Home » Amazon, Apple, Big Publishing, Legal Stuff, Passive Guy » Steve Jobs, Price Fixer?

Steve Jobs, Price Fixer?

12 March 2012

From today’s Wall Street Journal:

Book authors wonder about long-form writing in an attention-deprived world, publishers fret about revenue models as bookstores disappear, and consumers develop new reading habits that include both electronic and printed books.

No one knows the next chapter in the future of books, but lawyers in the Antitrust Division of the Justice Department claim to know precisely how this industry in transition must be structured and operated, down to the correct price for an e-book. The government’s certainty is the basis of a threatened price-fixing lawsuit against Apple and top book publishers.

At issue is an agreement publishers made with Steve Jobs in 2010, as he was about to launch the iPad. At that time, Amazon’s Kindle had 90% of the market for e-books. Book publishers had imported the “wholesale model” from the print world, where they sold retailers books for roughly half the recommended cover price. This made sense in the bricks-and-mortar world of returns of unsold books and expensive inventory. It was in the interests of publishers and booksellers to sell at whatever the market would bear.

. . . .

Publishers wanted competition among e-readers instead of a Kindle monopoly and worried that the subsidized price established artificially low prices. Jobs proposed that book publishers move to the “agency model”: Publishers set the price for each book and e-reader companies take an agreed percentage of the revenues. “We told the publishers . . . you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway,” Jobs told his biographer, Walter Isaacson. Jobs recalled that publishers then “went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books.’”

. . . .

It was about treating book publishers like every other industry. This is the same 30% revenue share that Apple takes for selling newspapers, magazines and games on the iPad. Publishers didn’t have to collude to accept it. While publishers ended up earning less per book because of the revenue share to e-reader companies, they regained control over their property.

. . . .

Government lawyers failed to learn that industries undergoing massive change brought on by technology are likelier to be flailing for sustainable business models than flouting market power to fix prices. Book publishers are still trying to predict the full impact of technology. As consumer choice widens, some people want beautifully produced printed books, while others want enhanced e-books with video and other graphics. There are e-books selling for 99 cents and others at premium prices. Perhaps a hardcover should come with access to digital versions. Contrary to the assumption by government lawyers, there’s no reason to think the price of e-books must be $9.99.

Link to the rest at The Wall Street Journal (Link may expire)

Passive Guy doesn’t agree with this opinion piece, but it’s always good to listen to differing viewpoints.

The statement that Apple wanted to sell books the same way it sold songs on iTunes, taking 30% of the selling price, is key in this context.

With music, Apple had no real competition two years ago and it was making plenty of money from the iTunes/iPod/iPhone combination of products and content. The ebook business was a different story. Apple was facing Amazon as a competitor and, unlike Apple, Amazon was willing to cut prices and sell below cost on occasion. Apparently Jobs didn’t want to do price competition with Amazon. That’s not his style, after all.

Apple’s interests combined nicely with Big Publishing’s interests, which were to limit Amazon’s price cutting in order to protect hard copy book sales and the bricks-and-mortar bookstores.

Contrary to the assertion of the article that government lawyers think the price of ebooks should be $9.99, what the antitrust investigation and likely suit is about is that government lawyers and PG don’t think Apple and five large book publishers should conspire to force pricing rules on Amazon or anybody else.

The fact that such a conspiracy means  in Jobs’ words, “the customer pays a little more” goes to the heart of the public policy behind antitrust laws.

UPDATE:

David Gaughran commented as follows:

The Irish Times (reputable paper) is reporting today that the EU regulators are open to the idea of a settlement (they launched their own probe in Dec, but have been investigating since they raided publishers’ offices across Europe around a year ago).

Parsing the article, it sounds like Agency would have to be dropped (or at least modified) for a formal suit to be avoided.

It should be noted that the EU have the power to levy considerable fines (up to 10% of *global* revenue) and haven’t been shy in doing so in the past (Microsoft).

http://www.irishtimes.com/newspaper/breaking/2012/0312/breaking25.html

PG has mentioned it before, but David has an excellent post discussing the Justice Department announcement.

