2012 Isn’t The End Of The World But It Is A Time Of Transition

For the past few months, I’ve laid back and soaked up the goings on in publishing, and the economy in general. Here are a few things I expect to see as we wrap up 2012 and head into the beyond.

1. Apple is in the process of cutting its own sizably profitable throat

I was once one of Apple’s biggest proponents. This was back when they produced the best computers going, especially when paired head to head with Microsoft’s crap-of-the-month they’ve spent the past 15 years cranking out. But no more. They are far too expensive in an atmosphere with downward pressure on device prices, and are showing far too many issues with signature devices like the iPhone. The iPad Mini is nothing if not a cannibal that has the potential to swallow the market for the full size (and pricier) model whole. Add to that the fact that, fairly or otherwise (I say fairly) Apple is a poster child for exploitative labor practices, offshoring of jobs and stashing large profits out of the country to avoid taxes, and I see a company who has reached its apex and is poised to begin the long decline down.  If Steve Jobs were still alive, I’d give them a shot to pull out of it, but he’s not, and Apple is in the process of becoming just another mega corporation focusing on profit at the expense of all else.

There’s a reason Apple is putting more and more resources towards patent lawsuits. It’s corporate complacency. Live off the value you have today, and do everything you can to stifle competition or progress beyond that point. It might work for a few years, but it’s a long-term loser bet. Much like Microsoft, the world will pass them by and they’ll learn that it’s much harder to play catch up than be the industry leader, especially after your corporate culture shifts from profit through new innovation to profit through exploitation of past innovation.

2. Consolidation amongst the largest publishers is a sign of desperation not forward-thinking strategy

Corporate consolidation and mergers come in many forms. Sometimes, they are aggressive, competitive moves, other times they are backs-to-the-wall defensive maneuvers. The Big Six mergers going on are in the latter group and, as such, are little more than time-buying exercises. The Disney purchase of Lucasfilm is just the opposite. The mouse didn’t snap up Star Wars to squat on the crazy-lucrative rights, they intend to use them. Publishers, on the other hand, are merging not as an aggressive bold move, but as a means of cutting costs and combining assets to add sheer bulk in some kind of misguided dick-measuring contest with the big retailer of the moment, Amazon.

I expect the Big Six will filter down to three, possibly even two within the next two years. The remaining giants aren’t going anywhere, they’ll still be raking in money, still produce bestsellers by the bushel, still be big name players, but while they get individually bigger, the overall share of the market once held by all six separate companies combined will decline.

While this consolidation will very likely appear positive on the accounting ledgers, in the real world, it means less skilled people employed in traditional publishing, less opportunities to get books published traditionally, less competition for authors between traditional houses, lower advances, lower royalties and more stringently pro-publisher contracts with increasing restrictions on writers. If you’re one of those people who still see a traditionally published book as something to aspire to, your work just got a lot more difficult and a lot less potentially lucrative.

If anything, I expect consolidation among the industry leaders will drive more writers to control their own destinies. In fact, I would not be the least bit surprised if, eventually, the bulk of the work coming out of the last of the giants winds up as work-for-hire ghost written material. Anonymous author-mills, basically.

3. Any improvement in publishing’s fate depends on a functioning economy

We just had an election that comes at a pivotal time for us and the one obvious problem that’s suffocating us went completely unaddressed. How, exactly, do we convince the corporate world to reinvest in its workforce through better pay and benefits, thereby investing in the market for its own products? Many corporations have become virtual crack-whores to ever-increasing margins, and the du jour move of the moment is to cut everything not nailed down from your employee base to improve the bottom line. We need to convince them to break that addiction, sacrifice some of those profits in the short term for the betterment of everyone, and mostly, their own long term bottom line.

The current system is clearly unsustainable. They need customers, and lots of them, which they’re not going to get if corporations en mass continue to bleed the workforce of any and all disposable income to pad their own criminally undertaxed capital gains. It’s doubly damaging condition because egregiously low wages also add to all of our tax bills. Walmart, for instance, made $15 billion in profit last year. Their employees, however, were paid over $2 billion in government assistance. That means we subsidized billions in Walmart profits with our taxes. But its the poor single mother on food stamps who’s the parasite, right? As things are now, obscene percentages of capital are being sequestered totally out of our economy, with more being drained every day. That has to stop, and it has nothing to do with tax rates. It’s a grab-the-cash-right-now strategy, and it’s sacrificing the future for everybody, rich and poor alike, to support gluttonous profits today.

