Welcome to a new series: All Things Bookstore. We all love books and we all have had favorite bookstores. This series is about the bookstore: what we like about them, their history, the people who work there, the hours we’ve spent looking through them and the stores in which we’ve found our favorite books and our greatest treasures. This is also about the economics of bookstores and the forces that help or hinder the existence of independent bookstores. In short, diaries about anything that has to do with the bookstore.
Please enjoy this fine inaugural diary!
-- Dave in Northridge
Three Independent bookstores, The Bookhouse of Stuyvesant Plaza, Fiction Addiction and Posman Books, filed a suit in the Federal District Court of the Southern District of New York on Feb 26 against the Big Six publishing houses and Amazon over the right to sell e-books free of DRM. They are contending that the Digital Rights Management coding makes it impossible for them to compete with Amazon in the rapidly growing electronic book market.
The Big Six in this suit are Random House, Penguin, Harper Collins, Macmillan, Simon & Schuster and Hachett.
This suit was filed the day after Macmillan settled with the Department of Justice in civil action that the DOJ brought against Apple and five of the Big Six publishers (Random House was not involved) claiming a restraint of trade.
So let us start with that suit as it relates to how ebooks are sold today.
DOJ vs Apple, Penguin, Harper Collins, Macmillan, Simon & Schuster and Hachett
Background
In the late 90s, Amazon was buying paper books from the publishing houses and selling those books to the public just like any other book retailer. Once the retailer buys a book from the publisher, it belongs to the retailer who can then sell it for whatever price he thinks is fair. Bookselling has been done by this method, known as the "wholesale model," for over a hundred years.
Then in 2007, Amazon developed the Kindle and introduced Americans to digital books. Using the "wholesale model" of purchasing and selling e-books, Amazon was able to offer most new releases and all New York Times' Bestseller List books for $9.99, which was often close to Amazon's cost.
The Conspiracy
This low price immediately caused consternation and no doubt profanity among these five publishers: Hachette Book Group, HarperCollins, Macmillan, Penguin and Simon & Schuster. They feared that the low price would seriously cut into their hardback book market as well as become the new normal for e-books.
So they got together over dinner in private rooms at exclusive restaurants, they telephoned and e-mailed each other with the big question: What can we do to stop Amazon? They knew that whatever action they took, they would all have to do it together in order for it to be effective.
The answer appeared to come from an unlikely source: Apple. Apple was entering the bookselling market via their new iBookstore app but found the profit margin at $9.99 to be unattractive. Meeting with Apple, the conspirators decided that the best way to stop Amazon from selling e-books so cheaply was to change the way they sold the books to the retailers.
Apple agreed to the plan which is known as the "agency model." Under this merchandising plan, Apple would get 30% of the sales and the publishing houses would set the prices for their books.
"We'll go to [an] agency model, where you set the price, and we get our 30%,and yes, the customer pays a little more, but that's what you want anyway."
-Steve Jobs
Form the
DOJ Civil Complaint (pdf file)
The plan - what Apple proudly described as an "aikido move" - worked.
Over three days in January 2010, each Publisher Defendant entered into a functionally identical agency contract with Apple that would go into effect simultaneously in April 2010 and "chang[e] the industry permanently."
These "Apple Agency Agreements" conferred on the Publisher Defendants the power to set Apple's retail prices for e-books, while granting Apple the assurance that the Publisher Defendants would raise retail e-book prices at all other e-book outlets, too.
Instead of $9.99, electronic versions of bestsellers and newly released titles would be priced according to a set of price tiers contained in each of the Apple Agency Agreements that determined de facto retail e-book prices as a function of the title's hardcover list price. All bestselling and newly released titles bearing a hardcover list price between $25.01 and $35.00, for example, would be priced at $12.99, $14.99, or $16.99, with the retail e-book price increasing in relation to the hardcover list price.
Under the agency model, retailers would become agents of the publishers, collecting a commission, but unable to determine the pricing of the e-books. By agreeing to the plan, Apple provided the leverage that the publishers needed against Amazon.
The publishing houses then turned to Amazon and said we will only sell e-books to you under the agency model. If you want to sell our books, you will sell them for our price and you will get a flat percentage profit. Although Amazon tried to fight it, rejecting the proposal would have meant surrendering its share of the market to Apple. Kindle owners probably remember the upset and anger as we realized that the $9.99 pricing was a thing of the past.
Of course, what the publishers and Apple did is clearly a violation of the Sherman Act, and illegal on its face. But that did not help Amazon any as it was given no option but to raise prices on the e-books that it sold or watch all of the publishers sell their books to Apple.
Enter the Department of Justice
Federal civil charges were brought against all five publishers and Apple for restraint of trade last summer. The publishing houses were quick to fold and to settle with DOJ. Except for Macmillan, which held out until last month before settling.
Under settlements with the Justice Department, the five publishers were required to terminate or not renew deals with Apple and other retailers that the government claimed were anti-competitive.
- Reuters 02/13/13
I am not sure what, if anything, has been won by the consumer. Even though Amazon was the alleged victim of the conspiracy, it appears that Amazon has made out pretty well. Its customers are now accustomed to higher ebook prices so there is no need to bring the prices back down to $9.99. Random House, the only one of the Big Six not involved in this case now seems to be setting its own ebook prices on Amazon. And we continue to pay more to insure profits all the way through the publishing/sales process.