Amazon, Apple, Big Publishing, Legal Stuff, Passive Guy

40 Comments to “Steve Jobs, Price Fixer?”

  1. I’m a freelance book designer, so I have a vested interest in the pricing of books. I’m looking for book prices (as with print books all along) to be at a level to support publishers (traditional, academic, and self-) the hiring of editors, designers, and production people to make each book (e- or print) something that people want to pay their hard-earned money to read.

    And it’s not only that the juice should be worth the squeeze–i.e., the money should be worth the work–but in all the cut-rate work that’s going into DIY and near-DIY cheapo book creation, the sense that there can be art and beauty to books above and beyond the writing and pictures in them gets lost and forgotten.

    • Stephen, I have to respectfully disagree. Raymond Feist’s newest release is apparently an editing fiasco on all fronts. Big Publishing is just as guilty of ‘cheapo book creation’ as self-publishers. In fact, I know a number of self-publishers who take the quality of their work much more seriously than the corporate coalitions spitting out fodder.

      Yes, a well-designed book can be a thing of art. But don’t conflate NY Publishing with always producing top quality. In terms of print books, I have some bought paperbacks with horribly squeezed margins, terrible leading and font-size, and flimsy paper PLENTY of times.

    • Self-publishing is not the same as DIY publishing–many self-published authors very much think that books should be things of beauty, and they’re willing to spend money on it. That’s a growing piece of the industry–these authors are making money, they’re noticing that stuff like cover art can help sales, and they want to produce a high-quality, professional product.

      Since you’re a freelancer, I’d recommend looking at expanding your clientele–no matter what happens with this antitrust case, self-published authors are going to make up a bigger and bigger piece of the publishing pie. I would be putting up a Web site, making sure my work was compatible with CreateSpace and Lightning Source, and generally putting out an indie-friendly vibe. There’s absolutely no reason for your job to vanish in this new world.

  2. You know, if the publishers didn’t try to force the same model on all ebook outlets they would not be in this position.

    I also find it interesting that this comes up After Steve Jobs died. Maybe the DOJ feard hi Reality Distortion Field.

    B.S.

  3. I don’t think that they were using the iTunes model — the iTunes songs have prices at fixed points that Apple mandates. They were using the App Store model, where the seller sets a price and Apple goes “sink or swim” and doesn’t care what the price is.

    Considering that some apps were books (I read Pride and Prejudice on my iPhone, from an independent 99c app, before I found Project Gutenberg…), it might’ve been very natural to think of books as apps, not songs.

    Does the quote actually state that Jobs instigated the “beat Amazon up with the agency model” bit? Or that he was just offering the agency model to the publishers to bribe them into the fold? (And they then went off and beat Amazon up, which… wouldn’t be unexpected, necessarily.) I haven’t bought the book.

    • I think the quote implies that Jobs instigated the pricing plan, but we’re relying on Job’s biographer for the quote, ABeth. You can be sure his notes and recordings (if any) will be carefully scrutinized.

      • *nod* I think my spouse found it, and it is indeed pretty obvious: it’s in the contract, and is one of those, “And you won’t let anyone else sell for less than we’re selling for” clauses, but with a “and you won’t give them permission to discount, neither” twist. (I.e., you won’t sell ebooks wholesale to anyone else, because you couldn’t control the discounting aspects.)

        That does pretty well say that a publisher agreeing to this contract would have to pull all their works from everywhere else (woo, exclusivity!) or point out to Everywhere Else that they need to go to agency instead so that Publisher can keep their stuff there. And it’s, gosh, not the publisher’s fault that they signed a contract like that, so Amazon can go make sadfaces at Apple. Really. Look, halo on a stick!

        I wonder if any of the defendants will get the great idea to claim that higher Big 6 (or 5) prices did increase competition by widening the gap between independent author prices and tradpub prices… *snicker*

        The other question is how to “fix” that — though, as you know, Bob (er, PG), I will miss publishers using it to blow their feet off… Anyway, I suppose they could simply strike the “and you can’t sell wholesale to anyone else” clause and fine people and call it good. But the question then becomes… If Amazon is actually making more money this way, rather than losing it, will they bother? (B&N might, to gain eyeballs, but that’s a tightrope as they presumably have shallow pockets…)

        Must run!

