Home » Big Publishing, Ebooks, Legal Stuff, Pricing » Judge Approves E-Book Pricing Settlement Between Government and Publishers

Judge Approves E-Book Pricing Settlement Between Government and Publishers

6 September 2012

From The New York Times:

A federal judge on Thursday approved a settlement with three major publishers in a civil antitrust case brought by the Department of Justice over collusion in e-book pricing, paving the way for a war over the cost of digital books in the coming months.

Denise L. Cote, the federal judge in Manhattan who is overseeing the case, rejected arguments against the settlement, saying they were “insufficient” to deny its approval.

. . . .

Three publishers — Hachette Book Group, Simon & Schuster and HarperCollins – agreed to settle with the government, while Penguin Group USA, Macmillan and Apple declined to settle. They face a trial next summer.

The settlement approved on Thursday called for the publishers to end their contracts with Apple within one week. The publishers must also terminate contracts with e-book retailers that contain restrictions on the retailer’s ability to set the price of an e-book or contain a so-called “most favored nation” clause, which says that no other retailer is allowed to sell e-books for a lower price.

. . . .

“The Government reasonably describes these time-limited provisions as providing a “cooling- off period” for the e-books industry that will allow it to return to a competitive state free from the impact of defendants’ collusive behavior,” the court said in a filing on Thursday. “The time limits on these provisions suggest that they will not unduly dictate the ultimate contours of competition within the e-books industry as it develops over time.”

Amazon, which in April called the settlement “a big win for Kindle owners,” has vowed to drop prices on its e-books, probably to the $9.99 point that it once preferred for most bestsellers and newly released e-books.

Link to the rest at New York Times and thanks to William for the tip.

Publishers Weekly, reflecting the attitude of Big Publishing, calls this a “stunning development.” PG thinks it’s straightforward antitrust law.

The big players in an industry can’t get together in an expensive New York restaurant or anywhere else to set prices on their products and plan ways to force all retailers to abide by their pricing. There was nothing subtle or sophisticated about this conspiracy. This was a bush-league play by some immensely clueless executives.

As for Apple, PG thinks this was Jobsian hubris reflective of Steve’s final illness. No organization constitutes a more implacable nemesis than The Department of Justice. Ask Microsoft and IBM.

The entire decision is embedded below.

 



Big Publishing, Ebooks, Legal Stuff, Pricing

35 Comments to “Judge Approves E-Book Pricing Settlement Between Government and Publishers”

  1. You clearly can’t become top dog (revenue-wise) in the tech world without attracting government attention. And once the hounds focus on you, they stay on your case until they bring to ground.
    AT&T (the original, now defunct), IBM, and Microsoft can all attest to that.
    The travails are just starting for Apple and friends.

  2. The publishers must also terminate contracts with e-book retailers that contain restrictions on the retailer’s ability to set the price of an e-book or contain a so-called “most favored nation” clause, which says that no other retailer is allowed to sell e-books for a lower price.

    Since Amazon price matches to the lowest price they know about, doesn’t this constitute restrictions?

    • Are you serious? Amazon isn’t one of the parties to the case. It is a retailer, not a publisher (in the scenario you describe). There is no contract involved in Amazon’s price matching. Which part of that do you not understand?

      • Well, for us self-publishing authors, there is a contract that says that we’re supposed to make sure that we give the same price to all distributors and Amazon will price-match anything lower that it finds elsewhere.

        (The Self Publisher’s Nightmare is that agency pricing for us will go away, but the price-matching won’t — so if B&N desperately discounts those silly independent authors, and Amazon matches, 99c might become the new price for the midlist authors against their will, until they pick a side. Which will probably put most eggs in Amazon’s basket, which — if they do play the “we can price-match, but no agency pricing allowed” game — is definitely a chancy position.

        Enjoy your “Murphy’ Law” Nightmare Fuel.)

        I’m gonna have to go over the Kindle contract again. *sigh*

        (Hey, PG-san! Did you ever do that assessment of the Kindle contract? 🙂 )

        • It is not a given that the agency pricing for indie publishers will go away. It may, but that will be up to Amazon. My guess is now that indie authors are used to getting that 70%, it may be hard to make them go back. The agreement with the three is they can’t use agency pricing for, I think it was 2 years? But there is nothing saying Amazon or any other retailer has to stop using agency pricing for any other publisher other than those three.

