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.

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