How The Agency Model Led To An Antitrust Suit

As reported yesterday, the Department of Justice has filed its antitrust lawsuit against Apple and five of the largest publishers (Macmillan, Penguin, HarperCollins, Hachette, and Simon & Schuster).

A settlement has been agreed with HarperCollins, Hachette, and Simon & Schuster; Macmillan claimed the terms were too onerous, and Penguin appears to have refused to contemplate settling.

The agreed settlement must still be approved by the court, but among the conditions are the end of Agency (despite the attempted spin by PW in the above-linked article) and the return of pricing control to the retailers (such as Amazon). In addition, the settling parties will be monitored by the DoJ, who must be copied on any communications surrounding this or any related matters.

While the DoJ’s case is getting all the attention, it should not be forgotten that all the above parties are also being sued by sixteen State Attorneys-General who are seeking both injunctive relief, and compensation for “e-book customers paying $100 million in overcharges.” HarperCollins and Hachette have also settled that case; as it stands, the remaining parties will go to court.

Finally, the European Commission has its own continuing investigation. Reuters report that Apple and four of the above publishers have sent a proposal to settle the case (Penguin being the hold-out). It’s far from certain that the Commission will accept this proposal, and they are said to be watching the outcome of the DoJ’s suit with great interest.

Penguin’s strategy of refusing to engage in any settlement negotiations is curious as they appear to have the most to lose if this matter goes to court. As the Bookseller notes from the DoJ suit:

[Penguin] is referenced 41 times, more than Macmillan, and double the number of times any of the settling publishers–HarperCollins, Hachette Book Group, and Simon & Schuster–are referred to. [Penguin CEO John] Makinson is also directly named, as is David Shanks, CEO of Penguin USA, a number of times: again more than any other CEO.

The suit contains a number of juicy allegations, all of it quite damning for Apple and the respective publishers. Despite the robust statements from Macmillan and Penguin – and their cheering-on from certain quarters of the publishing industry – to this layman’s eye the case appears to be clear and substantial, backed up with hard evidence including: phone records of conversations between publishing executives at the various companies and Apple; internal and external email transcripts from the defendants; and, sensationally, an alleged attempt to delete emails “to avoid leaving a paper trail.”

The full 48-page complaint is here, but The Verge do an excellent job of parsing the key points, and The Business Insider have a great blow-by-blow account, highlighting the most important section of the actual suit.

Before the Agency model was brought in at the start of 2010, e-books were sold (like print books) under the wholesale model. What this meant was that publishers would decide the list price of an e-book, and the retailer could set the retail price of their choice.

For example, if a publisher decided that Stephen King’s latest was to be priced at $14.99, Amazon were free to discount the e-book as much as they liked to their customers, but had to pay the publisher as if the e-book had sold for $14.99. Contrary to some widespread misunderstandings, Amazon had no control of the list price publishers would set – which was the price which decided what payment publishers (and authors) would receive from Amazon.

In practice, this meant Amazon discounted a large number of books from publishers, in an attempt to bring the retail price to $9.99 or below. Again, to be clear, this did not affect the payments publishers received, only the price customers paid, with Amazon swallowing the difference.

Publishers were said to be unhappy with Amazon’s discounting policy for two reasons. First, they feared this pricing approach would allow Amazon to grab an increasingly dominant share of a fast-growing market. Second, they worried that aggressive pricing of e-books would hasten the adoption of e-reading, threatening their business model (they largely controlled print distribution, but digital was wide open). The problem, in legal terms, is what happened next.

The DoJ allege that as early as September 2008:

[The publishers'] senior executives engaged in a series of meetings, telephone conversations and other communications in which they jointly acknowledge to each other the threat posed by Amazon’s pricing strategy and the need to work collectively to end that strategy.

The respective CEOs were alleged to have met in secret in the private dining rooms of upscale Manhattan restaurants, talking about how to deal with Amazon.

The DoJ allege that by 2009, the result of these meetings was an agreement “to act collectively to force up Amazon’s retail prices.”

However, in the meantime, while Apple weighed their entry into the e-book market, the DoJ also allege that Apple “contemplated illegally dividing the digital content world with Amazon, allowing each to own the category of its choice – audio/video to Apple and e-books to Amazon.”

By late 2009, “Apple and the [publishers] settled on the strategy that worked,” which was, of course, the Agency model. This model had two key points. First, publishers would control retail pricing. Second, the contracts would contain a most favored nation (MFN) clause, essentially meaning that publishers would not be able to have lower prices on Apple’s competitors.

According to the DoJ’s suit, “instead of an MFN designed to protect Apple’s ability to compete, the MFN was designed to protect Apple from having to compete on price at all.”

I just want to pause here for a moment, because I believe this is a crucial point. Defenders of Agency have argued that the model gave Apple (and other retailers) an opportunity to compete. The DoJ’s suit quite clearly alleges that the model prevented competition.

The result, of course, was increased e-book prices. This was predicted by Steve Jobs, who famously said in his authorized biography (and these words are repeated in the suit), “We’ll go to [an] agency model, where [publishers] set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what [publishers] want anyway.”

As the suit alleges in quite bald terms:

Apple was perfectly willing to help [publishers] obtain their objective of higher prices for consumers by ending Amazon’s “$9.99” price program as long as Apple was guaranteed its 30 percent margin and could avoid retail price competition from Amazon.