          And if wholesale pricing did return, Amazon could discount all they want, price match or no price match, and we would make the same money, because no matter what they sold it for, they would have to pay us our amount. If we set the price at $5.00, for instance, and they get a 40% discount, then they buy a copy for $3.00 no matter what they sell it for. It is agency pricing that allows them to do the price matching, because if you’re selling them cheaper somewhere, and they match it, then what they pay you is also reduced by the sale price. In the wholesale model, they’d still have to pay you the $3.00 even if they sold it for $0.99.

          But my guess is Amazon won’t be too quick to get rid of agency pricing for KDP. It might create too much author backlash, and we know how they are working to court authors.

          • It’s not a given, no. However, knowing corporate stupidity and greed, I believe it’s a possibility that we should be on guard about, instead of going “agency pricing = bad” and welcoming any changes to our version. (Because you bet your sweet bippy that the beancounters will want the contract to go, “If I discount, then I pay you the usual amount; if I price match, then I pay you on the new price.” And watch them price-match!)

            It’s also something that PubIt users should be aware of — probably even more aware than Amazon, because B&N has not shown themselves to be very savvy about the tech side, and might see a great way to lure in customers with cheap prices. They wouldn’t want to go to zero, because then they’d get nothing — but the race to 99c for the indie midlist (those people important enough to be worth discounting, but not important enough that if they pulled our their works, it’d “hurt”) seems like it would be a very real threat.

            (See, if you put in the interpretation above, it’d go like this:

            • Assume you have a $10 book.
            • B&N discounts to $9.50 and continues to pay you on $10.
            • Amazon price-matches to $9.50 and pays you on $9.50.
            • B&N “price-matches” to $9.50 and pays you on $9.50.
            • Insert several rounds of the author fighting with customer support about the price with both companies, trying to get it moved back up, and possibly giving up.
            • Later, B&N has a big sale and drops you to $5. They pay you for $9.50.
            • Amazon drops you to $5 and pays for $5.
            • B&N “drops” to $5 and pays you for $5.
            • Insert more rounds of the author trying to fix the price back, and/or going, “Well, I’m making it up in volume?” (As they might, if their $10 book is any good… 😉 )
            • Lather, rinse, repeat until it’s at 99c (and therefore at the lowest royalty bracket, too!) and the author’s only hope of straightening it out is to un-publish it at all locations, lose all their ratings and reviews, and re-publish under a slightly different title (so the automated spiders don’t auto-lower it again) — OR pick their most-profitable distributor and un-publish everywhere else.

            Is this a likely cycle? Maybe not. Is it a possible cycle? I’m going to think poorly of your cynicism if you think it’s impossible.)

            • If they wrote a contract that allowed that, then yes, it would be a possible scenario. But that isn’t how wholesale works. Price matching makes no sense in a wholesale model other than in competition with a retailer.

              No matter what price Amazon sells a book at, under a wholesale model, they have to pay you the price they agreed to by contract and you set the wholesale price based upon Amazon’s discount they get and the list price you set.

              If they can reduce the amount they pay you by selling for less, that is an agency agreement, or a hybrid of some sorts that wouldn’t make any sense to sign. Who would want to get an agency agreement where Amazon is free to set the price, not the author/publisher?

              Not impossible, I agree. But at least to this point, Amazon has been favorable to authors in their contract terms because of their desire to increase their market share, and getting an increasing amount of authors on board helps with that.

              But Bledso could always die tomorrow and new management heads a different direction. Who knows?

              Here’s a more likely scenario, however. Let’s say I have a book that I list for $10. I have an agency agreement with Amazon, but end up with a wholesale agreement with Kobo. That means Kobo is free to set their price at whatever they want, as long as they pay you your list price minus discount.

              And let’s just suggest that Kobo decides to run a WOW sale on your book, and sells it for $3.00 a book, all the while paying you lists minus discount. Great on the Kobo side. They are running a sale that increases the number of books sold, but you are still getting, let say they get a 40% discount, $6.00 for each book sold.

              But Amazon sees that new lower price, and matches it on the agency agreement you have with them. And being the bigger retailer, they sell much more of the book. Great too, except you aren’t getting as much money per book as you do at Kobo. Instead of $6.00, you’d get ($3.00 x 0.7 =) $2.10 per book.

