wholesale to agency in real time in early 2010 and called it The Kindle Missile Crisis, and frankly I’m pretty darn proud of that post because I guessed at the issues that are still at stake now in 2012.

And to be totally honest now that I’m out of the business: I didn’t agree with the publishers at the time. I didn’t think the agency model was a good move.

But I don’t (and didn’t) think publishers were crazy either. As the iPad was just about to come out, publishers were fearing that Amazon would build a de facto monopoly in the e-book market. They were hearing from other companies that they couldn’t get into the e-book game because they couldn’t compete with Amazon on price, and Amazon was busy locking consumers into their proprietary e-book format. Publishers were likely worried Amazon would use their position to tighten the screws on terms and use the low e-book prices to hasten the demise of brick and mortar bookstores, which are hugely important to publishers.

And credit where due, the competition that publishers were seeking did end up taking place. B&N’s Nook, Apple’s iBooks, Sony, Kobo… there are viable alternatives to the Kindle. E-booksellers have up until now mainly been competing on consumer experience rather than price. High e-book prices have likely slowed the adoption of e-books and preserved the print world a bit longer.

But would that e-book competition have happened anyway without the agency model? Did publishers really have to switch to agency to open up the marketplace?

That is literally the billion dollar question because publishers left a huge amount of money on the table when they switched to the agency model. They actually gave up money to raise prices.

And that’s what I always thought was misguided. I believe Apple and B&N would have found ways to viably compete with Amazon even with variable pricing. It’s not as if Apple in particular doesn’t have the resources to go toe-to-toe with Amazon.

It seemed to me that this had much more to do with trying to keep e-book prices high to hold onto a print world as long as possible. Publishers were compromising their future revenue stream and were risking alienating their most valuable customers and lending a huge opportunity to 99-cent e-book upstarts in order to preserve their diminishing stream as long as possible. Does that ever work?

I love bookstores. I want bookstores to survive and really think they will. But they need to adapt to compete in this world as well rather than relying on publishers to preserve high e-book prices. The future is like a giant perpetual wave. You can either surf it or get washed out to sea.

Though I also recognize that it’s much easier said than done. And another thing I know for sure: I’m glad I wasn’t the one making these decisions.

So where do things go from here?

The terms of the settlement are confusing. Essentially, publishers can still use the agency model, but they can no longer dictate prices and have to allow a variable pricing model and booksellers can discount, but not more than the 30% publishers are allowed to… yeah, you get the picture. There are actually things called discount pools. Whether publishers continue to stick to agency or try and re-summon the wholesale genie remains to be seen.

But regardless, we’re about to enter a very chaotic phase in the e-book marketplace where suddenly price is going to be an important part of our e-book choices when it comes to which apps we use and which devices we buy.

And of course: e-book prices are coming down.

So here are some “ifs” about where things can go from here:

If publishers are able to recapture the revenue per copy that they had in the old e-book wholesale model they might have just bought themselves some valuable time in the past two years to soften the blow from the Borders bankruptcy, to help make Apple and B&N viable contenders in the e-book space, and they’ll be happy they took the agency gamble while they could, DOJ lawsuit or no.

If, however, publishers find themselves stuck in a situation where they have the agency model but variable pricing, it could mean the worst of both worlds: less revenue per copy and little ability to hold the line on prices. In that case they may well regret letting Steve Jobs sweet talk them down the agency model rabbit hole.

We’ll see. I do know one thing for sure: The e-book world is going to keep on changing fast.

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