It’s a common problem. Publishers suffer from it. They invest less and less into the actual productive areas of their business and more into their corporate structure. In doing so, the financial barons on Wall Street reward them for their stats on paper, which always look good right away but don’t reflect the long-term negative consequences of the cuts. Those come later, and inevitably lead to more cuts. It’s a death spiral writ large. Amazon, by contrast, does reinvest large chunks of profit back into its business, and Wall Street punishes them for it routinely. It’s a good thing Jeff Bezos doesn’t seem to care what Wall Street thinks or Amazon might never have been anything more than one of the online retail pack. Our financial system, where nearly all of our resources are controlled, rewards corporate behavior that is destructive to the real-world economy and punishes actions that help it. How a system that was originally intended to allow companies to raise money with which to expand business has been allowed to mutate into this self-sustaining casino game is one of the great disgraces of the late 20th century. Our ends are fundamentally at odds with the ends of the financial sector.

These things have to change, or our very basic social fabric risks being torn asunder. It’s not going to matter what ebooks cost if people can barely afford food. A severe rich/poor class system will rip itself apart in this country. And all it takes to fix it is if our corporate leaders give up a small percentage of profits in favor of better compensation for employees. Stop hoarding your money overseas, pay your damn taxes, and pay your employees a fair, living wage. Actually give something back to the market you’re getting filthy rich on. There’s nothing to harvest if you don’t plant a few seeds. I’m not sure how, or even if we can change our corporate culture from its current parasitical nature back into a sustainable one, but I do know that if we don’t, the changes we’ve seen the past few years are but small scratches on the surface of what’s yet to come.

4. I’m holding to my opinion that the smart money is for people to develop their own skills and use them entrepreneurially

We can no longer count on steady, good paying employment on a wide scale. Companies aren’t going to give up the exploitative profit margins they’ve grown used to without being strong-armed, and any means of forcing them will have immediate, very ugly consequences. So let’s not do that. People everywhere need to cultivate ways to make money outside of traditional employment. The get-a-job thing is becoming a worse and worse deal by the day for workers and unless we are all happy ending up as poverty stricken wage slaves, we need to start creating our own economic opportunities. For writers, this means get off the fence and learn publishing. “I just wanna write,” sounds great and all, but it’s becoming increasingly unrealistic. Not knowing the business side intimately isn’t going to be a matter of choice much longer, either figure it out or get stuck under the boot heel of a giant publisher. It’s not an intriguing little side-light to consider any longer, but a virtual requirement for your long-term survival interests.

And it’s getting to be the same with everyone else. Wide-scale employment is becoming a race to the bottom, creating bottom-rung, benefit-less, minimum wage level jobs in droves while shedding living wage jobs. Figuring out how to generate adequate incomes on our own is the next essential skill we’re all going to need. Getting started sooner than later is probably going to be a very good idea.

Letters From The Front Lines of the ebook Wars

Earlier today, I read this piece on paidContent.org about some of the letters sent to the DOJ relating to the proposed settlement for three of the five publishers who, along with Apple, have been placed in the government’s crosshairs for (alleged) collusion and price fixing of the emerging ebook market. The piece contained excerpts from both pro-publisher and pro-DOJ contributors in a pretty balanced manner. However, I would like to take this opportunity to point out one or two things I find disturbing in the letters of support for the accused.

Just to be clear, I’ve made it no secret that I believe they did illegally collude (you don’t order your employees to double delete emails if you honestly believe you’re on firm legal footing) and I do fully support a serious DOJ smackdown. In fact, I believe these major publishers have been colluding on various matters for some time now, and have used their combined cartel-like influence to dominate the industry in a manner that exploits writers, overcharges readers and has created enormous barriers for entry for viable competition.

The emergence of ebooks, particularly spearheaded by Amazon, is the first true encroachment to the publishers’ gated community of competition in my lifetime. To me, that makes it even more crucial that the DOJ does what I believe it should and pursues this case to the fullest. In my opinion, agency pricing served only a few purposes; to raise prices on the digital versions of the largest selling ebooks to protect their preferred print market, to slow ebook growth and stifle the digital transition at a manageable (for them) 20-30% of the book market, and to handicap Amazon, the one company that truly is driving the industry-wide changes that threaten their long-standing dominance. That also says nothing of Apple’s interests in the deal, which had little to do with being a competitve ebook retailer and much more to do with heading off Amazon’s efforts to enter the tablet market and potentially swipe marketshare out from under the infinitely more expensive iPad.

In my mind, this entire enterprise had nothing whatsoever to do with creating and fostering competition in the industry subset of the ebook market and everything to do with stifling genuine competition across the entirety of the book publishing spectrum. The bigger the ebook market gets, and the faster it gets that way, the quicker the house of cards that is the legacy publishers’ cartel-driven dominance of the industry collapses. So to stop it, I believe they colluded to put the price fix in.

