Author & Speaker

Anti-whose-trust? The Problem of E-Books

I rise on a point of personal privilege.  My government, in the form of the U.S. Department of Justice, has just brought a legal action that will make my life considerably worse.  It has sued five publishing houses and Apple under what we somewhat nostalgically still call the “antitrust” laws.  As an author of three books published by one defendant (Simon & Schuster) and as a plaintiff’s antitrust litigator in earlier days, this, well, bothers me.  Big time.

The government’s allegations include all of the hallmarks of a litigator’s tunnel vision, busily checking off the elements of a cause of action under a statute enacted during the Benjamin Harrison Administration.

Ohio Republican Senator John Sherman, sponsor of the Sherman Antitrust Act.

(No, I won’t tell you when that was.  Look it up on Wikipedia, which you can do until the Justice Department sues them.)  So, the government charges, the five publishers got together in hotel rooms and agreed that they were getting hopelessly hosed by Amazon’s insistence on pricing e-books below the cost of producing them, at about $9.99.  Amazon’s business strategy was to grab the entire e-reader market for its Kindle and then drive down the prices it would pay to publishers for content.

The publishers then went to Apple and proposed to sell their e-books to Apple on terms that specified that Apple would impose a specific markup to its buyers.  With an outlet guaranteed through Apple, the publishers then could insist on similar terms with Amazon.  If Amazon did not accept the terms, then Apple would have exclusive access to the publishers’ books, which would dramatically undermine Amazon’s persistent wet-dream of market hegemony.  So, Amazon accepted the publishers’ terms.

The legal violation in all this is that the publishers allegedly acted together — “concerted action” between supposed competitors is what the antitrust law bans.  Ironically, a single massive business (like Amazon) has considerably greater leeway.  If the five publishers had all been joined as a single company, they could have followed the same business strategy with almost no legal risk.  (The law pretends to bar monopolistic conduct by a single company — such as Amazon’s strategic below-cost pricing of e-books in the past (and presumably in the near future)– but the Justice Department has almost no appetite for taking on such cases; fighting bullies is such a bore.)

So, where does this leave you, the readers, and me, the lonely hero of this sad story?  Well, it leaves us both unhappy and feeling ill-used.  First, and unquestionably, the publishers’ deal with Apple drove up prices, so e-books have been costing more.  Not your first choice; I get it.  There’s even a classic Adam Smith argument that the lower e-book prices will result in higher sales of e-books which will mean greater royalties for me.  At this point, it is even possible that there are enough e-readers and i-Pads out there (25 million sold in 2011) that this might become reality, oh, sometime in the 2020s.

But, please, take a look at where I sit.  With the transition to e-books from physical books, two of the three major participants in the supply chain have dramatically lower costs.  Publishers need not actually produce a book (no paper, glue, ink, binding, warehousing, or shipping).  Retailers need not actually stock a book, put it on the shelf, employ poets as sales staff, and so on.  Yet the third major participant in the supply chain — moi! — has EXACTLY the same costs.  I still must eat, pay the mortgage, and write the damned thing.  Yet my royalty on e-books under the Amazon approach was dramatically reduced, cut in half.  Under the Apple approach that the government is now attacking, my royalty went up to about 3/4 of the royalty on a hardcover book.  Better, but still not great.

I am not, sad to say, a huge fan of the publishers’ actions.  They have artificially suppressed my royalty, and used their market power to do so, at the expense of you, my loyal reader.  Perversely, I am viewed as the monopolist in this economic equation, since I have complete control over my own content, and am granted a monopoly over it by the copyright laws.  This is, of course, a ridiculously abstract concept that does not translate into the real world.  Stephen King and Stephen Covey actually have market power because their “brands” are so powerful in the marketplace.  They can negotiate for a better e-book royalty or e-book deals, and so they do.  I, alas, do not have such market power, though a fellow can dream. . . .

Worse, though, the publishers’ strategy for increasing e-book prices involved plainly illegal actions (meeting together in hotel rooms?  really, guys?) that principally restored publishers’ profit margins, and only incidentally repaired my still-suppressed royalty rate.  They were not, to put it simply, fighting for me.

Yet the Justice Department’s course plays directly into the hands of Amazon’s long-term monopolization strategy.  Three of the publishers (including Simon & Schuster) supposedly have entered into settlements that will tear up their deals with Amazon and Apple and restore us to the old days where Amazon underprices everything.  Now, Apple may be big enough to follow Amazon’s pricing down and prevent monopolization in the long term — good for you as consumers, but there goes my royalty into the dumpster again.  When elephants dance . . . you know the rest.

This is depressing me.  I am reduced to invoking Will Rogers’ observation about inflation.  Although dollars aren’t worth what they used to be, Rogers said, it still seems like the best strategy is to get your hands on as many as possible.  So I suppose I should go work on my next book.

4 Comments

  1. Darrell Delamaide on April 16, 2012 at 8:32 am

    David, $9.99 is patently not below the cost of producing e-books, for one; it cost publishers and distributors virtually nothing. 2020 is already here in terms of ebook sales and royalties.

    The two reasons publishers want higher ebook prices is a futile attempt to avoid cannibalizing (overpriced) print sales and to increase their own profit (you’ll notice an absence of taking care of authors as a motivation). I think siding with the Big Six publishers, as Scott Turow and the Authors Guild have done, is not in authors’ interests.

    Keep an open mind and be careful about aligning your interests as an author with the vested interests of a dying publishing industry.

  2. David Stewart on April 16, 2012 at 9:33 am

    I agree that the publishers are not my friends, but — boy, oh, boy — I KNOW that Amazon is out to screw me. http://www.nytimes.com/2012/04/16/business/media/amazon-low-prices-disguise-a-high-cost.html?_r=2&src=recg.

  3. Darrell Delamaide on April 18, 2012 at 3:23 pm

    David Carr doesn’t have any information that you or I don’t have. How does Amazon’s $9.99 price on ebooks screw you or any other. Where is the calculation showing it is “subprofit” as Carr asserts? It costs 20 cents to produce. Publishers may pay authors $3 or $4 if they’re lucky, Amazon takes $3 and the remaining $2.80 to $3.80 — profit to the publisher. And when the publisher using the agency model sells the ebook for $12.99, that’s an extra $3 in the pocket of the publisher instead of the reader. So who’s screwing whom?

    • David Stewart on April 18, 2012 at 3:49 pm

      I don’t much like defending publishers, but you’ve just waved away any costs they might have: editing the book, copy-editing, designing the book, managing images and producing maps, designing the cover, and rolling out publicity through the blurb-solicitation process and seeking reviews, interviews, and speaking opportunities. That’s a whole lot more than 20 cents. Self-published authors do all that work themselves, so their costs of production are much lower — or, more accurately, are absorbed in very different ways (sleepless nights, teaching themselves how to do lots of things they haven’t been trained to do). Look at Amazon: When they sell one of my hardcovers at $17, they have to handle the damned thing, pay those annoying human beings, and maintain a facility to house them until they’re sold. At $10 they just need a server farm. And MY royalty is substantially lower with the e-book (below your estimate by 30%). My first point — and continuing one — was that I’m the only part of the production line with the same costs with e-books as for physical books: both Amazon and the publishers have much lower costs. Still, I think your defense of Amazon is misplaced. Not our friend, either.

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