Them’s Fightin’ Words! Even publishers’ statements on DOJ antitrust suit sound like they were written together

So the other shoe finally dropped and the U.S. Dept. of Justice filed the long-rumored antitrust suit against Apple and five of the so-called Big Six publishers for their alleged collusion on a price fixing scheme using the agency pricing model. According to the DOJ, the publishers and Apple (allegedly) conspired together to raise the retail prices for ebooks and stifle competition in the growing ebook market, specifically targeting one particular competitor–Amazon. Immediately after the suit was announced, three of the six parties named in the suit agreed to a settlement, leaving only Apple, Macmillan and Penguin left standing.

While Apple has been silent on the matter thus far, the heads of the two publishers in the DOJ’s crosshairs released statements indicating their positions on the matter and why they intend to fight what they claim is the good fight. Interestingly, both publishers’ statement dismiss the notion that any collusion took place, each taking great pains to clearly state the decisions they made on agency pricing were taken totally independently. What struck me immediately after reading both statements was how absolutely identical they each were in form, justifications and even wording in some places. Odd that two companies who vehemently claim such independent thinking on the matter manage to crank out virtually indistinguishable responses to accusations of collusion, don’t you think? Not proof of a conspiracy by any stretch, but pretty telling nonetheless.

My beliefs on the agency issue have been pretty well on record both on this site and on my Twitter feed. I do think these publishers and Apple illegally colluded, and I think the DOJ is right in pursuing this. I believe they intended to use the agency model to institute significantly higher prices across the online retail landscape for several reasons. One, to handicap Amazon’s (and, in consequence, anyone else’s) ability to discount ebooks on the retail level. Two, to use the higher prices to slow the growth of the ebook segment and the rate of digital adoption in consumers. And three, most importantly, to insulate their much more favored print products and the physical bookstore and distribution ecosystem they largely dominate from digital competition. Taken together, the agency price fixing scheme put in place was, in my opinion, a conspiracy amongst several supposedly competing entities to hamper an emerging market that was disrupting their preferred and long-standing business models.

To be clear, I don’t think there’s anything inherently wrong or illegal about the agency model. The problem in this case rests with the way agency was used by these (allegedly) collusive businesses. A similar result could have come about if, instead of agency, these publishers had all agreed in unison to force a 50 or 60% increase in wholesale prices. Even Amazon would be hard pressed to discount books to $9.99 if they were paying double that or more for them. The pricing model isn’t the problem here, it’s the collusion amongst competitors that is at issue. Agency was the model used simply because that has been Apple’s preferred system on virtually all other forms of digital content it sells.

Anyway, I thought I’d run down a few points from the two publishers’ responses, starting with John Sargent, CEO of Macmillan. Click here to read his full statement.

We felt the settlement the DOJ wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents.

The bold emphasis on that comment is mine. Apparently, according to Sargent, physical bookstores are the only folks who sell books for a living. To hell with the numerous online book sellers, or the many, many hundreds of thousands of independent writers who are now selling books for themselves as well. I think he gives their underlying motivations away a bit with this statement. They wanted to protect bookstores and the physical print business model. The damage inflicted to the emerging digital markets wasn’t a strict concern, nor were the growing ranks of self published authors outside of their traditional control. Far from creating competition in the ebook segment, this arrangement tried to stifle competition by attempting to remove the most important weapon in the retail arsenal, price.

When Macmillan changed to the agency model, we did so knowing we would make less money on our ebook business. We still believe in that future and we still believe the agency model is the only way to get there.

So these publishers knowingly enterered into a business arrangement expecting to lose money in the short term in order to better position themselves for the future? Really? That’s funny because it sounds an awful lot like Amazon losing money on discounted ebooks to grow marketshare and better position themselves for the future. But when Amazon did it, we were told by these same folks that they were evil, despicable and destructive. Apparently when publishers behave similarly, they become defenders of culture and literature. See how that works?

The difference here, of course, is that Amazon’s loss-leader practices were undertaken on their own and directly led to lower prices for consumers. Publishers’ efforts in this regard, however, required (allegedly) illegal collusion amongst a critical mass of the largest competitors, and directly led to significantly higher prices for consumers. There might be a clue in there somewhere for why Amazon keeps chugging along nicely, and these various publishers will have DOJ lawyers all up in their business for the forseeable future. Just maybe.

I hope you will agree with our stance, and with Scott Turow, the president of the Author’s Guild, who stated, “The irony of this bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition. This would be tragic for all of us who value books and the culture they support”.

Antitrust lawsuits make strange bedfellows, apparently. Here we have a publisher being sued by the U.S. Government for a (alleged) price fixing scheme that, by their own admission, raised ebook prices and cost publishers (and by association, their authors) real, tangible dollars and he quotes the head of an organization called the Author’s Guild to justify his actions. I discussed Turow’s rather shortsighted take on this issue a while back, so I won’t rehash that, but if I were a member of that group and I saw his statements used in support of an act that both cost me money and tried to stifle competition and emerging market opportunities, I don’t think I’d be very happy. Turow seems to be supporting the publisher apparatus when he should be looking out for the interests of writers. His statements being used in this way by a publisher is awkward at best, and a serious conflict of interest to his position as representative of writers, at worst.