  4. I’ve wondered if Jobs’s words can be used at trial if he’s not around to verify or deny. The quote portrays him as careless in what he said to his biographer.

    I also wonder what would have happened if Amazon had said no to the publishers and let them stop supplying Amazon with books. How long could publishers have held out before they realized they’d shot themselves not just in the foot but in the head?

    The WSJ article does a nice job of presenting a wrong-headed version of what went down. It’s probably a blueprint of the defense.

    I heard on NPR last week that publishers were already in negotiations with the DOJ. I don’t know if that’s true.

  5. I avoid the WSJ editorial page for good reason.

  6. The Irish Times (reputable paper) is reporting today that the EU regulators are open to the idea of a settlement (they launched their own probe in Dec, but have been investigating since they raided publishers’ offices across Europe around a year ago).

    Parsing the article, it sounds like Agency would have to be dropped (or at least modified) for a formal suit to be avoided.

    It should be noted that the EU have the power to levy considerable fines (up to 10% of *global* revenue) and haven’t been shy in doing so in the past (Microsoft).

    http://www.irishtimes.com/newspaper/breaking/2012/0312/breaking25.html

    • Thanks for the tip, David.

    • I’ve always wondered about the EU’s stance on agency pricing, since many EU member states have national fixed book price agreements and so far the EU has not struck those agreements down, even though there were attempts in that direction.

      So how can something be price fixing and therefore worthy of prosecution on an EU-wide level but acceptable on a national level? Unless the EU really believes that e-books are not books.

  7. I’m beginning to wonder if RICO isn’t also applicable in addition to the collusion charges.

  8. I do agree with the last line of the quote, at least in part. There is no reason to think the price of e-books must be $9.99…or even that much. I buy a lot more books when they are priced in the range of impulse purchases than I do when I have to think about how much I’m spending.

  9. This situation seems a replay of the 1950s, when television and antitrust action (United States v. Paramount Pictures) nearly drove the venerable Hollywood studios into the ditch. They were saved by the realization that they weren’t in the theater and celluloid business, but in the entertainment content provider business. As Seth Godin puts it, publishers still think they’re in the paper products business.

  10. P.G.

    I believe Jobs was a dreadful snob and a brigand. He didn’t give a cuss about his customers, who keep on buying the shiny kit, and the poopy KBPS from his rotten store like sheep.

    Jobs would NEVER have changed the KBPS until Amazon put it out at 320, it was rubbish 64kbps. He would NEVER have taken the locks off, until Amazon forced him to do so. It would have killed Itunes if he hadn’t. There are many other locks applied, which Itunes don’t need to apply, they just do it because they can.

    At one moment, and I don’t think it is far away, there will be a change and the level of hostility that Itunes has engendered amongst its current and past customers will simply destroy them.

    IBM they thought they were impregnable. Till another brigand came along.

    The agency agreement was plainly unlawful, yet everyone fell into line. WHY? It bears far too many resemblances of the way the S.E.C. refused to look at Madoff’s scam, YEARS before it hit the pan, even in the face of Harry Markoupolous’s solid evidence*, thrice presented to them.

    “Oh, it’s okay, Jobs is doing it, it must be okay-and besides he’s too damn powerful, mustn’t upset him.”

    I really doubt whether anyone would have the courage to fight the agency agreement now, unless Jobs were not here.

    That is a shocking indictment of US, me and you.

    Can’t make these Ipads for the amount of money we’re charging. Hah..someone comes along with competition and suddenly, the price drops $100, specs improved.

    Yeah, right, can’t make ‘em for that.

    Sorry for speaking ill of the dead.

    brendan

    *”No one would listen” by Harry Markoupolous. A fine and scary read.

  11. Although I certainly understand anyone’s right to choose not to spend the money that Apple products cost, I remain amazed at how personal and vehement the snark is against Apple and Jobs. Fact is, Apple’s big mistake was in saying iPad prices are high because of how much they cost to make.

    That’s irrelevant. Their prices are what they feel their products are worth. If you don’t agree, don’t buy them.

    I don’t believe that platform is religion; I’m not about to move to Windows for price, as user experience for all the time I spend on my Apple devices matters to me. But I’m also not about to call Bill Gates names or hammer Microsoft. Hell, I use Word almost daily and keep my books on Excel.