              The end result, Kobo is having to go in the red to sell your book as a loss leader, Amazon doesn’t have to even though they could probably afford it easier. You get paid less per book at Amazon.

              So I see the problems more in line with that. If you have an agency agreement at some places with a sort of “favored nation clause” that allows them to price match if you sell it for less elsewhere, but you don’t have control over what a book gets sold at where you have a wholesale agreement, you don’t have full control over the price of your book where you have agency agreements. It makes more sense to either go all agency or all wholesale, so that you maintain control over your income either way.

        • This settlement has zero impact on the KDP contract. The Price Fix 6 got busted for price fixing, not for agency. Even Random House can keep their agency contract with Amazon. The three settling publishers can keep agency if they want to renegotiate their contracts and allow retailers to discount (they probably won’t keep agency, but they could).

          • I don’t think you can call it agency if publishers are allowed to discount! That’s the whole point — the distributor/retailer is an “agent,” not permitted to play with the price! So no, the three settling publishers cannot keep agency if they allow discounting.

            • That was the reason they used the Agency model, so that they could restrict book discounting but does the lack of that feature of the Agency Model negate the whole model.

              As I understand it the publishers could still use agency and set the prices of their books and Amazon would still only get 30% of that price. Amazon may still choose to discount new releases and best sellers but maybe they leave the majority of the Publishers back list alone. It may not make sense for the publishers to sign an Agency deal that allows discounting, after all they would make more money if they went back to wholesale, but it would still be an option.

          • As I recall from the agreement with the three settling publishers, they are barred for two years from using the agency model. They are being forced into a wholesale model for two years as a “cooling off” period. At what time the publishers will be able to negotiate agency agreements with Amazon and other retailers again.

            No publisher would want an agency agreement that allowed the retailer to discount at will. That would mean the publisher would get less and less per book as Amazon discounted to their hearts content, and Amazon wouldn’t have to go into the hole to discount. They could discount all they wanted and still make a profit on the book, while the publisher eats the costs. A publisher isn’t going to sign something like that if they have any business sense at all. They’ll opt for wholesale during this cooling off period so that if Amazon discounts too much, they are the ones eating the cost, not the publisher.

            • “No publisher would want an agency agreement that allowed the retailer to discount at will. That would mean the publisher would get less and less per book as Amazon discounted to their hearts content”

              I don’t think that is how it would work. I am one of the settling publishers, I set the retail price at 12.99 I get the 70% of the 12.99 but Amazon can discount that as much as they want. Their discount comes out of their pocket not mine.

              Essentially though, the Agency System in that case is very similar to the old wholesale model.

              • That wouldn’t be similar to a wholesale model, it is the wholesale model. It wouldn’t be agency if it opperated that way. In agency, if the retailer was free to discount, you would only get 70% of what the book sold for, not 70% of the set retail price. So lets say Amazon was free to discount our titles right now under our agency agreements, then you’d get 70% of whatever they sold it for. They could discount as much as they wanted and still make a profit, and you’d take the reduced profit.

                Once you set the price they have to buy it from you, no matter what they sell it for, you are back to the wholesale model. Not agency.

                • Is it actually in Amazon’s interests to drop prices into the ground? If it is then why do they have a 2.99 floor of the 70% royalty rate?

                  So if some other retailer decides to discount your work, without asking your permission, which leads to the Amazon price-matching algorithms cutting the price to a figure even Amazon don’t like, then it is the ‘other’ retailer who is at fault. They are the ones messing with your pricing structure without even a by-you-leave.

                  The Amazon price-matching algorithms actually mitigate against this happening, because:
                  a) they are the biggest fish in the sea.
                  b) they will not be undercut on price.
                  c) anybody who does try to undercut them on price ends up losing suppliers (authors) who simply pull their books from their smaller site and sell them through the big beast Amazon only (not saying I like this, I like competition, but it would be a natural reaction to such crass stupidity on the part of the initial discounter).

                  Therefore, by aggressive price-cutting (without asking the author’s permission) they lose all their authors/publishers and therefore stock. Not saying some of the other etailers in the market aren’t that stupid, but if they are then they won’t be in the market for long.

                  Or am I misunderstanding the scenario?