As an added problem for the publishers wrapped up in this, there are numerous civil lawsuits that will very likely result in many tens of millions of dollars in damages above and beyond whatever penalties the DOJ will look to extract. In fact, it’s already been reported that the three publishers who agreed to a settlement with the DOJ have also agreed to settle a civil suit with several state attorney generals that will result in damages that somehow filter down to consumers who purchased high priced agency ebooks during the time this practice was in effect.

My question is, if I’m an author under Simon & Schuster’s banner, for instance, and they end up paying a percentage of damages for each of my books sold under agency terms, is that money going to be backed out of my future royalties? After all, they theoretically paid me royalties on the initial full sale price, miserly though it may have been. If they’re forced to refund a few dollars of each sale back to the customers, am I going to be forced to give back my percentage of the refunded price? How thrilled would Turow’s membership be if all the agency authors he speaks for suddenly had future royalties docked to cover part of a legal settlement for a questionable practice he defended so openly? Sure, its hypothetical, but would it surprise anyone if publishers took this action?

Now it’s on to Penguin Group Chairman John Makinson. You can read his full statement by clicking here.

The decisions that we took, many them of them costly and difficult, were taken by Penguin alone.

I already addressed this point a bit, but for added clarification, no, they didn’t make this decision alone. They and four of their largest competitors all made this decision at the exact same time, with the exact same justifications. The DOJ’s complaint details a nice long list of instances where these publishers were in communication on this matter with one another and Apple in the lead up to this decision. There’s even an allegation that the publishers issued strict instructions to double delete emails and to leave no papertrail. Does that sound to you like businesses acting independently and behaving like they’re doing nothing wrong?

One of the allegations in the DOJ complaint I find most interesting relates to the one member of the so-called Big Six who initially stayed away from the agency scheme, Random House. According to the DOJ, Random House was actually gaining marketshare during the year in which they stayed out of the agency agreement. Allegedly, they were then pressured by the other publishers to get with the program, including an overt threat of retaliation against them by a large print and ebook retailer made by none other than Penguin’s U.S. CEO David Shanks. Sure, Penguin made that choice to go agency all alone. So did the other four, obviously. How could anyone think otherwise? It looks as though, according to the DOJ, that the one member of this group that actually did make a decision alone was pressured and/or threatened into changing their mind later. No collusion there, nope. Totally above board all the way, right?

The decision we took in January 2010 to move Penguin’s e-book business to agency pricing has been vindicated by the very rapid subsequent growth in the volume of e-books sold by agency publishers, and by the benefit to consumers of the steep decline in the price of e-book readers that that has resulted from this open competition.

Does he mean the rapid growth of ebook sales by everyone in the market, agency publishers or otherwise? That growth happened because the consumer demand is there. The agency pricing scheme had nothing to do with it. In fact, I would argue that these so-called agency publishers actually left a ton of money on the table they otherwise would have made if not for this pricing scheme. I think this shows that not only was this arrangement destructive to those involved because now they have to deal with the DOJ, compliance requirements and numerous civil lawsuits and probable steep damage claims, it didn’t even have the desired effect. The ebook market continued to grow, the print market continued to stagnate and decline, Amazon’s market position has remained strong and Jeff Bezos hasn’t exactly been crying himself to sleep over this matter.

This may ultimately end up as one of the most futile and expensive mistakes in recent business history by the time it all shakes out. Publishers have taken what was a difficult and trying circumstance in the teeth of a major technological disruption and made things exponentially worse for themselves. Good job, guys! I hear the local Waffle House is looking for a new manager after you’re finished running your respective companies into the ground. Have your resumes ready!

And perhaps I’m mistaken, but wasn’t the steep decline in device prices he mentions spurred almost entirely by Amazon? One of the accusations in the DOJ complaint was that Apple’s involvement in the conspiracy was driven by their desire to undercut Amazon’s ability to enter the tablet market as a legit competitor to the iPad. That would seem to me to indicate Amazon was well into the process of developing cheaper tablets long before this agreement ever came about. It seems Makinson just enjoys pointing out things that were inevitably going to happen, agency deal or not, and ascribing those results to the model they undertook. This, too, despite the fact that these results were precisely what the (alleged) collusive arrangement was supposed to prevent. I really wish I could find a job where I could fail upwards so magnificently.

We reasoned that the prevention of a monopoly in the supply of e-books had to be in the best interests, not just of Penguin, but of consumers, authors and booksellers as well.

Just a brief addition on this. I don’t doubt that they believed they were preventing a monopoly in ebook sales. But, to be clear, they tried to do so in a manner that propped up their own ogliopoly of the physical print book market. This wasn’t some selfless act undertaken for the greater good of the little guys, this was a fading cartel of major publishers desperately trying to hang on to the glory days in any manner possible. They pushed the envelope of legality because, apparently, actual innovation and adaptation to the changing environment was too difficult, and they got caught. No more, no less.

Amazon is no saint, and there are some significant, perfectly valid concerns with some of their business practices, but, at this point, it’s these publishers and Apple who’ve (allegedly) crossed the line into violating the law. Kind of hard to stake a claim to the moral high ground by crawling through the sewers to get there.

Anyway, here’s a link to a pdf of the full 48 page DOJ complaint. It’s definitely worth a read. This problem is not going away, though it remains to be seen what the far-reaching effects will be on the ebook market and book publishing in general. Keep in mind, too, that there are still a few civil lawsuits and an EU antitrust investigation hanging out there as well. This really has the potential to get a whole lot uglier for those involved before it gets better.

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