Of course, the Agency model would only do its job if all the other retailers signed on. To that end, the DoJ’s suit alleges that Apple and the publishers “set in motion a plan that would compel all non-Apple e-book retailers also to sign to agency or else as [Steve Jobs] put it, the [publishers] all would say, ‘we’re not going to  give you the books.’”

The suit goes on to give further details about pricing based on internal Apple emails which are alleged to show that the publishers were dead-set against Amazon’s $9.99 pricing for new releases and bestsellers, weren’t crazy about Apple’s proposed $12.99 price point, and successfully negotiated a tiered pricing structure to include some bestsellers and new releases at $14.99.

As to whether the publishers colluded, or acted in concert with each other, the allegations in the DoJ’s suit are clear. They quote internal Apple emails from an executive called Eddy Cue (Apple’s Vice President of Internet Services) who claimed that “all of [the publishers] were very concerned about being the only ones to sign a deal with us.” And the suit further states:

Penguin explicitly communicated to Apple that it would sign an e-book distribution agreement with Apple only if at least three of the other [publishers] did as well. Apple supplied the needed assurances.

The suit goes on to state that a further publisher (presumably Random House) who hadn’t signed up to Agency saw its market share grow. As a result, the DoJ allege, they came under increasing pressure to toe the line.

Penguin – and its US CEO David Shanks – are alleged to have taken the lead in convincing Random House to switch to Agency, actions which included encouraging “a large print book and e-book retailer to punish the other publisher for not joining the defendants’ conspiracy.”

The DoJ is quite clear about Apple’s role, alleging that they “knowingly served as a critical conspiracy participant” by promising the same deal to all the publishers and keeping each player in the loop as to the status of negotiations.

The suit goes into forensic detail about all the meetings that took place between the various parties, and clearly synchronizes email communications and phone calls between Apple and the publishers, as well as between the publishers themselves.

So that’s the DoJ’s case. As for the settlement, Wired do an excellent job of summarizing the key points from the agreement reached between the DoJ and Hachette, HarperCollins, and Simon & Schuster.

In short, Agency is toast. Presuming the settlement is approved, the publishers will be forced to terminate their agency contracts with Apple within seven days. A lot of speculation will surround what will replace those contracts, but the DoJ have set out clear guidelines.

For a (minimum) two-year period, any new contracts will not be allowed to prevent any retailers from discounting. For a (minimum) five-year period, those contracts will not be permitted to contain the “most favored nation” clause that caused such problems for the DoJ (and which was the backbone of the alleged price-fixing effects of Agency).

Finally, there are a series of onerous compliance conditions for the settling parties including designating an antitrust compliance officer, providing copies of any agreements with e-book retailers for a five-year period, notifying the DoJ of any joint venture with other publishers regarding e-books, and copies of any (non-privileged) communications regarding plans or strategies related to e-books. The DoJ also warned against the publisher retaliating against any retailers (presumably Amazon). It looks like the DoJ will be keeping a very close eye on the settling parties.

As for the parties which didn’t settle – Penguin, Macmillan, and Apple – they face a range of possible outcomes. Some anti-trust experts believe the DoJ has a much stronger case against the publishers than it does against Apple, and the details of the suit do seem to focus much more on the respective publishers’ actions. That may not matter, however. With three of the publishers agreeing a settlement to end Agency, it’s hard to see how it continues in any form.

What takes its place is less obvious. Will the wholesale model return? Or will the publishers come up with an alternative system? If it’s the latter, the DoJ will be watching closely to make sure that doesn’t result in higher prices for consumers – which was the one of the key aims of Agency in the first place.

Whatever happens, one thing seems clear: e-books are about to get cheaper.

About davidgaughran

David Gaughran is a 34-year old Irish writer, living in London, who spends most of his time travelling the world, collecting stories. He is the author of the South American historical adventure "A Storm Hits Valparaiso" and the short stories "If You Go Into The Woods" and "Transfection" as well as the popular self-publishing guide "Let's Get Digital: How To Self-Publish, And Why You Should."
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87 Responses to How The Agency Model Led To An Antitrust Suit

  1. Excellent analysis, David. Thanks.

  2. LM Preston says:

    Great rundown of the facts. I am wondering who is effected the most in all of this. Staying tuned for the outcomes.

  3. Jaye says:

    Laid out quite nicely, David. Thanks for this.

    I don’t have much an opinion on this, except that I don’t like dirty dealing and shenanigans. If Apple and the publishers are proven to have engaged in those, I hope they get nailed to the wall.

  4. Tyler Wills says:

    The whole, but especially Penguin, she-bang is reminiscent of the early Murdoch/NoW fiasco in their response to the revelations. These ‘old way’s’ conglomerates have obviously not stayed up to date with new technology and the repercussions there of; from sleeping on the job and thinking they can get away with anything forever.

  5. This whole battle seems like a power struggle between Amazon, Apple and the Big 6 publishers. As an Indie Author, I feel like a kid standing on the ground in the middle of a war between dragons. It doesn’t seem like any of them care about the actual writers, just their own treasure.

    The books and those that love to read them are what really matter.

    • *those WHO love to read them.

      • It seems, unfortunately, some people don’t care about the reader, only the bottom line. For we authors, WE know where our bread and butter comes from and most of us write for them, not the bottom line. This whole thing just pisses me off!