                • In the wholesale model, you don’t have to ask the publisher’s, or in this case, author’s permission to set the price. They by it from you for a set price, no matter what they sell it for. As a matter of fact, having a retailer discount your book is good for you, because you’ll sell more but get the same amount for each book as you would if they hadn’t discounted it. You set a suggested retail price, but the retailer is under no obligation to sell it for that price, and since it is their money, they can take as big a loss on it as they want.

                  However, there are some practical limits to that. One is how long can they afford to lose that much, especially if the loss leader turns into only a loss, and people don’t buy other things while there. More likely in a online store as opposed to the grocery store.

                  Plus, while “predatory pricing” isn’t a real threat on the Internet, there is the provisions that cutting prices too deep in some countries can be seen as violating their competition laws.

                  At any rate, the scenario I played out could happen. Whether any retailer would cut prices on a book that deep and Amazon be willing to match that, who knows. But they’d have more incentive to match it on an agency agreement than they would on a wholesale model, because they wouldn’t lose any money over it directly. The author would. But yes, I’m sure there are limits to how low they would go, in either model.

                • But, under the Amazon ‘agency’ model plus price-matching used at the moment, they cut the price and pay your royalties off the new price and if the new price falls below the magical 2.99 your royalties drop to 35%.

                  Unless I’ve got it all wrong.

                  In which case, if some other etailer starts deep discounting your price-points, then you would be a fool not to yank your book from their store. You might have to dance through some hoops with Amazon to get the price back up to where you want it, but it would make no sense to stick with an etailer that is screwing your entire pricing strategy in a futile attempt to undercut Amazon on price (because price-matching means they CAN’T undercut Amazon on price).

                  Therefore, for good or ill, Amazon essentially sets the price and competitors would be extremely stupid to try to use price as a way of competing with Amazon.

                  You can’t compete if all your suppliers jump ship and no supplier will stay with a retailer who unilaterally mess with their pricing structure in a futile attempt to undercut somebody who refuses to be undercut.

                  Maybe this means the wholesale model will become the norm for all books Indie and trad, but I can’t really see that happening.

                  Therefore, Amazon are the arbiters of price. The other guys will have to work some other magic to eat into their market share until they are big enough to take them on on price.

                  IMHO

                  Oh and I don’t like this anymore than ABeth. I don’t want any company to have that kind of power, but it is where we are at.

                • Yes, Steve, I think that is one possible scenario, if Amazon stuck with agency pricing with the option to match lower prices. That was the “bad” scenario I was proposing could be a problem. And if another retailer did that a lot, correct, you’d be forced to decide whether to keep doing business with them in order to save your Amazon profit margin from shrinking.

                  But, it is an unlikely scenario, because as you point out, a retailer may discount some for a sale and such, but probably will not discount that deeply to get into a price war with Amazon. Wouldn’t make much sense. So unless they went crazy with it, most of us would stick with both.

                  However, that with us indies who often price our books around $2.99 to $7 or $8. For Random House, for whom the agency pricing is still an option, they could face such a scenario more drastically since they like to have prices around $12 to $15.

                • Cool, RL.

                  But will trad publishers have been stupid enough to have allowed agency pricing and price matching on their offerings?

                  They have a bit more clout than start-up publishers, indie authors, and micro/small presses. So wouldn’t they have used that clout to avoid price matching algorithms wrecking their profit margins?

                  Mind you, maybe they didn’t think of this 😉

    • The KDP independent publishing program is far different from the types of contracts the publishing houses have with their retailers. Don’t think that what’s in KDP is even close. 🙂

    • It was a restriction on Amazon that they couldn’t sell a book any less than it could be found sold anywhere else. That “favored nation” clause restricted Amazon and other retailers from setting prices how they wanted to, no matter what anyone else did.

      All Amazon is doing with price matching is taking advantage of the favored nation clause in discounting where they are allowed to do so…when they see someone else selling it for less. With this ruling, at least for these publisher’s books, they can start discounting no matter what others are doing. They can now sell for a lower price than anyone else, and competition goes back into book selling.

    • I don’t know if it is kosher in the legal or business sense but I would think the Settlement Three would have negotiated a new agreement with Amazon contingent on the settlement being approved.

      B.S.

  3. My only disappointment in the ruling is that Judge Cote didn’t give Kohn the full Inigo Montoya treatment:

    Kohn: Predatory pricing
    Cote: You keep using that word. I do not think it means what you think it means.

    • Lol.

    • What I want to know is your take on the preferred spelling. Is it Ockham or Occam? I have seen it both ways. Assuming of course that this is a pseudonym, and a good one at that.

      • Yes, it is a pseudonym. I chose the “Ockham” spelling because that is how the town in Surrey spells it now. English spelling, especially for names, was essentially free-form until quite recently (300 years ago), so either spelling is acceptable.

        Namesake trivia: The original William Ockham wrote the first in-depth analysis of ternary logic, in which statements can be true, false, or unknown. This concept is crucial to relational database systems for handling null values.

  4. Techdirt has a nice report:
    http://www.techdirt.com/articles/20120906/11274320303/judge-quickly-approves-ebook-pricing-settlement-says-its-public-interest-to-stop-price-fixing.shtml

    They picked out a few choice quotes that show how the judge felt about the astroturf campaign to force hearings and delay the inevitable:

    “It is not necessary to hold an evidentiary hearing before approving the decree. Given the voluminous submissions from the public and the non-settling parties, which describe and debate the nature of the alleged collusion and the wisdom and likely impact of settlement terms in great detail, as well as the detailed factual allegations in the Complaint, the Court is well-equipped to rule on these matters. A hearing would serve only to delay the proceedings unnecessarily.”
    🙂

  5. I like your summary, PG. Call a spade a spade, why don’t you? 🙂

    Although, like Publisher Weekly, I’m also stunned. I really thought the five pages of comic strips would turn the tide.

    The DOJ and the Courts were facing formidable opponents in this one.

    I’m happy about this. I’m going to do a little happy dance.

    When I pay taxes to the U.S. Government in April, I will resent paying them 25% less, which is the difference between a 12.99 e-book and the 9.99 Amazon sweet spot.

    They’ve earned it.

    And I can’t wait for the actual trials next summer. That should be very entertaining.

  6. One more time. This case is not about agency pricing. It is a case about producers (the five publishers) with substantial market power colluding with one retailer to fix retail prices across an entire market. The tool that was used to accomplish the illegal conduct was the combination of the “most favored nation” clause and agency pricing.

    The settlement enacts certain restrictions on the three settling publishers. Unless you are one of those three publishers or an ebook retailer doing business with them, this settlement does not affect you in any way. It really is important for writers to understand truth about this. Nothing about this has any impact on KDP or what Amazon might do in the future.

    The contractual restrictions in this settlement are designed to remove the harm to consumers caused by the illegal actions of these publishers. Stop spinning these absurd scenarios about what Amazon might do based on thse terms.

    • Well said, William.

      • I agree, William, and have said as much. It is doubtful Amazon will change anything in the KDP over this, though that is possible. But the agreements don’t have anything to do with KDP agency agreements. As I’ve stated as well.

        However, am I to understand no one can now speculate or thing about what might happen if they do? I thought this was a discussion forum.

        And there are other interesting things to think through. Like the fact that Random House still has agency agreements in place with Amazon. How will that affect them when the other big three are forced into allowing Amazon to discount their titles? Are they going to lower their prices to compete with the $9.99 release of best sellers, because now they’ll be too high on theirs and lose sales? Will Random House renegotiate their contract with Amazon now?

        But seriously. There’s no harm in thinking about various scenarios no matter how unlikely to happen. It doesn’t hurt anything. I don’t get the ultimatum to stop talking about it.

  7. I would have to agree with William here. There is a difference between speculation based on factual information and then there is speculation based on based on erroneous information. William is arguing for the former. I can speculate I might get hit by a truck in my driveway but based on the lack of truck traffic on the driveway the likelihood of that happening is ridiculously remote so speculation about whether that will happen, while fun, is meaningless.

    The publishing industry has an interest in predicting dire results of an apocalyptic nature that are intended to fuel this kind of silliness and unfortunately it tends to get people’s shorts all wet for no reason. It is harmful when the apocalyptic talk is intended to persuade rather than enlighten.

    • I was actually speculating about why this wouldn’t affect prices and royalties for indie authors. The only way it could is if everybody involved in the marketplace is an idiot.

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