Anyway, here are a few excerpts from three of the pro-publisher letters listed in the piece. I’ll start with literary agent Simon Lipskar, whose full letter can be read here.

“The price of the average bestselling ebook has decreased significantly, from approximately $10.20 in Q3 2010 to $8.29 on April 27 – a decrease of 19% in the two years since the introduction of agency pricing – and that, furthermore, the average price today is in fact lower than it was before the introduction of agency pricing. (As a side note, it’s also clear that even agency-priced ebooks themselves are now cheaper than they were shortly after the introduction of agency.)”

These numbers are clearly false. I won’t get into specifics on the figures because Joe Konrath already has here, using Lipskar’s own methodology to show that, particulary, agency released bestsellers have increased in price dramatically since the introduction of the agency pricing scheme. It also strikes me as somewhat disingenuous to include self pubbed or independently pubbed bestsellers in the average price he sites for a couple of reasons. One, the six publishers involved in the agency scheme control something like 85% of the bestselling books in the U.S. To clarify, that’s referring to books that sell more copies than any other books. So the prices of nearly 9 out of 10 books that sell more copies than any other books have gone up significantly, yet Lipskar somehow believes this doesn’t constitute harm to consumers? Secondly, if you take a $14.99 agency book and a $0.99 non agency book and average them, you get $7.98. That might look good on a stat sheet, but it doesn’t change the fact that the agency book is way over priced and could only get that way through collusion of the six companies that control 85% of all bestsellers.

“It is impossible to look at today’s ebook marketplace – from a price perspective alone – and not see that, rather than causing a general increase in prices, instead the agency period has evidenced a remarkable explosion of competition, with new publishers, self-publishers and retailer-owned publishers providing consumers ebooks at lower prices than the agency publishers and taking significant market share from them in the process.”

One more time, these six publishers control 85% of the most frequently purchased titles. Agency pricing specifically stopped price competition on those books. Nothing agency did created the lower priced competition or the growth we’ve seen in the ebook market. In fact, I would argue that the recent slow down we’ve seen in ebooks is more attributable to the effects of agency pricing than any of the growth we’ve seen. That’s because this is specifically what the scheme was designed to do, stifle ebook growth.

As for all the extra competition Lipskar claims came about because of agency, that’s somewhat wishful thinking as well. As much as higher priced agency ebooks have helped Indies find marketshare, and it has, though not nearly as much as he suggests because the books in question were already several times more expensive than indies under the previous wholesale model, let’s remember that the ebook market has only been a major player for about three years now. Agency has been in effect for two of those three. As the ebook market grew, it was inevitable that other competition was going to enter the game whether agency existed or not.

What this actually means is that the agency publishers seriously overestimated the power they wield over the industry. It means that this shift isn’t about reasserting control but changing and adapting. Whatever their intent, agency was doomed to fail from the get go. At best, it’s an historical speedbump in the digital transition. Just because their efforts were an inept failure and steeped in entitled arrogance, that doesn’t mean we should ignore illegal collusion or the damage done to readers who’ve spent tens of millions more than they would have on these ebooks had no collusion taken place, and the damage done to their own writers, who’ve seen the pittance royalties these publishers deign to throw their way shrink even more with agency pricing.

On a somewhat related note, here’s a truly perplexing point made by independent bookstore owner Peter Glassman:

“Publishers have never sold ebooks under the wholesale model. Rather, they have sold them under the consignment model. Amazon and other ebook sellers never purchased or took ownership of the ebooks they resold. Rather,they advertised the product, handled the transaction, and only after they had received payment and concluded the transaction did they pay the publisher for the ebook. That is consignment, not wholesale. Amazon never placed any buy orders or made any commitments to purchase specific quantities of any ebooks.”

What? I’m pretty sure they did buy wholesale because, you know, that’s how the publishers sold the ebooks to them. Not sure I’d call it consignment because part of the transaction includes Amazon electronically delivering a copy to the buyer’s device. I may not be a tech wizard, but I’m pretty sure Amazon would actually have to have a copy of the work in their possession in order to do that. As for the last sentence there, it’s gotta be on my short list of the most absurd, ignorant statements I’ve seen yet. Amazon didn’t make any buy orders? Why would they? They already had what they needed to sell 10 copies or 10 million. And I can’t even come up with a smartass quip for the “specific quantities of ebooks” line. Does this guy even have a rudimentary knowledge of what ebooks are? You don’t suppose he really thinks publishers have bunches of individual copies of each ebook on their servers and every time someone buys one, Amazon gets it from the publisher, then sends it to the reader? He can’t possibly believe that, can he? That would be just silly!