    I’m a freelance book designer: I find work and do my work on Macintoshes; I communicate via my Macs and my iPod Touch (as I did on my first-gen iPad ’till I gave it to my granddaughter; I’ll use my soon-to-be purchased new iPad in making ebooks ans iBooks, and communicating. I’ve gotten value from every Apple device I’ve ever owned.

    Spare me the whininess about Apple wringing out every last cent they can from their products. If you don’t like captialism, try someplace that operates under socialism.

    • Well, iPad prices may indeed be related well to their cost — note that when the first competing tablets came out, most were priced… at about the same as an iPad, with a few exceptions that stunk on ice, or were due to fire-sales. The Nook Color and later the Kindle Fire seem to be the major tablets that gained traction at a lower price-point, and it’s arguable that the Kindle Fire is being subsidized.

      (I will yell at Word, though, since every time I get a new version (which is as rarely as possible), I have to go through the process of training it to work to my whims. This involves turning off smartquotes, but auto-correct will retain smartquotes unless I manually go in and fix each and every apostrophe in the auto-correct list. Which is a PAIN in the BUTT.)

  12. “Spare me the whininess about Apple.”

    Steve,

    Why?

    I thought that free speech was important in America?

    “If you don’t like captialism, try someplace that operates under socialism.”

    LOL, more demagoguery. I gotta shut up because you say so?

    I thought silencing the citizenry was a central part of socialist governments?

    Up yours Delors. I’ll speak my mind.

    brendan

    http://www.flickr.com/photos/dullhunk/437565574/

    • No, Brendan, of course you CAN say anything you wish. And I’m allowed to express my sense of how silly the complaining sounds and how immature the shots at Steve Jobs–dead, no less–sound. And I’m not even a big Jobs fanboy, but I recognize his having invented and been at the helm of a company that provided products that really pleased his customers AND built a company that made great money for its shareholders. That’s a success story in the place I live, the U.S. You’re free to live wherever you like and kvetch till the cows come home. And if the best you can come up with is up mine … well, if this were junior high I suppose I could come up with a like-minded reply. Instead I’ll just say, Be well and enjoy whatever platform and devices you choose.

  13. I don’t find anything inherently wrong or illegal with the agency model. Owners of copyrighted works should be able to control their prices.

    What I find strange about this DOJ investigation is where were they when Amazon was setting ebook prices below cost in order to maintain their 90% marketshare? That’s an antitrust violation too that no one seems to remember–arguably one that the agency model thwarted and allowed others to enter the market.

    Where is the DOJ investigation over Kindle Select–yet another program designed to bolster marketshare for an entity that already wields considerable marketshare 60% (now that Amazon lost control of being able to discount below cost).

    As an aside, this whole situation also informs us of how inept the big6 really are–They were treating ebooks like physical objects rather than licensed software. They should have never let Amazon set a below wholesale prices in the first place. Even now, if the Agency model goes away they should have a Wholesale, MSRP, and possibly a floor price (wholesale+ sum-odd%). The works are licenses-not physical books subject to the first sale doctrine.

    If Amazon can resume discounting below cost or at near cost, B&N and Kobo will likely go out of business. How is that useful to the DOJ that wants to encourage diversification? Instead they’ll create the monopoly they wanted to avoid.

    Even so, lots of other industries have tightly controlled prices set by the manufacturers–cars and oil come to mind–where the retailer has little control to set their own prices. None of those are antitrust violations and have been used for decades.

    The DOJ seems to also think that the Big6 are the only people that supply ebooks. What? The marketplace has exploded with small presses and self-publishers of ebooks. There is no shortgage of competition for ebooks.

    Now if the big6 really wanted to be bold they would open their own online ebookstores and pull all their content from everywhere else. Now they would be able to actually start building an actual brand where readers would come to identify the publisher as a place to go instead of solely by author.

    • “Now if the big6 really wanted to be bold they would open their own online ebookstores and pull all their content from everywhere else. Now they would be able to actually start building an actual brand where readers would come to identify the publisher as a place to go instead of solely by author.”