Apple has refused to settle, and the case should come before the court in June of 2013.
At the Apple trial, to be overseen by U.S. District Judge Denise Cote in Manhattan, the Justice Department will seek not monetary damages but a judicial decree that Apple violated antitrust law, court papers said.
Among other things, government lawyers want the judge to issue an order enjoining Apple from engaging in any conduct similar to that alleged in the case. Such a judgment could make Apple vulnerable to steep damages in related litigation.
- Reuters 02/13/13
It is easy to understand why the publishers settled,
If Apple loses, a number of plaintiffs could use the judgment as evidence against Apple in separate actions seeking monetary damages.
Those plaintiffs could seek compensation for higher prices paid for e-books plus damages. Antitrust laws allow plaintiffs to recover triple the actual damages, and in 2012 alone, those damages were estimated to be at more than $200 million.
If Apple went to trial and lost, the company could lose big. But the company may want to go to trial to establish an antitrust principle that could help it forge future deals with entertainment companies. Apple could still choose to settle with the DoJ, but at this time it is showing no signs that it plans to do so.
- tuaw
Last September, the Federal Court of the Southern District of New York approved the settlement between Simon & Schuster, HarperCollins, and Hachett and the Department of Justice.
Under the settlement, HarperCollins, Simon & Schuster, and Hachette will be required to allow big retailers to reduce prices for two years – an arrangement opponents fear could kill bookstores and be a boon to Amazon
"It's devastating to bookstores," Paul Aiken, executive director of the Authors Guild, told WSJ.
But Judge Denise Cote essentially said "too bad" when approving the deal, while noting the "birth of a new industry is always unsettling."
"It is not the place of the court to protect these bookstores," she said.
- Business Insider
Three Independent Bookstores vs Amazon & the Big Six
Using restraint of trade and the establishment of a monopoly as its basis,
The Bookhouse of Stuyvesant Plaza,
Fiction Addiction and
Posman Books have sued the Big Six and Amazon over the use of the DRM code that the Big Six and Amazon use to protect the ebooks they sell. The Big Six publishing houses are Random House, MacMillan, Hachett, Simon & Schuster, Penguin and Harper Collins which collectively, according to the complaint, control 60% of all books sold in the U.S. This lawsuit has been filed in the Federal District Court of the Southern District of New York.
At the heart of the lawsuit is the idea that the top publishers signed secret contracts with Amazon that allowed them to code their e-books in such a way that the books could only be read on an Amazon Kindle device or a device with a Kindle app. The booksellers are pushing for open-source coding that would allow readers to buy e-books from any source and download them on any device.
- New York Times
Anyone who owns a Kindle knows that you can't buy books from Barnes & Noble and download them to your kindle. You must use a Nook, or a Nook app. Same is true with Apple's iBookstore and all of the independent booksellers who deal in ebooks. Since Amazon is estimated to control 60% of ebook sales, this puts independents at a terrific disadvantage.
An ebook reader who wants to support his local bookstore can purchase a Kobo device and ebooks from his local independent bookseller. But, if he already has a library of books on his iBookshelves or his Kindle, he must leave those behind.
(Which kind of begs the question, whose books are they? After the consumer pays for an ebook, it seems that he can only read it on the seller's terms.)
And speaking of terms, according to Cory Doctorow, at boing, boing, the independent booksellers appear to have theirs confused:
That sounds great, but when you read the complaint, you find that what they mean by "open source" has nothing to do with open source. For some reason, they're using "open source" as a synonym for "standardized" or "interoperable." Which is to say, these booksellers don't really care if the books are DRM-free, they just want them locked up using a DRM that the booksellers can also use.
Although within the lawsuit, the plaintiffs make it clear what they mean by open source:
Along with device or platform specific DRMs, DRMs can also be open source, meaning that open source DRM protected e-books can be read on any open source device, regardless of whom the device and/or the e-book is purchased from.
-Lawsuit as posted by Huffington Post
The bookstores simply want the right to sell books. Regardless of the media or the digital reader. And while the publishers want to insure that the books they publish for digital readers cannot be reproduced they do not need the DRM to do so. Apple found a way to dispense with the DRMs that used to restrict iTunes music to an Apple device after being sued.
The more visionary option, and the one that most benefits readers, is to get rid of DRM entirely. Two imprints of Macmillan (whose CEO, John Sargent, has been exceptionally bold in standing up to Amazon), TOR and Forge, took this route last year. TOR and Forge publish genre books — science fiction/fantasy and crime/military titles, respectively — often popular with readers with the technological savvy to appreciate the advantages of DRM-free e-books.
It’s too early yet to know how well this experiment is working for TOR and Forge. However, many industry observers believe it’s just a matter of time before publishers realize that eliminating DRM is the best way to prevent the marketplace for books from being dominated by a single, mammoth, ruthless retailer.
-Salon
J.K. Rowling has also moved to DRM free books on her Pottermore website. Her books bear a watermark so that if a copy is illegally reproduced it can be traced back to the original owner. Apple uses a similar technique to protect media sold through its iTunes store.
Should the Independent Booksellers prevail, the defendants could be on the hook for triple damages. And after conspiring to bring down Amazon in 2009, I don't imagine that the publishers have any love for the retailer. The suit was filed on Feb 15, 2013 so it will probably be a while before anything is settled but it should be interesting to watch it go through the process.
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