I’m hoping he was just trying to make a point that digital sales resemble consignment more than wholesale, but it wasn’t particularly effective. To me, he just looks like someone far too stuck in the print book ecosystem to see the realities and efficiencies of digital. His comparison makes no logical sense whatsoever. That is the first and only time I’ve ever seen the term “quantities of ebooks” used in that way. I certainly hope he understands that Amazon only needs the one file to sell them to infinity. I also wonder if there’s not a bit of envy in there, being a purveyor of print books, for having to actually buy quantities of books and hope they can resell them or return them later. Of course, being the owner of a small bookshop, he might not want to see the reality. That has to be a bit like standing on the beach watching a 200-foot tsunami heading your way, I suppose.

Finally, here’s a pair of points from industry consultant Mike Shatzkin, whose full letter can be read here:

“My first concern is that there is a failure of recognition of the necessity for price-setting of individual titles across the ebook supply chain. Indeed, only by eliminating price as a basis of competition can we ultimately have
balanced competition in the real world of publishing as digital change has remade it.”

So we can only have competition in ebooks by eliminating the principle means of competition? I’m sorry, I do like Shatzkin’s work generally, even though he’s a little pro-publisher sometimes, but he’s really wrong here. Taking price out of the equation means that publishers themselves would then represent the only truly viable means for competition. Excuse me if I don’t find that a particularly compelling notion, given that the largest and most powerful among them are currently on trial for colluding together to fix prices. That, and the fact that many of them still appear clueless on how to actually compete in ebooks in any way other than trying to cram them into the same molds they’ve always used with print. Given that these same publishers have openly talked about things like windowing and higher ebook prices to protect print sales, increasing friction on the reader in the ebook acquisition process, and steadfastly attempting numerous rights grabs from authors while refusing even modest royalty increases, what reason does Shatzkin have to believe that these old guard publishers will give us anything even remotely like competition? The retail competition should be left right where it is, in the hands of retailers. Unless, of course, these publishers want to become retailers themselves. He also touches on that:

“The publisher of the future must be able to sell direct. With Amazon as their single biggest wholesale customer, that puts publishers in a Catch-22. If they sell direct at full price, Amazon will undercut them and make them look foolish to their customers.”

I understand Amazon is the biggest shop on the proverbial block, but as far as I can tell, there’s no law that says publishers have to sell through them. If they do set up a direct retail mechanism and they don’t like Amazon undercutting them, then don’t sell through them. Or cut a deal with them so that they won’t undercut you. Or offer books with special editions or bundles or what have you that Amazon doesn’t have. You know, actually figure out how to compete and take advantage of the opportunities of the market! Nothing’s stopping them but themselves.

To me, this sounds like the publishers want all the benefits of the retail giant Amazon’s built but only on their terms. Life doesn’t work that way, so sorry. They could have pioneered ebooks, and online retail book sales, but they didn’t. Amazon did. You don’t get to bitch and moan how unfair it is when you dropped the ball. Don’t like it? Too bad! Deal with it or find a better way. That’s how Amazon got where they are right now.

It all comes back to competition. These publishers didn’t have any for the longest time, then Amazon and ebooks came along. Now, they must compete to survive, but the best they can come up with are protectionist schemes like agency pricing that either stifle it or try to control it.

We’re past the point where they can control this industry like they used to, no matter what they believe. Crying to Uncle Sam that a better, more nimble, more efficient competitor is stealing their customers while they were out back napping in the hammock will get them nowhere. The quicker they realize this, and move on with some actual adaptive, genuinely competitive efforts, the better off everyone in the industry will be.

Correcting My Mistake: Petrocelli tops Carr in battle for who can be more wrong about DOJ price fix suit

Last week, I read what, at the time, I thought was the most one-sided, absurdly inaccurate article that could possibly be written about the ebook Agency Model price fixing lawsuit the Dept. of Justice recently filed against Apple and five of the six largest book publishers in the country.  I went through some points on the complete and utter nonsense spouted by David Carr in the New York Times here. Today, being one to readily admit my mistakes, I have to say I was wrong.

Now, I’m not about to suggest that my impressions of Carr’s piece have softened or that I’ve been convinced that he was right about any of it. He wasn’t.  It’s just that I read this piece in the Huffington Post by bookstore owner and former attorney William Petrocelli that, to my complete shock and dismay, somehow managed to reach a level even more misguided and inaccurate than Carr’s propoganda piece.  I guess the old adage really is true: don’t think things couldn’t possibly get worse because they certainly can. Here we go:

The Justice Department is hounding MacMillan and Penguin Publishers, even though those companies and other publishers have done nothing more than try to protect their business from the unfair tactics of Amazon.

This is a very early quote from the piece, but it sets the tone throughout. You can see pretty clearly that his take is Amazon is totally at fault and publishers were doing little more than defending themselves. Interesting take, particularly considering Amazon was the victim in this case, the admitted target of the pricing scheme that publishers (allegedly) illegally colluded to put in place.