      I don’t think they can. The big mergers, the corporate mentality, the huge expenses they’ve built in to their businesses, it’s made them overly dependent on blockbusters. It’s not just Amazon that’s hurting them, or ebooks, it’s losing newspapers and physical shelf space and controlling the supply and distribution. Readers don’t buy publishing lines unless those lines are highly specialized. Highly specialized lines means not promoting authors. Lines don’t become blockbusters. Authors do. So publishers are in a very precarious position.

      I really don’t think it’s the product that trad publishers produce that is the problem. I’m sure everyone who is a reader will agree that, for the most part, publishers turn out a good product. It’s how they sell it that causes problems. A very real problem with ebooks is that the big publishers can’t compete on price with the small presses and the indies. Where an indie can make a nice living raking in two bucks a unit, the huge corporations can’t. Too much bloat, too much overhead and they have shareholders gnawing at their knees every quarter.

      The Big 6 have set up and rely upon a system that has kept them removed from readers. To sell online, they have to know who their customers are and how to sell to them. They are so far behind the curve on that, I don’t know if they can ever catch up.

      I have no idea how this is going to shake out in the end. I do know that every minute they spend assigning blame and trying to find new ways to game the system, is a minute they’re getting weaker.

    • What I find strange about this DOJ investigation is where were they when Amazon was setting ebook prices below cost in order to maintain their 90% marketshare?

      Well, gee, it’s not illegal to put things on sale. Can you point to Amazon colluding with, say, compenent suppliers to make it impossible for B&N to build the Nook? Because THAT would be of interest to the DOJ.

      If Amazon can resume discounting below cost or at near cost, B&N and Kobo will likely go out of business. How is that useful to the DOJ that wants to encourage diversification? Instead they’ll create the monopoly they wanted to avoid.

      If B&N and Kobo go out of business, will Amazon have a monoploy, or Smashwords and All Romance and Google and even the iBookstore still exist? Will Amazon be able to exclude new companies from the market, or will other companies be free to enter it?

      The DOJ seems to also think that the Big6 are the only people that supply ebooks. What? The marketplace has exploded with small presses and self-publishers of ebooks.

      Well, now it has–thank you, Amazon! That’s exactly what the large publishers were afraid of, by the way–that Amazon would cut them out of the picture by making self-publishing viable. That’s why they colluded to hurt Amazon–they want to stop self-publishers from having a venue where they could compete.

      Of course, no one actually knows how many e-books are sold by small presses or self-publishing vs. large publishers. I’m hoping some real data will come out during discovery.

      • Actually, Mary, it can be an antitrust violation to price something at a loss–which Amazon was doing for ebooks–when you are the dominant player in the market–which Amazon was and still is–in order to maintain or grow the marketshare–which Amazon was attempting to do.

        • If you’re going to argue that every pricing or exclusivity ploy that helps a company grow or maintain market share is anticompetitive behavior, you would have every single major retailer under investigation.

          • They have been at one time or another, even B&N was.

            • The ABA’s lawsuits against Barnes & Noble weren’t because B&N was selling books at a loss–quite the contrary. It was because B&N was receiving books from publishers at a greater discount than those offered to indie bookstores so they could offer books at a lower price WITHOUT taking a loss.

            • There was also collusion, of course.

            • Antitrust punishes collusion because it gives the colluders market power they wouldn’t have otherwise. A monopolist doesn’t have to collude with anybody to raise prices because it, by definition, has all the market power. I’m not so sure the Big6 have any market power, even combined, anymore. Yes, they were able to force Amazon to accept the Agency model, but that was in part because of copyright–a government-sanctioned monopoly. But many readers have found books fungible and have propelled indie authors to success.

              The term “predatory pricing”, used by Turow in his article, refers to the practice of a market leader pricing a product at a loss in order to maintain marketshare by closing out or forcing out competition. The market leader knows that they can out distance the competition because they have a larger purse or a way to subsidize the loss that the competition doesn’t have.

              Amazon can take the loss on the ebooks because they have the other merchandise they sell at a profit. B&N and Kobo have no such way to subsidize losses on, presumably, the most profitable ebooks–NY Times bestsellers. B&N has tried belatedly to diversify its stores with other products and Kobo never really had anything else, its affiliation with Borders dead. Only Apple has pockets deep enough to survive such a battle–but they seem to have no real interest in winning it.