    • You have a point, but I suppose you could take it up a notch and say that this is truly a battle between the tech giants: Amazon, Apple, and Google (and maybe Rakuten) and agents, publishers, and bookstores (and writers) are mere leafs in the wind…

  6. This blog is the go-to place for keeping up with the rapidly changing publishing landscape, I’ve seen the same story covered elsewhere but not with the same depth.

    I’m looking forward to stocking up my Kindle without feeling gouged.

    • You can download a book a minute every day for a year, and never pay more than 99 cents for each one. You don’t have to “look forward” to it. How much cheaper do you want books to be, Paul, before you feel you’re not being “gouged”?

      • Dan DeWitt says:

        That makes no sense. I could eat for free out of other people’s garbage if I wanted to, but I’d prefer buying quality groceries.

        I think Paul’s saying, just because there are plenty of cheap (and sometimes even good) ebooks out there, that doesn’t mean that publishers aren’t gouging on the big name titles. That’s what this whole collusion thing is about: artificial price inflation. I’m rolling my eyes hardcore on your comment.

        Dan

      • Hi Techsavvy, My intention was to highlight the difference in cost of goods between print and eBook. Of course, the author and publisher can maintain profit margin but I expect to pay substantially less for the eBook version because it costs less to produce.

    • “That makes no sense. I could eat for free out of other people’s garbage if I wanted to, but I’d prefer buying quality groceries.”

      So, you’re saying that most of those 99 cent books are garbage? You just paraphrased the subject of one of David’s recent posts.

      “That’s what this whole collusion thing is about: artificial price inflation.”

      And the obverse of that is artificial price *deflation*, the complaint of everybody that is not Amazon.

      “I’m rolling my eyes hardcore on your comment.”
      Aww.

      • Dan DeWitt says:

        Seeing as I priced my own first novel at $.99, no. Nice try, though.

        Who’s going to deflate the prices? Publishers? Absolutely not. Amazon? They’re going to go right back to their original pricing strategy. Everything else is alarmist B.S. Apple is worth like 5 times what Amazon is. They can compete on ebook prices all day long; they just chose to go the other way, and break the law to do it.

        This is rich: Amazon is bad because they sold books at a loss to gain market share and sell Kindles, but Apple is great because they colluded with publishers to raise ebooks by a couple of dollars per.

      • “Who’s going to deflate the prices? Publishers? Absolutely not. Amazon? They’re going to go right back to their original pricing strategy.”

        I’d be grateful for your source that shows Amazon’s intention to go “right back” to their original pricing model. You can post it here, or e-mail me directly.

        “Everything else is alarmist B.S. Apple is worth like 5 times what Amazon is. They can compete on ebook prices all day long; they just chose to go the other way, and break the law to do it.”

        Apple hasn’t broken the law–they’ve been sued by the DoJ. So has Amazon in the past. The hyperbole surrounding the case has become so bizarre that I keep expecting Al Sharpton to show up demanding justice. Here’s one take on the case that I appreciate:
        http://news.cnet.com/8301-13578_3-57412861-38/doj-is-likely-to-lose-e-book-antitrust-suit-targeting-apple/

        The focus on Apple is interesting, because–as it turns out–there’s no actual proof that Apple colluded. The publishers are a different matter. Nevermind the fact that “collusion” isn’t automatically illegal in the US. If it were, Amazon would be on a long list of DoJ defendants for several other product markets.

        “This is rich: Amazon is bad because they sold books at a loss to gain market share and sell Kindles, but Apple is great because they colluded with publishers to raise ebooks by a couple of dollars per.”

        Neither company is “good” or “bad”, in my opinion–they’re just giant corporations. And it’s interesting to unpack what “gain market share” means, in this case, because to do that required that independent bookstores disappear (this was before Apple opened the iBookstore).

        And by the way, Apple pays a royalty of 70% on self-published 99-cent ebooks. What does Amazon pay you?

      • Dan DeWitt says:

        You might want to read the breakdown at The Verge (posted in the body of the blog post) before you go taking CNET’s word as gospel. The DOJ apparently has a lot on Apple, too. That’s amazing, because the DOJ normally goes after big corporations without any evidence whatsoever. So do 16 states. And the UK.

        But you’re right about one thing. I’m despondent that Amazon only pays me a 35% royalty on my $.99 ebook that I no longer have at $.99. I’m sad enough that I will dismiss out-of-hand allegations of collusion and price-fixing being pursued by the DOJ, just because I’m a fanboy of said corporation.

      • “You might want to read the breakdown at The Verge (posted in the body of the blog post) before you go taking CNET’s word as gospel. ”

        I read both articles, and didn’t take either one as gospel. Dan, the hyperbole about eye-rolling, “fanboys”, and other stuff is a bit much. I’m sure you’re better than all that, and I’ve been commenting on what you’ve said, not who you are. I (hopefully) did it without insulting you, but if I did, I’m sorry.

        “The DOJ apparently has a lot on Apple, too. That’s amazing, because the DOJ normally goes after big corporations without any evidence whatsoever. So do 16 states. And the UK.”

        In fact, the DoJ has had to drop cases and say “sorry” many times. The CNET article describes a few. The states? It’s common for states to join in on DoJ actions (in fact, it’s almost a given). Amazon’s settled several state-level cases of a similar type.