News coverage of the DOJ’s case has been almost uniformly critical. When large publishers, small publishers, independent booksellers, Barnes & Noble, Apple Corporation, the American Booksellers Association, and the Authors Guild all agree that this case is terribly wrong, it’s time for the Justice Department take a step back and re-assess what’s doing.

Really? I’ve read more than a few defenses of the DOJ since this was filed, but then again, he might have a point. In the mainstream press, coverage has been generally critical of the case. But consider the sources. Most of the entities that own the mainstream press also own other business interests, you know, like book publishers, including some of the defendants in this case, under giant conglomerate umbrellas. Not exactly an unbiased position to report from, huh?

As for his list of groups inside the book industry that have been critical of the decision, they have one thing in common. They all have notable ties to the traditional industry, and therefore stood to benefit from the price fixing scheme. Without it, genuine adaptation is looking even more necessary, and that places every group inextricably tied to the traditional model at risk.

By the way, the big news this week is the DRM is on the verge of being killed off by some major publishers. Does anyone for even an instant think that would have happened if not for the DOJ lawsuit that stifled the price fixing racket? The lawsuit has already worked as it has compelled these publishers to actually compete rather than spend their time trying to squash competition they don’t like.

The DOJ has stepped into a business it doesn’t understand at all, and it is tilting the outcome against those who are trying to play by the rules.

Huh? I’m sorry, but even as cynical about government as I am, I just don’t see anybody getting sued for antitrust violations for simply playing by the rules. Collusion and price fixing are illegal actions that artificially hike prices and stop or slow down competition. If that’s considered playing by the rules, I’d hate to see what a publisher who was openly cheating looks like. Maybe Petrocelli needs to brush up a bit on what constitutes playing by the rules. Pretty sure breaking them doesn’t count.

What did the publishers do to bring down the wrath of the Justice Department? They did nothing other than what any rational business person would do in the face of unfair pressure from an over-bearing, dominant retailer.

So, according to a former attorney, the rational course of action for a business person faced with growing competitive pressure is to break the law? That’s the rational choice? Not to innovate or adapt? Not to find new ways to compete in a changing marketplace but to violate the law to manipulate market conditions to quash a competitor’s earned advantage? Sure, I guess that’s rational. This must be a line of thinking I missed out on by skipping law school.

If you read the Justice Department’s complaint , you’d get the impression that the publishers adopted the Agency Plan as a means of maximizing their profits at the expense of the consumer.

You know, he’s right. When I read the DOJ complaint, I did get that impression. You know why? Because that was their intent. And it worked. Remember all those stories a few months back about publishers’ profit margins increasing even in the face of declining revenues? How do you suppose that happened? Could it possibly have been consumers paying 30-50% higher ebook prices? And let’s not forget that a big part of the Agency strategy was to protect print profits, as well. Of course, this could just be a serendipitous coincidence for the publishers in question, right?

It is clear even in paragraph 30 of the DOJ’s own complaint that Amazon was engaging in predatory pricing — i.e. by selling e-books at $9.99, Amazon was selling them below cost.

It’s only clear if that’s what you want to believe it says. Here’s a direct quote from that same paragraph 30 that he seems to believe is so incriminating: “From the time of its launch, Amazon’s e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles.”

Predatory pricing is generally defined as losing money to run off competition, then recouping those losses later through unchallenged higher prices. But what happens if the supposed predator isn’t actually losing money? Isn’t it just as feasible that Amazon’s managed to develop a more efficient, consistently profitable mechanism for selling ebooks? Maybe they’re not really predatory at all, but actually have a sound, profitable business practice? Notice the emphasis on the word profitable there. Also, there’s the perplexing fact that in all of U.S. history, there’s never actually been a monopoly created through predatory pricing.

To top it off, here’s a quote from the SCOTUS in its 1993 case Brooke Group v. Brown & Williamson Tobacco , dealing with a predatory pricing allegation:

“The mechanism by which a firm engages in predatory pricing–lowering prices–is the same mechanism by which a firm stimulates competition; because cutting prices in order to increase business often is the very essence of competition. Mistaken inferences are especially costly, because they chill the very conduct the antitrust laws are designed to protect. It would be ironic indeed if the standards for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high.”

Interesting that Amazon haters who toss around the predatory label seem to want antitrust law to do exactly what the Supremes in 1993 declared it shouldn’t; chill competition and keep prices artificially high. Even more interestingly, there hasn’t been a successful prosecution in this country for predatory pricing since this decision. That’s because (1) predatory pricing doesn’t work (2) the remedies end up more anticompetitive than the offense itself and (3) very few, if any, are actually engaging in it, not even Amazon.