            • A monopolist doesn’t have to collude with anybody to raise prices because it, by definition, has all the market power.

              Amazon was, by your admission, unable to set prices at will. Ergo, it does not have market power and is not a monopoly. Because Amazon lacked market power, its (supposed) 90% market share in e-books fell to 60% within a couple of years, nicely demonstrating that a large market share does not necessarily translate into market power or monopoly power or pricing power or whatever you want to call it.

              B&N and Kobo have no such way to subsidize losses on, presumably, the most profitable ebooks

              That is a failure of their management–they are not running profitable businesses. Smashwords makes a profit. Google makes a profit. Apple makes a profit. Indie bookstores are increasing in number, so they presumably are making a profit. Why do you feel that Scott Turow or the Big 6 should be able to pick and choose the winners and losers in this market?

            • Amazon was, by your admission, unable to set prices at will. Ergo, it does not have market power and is not a monopoly…

              Back in 2010 it’s true, but I’m not so sure anymore. There is a vibrant self-publishing community now that competes on price. Consumers are buying them as shown by Amazon’s various best seller lists. Amazon has also created its own publishing arm so it isn’t caught flatfooted again. It has to be viewed on a continuum. There’s lots of publishing competition and retailer competition now than there was in 2010 (or prior).

              That is a failure of their management–they are not running profitable businesses.

              Probably so, but not if it is because of anticompetitive practices. Pricing at loss can be an antitrust violation too.

              Smashwords makes a profit. Google makes a profit. Apple makes a profit. Indie bookstores are increasing in number, so they presumably are making a profit.

              You’re speculating here. Smashwords is probably profitable as an aggregator. Who would use their store otherwise (except people vehemently against DRM)? Google, Apple, who knows? I haven’t heard anything good about Google books–it might as well be nonexistent. Apple has had lackluster performance. I’ve only been watching indie bookstores close (and big chains too) in my neighborhood.

              Why do you feel that Scott Turow or the Big 6 should be able to pick and choose the winners and losers in this market?

              I don’t feel that way-I could care less about them. That said, my only feelings on the issue is that neither should the DOJ be picking winners and losers. We are in a dynamic and radically changing market–The DOJ should let them duke it out some more. My comments here are meant to be contrarian.

    • If the DOJ investigated Amazon for its e-book pricing, they would have learned that the $9.99 pricing was a promotional ploy — applied only to bestsellers — to persuade customers to buy a Kindle. No one (not publishers, authors, or customers) were short-changed in the transaction. Seems aboveboard to me.

      And if they had investigated KDP Select, they would have learned that via the program Amazon was giving authors unparalleled exposure through the access to free promotions included in the program and through the lending library, while making the exclusivity commitment a mere 90 days. Again, aboveboard.

      • But he exclusivity is designed to hurt Amazon’s competitors in order to maintain or grow its marketshare–that’s where Amazon may get into trouble.

        • I don’t know that. It’s just as easy for me to believe that Amazon doesn’t want to give free promos and lending library exposure to books that might then be purchased elsewhere. And, again, it is for only 90 days. Authors are free to pull out then, so it’s not like Amazon is asking for exclusivity for eternity (though many of us might grant it without their asking). They even allow paper versions of the books to be sold elsehwhere during the enrollment in KDP Select. It makes sense to me that Amazon would ask for something in return from the authors. Seems to me the authors get the better deal.

          • Authors aren’t part of the equation here, sadly, as usual. Exclusivity even for ninety days is at other ebook retailer’s expense–they’re deprived of access to a work for that period. KDP Select is designed to further entrench Amazon as the market leader of ebooks.

            Let’s say B&N offered a similar program, what author/publisher would use it if it meant pulling the book off of Amazon for ninety days? How about thirty days? I think it is safe to say few, if any, would use it. How does that effect new consumers that are thinking about buying a Nook versus a Kindle? Probably enough to tip a few more buyers to choose the Kindle. It becomes a self-reinforcing cycle.

  14. Does anybody know which , if any, publishing houses the WSJ has a financial association with ?
    The entire big government applying pressure on poor little businesses sounds like the political line of defence after the legal defence fails.

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