      • Dan DeWitt says:

        I didn’t mean “fanboy” as an insult; I meant it as a statement of fact after perusing your blog. There’s a definite pro-Apple slant there, up to and including, “I ‘trust’ Apple more than I trust Amazon.” But I can see why “fanboy” may have come across harsh. I retract. And then I show a smiley face. :-)

        However …

        Saying that there’s no proof that Apple colluded is ridiculous. Win or lose, the DOJ isn’t going to bring a suit without what they believe is enough evidence to win. A few of those emails alone are enough to prove that the dealings were, at best, sketchy. The amount of people who are defending Apple for … and this isn’t contestable … “working” with major publishers to significantly increase the price of ebooks for consumers is mind-blowing to me. People are actively defending the allegedly illegal activities of a giant company who raised prices by 30-50%.

        Three of the largest publishers in the world have already settled. Apple’s being sued for a reason.

      • “I didn’t mean “fanboy” as an insult; I meant it as a statement of fact after perusing your blog.”
        Another ad hominem? Okay, Dan, you win. Carry on.

      • Dan DeWitt says:

        Ad hominem? Really? Wow. Your overall tone is one of dismissiveness and derision, but you cry about being called a fanboy when you obviously are pro-Apple and anti-Amazon to the point that you hope Apple gets away with potentially very serious illegal business practices where they raised prices.

        I’ve never seen anything quite like it.

      • “Your overall tone is one of dismissiveness and derision, but you cry about being called a fanboy when you obviously are pro-Apple and anti-Amazon to the point that you hope Apple gets away with potentially very serious illegal business practices where they raised prices.”

        That’s ironic. And now I’m “crying”? You’re still winning, Dan. And by the way, I’m selling a book on Amazon right now. Does that mean you’ll call me self-loathing next?

        “I’ve never seen anything quite like it.”
        I agree. The main difference between the tones we’ve struck is that I’m not attempting to define your character as a human being, I’ve been rebutting your opinions. That’s what I meant by “ad hominem”, Dan. Why do you keep posting comments that describe me personally? I’m a “fanboy”? I “cry”? I’m “sad”? You’re “rolling your eyes”?

        And now, my ego’s taken up more than enough room on Dave’s blog.

      • Dan DeWitt says:

        I actually came back to apologize for us getting off on the wrong foot.

        But … whatever.

  7. Matthew Iden says:

    Hmm…there goes indies’ ability to undercut Big Publishing on price? It was being eroded anyway, but competition might’ve just gotten a lot tougher for the little folk. Still, a level-playing field is worth it. Go get ‘em DOJ.

    • I left out most speculation on what this means for indies and pricing in general, as so much is unclear at this point. However, I don’t think it’s all doom-and-gloom for indies. If Amazon wants to price bestsellers and new releases at $9.99, that still give significant room for indies to price lower.

      In addition, if Amazon does start discounting heavily, it will likely speed the digital changeover, increasing the pool of potential customers. Also, if Amazon start discounting, and the others don’t match them book-for-book (and they have shown little appetite to do so to date), then it could (possibly) increase the amount of Kindle users at a greater rate, which works well for indies.

      Whether this is good for indies or not is not my greatest concern. It’s certainly good for readers (a group absent from the consideration of the parties named in the suit, and in their subsequent statements), which is something I applaud (as a reader and a writer).

      Finally, I’ve seen some interesting experiments on Amazon in the last few days. Spots on the Kindle Store homepage which used to be given over to co-op are now (sometimes, looks like split testing going on) being filled with personalized recommendations. As these co-op spots were usually given over to large publishers (or Amazon titles) in the past, this is another leveling of the playing field, as indie books will get into those slots on merit (like they do in also boughts and other customer recommendations).

      That is a very interesting development, and a wonder if it is just testing, or if it’s Amazon preparing for the eventuality that publishers don’t purchase the co-op spots at the new (reported) higher prices. If it comes to pass, that could greatly increase the visibility of our books, at the expense of books from large publishers.

      • Matthew Iden says:

        I like the way you think. Whatever the outcome, the DOJ case makes play-fair business practices and more honest competition the norm instead of what’s been going on, and that can only mean good things for writers and readers of all kinds.

      • If we are just throwing around thought experiments, one thing this suit and settlement will lead to is more chaos. I think (smart) indies thrive in chaotic business conditions which suit fast, nimble players. Progressive, digitally focused small publishers too. The corporate behemoths will always move slowly, but can be intimidating when they finally set course and pick up speed. It took them a while to get to grips with basic stuff like digital-first, cheap pricing the lead book in a series, and price-pulsing, but they were starting to close the knowledge gap. This will set them back again. It will set us back too, but we have a track record of learning faster (IMO), given the quasi-crowdsourced way we all experiment and share info (and aren’t scared of trying radical new things). So, bring on the chaos, and let the chips fall where they may!

      • Imagine Amazon pricing major releases on Kindle at $3.99-and free for Prime members. And promoting the hell out of those blockbusters with every ounce of algorithm they can muster. It can happen, and soon.

        Now, imagine self-publishers looking at their genre fiction novel and thinking “sh*t. I’ll practically have to give this away to compete with them”.

        Today, I think both of those are likely scenarios.

      • I think there is a huge difference between Amazon swallowing a few dollars per copy and swallowing ten dollars per copy.

        I’m not saying it wouldn’t happen, but I think deeper discounts of that sort will be reserved for special temporary promos like the Kindle Daily Deal or the Editor’s Picks etc. There is no way Amazon could sustain all new releases at $3.99 or anything close to that price.

      • Matthew Iden says:

        “Imagine Amazon pricing major releases on Kindle at $3.99-and free for Prime members.”