While it is true the cost of producing e-books is somewhat lower than print books, there are large development, marketing, and other costs that publishers simply couldn’t recover if they were forced to drop their wholesale price significantly below $9.99.

This, to me, seems a little confusing. The market shifts, prices drop and publishers find themselves in a position where their established costs exceed the prices they can bring in. Ok, so that’s Amazon’s fault? It is, in a way, because they largely ushered in the ebook disruption, but other than that, this seems to be pointing out the necessity of publishers to change. Their business model isn’t working with current or sure-to-be future market conditions. Shouldn’t the point here be adapt before you go under? Rather, he seems to be using this point to justify publishers’ actions to stifle the changes in the market to support a status quo your own damn customers are walking away from! I just don’t know anymore. These people work with books, for god’s sake! Wouldn’t some knowledge and logic sink in just out of random chance once in a while?

To really see the disastrous effects of the DOJ’s action, we should probably listen to authors.

By authors, he really just means Scott Turow. Otherwise, you might actually run across some authors who aren’t all that fond of the traditional book business model, and they might even hold opinions that don’t truck with illegal collusion and price fixing. Can’t have that. Don’t these silly writers understand that if something isn’t good for old school publishers, then it must be bad for them, too? I mean, writing and literature–hell, the entire culture itself–will simply cease to exist if the so-called Big Six go under. I’m sure I read that somewhere.

With a new hardcover book, an author will typically get around $3.00 to $4.00 per copy in royalties — hardly an extravagant amount, when you consider the effort that goes in to writing a book. But if the print book fades away and the $9.99-priced e-book becomes the new norm, authors’ royalties would be reduced to a pittance.

If I started selling ebooks on Amazon for $9.99, I’d make $7 a book. I already make the $3-$4 per book he cites for an author’s royalty on a hardcover for an ebook priced at $5. Not that it’s possible to make that, mind you, I already have, virtually every day for several months now, and so have lots and lots and lots of other writers.

This is, again, a problem for the publishers and their business model. Writers get the pittance royalties, particularly on ebooks, because that’s what publishers want to pay. This may well become a problem for those chained to traditional contracts down the road, but the rest of us pretty much just shrug it off and go back to writing.

The entire end of Petrocelli’s article is a virtual point by point presentation of the failings of the traditional model. But unlike what most rational people would do, see the need to adapt, he seems to prefer sticking his fingers in his ears and yelling, “Nah, Nah, Nah, It’s all Amazon’s fault, Nah, Nah, Nah, It’s not fair, Nah, Nah, Nah!”

So, as I said at the beginning, I was wrong about David Carr’s piece being the worst possible. And to show that I do learn from my mistakes and know how to adapt, here’s my new take: William Petrocelli’s piece is the worst, most misguided, one-sided Amazon hating missive I’ve seen, so far. See, adaptation isn’t so difficult.

Bass Ackwards: NYT’s David Carr somehow manages to get everything wrong

Ever since the U.S. Dept. of Justice first dropped hints of taking antitrust actions against Apple and several publishers over what is quickly becoming the agency pricing debacle, there has been a noted increase in hit job articles ripping Amazon flooding the net. After the much-rumored lawsuit was actually filed last week, those efforts ramped up considerably. But perhaps the single worst, most misguided one of these missives came yesterday from David Carr in the New York Times. I thought I’d seen everything in this regard but when I read his piece yesterday, I was absolutely dumbfounded how someone with the skills to be a regular contributor to one of the most prestigious newspapers on the planet could get, quite literally, everything so completely wrong. About the only accurate thing in his article was the spelling of his name in the byline. Here goes:

That’s the modern equivalent of taking on Standard Oil but breaking up Ed’s Gas ‘N’ Groceries on Route 19 instead.

What? Five of the six largest publishers in the country (all six after Random House allegedly was threatened and coerced into jumping in) plus the largest tech company on the planet, one several orders of magnitude bigger than Amazon, colluding together to price fix is the equivalent of Ed’s Gas & Groceries? This is so completely absurd a statement that it almost doesn’t need to be refuted. Almost. Wow, what an amazingly disingenuous thing to say! Six companies with combined resources that far outstrips Amazon joining up to, openly and admittedly, stifle competition from the online retailer is no small thing to sneeze at.

Let’s stipulate that there may have been some manner of price-fixing here, perhaps even arranged in “private rooms for dinner in upscale Manhattan restaurants.”

