Throughout the 1990s, the American Booksellers Association—the trade organization that represents independent bookstores across the country—spent more than $18 million dollars suing publishers and big box book retailers. (read: “Booksellers Settle Lawsuit Against Chains“) The controversy concerned the third line item of my recent samples of book publishing Profit and Loss reports:
TERMS OF SALE
In 1994, the ABA accused Random House, St. Martin’s Press, Penguin, Houghton Mifflin, and others of giving special rebates and discounts to Borders Group and Barnes & Noble that were not offered to its membership. While publishers were extending independent stores a 40% wholesale discount off the retail cover price of an individual title, they granted chains secret additional discounts and credits that in some cases resulted in 50% off.
Wholesale discount policies, credit calculations and payment terms make up what is known as a publisher’s terms of sale. Every publisher has a one-pager that outlines their policies for retailers to order and pay for its books. The term sheets have lots of small type but the bottom line is pretty much the same for all of the big six publishers and their distribution clients. (When I was a publisher, I was distributed by two of the big six and the biggest mini-major).
But today there are two terms of sale models…wholesale and agency.
The wholesale model is the traditional model for orders of everything but eBook titles. Publishers, for the most part, invoice physical books to third party sellers (Amazon, B&N, Mom and Pop’s Independent story) at 50% off the retail cover price. So for a profit and loss report using the wholesale model, you can figure out how much revenue a book will generate by multiplying the total number of orders shipped by the retail cover price of the book and then cut it in half.
The agency model is different—it’s commissioned based—and brand new. It is exclusively for eBooks and I’ll get more into it next week.
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Back in the 90s, Mom and Pop stores had to pay $12.00 (40% off) for a $20.00 title from a publisher. The chains could buy the same book for $11.00 or even $10.00. The profit margin is the difference between what a store pays the publisher to offer the title and what price it sells the book to consumers. In this case Mom and Pop got $8.00 for every hardcover book they sold while the chains were getting $9-$10 per book.
This discrepancy led to the birth of the “deep discounting” era. Publishers favored chains because they are capable of ordering a thousand copies of an individual title for every single copy an independent can order. This favoritism allowed the chains to out-price the independents. The chains took the extra discounts and credits from publishers and passed them on to consumers with big displays that trumpeted 20% off! Because of the volume of sales, it could pass on a discount and still maintain a healthy profit margin. In fact, Barnes & Noble began discounting New York TimesBestsellers 40%. Unless an independent store was having a “going out of business sale,” you could pretty much count on paying full retail price for a book at Mom and Pop. That’s a big disadvantage.
The superstore discounts of the 90’s drove readers to chains instead of Mom and Pop’s stores. Buying there was cheaper. Over time, the independents started closing up shop. Estimates put their numbers at about 1,400 today. But in 1991, they numbered 5,400.
The side deals between publishers and chains were wink-wink, nod-nod arrangements, and they helped the publisher as well the chains. In many instances for the extra discount along with a publisher’s commitment to pay for “cooperative” advertising (front of store placement), the chain would increase its order. Instead of ordering 2,000 copies of a big book that a publisher was desperate to get onto the bestseller list, it would take 10,000.
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If you look at the under the table deals from the publishers’ point of view, favoring the chains back then made sense. Instead of having to employ an army of sales people to canvass thousands of independent stores for single or two or three copy orders, they could send one salesperson to Borders and get a 10,000 order for the entire country. It was more efficient.
The economies of scale that the chains brought to the table were irresistible because publishers were able to increase print runs (more orders meant bigger first printings and cheaper per unit costs) and decrease overhead (lay off sales people).
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There was only one problem. The different kinds of PUBLISHER/CHAIN “terms of sale” shenanigans were illegal. The Robinson-Patman Act of 1936—an era when small businesses were viewed as important job creators and vital components of a community—expanded on the old Sherman Antitrust Act of 1890. Robinson-Patman forbade anticompetitive business practices.
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What appeared to happen when a single market was dominated by just a short list of companies was either intentional or unintentional collusion. The steel industry was a perfect example. The price fixing became so outrageous that the U.S. would eventually lose the entire industry to foreign markets. Once J.P. Morgan’s U.S. Steel raised prices, so did Bethlehem Steel and Jones and Laughlin.
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Book publishing, though, is not La Cosa Nostra. It’s not that efficient. At least not in the 1990s.
Citing the Robinson-Patman Act, the ABA sued publishers in 1994 for unfair business practices. The legal “discovery” process—a defendant has to turn over all its correspondence, record keeping etc. to the court—soon revealed the obvious. The publishers knew they’d been caught, so they settled out of court and agreed to abide by the same terms of sale for all of their wholesale customers. Estimates place the ABA’s reparations from the publishers of upwards of $25 million.
Since then, to the best of my knowledge, the publishers have kept their word. Ironically, the penalty for colluding with Barnes & Noble and Borders resulted in an unintentional collusion among publishers. In order to level the “terms of sale” playing field, the lights in the publishing stadium had to be turned on (the ABA’s lawsuit did that) and all of the publishers were able to see what terms of sale their competitors were offering. So today, retailers of all stripes order and pay for a book in just about the same way from all of the big six and their distribution clients.
All of the big players came down to essentially the same place. So Random House and Simon & Schuster and Penguin and Macmillan and Hachette and HarperCollins don’t compete with each other in the ways they “sell” a book.
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Back to the ABA.
In 1996, emboldened by their victory over the publishers, the ABA took on the chains—Borders and Barnes & Noble. One of the bones of contention for them was predatory pricing. Predatory pricing is selling a product cheaper than it costs until you drive off competition. The chains settled their case with the ABA, too. But for pennies on the dollar of what it cost the ABA to litigate.
The judge in the case didn’t buy the ABA’s argument that the chains’ behavior hurt consumers, a critical element of Robinson-Patman. Prices went down not up because of the chains’ behavior. It was clear he wasn’t about to even consider awarding damages to independent bookstores. So in 1998, the ABA accepted $4.7 million as reimbursement of court fees from the chains. But the problem was that the case cost the ABA more than $15 million to take to the judge.