        I’m not sure I see that scenario playing out, or at least not forever. If I’m not mistaken, Amazon is/was already taking a bath at $9.99 in an attempt to grab market share (i.e., they paid list vs. retail back to the publishers). How long will they hold “major releases” at $3.99 and eat the 75%+ difference? Or are you suggesting Big Publishing will throw in with Amazon and lower their list prices to $7.99 so Amazon can, in turn, lower retail prices to $3.99 forever? Isn’t it more likely that Big Pub will keep their list prices *relatively* high (by ebook standards) and Amazon will lower the retail a little?

        I realize I’m recanting on my earlier comment here about indies’ losing their low-pricing advantage, but in thinking about it, the only two way for it to happen is for Amazon to take an immense loss on each major release or the Big Pub community has to be willing to bring their prices down significantly. Is either case going to happen soon?

  8. “Whatever happens, one thing seems clear: e-books are about to get cheaper.”

    What Amazon wants–and I’ve heard this straight from the horse’s mouth up in Seattle, so to speak–is control over pricing, so they can make use books as part of their larger goal to dominate content sales.

    Which, interestingly, is exactly the same goal for books that the “big six ” publishers have. And that’s what puzzles me about when I read comments lambasting agency model advocates. Or are readers truly naive enough to think Amazon wants this price freedom because they want customers to pay as little as possible?

    I’ll say that again–Amazon’s larger goal is not about books, it’s about leveraging content and *all* products to sell all other content and products. It’s a retail strategy, not a publishing strategy. The “big six”-style publishers are one of the last remaining bastions of content and products that Amazon can’t dictate all terms to, and it’s driving them crazy. That’s it–that’s all it’s about.

    • We don’t know what model will replace Agency, but in the absence of anything else right now, let’s assume it’s a return to the wholesale model. If it’s good enough for print books, why are publishers so against it for e-books? They don’t insist on controlling *retail* pricing for print, so why do they want to do it for digital?

      I’m not arguing, just posing the question.

      If the wholesale model is (re-)adopted for digital, publishers will still control *list* pricing and will thus control their income per book at list prices they set. The end of Agency means that they no longer have a mechanism for dictating the *retail* price.

      Personally, I’m less concerned with arguing whether that’s a good thing or a bad thing or whatever, than how this will affect the market as a whole.

      I’m sure there will be a few more twists and turns in all this. I suspect the various publishers are studying the parameters laid down by the DoJ and seeing if they can quickly install an alternative model. However, they don’t appear to have a lot of wiggle room. The DoJ will be watching closely, must receive copies of any communications regarding strategy, and have explicitly warned against retaliation against retailers – which I read as warning against jacking up list prices to force Amazon to swallow huge discounts if it wants $9.99 new releases.

      If I’m wrong on that interpretation, and publishers do pursue that strategy, Amazon could try letting them swing in the wind at their much higher prices and spend their time highlighting the great deals available from smaller publishers and self-publishers.

      I also don’t know what happens in the short term. Let’s say the settlement is approved as-is. That leaves three large publishers exiting from Agency contracts, presumably getting discounted, while the contesting publishers may continue to be listed at their higher prices (possibly costing those publishers in sales and market share).

      There are so many aspects to this it’s tough to keep up. For example, is the KDP contract affected? Will Amazon seek to replace it with a wholesale model? What about the agency contracts signed with Random House etc.? Will Amazon tear those up and seek a wholesale model there? I suspect so, or that it will radically alter the current negotiations.

      • I might be missing something here but I really don’t see much difference between the wholesale model and the agency model apart from the retailer’s ability to discount.
        Before eBooks the bookstore (retailer) charged the publisher 40% of RRP. The eRetailer (Amazon) now charges the publisher 30% of RRP because the eRetailer’s distribution costs are substantially lower than physical bookstores.
        I think it really is about controlling content and both Amazon and the Big 6 are jostling to do that. Amazon wants to do it by discounting and selling higher volumes. The Big 6 probably would not mind if they had their back catalogues digitalised. (I think the unreasonably high eBook prices they want is more about buying time for this costly exercise than trying to keep the moribund bricks and mortar industry in life support).
        Most of us see a bleak future for the Big Six unless they can re-invent themselves.
        What surprises me is that more don’t question how sustainable is Amazon’s market share of 65%. Did anybody say MySpace?

  9. John Hayden says:

    Excellent journalism! I’m looking forward to the lower prices. I guess this means Indie authors will be competing with established authors like Ann Patchett, John Grisham, etc., whose Ebooks will be available at less than the mass-market paperback price, after a brief release period at a higher price.

    I’m thinking the competition will make it more difficult for little-known Indie authors to sell at the $3.99 and up price point. New authors will likely find more pressure to stay at $2.99, $1.99 or below. 49-cent specials, here we come. But expanding the market for Ebooks will be worth it.

    Increased competition from established authors on Kindle, Nook and Apple may also give retailers like Smashwords a new lease on life. I’m looking for more specialty Ebook retailers, who will make it easier to find books in narrow genres or subject areas.

    • “49-cent specials, here we come. But expanding the market for Ebooks will be worth it.”

      At an initial net profit of about 15 cents, you’ll need to sell about *two million* copies of your books to make even a modest income. Why are you looking forward to lower prices like that? Or do you think the e-book market can expand by a factor of 100?

      • John Hayden says:

        To clarify: I’m looking forward to lower prices for myself and other readers. In general, I think wider availability of books at lower prices is a good thing for society.