Oh, okay, let’s do that. Let’s stipulate that there may have been some collusion and price fixing going on. Hate to break it to you, but those actions are illegal! What are we supposed to do, simply ignore it? Look the other way while a genuine innovator from outside the traditional industry gets attacked illegally (maybe if we keep pointing that out, it will sink in eventually) by companies who have largely sat on their hands, fat and happy with their “chummy little business” as Carr calls it? Sorry that it’s inconvenient to your worldview, but the entire point of the Sherman antitrust act was to prevent competitors within an industry from combining their market power to hamper competition. That is precisely what seems to have happened in this case, and the primary reason the DOJ got involved is because the publishers in question were too arrogant to keep their damn mouths shut about it!

(Amazon) leaned on the Independent Publishers Group in recent months for better terms and when those negotiations didn’t work out, Amazon simply removed the company’s almost 5,000 e-books from its virtual shelves.

No, Amazon was in negotiations for a new contract when the old one was up. They failed to reach an agreement, so they had to pull the books because, I repeat, the contract was up! If Amazon had continued selling their books with no contract, that would have been illegal. Besides, IPG isn’t a publisher, they’re a distributor. Distributors are still somewhat useful in the print market, but in ebooks, they represent an unnecessary and inefficient expense that increases prices and little else, something Amazon didn’t want because, you know, they seem to actually give a shit about not gouging their customers. How useful is IPG in the ebook market? Well, combined, the publishers in their membership earn, on average, about 10% of their revenue from ebooks. The rest of the industry is more than double that and growing. Did Carr ever consider that maybe Amazon wanted better terms because they actually wanted to sell some damn books!

The Seattle Times just published a series with examples of how Amazon uses its scale not only to keep its prices low, but also to keep its competitors at bay.

The only thing I’m going to say about this is of course he referenced the Seattle Times. Over the past few weeks, they’ve made one-sided hit pieces on Amazon a virtual art form. At this point, I’m almost curious to find out if the Times has gotten any large donations or influxes of cash from any particular Manhattan addresses recently.

Remember that it was only after agency pricing went into effect that Barnes & Noble was able to gain an impressive 27 percent of the ebook market.

No, Barnes & Noble earned that marketshare once they actually decided to genuinely compete in the ebook segment. The Nook device was generally well received, they smartly leveraged their physical stores to push devices and ebook sales to customers, and generally made a real effort. Funny how much easier it is to gain marketshare when you actually try!

If the decision to charge the publishers was good for competition, why has the stock price of Barnes & Noble dropped more than 10 percent since Wednesday?

This is another easy one. B&N is still inextricably linked to the print ecosystem. Agency pricing, at its core, a point Carr has apparently missed entirely, was a protectionist racket to slow digital growth and artificially prop up print. So B&N stood to benefit from the illegal collusion. This model goes away, and there’s nothing to stop ebooks from quickly jumping up to 50%, and very likely much more, of the industry’s revenues.

B&N is still saddled with a ton of physical stores that can quickly become an albatross around their neck when (not if) print sales continue to decline. That’s why there’s been rumors floating around that they will soon be spinning the Nook portion of their business off, so it doesn’t get dragged down with the stores. There’s also the little matter of B&N allegedly taking retaliatory action at the behest of Penguin against Random House to pressure them into joining agency as well. At this point, they’re lucky they aren’t named as a co-conspirator. Any of these are perfectly understandable reasons for their stock to decline.

Amazon views e-books as cheap software sold to animate device sales, in this case, the Kindle.

Here’s my favorite piece of pretzel logic making the rounds of Amazon haters these days. Apparently, they don’t care about losing money on ebooks because it drives kindle device sales. But wait, I’m pretty sure I’ve read somewhere that Amazon is taking a loss on device sales. So, apparently, Amazon is selling ebooks at a consistent loss in order to drive device sales at a consistent loss. And conversely, depending on who you ask, they’re selling devices at a loss to drive further ebook sales at a loss. At some point, you’d think someone would realize how absurd this logic is. I don’t care how much money Amazon has, they have to make a profit on something!

The problem is they aren’t really selling ebooks at a loss, only select ones (NYT bestsellers in the pre agency days, for instance) as loss leaders to get customers into their system and buy any of the hundreds of thousands if not millions of other books that aren’t discounted below cost. They might be selling devices slightly below cost today, but the tech is only going to get cheaper. Besides, some of the cheaper Kindles are ad supported which mitigates some if not all of those supposed losses. And that’s not to mention the profits on all those books that aren’t priced below cost they sell on those devices.

Publishers are pissed because, while they sat on their hands and had fancy dinners discussing ways to undermine ebooks, Amazon identified and executed a rather impressive retail plan to attract tons of customers, sell lots of devices and boatloads of books, all while keeping prices low and raking in the cash. Sorry for your luck, but I’m pretty sure this qualifies as “you snooze, you lose.”

The counterargument to the publishers’ position runs like this: why should consumers be saddled with paying an extra few dollars just to keep competition alive?

