Thursday, April 12, 2012

It's an All-Bad Guy Battle Royale: Tennessee Joins in the Ebook Suit

Posted By on Thu, Apr 12, 2012 at 7:06 AM

The City Paper is reporting that Tennessee has joined in the 15-state lawsuit against Apple, Macmillan Holdings, Penguin Group USA, and Simon & Schuster Digital Sales.

This story is big and convoluted, and while the spin seems to be, "Publishers colluded to make you pay too much for ebooks" — and while this spin would then firmly place most reasonable people on the side of the people trying to make sure you pay less — the truth is that this story is more like Hitler fights Stalin who fights Dracula who fights Alien who fights Predator who fights Hitler. You can root for whomever you want, but don't get too close to them, you know?

Here's the back story that will make this story make more sense.

Amazon used to buy ebooks from publishers at some discount off the publisher's list price. So, if the publisher had a suggested list price of $24.99, Amazon could, if it wanted, pay the publisher an agreed-upon percentage of that list price and then price the ebook at whatever Amazon wanted — say, $9.99.

In other words, Amazon was using new ebooks as loss leaders and taking a bath on the books knowing that it would therefore sell the equipment to read the books on. Amazon is happy to let you pay $9.99 for a new big-publisher book, even if Amazon loses money on it because it will make up that money on the Kindle sales (especially if you like to get a new Kindle whenever one is released) and on any books you might want that actually do make a little money. Plus Amazon would love it if you thought of Amazon as the place to buy everything, so all the goodwill they generate by making ebooks cheap and easy to get is beneficial to them.

On the surface, this doesn't really hurt publishers. They still get whatever percentage of list price they agreed to with Amazon. But it does hurt publishers (or so the thinking goes) if Amazon drops their prices so low that it puts other ebook retailers out of business. There have also been rumors that Amazon has different deals with different publishers; that some publishers are only able to get the agreed-upon percentage for what the book sold for. In other words, instead of getting 30 percent of $14.99, they might only get 30 percent of $4.99.

I don't know if this is true, but it has long been a rumor in the publishing world, and it's important to know that rumor is out there and widely believed in order to understand some of the bad feelings. Publishers don't want Amazon saying, in essence, "You get whatever we say you get." Keep in mind, too, that Amazon is also a book publisher, so publishers may be feeling a little like one of their competitors is using its retail arm to try to drive them out of business.

So publishers came up with another pricing model: agency pricing. In this model, the retailer is supposedly not actually selling the book, but just acting as an agent for the real seller: the publisher. In this scenario, the seller (the publisher) can set the sale price of the book at whatever they like, and the agent for the seller (the electronic bookstore, in whatever form) gets an agreed-upon percentage. The big publishers went to Amazon and said, "We want agency pricing, or we're not going to let you sell our ebooks at all." And Amazon was all, "Fuck you, dudes. Fine, we won't sell your books." And they turned off one publisher's buy buttons.

This game of chicken lasted until consumers started to get upset. Remember, Amazon wants to be your go-to place for everything. They don't want consumers thinking that there's some stuff they can't get at Amazon. The buy buttons came back. And the big publishers got their agency pricing.

At this same time, Apple entered the game. Apple said to the publishers, "Charge what you want for books, we don't care." Apple's strategy, I would guess, is slightly different than Amazon's. Amazon is willing to take a loss on ebooks in order to get you to buy their Kindles. But Apple knows that consumers already have Apple's products — iPhones and iPads. They don't need to convert you to a special piece of equipment for reading. If you have a mobile device with iBookstore on it, you can read an ebook on it.

And yes, it's true that you can stick a Kindle app on your Apple product. But Apple's fine with that, because you've still bought the Apple product — and now any ebook you buy from Amazon that they're taking a loss on is like sweet nectar to Apple. Apple doesn't need cheap ebooks to lure you into buying an iPhone. So, they're fine with publishers setting the list prices, and even fine with you buying books from Amazon that hurt Amazon financially.

But here is where the meat of the DOJ's case lies, if there is meat to be found. The DOJ is saying that Apple more specifically said something like, "Why don't you all set your ebook prices at $12.99 or $14.99?" — and the publishers all talked amongst themselves and said, "Those sound like great prices, sure!"

Some of the publishers seem to believe that they cannot prove that such discussions didn't take place. They've already settled. So far, a couple of holdouts and Apple seem too think that they can prove there were no discussions. I am betting when Apple gets a chance to defend itself, it will point out what I've pointed out above — that they have no motivation to collude with publishers because they win either way. If people buy more expensive books from Apple at the price publishers want, great; if people buy books on their iPhones through a Kindle app that Amazon is taking a loss on, also great. Apple is in the catbird seat.

And why is Tennessee getting involved? Do they really think that Tennesseans have been so ripped off by the book industry that they need to sue to recover our funds for us? Or is there something else? I don't know, but here are the states participating in the lawsuit: Alaska, Arizona, Colorado, Connecticut, Illinois, Iowa, Maryland, Missouri, Ohio, Pennsylvania, South Dakota, Texas, Vermont and West Virginia. Arizona has Amazon warehouses. Pennsylvania has Amazon warehouses. We're getting Amazon warehouses. And Texas has Amazon warehouses. Our motives may not be pure.

Who do you root for in a situation like this? Honestly, I don't know. Everyone's a little shady and the people who seem like good guys today won't seem like good guys tomorrow — and vice versa.

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