        From the perspective of a writer hoping to publish my own book soon, I’d prefer higher prices.

  10. jakeescholl says:

    I always thought $14.99 was too much. Thanks DoJ. :)

  11. jackz says:

    Pubs may use Agency pricing, but with the stipulation that retailers are allowed to discount and the retailer sets the retail price and no more MFN or collusion. The amount of discounting though cannot exceed the wholesale price for the publishers line with the retailer. So some books will be discounted more and some will be discounted less or the retailer may just sell all the publishers ebooks at wholesale.

    If wholesale the publisher still gets to set their wholesale price which may be 9.99 or 12.99 or 14.99 or whatever. From there Amazon decides what the retail price will be and balance the publishers overall line. I didn’t see anything in the settlement that said the publishers have to price themselves out of business.

    In this whole debacle it was really Job’s who was the prime mover. Without Job’s the price-fixing and MFN probably would not have happened. He was the spoke in the wheel of the conspiracy. The publishers were given an offer they couldn’t refuse and knew it was illegal.

    Otherwise, Shakespeare was right, “Oh want a tangled web we weave…”

    I doubt this will impact indies that much unless pubs really want to lower their prices.

    • Well, they can still use an agency model, but without the MFN, without the ability to prevent discounting, and without the ability to force it on all the other retailers. Essentially, without being able to achieve any of the aims of the agency model.

      In short, it isn’t really the agency model if Amazon can discount.

  12. Matthew Iden says:

    Reblogged this on matthew iden and commented:
    As usual, David Gaughran has one of the better analyses of the publishing and e-publishing industry. Check out his blog on the recent Department of Justice announcements regarding their case against Apple and Big Publishing. A must-read if you’re an indie or would-be indie author.

  13. Dan DeWitt says:

    I don’t see how this effects indies at all. They will still control the lower-priced range. The only people who are pricing at $.99 to $3.99 are indies and tiny publishers. Publishers are never going to come within a country mile of listing near those prices, and Amazon’s never going to discount THAT much.

    This is something that Mark Coker at Smashwords has failed to understand throughout his crusade to save agency pricing. Agency pricing in the hands of indies means low prices; in the hands of big publishers, it means drastically higher. Even without agency, mainstream offerings are still going to cost much more.

    • I think that’s a good point. Mark Coker presented his spreadsheet of indie prices dropping over the last few years and made the argument that this showed that agency reduces prices. I have a lot of respect for Mark, but that was nonsense. As you said, it shows that indie prices have dropped – nothing more (and the argument could be made that there were a lot of other factors other than agency involved, but I digress).

      What Mark Coker left out of that presentation is that Smashwords doesn’t list books from any of the large publishers – which have quite clearly risen, it happened overnight, books went from $9.99 to $12.99 and $14.99 as soon as Agency was introduced.

      • Dan DeWitt says:

        I actually had a lengthy Twitter-then-email exchange about exactly this. I noted the same points about indie vs. big publishing. He’s blinded to reason regarding agency pricing. His chart was unbelievably misleading, for exactly the reason you said: only indies and small fry house use Smashwords.

      • Dan DeWitt says:

        Email exchange with Mark Coker. I seem to have left that part out.

        <—doofus

  14. Tyler Wills says:

    Tend to agree with Dan DeWitt. The only hurt out of all this is going to be felt by the big six. Indie prices as they are now are unreachable by any other supplier. My feeling has always been that once you take into account the sweat and tears that goes into any e-publication the present price range is pretty low, even taking into account the multiplier of likely of the market. $1 to $2 to me is pretty ludicrous, but hey that’s the market.

  15. virginiallorca says:

    You can buy a beautiful necklace at a craft fair or at Neiman Marcus. You pick.

  16. I’ll re-post a comment here I left on the NYTimes article this morning. It continues to amaze me how many people jump to attack Amazon and defend the traditional publishers:

    There are a lot of arguments here about the costs involved in producing an ebook vs. a paper copy and how that relates to pricing. To me, those discussions are irrelevant. The real crime regarding pricing in the book/music industry is how much the creator of that content gets.

    When you purchase a song or a book, intrinsically, who do you feel should get the largest portion of whatever money you spend? I think most people would say, “the artist who created it,” yet, that is not the case with the traditional methods that have been around for over a hundred years.

    That $25.99 hardback you bought by an author you adore? Said author will receive $3-4 of that, if they’re lucky. And only if that book sells enough copies to earn out the smaller and smaller advance most authors are receiving. Only the giants make enough money writing to be able to quit day jobs and not worry about where their next paycheck is coming from.

    Yes, the support personnel for a book add value. Editors, cover designers, interior page designers, formatters, and publicists all perform important functions and should be compensated. But what would any of those people do without the work’s originator?

    The pricing/business model for these things has been upside down for far too long. It’s time for change.

    • Tyler Wills says:

      Precisely, at 99c to $2.99 who wouldn’t expect the majors to try something drastic.
      I’m sure he won’t mind but let’s take a look at the excellent ‘A Storm Hits Valparaiso, the Smashwords price of $7.99 to me is the correct one, I would have actually been happy spending a little more, but if it is available elsewhere at $3.99 and again at $2.92 where would the smart money go? All this is due to the market restraints – I understand that, I also understand that the pricing is set by likely sales/returns, but it still does not really make sense, to me this spells likely problems all around, for the purchaser, the market, even the author but especially the ‘Trad Pubs’, there had to be some gut reaction from them.