I’ve made bunches of counterarguments to the publishers’ positions over the past couple years, and read bunches more. Never once have I seen that one. If he changes the wording to read “to keep certain competitors alive” then he has a point. Why should we, as readers be saddled with artificially high prices so Macmillan’s outdated and inefficient business model can survive, for instance? We shouldn’t. In reality, the agency deal was all about stifling competition by forcing all ebook retailers to homogenize pricing at high levels across the board and protect print sales from erosion at the hands of ebooks. It’s all about picking winners and losers on the retail side, and on the product side. In the end, customers get to pay extra to have a cartel of publishers decide for them what they’re allowed to buy and from whom. Agency has stopped untold numbers of retail pricing models and experiments from happening, from package deal, group offerings, subscription services, and who knows what else could have been developed?

It has very effectively stifled competition in the retail market. Don’t believe me? Look at Google. They were gung ho to get into ebook retailing in a big way before the agency debacle. Now, they’ve dropped out of the market altogether very likely because of the restraints agency placed on real retail competition. When everyone uniformly has the same products at the same prices, it becomes an enormous barrier for entry to anyone who doesn’t already have an established ebook store and associated device. So agency really only served to lock online ebook retail to a select handful of players already in the game–Amazon, Barnes & Noble, Apple, and to a lesser extent, Kobo and Sony. Agency didn’t increase competition in ebooks, it hindered it.

Richard Epstein, a professor at the New York University School of Law, pointed out, “It is not clear that lower prices are necessarily in the long-term interests of the public at large.” He said that lower prices work both ways, spelling “low costs to consumers and low royalties to authors.”

No, it is clear that low prices aren’t in the long term interests of publishers who still insist on expensive, outdated and inefficient products. It is also clear that lower prices are in consumers’ interests, both now and in the future. And as to his second point, here’s a slight illustration to how wrong he is. In strictly the current traditional model, he may be right that lower prices lead to lower royalties for authors, but that’s only because publishers want it that way. On a $15 agency ebook where the author gets a standard 25% net, that author makes $2.62 per sale. On a $4.99 ebook sold directly through Amazon, the author gets $3.49 of each sale. That is a rate $0.82 more than the traditional author on a book 1/3 of the price. My math skills may be a little rusty, but that kinda looks 67% lower price to the reader and a 25% higher royalty at the same time per sale.

Robert F. Levine, a lawyer with an extensive practice in publishing, said, “There is not a drop of new capital coming into this business. The margins are low and there is almost no growth, so you end up with a rather small industry, with a handful of companies and a handful of players.”

Is this guy looking at the same industry everybody else is? Ebook sales have been growing in triple digit percentages the past few years. Sales of devices have exploded. The whole DOJ lawsuit stems from the manner in which Apple brought its weight and resources into the market. There are hundreds if not thousands of independent authors selling their wares now that never could have before, and many more of them than the mainstream industry and its defenders will ever admit are making money doing it that’s nothing to sneeze at. Publishing is a growth industry again, for the first time in a long time. If anything, the agency model actually slowed that growth slightly, but that’s pretty finished now, however the suit ends up. The only way it worked in the first place was if all those publishers colluded to make it happen. They’ve already fragmented with three settling, and will stay that way for at a minimum two years. But by then, it may be irrelevant what any of these companies wants to do. Besides Apple, Penguin and Macmillan could all still be tied up in court at that point, too.

The problem with this line of thinking is that, prior to digital, publishing already was an industry dominated by a small handful of players; the so called Big Six, the few big box retailers, and two or three distributors pretty much called the shots. There’s more diversity in book publishing right now than there’s been in a long time and, despite all the hand-wringing over a theoretical Amazon monopoly, that diversity seems poised to continue expanding.

I’d be lying if I said I didn’t get a little thrill when I found out on Amazon that I could get an e-book version of “Fifty Shades of Grey,” the No. 1 book on the New York Times best-seller list, for just $9.99. But after a week of watching the Justice Department and Amazon team up, I’ve learned that low prices come with a big cost. Maybe I’ll order it at my local bookstore instead.

Interesting example. An essentially self published ebook and POD paperback that grew out of fan fiction that traditional publishing never would have touched in a million years before the DIY way spearheaded by Amazon produced a bestseller. In addition, in the past, you’d have had to order it specially because, being DIY, the local bookstore almost certainly would never have considered stocking it. And even if they did, it would have ended up spine-out on a back shelf somewhere, virtually out of sight, out of mind.

So what was all that Carr was saying earlier about Amazon wiping out competition and the publishers championing it? Seems to me, he’s got that all ass backwards.

Follow

Get every new post delivered to your Inbox.

Join 108 other followers

%d bloggers like this: