Friday, March 9, 2012

News: Department of Justice to Take on E-Book Pricing

It appears that the Justice Department may be planning to sue Apple and some of the biggest U.S. publishers over e-book pricing. Yesterday’s Wall Street Journal article does a good job at outlining the issues, you should read it, but I wanted to write more.

The major issue is the concept of “agency pricing” and whether there was collusion between the companies to keep e-book prices high. (I have written on agency pricing, in passing, once before. See my post from January here.) Under “agency pricing,” the publisher sets the price of an e-book. If a retailer wants to sell the e-book, they must charge the established price, taking a commission as an “agent” of the publisher. This is distinct from “wholesale pricing,” where publishers sell physical books to retailers at a discount to the cover price, and the retailer can sell the books at any price they choose – even at a loss.

If your first instinct is “mandating a price must be illegal,” you would be right. Or you would have been right until 2007. According to this article from PaidContent, prior to then it was an “automatic violation of antitrust law for manufacturers to impose prices on retailers.” Then the Supreme Court decided a case called “Leegin” in which it rejected a blanket ban in favor of a case-by-case approach. If publishers can show that the agency pricing model is “reasonable,” it may be able to stand. It is unclear to me what the “rule of reason” established under Leegin entails, but publishers might have to prove that the pricing protects consumers.

Is there really a circumstance under which higher prices actually protect consumers? Skepticism over that question is at the heart of the Justice Department investigation. Publishers might argue that consumer protection exists where higher prices lead to more options. One of the reasons why publishers pushed for the agency pricing model is because of Amazon. According to the Wall Street Journal article above, there was concern that if e-books were sold under the wholesale model, Amazon would discount them so much that other retailers could not keep up and that would leave only one major seller of e-books. One argument is that agency pricing levels the playing field and allows options such as Google Books to exist.

The contrary argument is that publishers were simply being greedy and that they did not want consumers to get so used to cheap e-books that they could not sell higher-priced books. For the most part, agency-priced e-books cost a few dollars less than the cover price of paperbacks.* Many consumers seem to think that this price is still too high. The popular wisdom is that the publishers must be making a killing with no paper, printing and shipping costs. The fact of the matter is that “most of the costs of publishing a book are fixed (acquisition, cover design, editing, marketing, etc), and don’t go away in a digital world.” This may not be an argument that will be part of any legal proceeding, but it is one that publishers may need to make with consumers. If publishers are forced to go to a wholesale model, the cover price of an e-book may have to be closer to the price of a hardcover in order for publishers to make a profit. Consumers may whine, but they will likely buy their favorite authors.

This is a complicated situation and I make no claims to have gotten everything correct. I welcome your comments and look forward to writing on the topic again.

*(On discount sites this often makes the paperbacks less expensive. Still, given that the publisher typically discounts paperbacks 50-60% to such sites, but keeps approximately 70% of the agency-priced e-books, their cash flow is the same.)

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