      • Well spotted, sir. I’m in the process of setting up a pricing experiment. I’ve played with all sorts of prices from $0.99 to $4.99, but I’ve never tried higher. Historical fiction tends to be priced higher, and it’s a meaty novel. It’s not setting the world on fire right now, so I thought I’ve got nothing to lose. So, I’ve increased the price at Smashwords, that should filter out to B&N etc. soon, then I can raise at Amazon. And we’ll see. I’ve no real expectations.

    • “When you purchase a song or a book, intrinsically, who do you feel should get the largest portion of whatever money you spend? I think most people would say, “the artist who created it,” yet, that is not the case with the traditional methods that have been around for over a hundred years.”

      When you sell a 99-cent ebook on Amazon, Amazon gets the largest portion of what the consumer spends–not the author. The same is true if your book is $10 or more. If I sell my book on Amazon for $10 and they get 65% of the sale price, how is that way better than the “old” model?

      • But, if you price your book between 2.99 and 9.99, you get 70% of that. Yes, Amazon is certainly steering you toward a range of prices, but I think it’s a reasonable range. If a trad pubbed author’s book sells at 9.99, he/she gets much, much less than if they had avoided the “middle man” and published themselves.

      • “If a trad pubbed author’s book sells at 9.99, he/she gets much, much less than if they had avoided the “middle man” and published themselves.”

        I’m likely in the minority, but clicking “upload” at Amazon isn’t the same thing as publishing with a publisher. When I estimate the cost to me in labor, hardware depreciation, software, internet access, other utilities, and time, publishing my own book recently cost me a few thousand dollars or more–and that excludes the ongoing cost of marketing.

        Self-publishers discount or ignore the costs of things like paying for their internet access, the depreciation of their computer, the cost of their labor, the opportunity cost of hundreds of hours lost to marketing and publishing tasks, etc. Publishing houses don’t. I’m not saying traditional publishing has been fair to authors, but I am saying that it’s not fair to compare uploading to Amazon prices to that of using a publisher.

      • “I’m likely in the minority, but clicking “upload” at Amazon isn’t the same thing as publishing with a publisher.”

        I never said it was. I was merely comparing the cut an author would make between the two methods. Are you arguing that 9.99 is too low a price to charge for an e-book? If that’s the case, then you certainly are in the minority.

      • “Are you arguing that 9.99 is too low a price to charge for an e-book? If that’s the case, then you certainly are in the minority.”

        No, but 99 cents is, when you operate in a real-world business model of what it takes to produce, distribute and market a book-length e-book. Will the market bear it? Nobody really knows.

  17. The biggest problem for indies is that the wholesale model may drive us to sell on Amazon exclusively.

    When I put my books up on Smashwords, B&N and Kobo discounted them by $2 to $3. Therefore Amazon paid me, not 70% of my retail price, but 70% of the discounted price on the other sites EVEN THOUGH AMAZON SOLD THE BOOKS AT FULL RETAIL.

    I was about to take my books off Smashwords when Mark Coker got us agency pricing from the sites he distributes to. Since 94% of my ebook sales are through Amazon, the minute another distributor starts discounting them, I’ll have to pull my books from that distributor or lose a significant amount of income.

    So unless someone comes up with some brilliant idea, the result of the demise of agency pricing may be that indies will have to sell through Amazon and nowhere else. Not good for indies, and not good for consumers either, I think.

    • “So unless someone comes up with some brilliant idea, the result of the demise of agency pricing may be that indies will have to sell through Amazon and nowhere else. Not good for indies, and not good for consumers either, I think.”

      Exactly so, and it’s puzzling to me how many folks don’t see the signs of what’ possibly coming here.

    • booksandpals says:

      Except there is nothing in this that makes agency pricing illegal. The settlement (for those who have done so) has no impact on Smashwords. They can continue to use agency pricing as they currently do. Even the publishers who have settled are not precluded from using agency pricing at some point in the future. The settlement limits how soon that would be a possibility. It isn’t agency pricing alone that is all edged to have violated anti-trust laws. It is a combination of that, most favored nation pricing with Apple, and collusion between Apple and the publishers. Absent any one of those three things, there might not have even been a case. Certainly there wouldn’t have been without both agency pricing and collusion.

  18. Looks like Smashwords is going to keep agency pricing:
    http://www.mediabistro.com/galleycat/smashwords-to-keep-agency-pricing-model_b50083

    at least until the DoJ notices…

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  21. Dan DeWitt says:

    You can’t be serious. Ad hominem? Really? Wow.

  22. Aron White says:

    One sentiment I’m beginning to disagree with more and more is the idea that indies must price their work substantially lower than that of “Big 6″ publishers in order to compete with them. It does a disservice to indie writers, many of whose books have a reasonable and professional level of editing, formatting and graphic design, to suggest the only feasible way one can compete is with a substantial price difference. Price is a factor in consumer taste, but so is emotional preference. If you like a writer’s work, odds are you may be willing to pay a decent price for more of their work. If a “Big Six” publisher prices a Sci-Fi or Romance ebook at $9.99, why can’t an indie list a similar book for the same price? Obviously taste is subjective, but I’d be willing to bet most consumers will pick the book that sounds/looks more interesting, not because of the publishing label. Indies, don’t shame yourselves over pricing. If you think you have what it takes to compete with New York, go for it and don’t be afraid to have a higher price if need be.

    • I pick the price that will maximize income. I don’t really care that much if it’s 99c or a lot, lot higher. Up until now, I’ve never tried higher than $4.99, but I will be experimenting with higher this month. We’ll see what happens.

      • Dave, as a fan of historical fiction, I’d pay more than $4.99, but that’s me. I recently bought a historical fiction ebook about Rome for $8.99, but the author was a known quantity.

      • I think readers of historical fiction are prepared to pay more. I don’t know if that’s an understanding that the books take longer to produce, given the significant research required etc., but whatever the reason, it does seem to be the case. It’s worth experimenting with.

      • Aron White says:

        Thanks for your input, David. There’s a lot of talk surrounding the DOJ investigation along with a lot of concern about what will happen to pricing. A lot of it is out of our hands as writers and eventually tends to work out in the long run. I just hope people remember that. All each of us can do is price our books in a way that works for us and also with the goal to maximize income as you said. I’ve had lower pricing for awhile and am starting to experiment with higher ones as well. Thanks for the great post as always :)

    • I have been offering the first book of a trilogy for free from my website and now on Amazon too through price-matching. I priced Books II and III at $9.99 each. So far I’ve had very few complaints about the price. More often I hear how quickly my readers rushed to buy the rest of the series, and my sales stats indicate that people most often buy Books II and III at the same time, so having read Book I, they seem confident that they will enjoy the rest, and by then the price is a non-issue.

      • I think making the first book in a series free is very smart strategy, and I know it has worked well for Sarah Woodbury, Lindsay Buroker, and Gemi Sasson (all of who made the first free everywhere, and let Amazon price match).

        The pricing at $9.99 is *very* interesting. Have you tested other prices? Is that the point which maximizes income?

      • David said: Have you tested other prices?

        Nope. I made the first a gift and priced the others at what I thought they were worth.

      • They are certainly ranked well at Amazon. Nicely done.

        I’ve only just started selling direct on a small scale. Does it make up a significant percentage of your sales now?

      • David said: I’ve only just started selling direct on a small scale. Does it make up a significant percentage of your sales now?

        I sell autographed paperbacks from my website as a service to my fans. I get one or two orders per quarter. I also offer autographed bookplates which I will send for free anywhere in the world, so most folks who want autographs settle for that. (And for those who have ebooks, I offer an autographed postcard, also free. Those are quite popular.)

  23. PJ Jones says:

    Excellent article, David. Thanks so much for explaining it so clearly. I do think lower ebook prices may be on the way. I don’t think the big six and Amazon can sustain anything lower than $4.99 for long periods of time, so indies can still offer slightly lower prices.

  24. If I knew Amazon was going to discount my books, I would simply raise the list price so that my payout was bigger. In some ways, I think ridiculously low ebook prices are just that, rediculous. If you have so little confidence in your writing that you have to bribe people to look at you, then have at it. You have to think for a minute: is it better to be a commodity with ever declining returns with people’s decision to read you based on price or would you prefer to collect readers who are just looking for a fair price because they are actually interested in reading you. If you look at Stephen King’s pricing, even his ebook prices are pretty high. And people are willing to pay that high price to read him. In some sense, publishers not thinking about the quality of their authors led to this fiasco. They began to think of books as commodities. If they had just held the line on their list price, let the discounters slit each other’s throat, and just waited for things to burn out, they would have been in much better shape. When companies like Amazon demanded a larger discount on their list price, they should have simply said no. If Amazon dumps them, then look at helping bookstores beef up their websites. The volume might have been lower but if the profit is the same then that’s a good thing.

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  28. I am far from convinced the doJ’s case is compelling.
    Consider this:
    1. Before Apple entered the eBook market, it scrupulously refused to budge from its 30% agency commission on movies, music, newspapers, magazines and apps which totally pissed off content providers,, especially those from big business. It was far from price fixing with these suppliers..
    2. The allegation that Apple “contemplated illegally dividing the digital content world with Amazon, allowing each to own the category of its choice – audio/video to Apple and e-books to Amazon.” is flimsy. It takes to tango or price fix and if contemplation of dark deeds were a crime, we would all be in jail, with we authors the first to go.
    3. Penguin saying it wanted three or four other publishers to come on board before it signed with Apple sounds damning. But was it price fixing or Penguin’s fear of being stranded with an uncompetitive contract?
    It was not the agency model which forced Amazon to cave and raise eBook prices. It was the strike action by Hachette and the threat of similar action by the other 5.
    The battle between Amazon and the Big 6 is more clear cut than these court cases.
    Amazon believes it can maximise its profits with a price ceiling of $9.99. The Big 6 believe it can maximize its profits with a ceiling $5 and more higher. Once the Big 6 complete the digitalisation of their back catalogues, which could be 2-3 years away, they could miraculously agree with Amazon about the 9.99% because they will be in a much stronger bargaining position regarding producer/ retailer share as quality content providers of considerable volume.
    Amazon in the meantime is offering indies agency terms of 30% at the 9.9% ceiling to sell content other than the Big 6s.
    Let the battle rage but let’s not be fooled into thinking either side is the champion of the author or the reader.

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  30. This is very interesting as I’ve been saying for some time that the real market for the iPad is the tablet market and their real competitor is the Kindle and other e-readers.

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  34. SaxThunder says:

    So it was illegal to sale e-book by agency model, Publishers can not sell their products direct to customers. right?
    What will happen if publishers sell e-book by agency model at the lower price than Amazon’s price? Do they still got sue by the government?

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